6/5/20: The Glut of Oil: Strategic Reserves

The Giant Glut of Oil continues (see my analysis of oil markets fundamentals here: https://trueeconomics.blogspot.com/2020/04/23420-what-oil-price-dynamics-signal.html)

China strategic oil reserves have also surged. U.S. oil reserves are now nearing total capacity of 630 million barrels, and China's reserves are estimated to be about 90% of the total capacity of 550 million barrels. Japan's reserves similar (capacity of ca 500 million barrels). Australia is using leased U.S. strategic reserves capacity to pump its own stockpiles, with its domestic storage capacity already full. 

20/4/20: Oil

The madness of Oil (see an explainer below):

As I said a few minutes back: at this rate, within a couple of days, it will make sense to start re-injecting the stuff back into the wells, as opposed to storing it.

An explainer:

Quite a number of folks - including journalists - have confused the above data and the 'reported' price of oil today for the actual price of oil. It is not as simple as that. Actual price of oil did not fall below zero, though for some grades it has been below zero before and is still staying there now. So what all of this really means?

Q1: Is price of oil below zero? The answer is "it depends on what price of oil one takes". Let me explain.

First, there are several major grades of oil. The two most popular are:

• Brent North Sea Crude (commonly known as Brent Crude). Brent originates in Brent oil fields and other sites in the North Sea. Brent is a benchmark price for African, European, and Middle Eastern crude oil producers, covering, roughly two-thirds of the world's crude oil production.
• West Texas Intermediate (commonly known as WTI) and this is a benchmark oil for North America.
• Urals grade oil is Russian oil
• Fateh grade oil or Dubai Fateh is the most important crude oil benchmark for Asia
• Iran Heavy and Iran Light are benchmarks for Iranian oil.

The percentage of sulfur in crude oil varies across the grades and fields of extraction, and this percentage basically determines the amount of processing required to refine oil into energy products. "Sweet crude" is a term that refers to crude oil that has less than 1% sulfur: Brent at 0.37% and WTI at 0.24%. And both Brent and WTI are "sweet". So, "sweet" oils carry a market premium, as refineries can process these at lower cost. 

Fateh sulphur content is around 2%, Urals at 1.35%, and other grades are described here: https://en.wikipedia.org/wiki/List_of_crude_oil_products. Higher sulphur content oil trades at a discount on WTI - or used to, roughly, prior to 2008 GFC. Since GFC, U.S. supply of WTI oil has been growing more robustly than Brent supply, so the relationship reversed (see chart below).

Now, notice the above table also shows "Port of Sale". This is an important feature of trading and pricing of oil and it matters in today's oil price determination too. Bear with me.

So, let's focus on WTI and Brent. 

• Brent is traded at a discount on WTI because it is harder to process
• WTI is traded in the futures markets - with contracts signed and priced today for future delivery. The NYMEX (New York Mercantile Exchange) division of the CME (Chicago Mercantile Exchange) trades futures contracts of WTI. Physical delivery for WTI futures occurs in Cushing, Oklahoma. Futures are contracts that must be delivered in physical delivery if held to maturity. In other words, futures are NOT options. Options can be left to expire and the bearer does not have to take a delivery of the commodity on which the option is written. With futures, if you bough June 2020 delivery of oil contract for 1,000 barrels at, say $22, and you hold it to expiration (at the end of May 2020), you will have to take physical delivery of 1,000 barrels of oil in Cushing, OK, no matter what. 
• Brent crude oil futures trade on the Intercontinental Exchange (ICE), and are traded with delivery internationally. In other words, Brent futures contracts are deliverable to specific country, not to one location globally, as is the case with WTI.

So, now, what happens if your hold a contract for oil, deliverable in May 2020, at 8:00 am EST today? You have two actions you can take. Today happens to be the day when May 2020 contracts mature for WTI. You can: (1) let contract mature and take delivery of oil in Cushing, OK in May, paying the price of the contract - say $22 per barrel. Or (2) you can sell the contract today, before it matures, to someone else who will then face a choice of (1) or (2) herself. 

If you opt for (1), you will need somewhere to store 1,000 barrels and a transport from Cushing, OK to wherever that storage facility is. Both cost money. And, worse, the former is not available, since we are experiencing a glut of oil. You can pay to store your oil on board transport - e.g. on board a tanker sitting in the Gulf of Mexico, or on-board railroad cars. This is hellishly expensive, even if you own the said tanker or railroad cars. So you will not do this. Worse, yet, there is so much crude out there in storage already, that short-of-demand refineries are not buying oil today. Which means you will be paying high costs of storing this stuff for weeks to come.

If you opt for (2), you need a buyer of the contract that can do (1). And these are not available, because everyone is short storage and everyone is facing a market with no buyers for this stuff for weeks. 

So you dump your May futures contracts at a negative price just to get rid of the obligation to take physical delivery of oil in May. And this is exactly what happened today with May futures (charts above) for WTI.

Now, the same did not happen today in the Brent markets. Why? Because Brent, as noted above, is deliverable across a number of countries, not just Cushing, OK. Which means you can shift location of delivery to find a more-likely-available storage facility for it, or a more-ready-to-buy refinery. In chart 2 above, top red line did not fall as much today - these are Brent futures for May contracts.

Here is the spot price of oil for Brent and WTI:

And here it is over the last year:

Today's prices are not in the chart. So here they are:

Observe negative prices on some lower quality (high sulphur - ugly) stuff in the above. These are down to the lack of refineries willing to take low quality crude when there is a glut of higher quality key stuff available. And note that Brent is nowhere near $0 today. 

Blend of WTI and Brent is another way to look at oil prices. And here is a table from the CME showing different month contracts for the blend:

Yes, may delivery is ugly. June and on, however, is well above $20 per barrel. 

13/11/16: Oil Prices: Still in the Whirlpool of Uncertainty

This is an unedited, longer, version of my article for the Sunday Business Post covering my outlook for oil prices.


Traditionally, crude oil acts as a hedge and a safe haven against currencies and bond markets volatility. Not surprisingly, during the upheaval of the U.S. Presidential election this week, when dollar went into a temporary tailspin, equity markets sharply contracted and bonds prices fell, all eyes turned to the risk management staples: gold, oil and, on a more exotic side of trades, Bitcoin. Gold and Bitcoin did not surprise, staunchly resisting markets sell-offs and gaining in value. But oil prices tanked. The old, historically well-established correlation did not apply. Instead of rising, U.S. oil futures fell in the immediate aftermath of Donald Trump’s surprise victory, and then, in line with the stock markets, futures rose. Within the day, U.S. crude futures prices were back at USD45.27 a barrel on the New York Mercantile Exchange, while Brent rose back USD46.36 marker. More broadly, the S&P 500 Energy Sector Index rose 1.5 percent within 12 hours of the election results announcement.

