6/2/21: Longer Trends in Economic Uncertainty

 

Quite dramatic trends in terms of rising economic uncertainty over the last 21 years:

And, not surprisingly, the rise of uncertainty in Europe, the U.S., and globally pre-dates the Covid19 pandemic. In fact, Europe has been experiencing dramatically elevated uncertainty levels since the start of the Euro area crisis, while the U.S. saw a virtually exponential rise in uncertainty from 2017 on. Global measures of uncertainty have been running high through 2016 and rose dramatically thereafter. 

While amelioration in the Covid19 pandemic dynamics is likely to lower the levels and the volatility of the uncertainty in global economic systems, it is highly unlikely to return us to the pre-Global Financial Crisis state of affairs.

17/4/20: COVID19 Updated Charts and Outliers

Updating two charts for #COVID19 pandemic today:

First: US vs EU chart:

Second: Russia chart:

Since I included no commentary on Russian data in the chart itself, it is worth noting that data so far indicates no data suppression or mis-reporting. This is confirmed by analysis of 'outliers' in the data. I have looked at all countries with > 1,000 cases reported and considered observations on cases reported that fall out of trend line from the time when the country cumulated cases counts reached > 50 cases. For example, if a country reported 127 cases in day T, followed by 139 cases in day T+1, and suddenly showed 0 cases in T+2, followed by 99 cases in T+3, the date of T+2 was marked as an 'outlier'. I ignored all cases where 'outlier' suspect dates were above 20 cases, even if the number was still outside the range of the trend-defined 'norm'.

Note: these outliers can be a function of tests arrivals dates, availability of tests, hospitals reporting dates and other differences that have nothing to do with 'Government manipulation'. All in, 43 countries out of 77 with more than 1,000 cases have reported at least one outlier.

Russia had 3.45% of days reporting appearing as extreme outliers. 30 out of the total 77 countries on the list had higher percentage of outliers days than Russia. Median for 77 countries was 2.9%, mean was 5.9% and STDEV was 8.6%.

Only two of these countries, namely Russia (3.45% of observations countable as outliers) and China (13.3% of observations being outliers), has been accused in the Western media of releasing politically manipulated data. China, of course, has a very high percentage of observations that can be identified as outliers, while Russia is, basically, middle-of-the-road.

2/4/20: COVID19 in three charts

#COVID2019 economy in three pics:

U.S. unemployment claims, week 2 of filings:

Irish unemployment claims, first month of filings:

 World GDP forecast after one month of Covid pandemic:

FUGLY! All around. 

22/3/20: COVID2019 in Numbers

Updating numbers for Corona Virus infections and related deaths:

Next up, comparing Italy and U.S. numbers in terms of their dynamics from the start of the infection detections in each country (date 30) to today:

Note, while the U.S. infections dynamics have overtaken Italy already, U.S. death rates remain well below those in Italy. This is due to a range of factors, none of which are particularly satisfactory for the U.S. healthcare system assessment:

1. Italian demographics and deaths cases suggest that Italian patients were more likely to die from the disease earlier on after the detection than the U.S. patients.
2. Higher population density and concentration of the virus cases in Italy mean greater strain on healthcare resources in specific locations in Italy than in the U.S.
3. rates of detection and treatment are most likely much higher in Italy than in the U.S. due to more severe restrictions in the U.S. in accessing healthcare. 

I covered some of these earlier here: https://trueeconomics.blogspot.com/2020/03/15320-acute-beds-and-hospital-beds.html. But here is an added kicker not mentioned in the linked post: the U.S. is now facing a massive wave of ongoing layoffs. As workers lose their jobs, they also lose access to health insurance (the continuity coverage program, COBRA, is excruciatingly expensive).

15/1/20: What Trade Deal Phase 1/N Says About the Four Horsemen of Apocalypse

Phase 1 of N of the "Greatest Trade Deal" that is "easiest to achieve' by the 'stablest Genius' is hitting the newsflows today. Which brings us to two posts worth reading on the subject:

Post 1 via Global Macro Monitor: https://global-macro-monitor.com/2020/01/15/phase-1-of-potemkin-trade-deal-signed-sealed-and-yet-to-deliver/ is as always (from that source) excellent. Key takeaways are:

• "We never believed for one moment that China would cave on any of the big issues, such as restructuring its economy and any deal would be just some token political salad dressing for the 2020 election."
• "Moreover, much of the deal depends on whether the Chinese will abide by Soviet-style import quotas," or in more common parlance: limits on imports of goods into the country, which is is 'command and control' economics of central planning.
• "We are thankful, however,  the economic hostilities have momentarily ratcheted down but the game is hardly over," with tariffs and trade restrictions/suppression being the "new paranormal".
• "Seriously, after more than two years of negotiations, they couldn’t even agree on dog and cat food imports?"