This breakdown in historical patterns of correlations between crude and financial assets prices underlines the simple reality of the continuous oil markets slump: we are in the new normal of systemically low oil valuations underpinned by the very same driving forces that precipitated the crude price collapse from over USD100 per barrel to their mid-to-high 40’s today. These forces are three-fold, comprising reduced demand for energy, reduced demand for oil as a source of energy, and increased supply of oil.

Prices and Stocks

Currently, oil prices are rebounding from the eight-week lows, but prices remain sensitive to any signals of changes in demand and supply. The reason for this is the excess stockpile of oil stored in tankers, ground facilities and at refineries. Most recent U.S. federal data showed oil stockpiles swelling well ahead of the markets expectations, as producers continue to pump oil unabated.

U.S.-held inventories of oil were at 2.43 million barrels at the beginning of November, based on the data from the U.S. Energy Information Administration. American Petroleum Institute puts total stocks of oil in storage and production at 4.4 million barrels - more than 1 million barrels in excess of the seasonally-adjusted forecast for demand. And at the end of October, the U.S. posted a 34-year record in weekly increases in crude and gasoline stocks - at 14.4 million barrels.

The U.S. is no exception to the trend. OPEC recently revised its outlook for oil price recovery for the next three years based on the cartel’s expectation that current levels of production will remain in place for longer than anyone anticipated. Per OPEC latest forecast, we won’t see oil hitting USD60 per barrel until 2020. Only twelve months ago, OPEC forecast for 2020 was USD80 per barrel.

Similar forecasts revisions were produced a month ago by the IMF. In its World Economic Outlook forecast, the IMF revised its outlook for 2016 crude prices from USD50.54 per barrel forecast in October 2015 to USD 42.96 per barrel. 2017 full year price forecast moved from USD55.42 in October 2015 to USD50.64 in October 2016. If in 2015 the IMF was predicting oil prices to hit USD60 marker by mid-2018, today the Fund is projecting oil prices remaining below USD58 per barrel through 2021.

Both, the OPEC and the IMF forecast lower global economic in 2016 and 2017. The IMF outlook is based on world GDP expanding by just 3.08 percent in 2016 and 3.4 percent in 2017, well below post-Crisis average of 3.85 percent and pre-crisis average of 4.94 percent. OPEC forecast for oil prices is based on similarly pessimistic growth outlook for 3.4 percent average growth over the next six years, down from 3.6 percent forecast issued in October 2015.

Alternative Energy: Rising Substitutes

As demand for energy in general remains weak, alternative sources of energy are starting to take a larger bite out of the total energy consumption. Solar power capacity has almost tripled in the U.S. over the last 3 years. Renewables share of the U.S. power supply rose from around 4 percent of total power generation in 2013 to 8 percent this year, on its way to exceed 9 percent in 2017. Solar energy supply is now growing at a rate of almost 40 per annum, spurred on by the Federal solar tax credits, extended by the Congress in early 2016. In Germany, following the Government adoption of Energiewende policies — a strategy that aims to move energy supply away from oil and uranium — renewables now provide almost 30 percent of electricity, on average. And Gwermany’s upper chamber of parliament, the Bundesrat, has passed a resolution calling on the EU to create a system of harmonised taxation and vehicle duties that can ensure that only emission-free cars will be registered in Europe by 2030. On the other side of the spectrum, in the OPEC member states and Russia, renewables energy production is currently standing at below 5 percent of total energy demand. While the number is relatively low, it is rising fast and countries from Saudi Arabia to United Arab Emirates to Russia - all have significant ambitions in terms of lifting non-oil based energy output. In Abu-Dhabi, a recently approved solar energy project will deliver electricity at a cost below coal-fired power plants, at 2.42 US cents per kilowatt-hour, setting world record for the cheapest solar energy supply. Dubai plans to get 25 percent of its energy needs from renewables by 2030. The target is to reach 75 percent by 2050. Even Iran is opening up to use of renewables, with wind and solar investments in 2016-2017 pipeline amounting to close to USD12 billion. In Jordan, just one wind farm - a 38-turbine strong Tafila - is supplying 3 percent of country electricity, since production began in 2015.

All-in, globally, estimated 7 percent of oil demand decline over the last 5 years is accounted for by energy sources substitution. The key drivers for this trend are new environmental agreements, putting more emphasis on alternative energy generation, local environmental pressures (especially in China), and the desire to shift oil production to export markets, away from domestic consumption. Another incentive is to use clean power to reduce domestic subsidies to fossil fuels. According to the IMF report published earlier this year, Middle East, North Africa and Central Asia account for almost one half of the total worldwide energy subsidies. Since the onset of the oil price shock, UAE, Egypt, Oman and Saudi Arabia have been cutting back on fossil fuels subsidies and bringing retail prices for energy closer to market standards.

The second order effect of the above changes in energy composition mix is that moving away from subsidised fossil fuels improves markets transparency and reduces corruption. It also compensates for declines in oil prices in terms of exports earnings.

Drilling at These Prices?

As slower global growth and increasing substitution away from fossil fuels are suppressing demand for oil, supply of the ‘black gold’ is showing no signs of abating. Per latest OPEC statement, oil producers, especially in North America, surprised markets analysts by failing to curb production volumes in response to weak prices.  OPEC members have been running production volumes near historical records through out the 3Q 2016. And in the U.S., the Energy Department raised its production forecasts for both 2016 and 2017. However, U.S. crude output this year is unlikely to match the 2015 levels - the highest on record since 1972. All in, the Energy Department now estimates that 2016 average daily production will be around 8.8 million barrel per day (bpd), which is lower than 9.5 million bpd delivered in 2015, but more than forecast for 2016 back in September. Likewise, for 2017, the Energy Department revised its September forecast from 8.57 million bpd to just over 8.7 million bpd in October. Through the second and third quarters of 2016, North American drillers actually increased drilling activity as prices improved relative to late 2015. The number of active oil rigs operating in the U.S. is now up by more than 130 compared to May counts and the rate of new rigs additions is remaining high, rising to 2 percent last week alone.

Russia and Iran

A combination of stagnant or even declining demand, and expanding production means that the only change in the flat trend in oil prices over the next 6-12 months can come only from a policy shock on the supply side. For OPEC, Iran and Russia such a shock is unlikely to happen. Majority of oil exporting economies have either fully (as in the case of Russia and Iran) or partially (as in the case of Saudi Arabia) adjusted their economic policy frameworks to reflect low price of energy environment.

I asked, recently, Konstantin Bochkarev of Forex-BKS, who is one of the leading financial markets analysts working in the Russian markets for a comment on the current state of play in Russian economic policies in relation to oil prices. In his view, “It looks like the worst is over for the Russian economy in terms of adaptations to low oil prices, Western sanctions, geopolitical risks and other challenges of last two years. Sub-50-55 USD oil or even $40 is the new reality and it doesn’t scare any more. On the other hand low efficiency of the economic policy in Russia (due to a lot of constraints like the lack of reforms and the will to change anything before the President election in 2018) means that there’s rather huge cap for the Russian GDP growth which can be limited by 1%-1.5% at 40-55 USD oil.” Overall, “the «crisis policy» which was rather successful during this recession and led to the stabilization of the macroeconomic situations. The recapitalization of the Russian banking system, free float of the Russian ruble, higher interest rates, the transparency of the CBR policy and rather tight budget policy. All these measures finally led to 6% inflation by the end of 2016, rather sufficient decrease in volatility of the Russian ruble and less correlation with oil prices.” And moving away from the petroleum-dominated economy has had even deeper impact. Per Bochkarev, “Oil can’t solve all your problems any more whether it’s 40$ or 100$, because changing social and business environment, external and internal challenges demand something more than budget without deficit or stable cash flow. Still low oil prices can accelerate changes in the Russian economy and society and lead to some necessary reforms or unpopular measures.”

In a sense, Russian experience shows the direction that many oil exporting economies are heading in the age of low oil prices: the direction of accelerated fiscal and monetary responses and gradual structural economic reforms. In some areas, Russia took its medicine first and in a larger dose, but other big producers, including Iran and Saudi Arabia, as well as UAE are also traveling down the same path.

As an aside, it is worth noting that Iranian production is growing ahead of expectations. Per Bloomberg report:  “Output at the fields west of the Karoun River, near Iran’s border with Iraq, rose to about 250,000 barrels per day from 65,000 barrels in 2013, the Oil Ministry’s news service Shana reported Sunday, citing President Hassan Rouhani at a ceremony to formally open the project. Iran had expected to reach that output target by the end of the year, Mohsen Ghamsari, director for international affairs at the National Iranian Oil Co., said in September.” (http://www.bloomberg.com/news/articles/2016-11-13/iran-pumps-more-oil-as-saudi-minister-calls-for-opec-output-cuts)

Since the easing of the sanctions, starting with end of January 2016, Iran’s output rose from just around 2.82 million bpd to ca 3.65 million bpd.

Russian producers are also hardly feeling a pinch. According to Bochkarev, “Tax system plays a much more important role in the Russian oil companies production decisions than the rise or fall in oil prices. Whether oil is $40 or $100 per barrel majors are generating generally the same financial results. Besides almost oil majors are stable even at $30 oil. The decreases in oil prices are easily compensated by the fall in the ruble exchange rate. So cost control or cost cutting plays much more important role in other sectors of the Russian economy.”

Still, Russia and Iran might be heading into a direct competition in the European markets, where geopolitics and legacy contracts are changing the playing field away from simple price competition. This new - since January 2016 - competitive dynamic may be a longer term, rather than a current issue, however, according to Bochkarev. “It doesn’t look like that Iranian oil is huge challenge for Russian majors next several years. Numerous consumers who stopped buying the oil from Iran due to sanctions made some changes to their refinery or productions lines and equipment. So Iran has to offer some kind of bonus or lower oil prices to make them return to its oil. Probably it’s much easier for Iran to deal with China, India and other countries in Asia in order to find export markets for its oil. Iran can try to restore market share in Europe but the other hand of such policy can be lower oil prices or necessary discounts. LNG Imports from the US as well as the bigger role of Qatar and Iran in the future are already evident in European markets. The unique status of Gazprom is probably now a matter of the past but the more competitive market can finally make Gazprom more competitive.”

Trump Cards

Which means that economic policies shocks that can alter the current flat growth trend for oil prices are unlikely to come from the OPEC+ countries. Instead, the key to the near-term future variation in oil price trend will most likely come from the U.S. The markets are still assessing the full impact of Mr. Trump’s victory on his foreign and energy policies - the two key areas that are likely to alter the supply side of oil equation, as well as his economic policies that might influence the demand side and inflation. Starting with the latter, if - as promised during the election - the new White House Administration deploys a significant infrastructure and spending stimulus across the U.S. economy, we can expect both the demand for oil to firm up, clearing out some, but not all of the excess supply currently available in the markets. A stimulus to the U.S. growth is also likely to trigger higher inflation. With oil generally being a historical hedge against inflationary pressures, the likely outcome of improved growth performance across the U.S. will be a rise in oil prices from the current range of mid-40s to mid-50s and upper-50s, slightly above the IMF forecasts for 2017 and well ahead of the current market prices.

On the other hand, President-elect has promised to shift Federal supports away from alternative energy toward ‘clean coal’, oil and gas sectors. If he gets his way, the impact will be more American oil flowing to exports and higher excess supply, with lower prices. Mr. Trump’s election is likely to see the Republicans-controlled Congress moving to approve more export-driven pipelines, reducing the cost of oil transport from shale oil rich regions, such as Ohio and Pennsylvania, as well as North Dakota, and increasing incentives to boost production levels. Beyond stimulating production of the U.S. oil, Trump Administration is also likely to green light Keystone XL pipeline that will connect Canadian oil sands to exports terminals in the Gulf of Mexico. This will further expand supply of cheaper oil in the global markets.


Combining the two factors, it appears that the current IMF and OPEC outlook for 2017 for oil prices may be rather optimistic.

Barring a significant surge in global (as opposed to the U.S. alone) growth, and absent supportive cuts to production by the OPEC and other major producing countries, in all likelihood we will see oil prices drifting toward USD52-55 per barrel range toward the second half of 2017. Until then, any significant repricing of oil from USD47-48 per barrel price levels up will be a speculative bet on strong economic growth uptick in the U.S.

15/4/16: Of Breakeven Price of Oil: Russia v ROW

There has been much confusion in recent months as to the 'break-even' price of oil for Russian and other producers. In particular, some analysts have, in the past, claimed that Russian production is bust at oil prices below USD40pb, USD30pb and so on.

This ignores the effects of Ruble valuations on oil production costs. Devalued Ruble results in lower U.S. Dollar break-even pricing of oil production for Russian producers.

It also ignores the capital cost of production (which is not only denominated in Rubles, with exception of smaller share of Dollar and Euro-denominated debt, but is also partially offset by the cross-holdings of Russian corporate debt by affiliated banks and investment funds). It generally ignores capital structuring of various producers, including the values of tax shields and leverage ratios involved.