Post 2 via Market Watch: https://www.marketwatch.com/story/phase-one-trade-deal-wont-end-the-uncertainty-in-markets-hsbc-strategist-says-2020-01-15. Key takeaways:

• "The [trade] environment remains very much in flux and a source of concern and challenge for investors".

My takeaways from Phase 1/N thingy: we are in a VUCA world. The current U.S. Presidential Administration is an automated plant for production of uncertainty and ambiguity, while the world economy is mired in unresolvable (see WTO's Appellate Body trials & tribulations) complexity. Beyond the White House, political cycle in the U.S. is driving even more uncertainty and more ambiguity into the system. The Four Horse(wo)men of the Apocalypse in charge today are, in order of their power to shift the geopolitical and macroeconomic risk balance, Xi, DNC leadership, Putin and Trump. None of them are, by definition, benign. 

The trade deal so far shows that Xi holds momentum over Trump. Putin's shake up of the Russian Cabinet today shows that he is positioning for some change in internal power balances into 2020, and this is likely to have some serious (unknown to-date) implications geopolitically. Putin's meeting with Angela Merkel earlier this week is a harbinger of a policy pivot to come for the EU and Russia and Lavrov's yesterday's statement about weaponization of the U.S. dollar and the need for de-dollarization of the global economy seems to be in line with the Russo-German New Alignment (both countries are interested in shifting more and more trade and investment outside the net of the U.S. sanctions raised against a number of countries, including Iran and Russia).

DNC leadership will hold the cards to 2020 Presidential Election in the U.S. My belief is that it currently has a 75:25 split on Biden vs Warren, with selection of the former yielding a 50:50 chance of a Trump 2.0 Administration, and selection of the latter yielding a 35:65 chance in favour of Warren. The electoral campaigning climate is so toxic right now, we have this take on the latest Presidential debate: https://twitter.com/TheDailyShow/status/1217431488439967744?s=20. Meanwhile, debate is being stifled already by the security agencies 'warnings' about Russian 'interference' via critical analysis of the candidates.

Mr. Trump has his Twitter Machine to rely upon in wrecking havoc, that, plus the pliant Pentagon Hawks, always ready to bomb something anywhere around the world. While that power is awesome in its destructiveness vis-a-vis smaller nations, it is tertiary to the political, geopolitical and economic powers of the other three Horse(wo)men, unless Mr. Trump gets VUCAed into a new war.

BoJo's UK as well as Japan, Canada, Australia et al, can just sit back and watch how the world will roll with the Four punchers. The only player that has a chance to dance closely with at least some of the geopolitical VUCA leaders is the EU (read: France and Germany, really). 

1/9/19: U.S. Non-Financial Corporate Sector: Stagnation in Net Value Added

Value added by the U.S. non-financial corporates has been languishing well below the cyclical peak for some months now:

In fact, since Q3 2016, net value added by the non-financial corporations has been running below long run trend, and has been basically flat. This suggests substantial pressures build up in the economy, consistent with all previous early indicators of a recession. Interestingly, there is zero evidence of any improvement in the non-financial economy in the U.S. since 2016 election.

23/8/19: Counting Trillions: The Unrelenting March of Debt

The never-ending march of leverage:

Between 2001 and 2008, Big 4 Non-Financial Sector Debt rose USD 30.04 trillion or 96.5 percent from trough to peak. Since 1Q 2009 financial crisis trough through 2Q 2019, the same is up USD 37.35 trillion or 62.7 percent.

6/8/19: El Paso and Dayton mark 2019 as the worst year for mass shooting violence in America on record

In the wake of the extremely sad events of the last two weeks, it took me some time to run through the data from the https://www.gunviolencearchive.org/ on mass shootings in the U.S. 2014-2019 (to-date), and the numbers are shocking. The El Paso, TX shooting of August 3, followed by the Dayton, OH incident on August 4  (with combined numbers of those killed or injured at 82 with 30 people dead, may they rest in peace) have shaken the world (see, for example, https://www.nytimes.com/2019/08/06/world/europe/mass-shooting-international-reaction.html). 

Here is a summary table on U.S. mass shootings over the last 5 years and 7 months:

So far, 2019 has been the deadliest year on record in terms of overall number of mass shooting incidents, in terms of the numbers of people killed and injured, in terms of the number of people killed, in terms of the number of people injured, and in terms of the number of incidents with 10 or more people killed and injured.