Third factor driving oil break-even price for Russian (and other) producers is ability to switch some of production across the fields, pursuing lower cost, less mature fields where extraction costs might be lower. This is independent of type of field referenced (conventional vs unconventional oils).

Russian Energy Ministry recently stated that Russian oil production break-even price of Brent for Russian producers is around USD 2 pb, which reflects (more likely than not) top quality fields for conventional oil. Russian shale reserves break-even at USD20 pb. In contrast, Rosneft estimates break-even at USD2.7 pb (February 2016 estimate) down from USD4.0 pb (September 2015 estimate).

Here is a chart mapping international comparatives in terms of break-even prices that more closely resembles the above statements:

Here is another chart (from November 2015) showing more crude averaging, with breakdown between notional capital costs (not separating capital costs that are soft leverage - cross-owned - from hard leverage - carrying hard claims on EBIT):

Another point of contention with the above figures is that they use Brent grade pricing as a benchmark, whereby Russian oil is priced at Urals grade, while U.S. prices oil at WTI (see here: http://oilprice.com/Energy/Crude-Oil/Will-Russian-Urals-Overtake-Brent-As-The-Worlds-Oil-Benchmark.html). All three benchmarks are moving targets relative to each other, but adjusting for two factors:

• Historical Brent-Urals spread at around 3.5-4 USD pb and
• Ongoing increase in Urals-like supply of Iranian oil

we can relatively safely say that Russian break-even production point is probably closer to USD7.5-10 pb Brent benchmark than to USD20pb or USD30pb.

Another interesting aspect of the charts above is related to the first chart, which shows clearly that Russian state extracts more in revenues, relative to production costs, from each barrel of oil than the U.S. unconventional oil rate of revenue extraction. Now, you might think that higher burden of taxation (extraction) is bad, except, of course, when it comes to the economic effects of the curse of oil. In normal economic setting, a country producing natural resources should aim to capture more of natural resources revenues into reserve funds to reduce its economic concentration on the extractive sectors. So Russia appears to be doing this. Which, assuming (a tall assumption, of course) Russia can increase efficiency of its fiscal spending, means that Russia can more effectively divert oil-related cash flows toward internal investment and development.

During the boom years, it failed to do so (see here: http://trueeconomics.blogspot.com/2016/02/10216-was-resource-boom-boom-for.html) although it was not unique amongst oil producers in its failure. 

Note: WSJ just published some figures on the same topic, which largely align with my analysis above: http://graphics.wsj.com/oil-barrel-breakdown/?mod=e2tw.

Update: Bloomberg summarises impact of low oil prices on U.S. banks' balancesheets: http://www.bloomberg.com/news/articles/2016-04-15/wall-street-s-oil-crash-a-story-told-in-charts.

Update 2: Meanwhile, Daily Reckoning posted this handy chart showing the futility of forecasting oil prices with 'expert' models

15/1/16: Russia in a Downshifters Club

A very interesting speech by German Gref (Sberbank) on Russian economic development amidst global economic transition from hydrocarbons-based economy

In the nutshell: Russian economy is in a state of 'downshifting' and is positioned to be a losing economy in the new post-hydrocarbons era.

I am not sure about Gref's timing (he thinks there is at most a decade left before the global economy fully re-orients toward alternative sources of energy), but he is correct on the urgency of institutional reforms.

17/12/15: Re-aligning Ruble with Oil: Fed Hiccup...

Two casualties of the Fed's rate jitter: Oil & Ruble

Source: @Schuldensuehner 

Ruble is now nearing August 2015 lows on a continued trend that realigned with oil prices.

And while we are at it, another pairing:

Source: @Schuldensuehner 

Note: as of yesterday's closing Russian CDS 5 year spread was at 308.91 with implied probability of default of 19.15%. A week ago, same stood at 291.64 with implied probability of default at 18.26% and at the end of Tuesday, at 305.91 with implied probability of default at 18.99%.

But as a reminder, watch not only Brent, but also Urals-Brent spread. Hawkish dove of the Fed has less to say on that than Russian energy substitution ongoing in Europe and Turkey via Saudi's and Iranian contracts.

15/12/15: There will be more blood: Global commodities markets

My Article for Sunday Business Post on commodities markets outlook: http://www.businesspost.ie/constantin-gurdgiev-there-will-be-blood/.

16/11/15: IG Insights Summit: Markets Outlook

Recently, I took part at the IG Summit in Dublin on a panel covering the future direction of financial markets. Here is the link to the panel video: https://www.youtube.com/watch?v=iYFRnOCE4Mk.

My interview on the topic is available here: http://trueeconomics.blogspot.ie/2015/10/281015-flatter-growth-trend.html.

12/1/2015: Falling... falling... still... falling: Oil Prices in Time

With WTI just flying past USD45.99/bbl price marker and Brent fell through USD47.47, here's the best visualisation of the 'Plight of Oil' (courtesy of @EdConwaySky):

Note: Above is Brent, but, hey... anyone cares at that stage?..

And here's one in a more historical perspective (courtesy of @Convertbond):

Note: Above is through December 2014. Which means that by now, we are down at the levels of October1990-April 1991 crisis and heading further South.

And in case you are keen on celebrating the above as a definitive Western victory over the Bad Russkies, as Reuters is reporting - Standard Chartered might need to raise USD4.4 billion in capital to cover losses due to commodities-related loans exposures (link). 

25/12/2014: Unwinding Western Excesses, Squeezing Emerging Markets

Just in case you need a scary story for the holidays seasons, here's one from economics. Some time ago, we've learned that zero bound (extremely low) interest rates in the advanced economies spell quite a disaster for the emerging markets, where the economies are now suffering from triple pressures: declining commodities prices (on which many emerging markets economies often rely for exports, declining demand for their exports of goods, and declining investment inflows from the advanced economies.

But that's just the beginning. It seems that any unwinding of the QE deployed in the West is likely to hammer the emerging markets more.

Here's a World Bank paper from earlier this year on the topic: Burns, Andrew and Kida, Mizuho and Lim, Jamus Jerome and Mohapatra, Sanket and Stocker, Marc, Unconventional Monetary Policy Normalization in High-Income Countries: Implications for Emerging Market Capital Flows and Crisis Risks (April 1, 2014). World Bank Policy Research Working Paper No. 6830: http://ssrn.com/abstract=2419786

What the authors found is that as "the recovery in high-income countries firms amid a gradual withdrawal of extraordinary monetary stimulus, developing countries can expect stronger demand for their exports as global trade regains momentum, but also rising interest rates and potentially weaker capital inflows. …In the most likely scenario, a relatively orderly process of normalization would imply a slowdown in capital inflows amounting to 0.6 percent of developing-country GDP between 2013 and 2016, driven in particular by weaker portfolio investments. However, …abrupt changes in market expectations, resulting in global bond yields increasing by 100 to 200 basis points within a couple of quarters, could lead to a sharp reduction in capital inflows to developing countries by between 50 and 80 percent for several months."

Wait, we are witnessing this already, in part, as bond prices in a number of emerging economies are following oil prices down. And worse, if the above applies to corporate yields, the same will apply to government yields. Thus, 'normalisation' in the West can yield double shock to debt markets in the emerging economies.

World Bank paper has more on the subject: "Evidence from past banking crises suggests that countries having seen a substantial expansion of domestic credit over the past five years, deteriorating current account balances, high levels of foreign and short-term debt, and over-valued exchange rates could be more at risk in current circumstances. Countries with adequate policy buffers and investor confidence may be able to rely on market mechanisms and countercyclical macroeconomic and prudential policies to deal with a retrenchment of foreign capital. In other cases, where the scope for maneuver is more limited, countries may be forced to tighten fiscal and monetary policy to reduce financing needs and attract additional inflows."

So the best case scenario, sovereign wealth reserves (if any) will be exhausted on 'normalising' the US, UK, Euro Area and Japan, while if none are present, tough luck - the emerging economies are into a tailspin. They'll have to relieve the path of austerity-driven internal devaluations. Just because the West has ramped printing presses up so much, any 'normalisation' is going to be a disaster. If that is not a case of beggar thy poorer neighbour by enriching thy stock markets strategy, then do tell me what is?

And in another paper, "Tinker, Taper, QE, Bye? The Effect of Quantitative Easing on Financial Flows to Developing Countries" the same authors looked at gross financial inflows to developing countries over 2000-2013 (see: World Bank Policy Research Working Paper No. 6820: http://ssrn.com/abstract=2417518).

As above, authors found evidence "for potential transmission of quantitative easing along observable liquidity, portfolio balancing, and confidence channels. Moreover, quantitative easing had an additional effect over and above these observable channels, which the paper argues cannot be attributed to either market expectations or changes in the structural relationships between inflows and observable fundamentals. The baseline estimates place the lower bound of the effect of quantitative easing at around 5 percent of gross inflows (for the average developing economy), which suggests that of the 62 percent increase in inflows during 2009-13 related to changing global monetary conditions, at least 13 percent of this was attributable to quantitative easing. The paper also finds evidence of heterogeneity among different types of flows; portfolio (especially bond) flows tend to be more sensitive than foreign direct investment to our measured effects from quantitative easing."

So broadly-speaking, QE is impacting bond/debt flows and unwinding QE can be a costly proposition for the emerging markets.

24/10/2014: Weekly Russian Economy Update

Bofit released some latest data on Russian economy, so here is the summary, with some of additional points by myself.

September economic activity acceleration came as a bit of a surprise.

• Manufacturing output was up 4% y/y, driven in part by devaluation of the ruble and in part by increased oil refining activity.
• Defense spending is up 33% y/y in January-September, which also is helping manufacturing orders.
• Agricultural output is sharply up as harvest hits near-record levels.
• Consumption is up as retail sales rose 1.7% y/y with non-food sales up 3.5%. Some observers suggest that households are taking out savings to prepare for higher inflation (inflation hit 8.3% in September, sharply up on 8% in August). Since incomes declined in real terms (down to devaluation and inflation), we can assume that this is to some extent true, although banks are not reporting declines in deposits.
• New car sales shrank 20% y/y in September from 0% y/y in Q1 2014. 
• But consumption is most likely showing lags relative to the rest of the economy, so we can expect continued deterioration in retail sales into Q1 2015.
• Decline in fixed capital investment shallowed out by about 2 percentage points, as Bofit notes "thanks to distinctly better development in investment of large energy and transport enterprises than other investment".
• Meanwhile, construction activity is slowing down from the H1 2014 boom.

Net outcome: the Economy Ministry estimates GDP growth at +0.7 % y-o-y in January–September 2014, with only slight deceleration in the July-September.

This is strong reading, considering some forecasts (e.g. World Bank at 0.5% for 2014). That said, as I noted earlier today, with Central Bank heading into October 31 decision on rates with expected 50-100 bps hike, we might see a sharp decline in the economy in Q4 2014. It would take 0.2% drop in Q4 to get us to WB outlook.

On the other front, everyone who grew tired of focusing on ruble collapse have switched into prognosticating federal budget meltdown on foot of falling oil prices. Yes, Brent fell by a quarter compared to 2014 highs. And Urals followed the trend with prices around USD85/barrel. The chart below (via Bofit) illustrates.

But no, this is not a letdown yet on fiscal side. Here's Bofit analysis: "If the price of crude oil holds at the $85–95 level for a longer time, Russian growth will be much slower than current consensus forecasts predict… Russia’s 2015 federal budget also assumes an average oil price of $100 next year, producing a budget deficit of 0.5 % of GDP. The impact of a lower oil price on Russia’s fiscal balance will still be manageable; the nominal increase in budget revenues from ruble depreciation will in part off-set losses. Prof. Sergei Guriyev estimates public sector finances could withstand an oil price of $80–90 for a couple of years thanks to reserve funds and the weak ruble. Sberbank’s research department has calculated that the current account will remain in surplus next year even if the oil price holds at $85. Export revenues will fall, but also imports will decline substantially on e.g. the weak ruble and impacts from economic sanctions."

How fast Russian imports fall relative to exports? Tough guess, but here's IMF data showing 2009 crisis period:

One thing is clear: the above forecasts by the IMF for 2015 show pretty small reaction in imports. If Russian demand for imports goes negative, it will be down to a number of factors:

1. Lower ruble leading to imports substitution - which is GDP-enhancing;
2. Russian sanctions leading to imports substitution - which is GDP-enhancing;
3. Government contracts shifting to imports substitution (including those with Ukraine, relating to military equipment) - which is GDP-enhancing.

And as 2009 shows, the room for contracting imports is massive: 28.7% y/y in one shot. And IMF is forecasting 2015 decline to be just 0.3% y/y.

23/8/2014: Two charts: US Oil

Two charts for trend spotting:

First one shows US production of oil from 1983 through today:

This shows the reversal of the 45% decline in oil output suffered from 1984-1986 through 2008 in just a few years (2009-present).

The second one maps development of oil pipelines network in the US to match this expansion of production and re-orient infrastructure toward exports:

That's shale & sands impact in just two charts...

17/7/2014: Geopolitics of Russian Gas & Oil: BRICS, US, EU and more

Let's put together three areas on the geopolitical and economic map:
- Ukraine
- Latin America
- Central Asia

What do we have?

A conflict theatre that pitches against each other: Russia, Europe, China and the US. This conflict is drawn across both geopolitical and economic spheres and is, largely, fought via PR and finance. It is, however, a conflict that continues to shift the global balance of power East and South, away from its traditional focus on the West and North.

Let's take a look at all three theatres of the conflict. Keep in mind that in 2013, Russian total energy output grew by 1.5% y/y to rise to 15% of the global output. This represents the largest combined oil & gas output in the world. In natural gas, Russia supplies 22% of the world total. But… and there is a proverbial 'but'… US gas output is growing and US exports of LNG are growing too.


Ukraine: Europe's Push Point

Ukraine is a clear battlefield relating to the energy supply security for EU and gas (less so oil) exports for Russia. We have been here before: most recently in 2006 and 2009, but back then Ukraine was much more independent of the EU and thus Russian-Ukrainian gas price conflict at the time did threaten to disrupt supplies of gas to Europe. This time around, Ukraine has no teeth and Russia needs gas flows, so no one West of the Uzhgorod is losing much of sleep. This sense of security is reinforced by the fact that Moscow needs sales, as Russian economy is running in the red, as opposed to 2006. 2009 was, of course, different in this sense. Another footnote to this is that in the medium term, Europe has plentiful stored reserves of gas: some 65% of its gas storage capacity into early summer is full. This is a record high, allowing EU to do some sabre-rattling vis-a-vis Russia.

In addition, EU currently holds the trump cards when it comes to completion of the South Stream pipeline. This point is very significant. South Stream can provide meaningful diversification for transit of gas into Southern European markets, currently being serviced via Ukraine. South Stream capacity is set at 63 billion cubic meters (bcm) per annum, in excess of 55 bcm capacity of Nord Stream 1 & 2 which is up and running. There are problems with capacity utilisation on Nord Stream which are down to EU regulations. The same is threatening the South Stream plans (although the EU has exempted from the said regulations the Turkish pipeline, while it is unwilling to grant an exemption to Russians).

Source: Expert.ru

EU gas imports from Russia currently run at around 1/3 of total european demand, and cost ca USD53 billion per annum. Total volume of gas sales to EU from Russia was 138 bcm in 2013 at an average price of USD387 per thousand cubic meters (mcm) or USD10.50 per million British thermal units (therm). Currently, around 15% of Russia's Federal budget comes from gas exports and Europe is by far the largest market for Russian gas. This underpins medium-term Russian dependency on Europe. But it also underpins medium-term dependency of Europe on Russia: replacing Russian gas in any meaningful quantities will be costly. According to Bloomberg report (here) from earlier this year, "Benchmark U.K. prices would need to rise 127 percent to attract liquefied natural gas if Europe had to replace all its Russian fuel for two summer months". That is only for summer months. Furthermore, "The EU would need to pay as much as 50 percent more to replace that with a combination of LNG, Norwegian gas and coal, according to Bruegel, a research group in Brussels."

Source: Bank of Finland, 2014.

So with power to block South Stream (primarily by pressuring EU member states through which it will pass), the EU holds some serious tramp cards against Russia. These states are: Bulgaria (which was the first signatory to South Stream construction project back in January 2008, just 5 months after South Stream MoU was signed between Eni and Gazprom; Hungary (which signed an inter-governmental agreement on South Stream at the end of February 2008), Slovenia (in South Stream partnership since November 2009) and Croatia (since March 2010). Interestingly, Austria signed a legally binding agreement to build South Stream section (50km) via its territory on June 30th (Russian version here). The EU Commission has engaged in very heavy-handed 'diplomacy' bordering on bullying when it comes to those countries (namely Hungary, Austria, Bulgaria and Slovenia) which have been at the forefront of progressing the South Stream project. But their position is reinforced by both necessity and expedience. Neither the South Stream countries, nor Germany and Italy want to see continued EU dependence on Ukraine as transit route. Despite all the Ukrainian claims to the contrary, this transit has been less than reliable both due to Russian position vis-a-vis Ukraine and Ukraine's position vis-a-vis Russia. On expedience side, transit fees for Russian gas are lucrative to many Balkan countries and South Stream involves partnership with Italian Eni and French EDF - both of which have massive political and economic clout.

Still, Ukraine is clearly attempting to drive a wedge between EU and Russia when it comes to gas transit. Kyev has offered to construct own pipelines to transport Russian gas, in a JV with European countries (who, presumably, will fund this programme). See a report on this idea here. And Russia considered (albeit did not follow through with it) responding in-kind: South Stream economics would significantly improve if it were to go sea-route from Crimean land mass. However, to-date Russia has not indicated officially it is interested in this re-routing).

Russia has another, albeit more limited alternative. In April 2013, Gazprom was instructed to restart the Yamal-Europe-2 gas pipeline bypassing Ukraine, via Belarusian border to Poland and Slovakia. This was scheduled to be completed by 2019, but we can expect some acceleration in the project later this year. This will add only 15 bcm to Yamal-Europe-1 pipe that currently has capacity of 33 bcm. Beefing shipments via Belarus in the future is an alternative. It involves added costs and uncertainty for Russia too. On costs side, Belarus is heavily dependent on Russian energy subsidies and this dependency can be amplified if it serves as a more important gas transit conduit. Russia, weary of its Ukrainian experience - the never ending double-play by transit countries of EU against Russia in gas politics - is not too keen on switching Ukrainian routes to Belorussian. And on risks side, there is Poland with staunchly Russo-sceptic politics and insistence on ownership of transit infrastructure that potentially makes Russian gas hostage to Warsaw.

Source: American Enterprise Institute, 2013

On to Central Asia

All of which means that Russia is looking for diversification away from the European markets for its gas. Earlier this year, China provided a convenient outlet. China accounts for 22.4% of world's energy consumption and it signed a Chinese-Russian 30 year, USD400 billion (plus options) gas deal this May (I covered the deal here). China is also engaged in Bazhenov super-field exploration development (see my earlier note on this here). Both are mega-deals, beyond any doubt. But China will be buying (in first stages) only 38 bcm of gas from Russia.

The reason for this is that China has been also gradually diversifying its sources of supply. This year, China will purchase over 45% of its imports of natural gas directly from Central Asia, according to BP. Turkmenistan ships around 25 bcm of gas to China, Kazakhstan and Uzbekistan ship 2.9 bcm and 0.1 bcm. The latter has capacity to increase these shipments by 50 fold by 2015-2016. Turkmenistan holds a 65 bcm supply deal (by 2020) with China. And China is completing two pipelines linking it to Central Asia this year (see here). Combined Central Asian pipeline capacity by 2015 will be running at 55 bcm - same as South Stream. And in December, China will launch construction of line D which is expected to be in full operation by 2020.

On the surface, this looks like China is aggressively shifting toward increasing its share of imports from Central Asia, but even with line D fully running, the target is for Central Asia to ship about 40% of China's overall imports demand for natural gas - a small decline on current share of Chinese imports. Still, China's aggressive move into Central Asia puts a bit of a chill into Russia's regional power base there. And it happened over the last 7-8 years, just at the time as Russia has been focusing increasing attention on its European border. In fact, Russian global position can be described as being under double-pressure: in the West by the EU and Nato and in the East by China - all actively moving into Russian 'near-abroad' and both actively pushing Russia into defensive position with respect to its traditional or historical economic and political allies.

This is best exemplified by Turkmenistan which used to depend almost entirely on Russian gas infrastructure and sales capacity to export its gas. The country has the sixth largest proven natural gas reserves in the world (at 7.5 trillion cubic meters) and is the second largest dry natural gas producer in Eurasia. Turkmenistan is continuously increasing its proven reserves: between 2009 and 2011 these rose 2.8 times. Since 2006, the Government has focused on diversifying its exports outside the markets supplied by Russian infrastructure. Turkmenistan exported some 42.48 bcm of natural gas in 2012, of which 52% went to China, 24% to Russia and 22% to Iran.

Crucially, from China's point of view, Beijing owns the Turkmen infrastructure: it has effectively full ownership of the pipelines and it built the USD600 million gas processing facility at the Bagtyyarlyk gas field (plant capacity is 8.7 bcm per annum). China also built the first plant at the field back in December 2009 and Chinese investment in the field runs around USD4 billion and rising. In June, the Government launched construction of another processing plant at the super-giant Galkynysh field (world's second largest gas field). Turkmenistan is also heavily pushing for a Trans-Caspian pipeline with a link to Trans-Anatolian pipe which would give it access to European markets. The EU has indicated already that the pipeline will be exempt from the European regulations relating to the Third Energy package, the same regulations that are effectively cutting Russia's Nord Stream capacity by a half and are threatening the derailment of the South Stream.

Russia's response to the Central Asian challenge is to push for more business on its Western and Eastern flanks. Azerbaijan is currently in negotiations with Moscow to join the Eurasian Economic Union. Based on economic analysis (see here) the EEU offers significant trade and trade diversification opportunities for Azerbaijan, but it will also harmonise energy policy, reducing Azerbaijan's clout in terms of accessing the EU markets. The major sticking point, however, is Azerbaijan's ongoing 'cold' war with Armenia in which Russia backs Yerevan and Turkey backs Baku. However, there are rumours that Russia is trying to bypass this issue by negotiating simultaneous accession of Armenia and Azerbaijan into EEU. Although these are just rumours. Officially, Azerbaijan was not (yet) invited to join. For now, Azerbaijan is playing both sides of the Russia-West divide but how long this game can go on is a huge question. The country is pivotal for transit routes for Trans-Caspian gas to Europe and it is a major player in Central Asian developing links to Turkey. Europe is keen on incentivising (or de facto geopolitically bribing) Azerbaijan to shift toward its orbit and Turkey is keen to play the leadership role in this game. Georgia - the dealing of the West in the region - is also keen on drawing Azerbaijan into Western orbit, as it hopes to act as a bridge between oil and gas rich Caspian and cash rich Europe via the Black Sea routes.

In recent months, EU and US both stressed the importance of Azerbaijan to energy security in Europe. In April, US Secretary of State, John Kerry, declared Azerbaijan to be "the future of European energy" despite the obvious fact that even if Azerbaijan gains access to European markets via TANAP and TAP pipes linking it (via Turkey) to Austria and Italy the combined pipelines capacity will be around 30 bcm per annum. EU consumes roughly 460 bcm of natural gas annually. The 'future of European energy' is a source of no more than just 6% of the European demand. Not that absurdity of exaggerated claims ever stopped Mr. Kerry from making them in the past. Incidentally, the EU and US both have brushed aside significant security concerns relating to putting two major gas pipes through the region that is ripe with risks of terrorist threats.

Source: http://www.tagesschau.de/wirtschaft/nabucco-aus100~magnifier_pos-1.html

From Central Asia to Broader Asia

So Russia is forced into a defensive position in Central Asia, just as it is being forced into a defensive position o its Western borders. Russian response to-date has been two-pronged:

1. Engage China into broader cooperative inter-links via BRICS; and
2. Find new geopolitically strategic markets.

In terms of new geopolitically and economically lucrative markets, Russia has been looking both at the BRICS and elsewhere.

On the latter front, recent move (April 2014) to cancel 90% of the Soviet-era North Korean debt and engagement with the country in trying to open transit routes to Korea show Moscow's interest in driving gas and oil exports out to the wealthier Southern Korean markets, currently reliant on excruciatingly expensive LNG shipments (97% of total energy needs of the country are imported). Russia is planning to invest some USD1 billion in North Korea, amongst other things, building a gas pipeline to South Korea.

Beyond this, there is Japan. Per Bloomberg report a group of 33 Japanese lawmakers have backed a 1,350 kilometer USD5.9 billion (estimated cost) pipeline connecting Russia’s Sakhalin Island and Japan’s Ibaraki prefecture. Pipe capacity: 20 bcm or just over half the Chinese deal Russia signed. This pipeline, if completed, would supply up to 17% of Japan’s imports, but more importantly, open up Sakhalin fields access to a huge market. Cost savings for Japan and Korea can be sizeable. Russia-China deal was priced at around USD10.50-11 per therm, as opposed to the LNG priced at USD13.3 at around end of May (down from USD19.7 back in the winter 2014).

And then there is India, the 3rd-largest oil importer in the world after the US and China, with forecasts showing the country becoming world's largest importer by 2020. Worse, with prices sky-high and its economic growth heavily dependent on energy-intensive services sectors, India is now facing an energy crunch.

Russia has been negotiating with India the most expensive pipeline deal in history: a USD30 billion oil pipe linking Russia’s Altai Mountains to the Xinjiang province of China and northern India. Oil is a different equation for Russia (the country exports 70% of oil output against 30% of gas output and Federal revenues are more dependent on oil than on gas.

In 2012, 52% of Federal revenues came from exports of energy carriers, with gas supplying around 1/3rd of this. Still, pressure is rising. Russia's 2014 budget is balanced at around USD115-117 per barrel, which more than 5-times higher than 2006 when its budget balanced at around USD21-22 per barrel. In its revised Budget plan for 2014, based on performance over January-April 2014, Russia expects federal budget revenue of 14.238 trillion rubles (an increase of 668.3 billion rubles compared to the previously published budgetary estimates). This includes additional oil and gas revenue of 1.567 trillion rubles, up 952.1 billion rubles on previous. Moscow expects a federal budget surplus of 278.6 billion rubles in 2014. On the other hand, Russian Government actual revenues rose 10 % y/y in Q1 2014, primarily due to foreign exchange effects of ruble devaluation (dollar up, dollar revenues from exports translate into more ruble revenues). Which means that, assuming the price of Urals-grade crude stays at USD104 per barrel and if ruble/dollar exchange rate stays at around 35.5 rubles to the dollar (ca 10 % devaluation on 2013), then Russian federal budget is likely to show a forecast surplus despite lower economic activity.

Back in October 2013, India and Russia reiterated that they will continue collaborating on developing direct ground links for oil and gas transports. Indications are, the issue was mentioned at the latest BRICS summit. India imports ca 35% of its gas consumption. Interestingly, in this area, Russia can squeeze out Turkmenistan. The proposal for a USD9 billion Turkmenistan-Afghanistan-Pakistan-India gas pipeline is currently finding it difficult to raise funding and sign a consortium lead. The project ran pitches in London, Singapore and New York but failed to attract an international major to join. India is now looking to Russia for developing a gas pipeline, similar to the oil pipeline, via China. India is already linked into Russian oil and gas industry. Back in 2011, Indian FDI into Russian energy sector totalled USD6.5 billion, with USD2.8 billion invested in Sakhalin-1 and is seeking a stake in Sakhalin-3. India is also looking to invest some USD1.5 billion in the Russian Yamal peninsula. Yamal holds one-fifth of global natural gas reserves. Last, but not least, India is trying to get off the ground gas liquefaction offshore projects in Russia for shipments to Indian market.

Source: http://www.dailykos.com/story/2009/10/29/798609/-Building-A-Pipeline-Energy-Politics-In-Afghanistan

Here is a far-reaching possibility: India, Russia and China creating a joint/shared infrastructure system that links Russian and Central Asian oil and gas to India and China. The net losers in such a scenario will be the US (due to lower cost of LNG in Asia-Pacific), Australia (major supplier of LNG to Korea and China) and Europe. Azerbaijan, on the other hand, is likely to link up with the BRICS-led transport network, although it might require the country to sign up to the EEU.


BRICS: The Flavour of the Month

Which, naturally brings us to BRICS. This week, we had a BRICS summit and Vladimir Putin's visit to Latin America. Both played a central role in shaping the evolving Russian geopolitical strategy. Firstly, the trip and the summit shows that Russia is not a regional power (as President Obama claims), but a global player (as Russia claims). Via twin track approach: BRICS + disenfranchised states provide exactly this platform. Hence we saw Cuban visit and cancelation of 90% of the (completely un-recoverable) Cuban debts. We also saw Argentina talks, which yielded major nuclear power contract: Rosatom will build two new power generation units. There were also talks about development of Argentinian shale gas deposits.

Secondly, BRICS summit is now set to remain neutral on the issue of Ukraine. With BRIC leaders abstaining from criticising Russian position, President Putin achieves two goals:

1. puts Russia into a major international decision making arena without having to deal with the issue of Ukraine; and 
2. shows to the West that US and EU cannot automatically count on emerging economies falling into their orbit on geopolitical issues.

Thirdly, Putin's initiative for creating a BRICS-based development bank strengthens the BRICS cooperation and moves it toward a tangible financial and policy commitment. The same goes for a reserve fund.

On geopolitical side of things, Russia, India and China are already facing common security considerations (as well as some growing economic interests) in Afghanistan. The countries have raised a possibility of setting up a trilateral framework of cooperation there and this is also likely to feature in their discussions in Brazil, although don't expect to see it in the official reports. And BRICS are getting more active in the Latin American neighbourhood. BRICS held a meeting with Unasur organisation and leaders of a number of Lat AM countries.

On trade side, President Putin and Brazil president Dilma Rousseff have confirmed their objective of doubling the bilateral trade between the two countries to USD10 billion dollars per annum from current (2013) USD5.56 billion. The original target was set three years ago.

Elsewhere, in June, Russia and Nicaragua confirmed Russian engagement with the Chinese-led plan for Interoceanic Grand Canal. Construction is expected to start by the end of 2014. The IGC will be 286 km long (Panama Canal is 81.5 km), have width of 83 meters and depth of 27.5 meters. This will make it suitable for long-range ships with a deadweight of up to 270,000 tons. The cost of which is estimated at USD30-40 billion.

Source: http://www.qcostarica.com/wp-content/uploads/2014/02/Canal-Nicaragua.jpg


Conclusions:

The last point ties in the BRICS dynamics with Russia's economic push East. China is becoming a major partner in a number of Russia-linked initiatives, including those that are of greater benefit to Beijing than to Moscow (e.g. the IGC). In effect, Russia is gradually building up mutual inter-dependency with China in Latin America, Central Asia and, via the Northern Passage (the sea route to Europe via Russia's Arctic waters) in Europe. This process is in its early stages, but it is a part of the emerging long-term strategy that can lead to significant re-orientation of global politics and, to a lesser extent, economics. Further ahead, beyond the bilateral agreements, Russia, India and China are sitting at the centre of the vast and rapidly growing infrastructure-light markets for energy and transport. Joint co-development of this infrastructure, especially pairing transport of energy with transport of goods and other commodities, suits all regional powers well. This is similar in nature to, but more massive in scale than the ongoing emerging cooperation between China and Russia in Central and Latin America. It does not suit the West.

So Ukraine is a flashing point of the old battlefields. It is still 'hot' but it no longer matters as much as Kiev and Brussels want it to matter. From here on, keep an eye on Latin America, Central Asia and Asia-Pacific for the places where Russian strategy is going to play out next, this time around with BRICS most likely alongside Moscow. The core driver for this change is not Russian 'nationalist revival' or Kremlin's 'aggressive aspirations'. Instead it is the force of the pince-nez squeeze of Western geopolitical pressures on Russia on its Western flank and Chinese demand for natural resources on the Eastern flank that is driving Russia to a reactive, not pro-active strategy. That this strategy is defensive is clear from its reactive and lagged nature. That this strategy is getting now active is clear from the geographic reach it assumed in recent months.

22/8/2013: Hedges & Safe Havens out in print

Our paper on hedges and safe havens is finally out in print. Full citation:

Cetin Ciner, Constantin Gurdgiev, Brian M. Lucey, "Hedges and safe havens: An examination of stocks, bonds, gold, oil and exchange rates"

International Review of Financial Analysis, Volume 29, September 2013, Pages 202-211

ISSN 1057-5219

http://dx.doi.org/10.1016/j.irfa.2012.12.001.
http://www.sciencedirect.com/science/article/pii/S1057521912001226

Keywords: Safe havens; Quantile regressions gold; Oil