Here is a summary of the 26 largest mass shootings on record:

There appears to be little in terms of distributional trends, especially given small number of years in data coverage, but so far, data suggests that there can be an ongoing increase in the number and severity of mass shootings over the years, with 2019-to-date reconfirming 2016-2017 dynamics that were partially reversed in 2018.

Two visualisation charts, identifying the Texas mass shooting of August 3rd:

 

As the charts above clearly show, August 3, 2019 shooting in Texas is the fourth largest in terms of people either killed or injured (46) after October 1, 2017 mass shooting in Nevada (500), June 12, 2016 shooting in Florida (103), and November 5, 2017 mass shooting in Texas (47).

Overall, there has been 1,925 mass shootings in the U.S. over 2042 days since the start of 2014, with 2,163 people killed and 8.160 people injured. Since January 1, 2014 through August 4 2019, on average, almost 1.06 persons died and 4 persons were injured in mass shootings per day.

The impact of these horrific incidents is, of course, far deeper-reaching, touching the lives of those close to people killed or injured, as well as those in public vicinity of those directly impacted. There is also an unquantifiable broader impact on the society at large. We need better data to better understand these deeper and broader impacts.

We also need better data to try and decipher any causal links and drivers for these horrific crimes. And we need more analysis of the deeper roots and causes of these.


As a tail end of the post, my deepest sympathies to the families and friends of those taken away by the gunmen in mass shootings, and indeed by all gunmen in all guns-involved violent events, and my best wishes for full and speedy recovery for all those injured by them.

1/9/19: 'Losin Spectacularly': Trump Trade Wars and net exports

U.S. net exports of goods and services are in a tailspin and Trump Trade Wars have been anything but 'winning' for American exporters. You can read about the effects of Trade Wars on corporate revenues and earnings here: https://trueeconomics.blogspot.com/2019/07/31719-fed-rate-cut-wont-move-needle-on.html. And you can see the trends in net exports here:

This clearly shows that 'Winning Bigly' is really, materially, about 'Losin Spectacularly'. Tremendous stuff!

13/7/19: BRICS and G7

As a side note: the BRICS now have a bigger share of the world economy than the Euro area and the U.S. combined:

In 2019, BRICS combined GDP will surpass (using PPP-adjusted GDP) that of G7 economies, and in 2020, based on IMF forecasts, it will exceed the combined share of the world GDP for the US + EU27 economies.

Not a single BRICS economy is currently represented in G7. Dire...

30/7/18: Corruption Perceptions: Tax Havens vs U.S. and Ireland

Transparency International recently released its annual Corruption Perceptions Index, a measure of the degree of public concerns with corruption, covering 180 countries. 

The Index is quite revealing. Not a single large economy is represented in the top 10 countries in terms of low perceptions of corruption. Worse, for a whole range of the much ‘talked about’ tax havens and tax optimising states, corruption seems to be not a problem. Switzerland ranks 3rd in the world in public perceptions of corruption, Luxembourg ranks 8th, along with the Netherlands, and the world’s leading ‘financial secrecy’ jurisdictions, the UK. Hong Kong is ranked 13th. Ireland is in a relatively poor spot at 19th place. 

American exceptionalism, meanwhile, continues to shine. The U.S. occupies a mediocre (for its anti-corruption rhetoric and the chest-thumping pursuits of corrupt regimes around the world) 16th place in the Corruption Perception Index, just one place above Ireland, and in the same place as Belgium and Austria (the former being a well-known centre for business corruption, while the latter sports highly secretive and creative, when it comes to attracting foreign cash, financial system). UAE (21st), Uruguay (23rd), Barbados (25th), Bhutan (26th) and more, are within the statistical confidence interval of the U.S. score. 

And consider Europe. While most of the Nordic and ‘Germanic’ Europe, plus the UK and Ireland, are  in top 20, the rest of the EU rank below the U.S. All non-EU Western European countries, meanwhile, are in the top 15. 

Now, in terms of dynamics, using TI’s data that traces comparable indices back to 2012:

- The U.S. performance in terms of corruption remains effectively poor. The country scored 73 on CPI in 2012-2013, and since then, the score roughy remained bounded between 74 and 75. Ireland, however, managed to improve significantly, relative to the past. In 2012, Irish CPI score was 69. Since then, it rose to a peak of 75 in 2015 and is currently standing at 74. So in terms of both 2012 to peak, and peak to 2017 dynamics, Ireland is doing reasonably well, even though we are still suffering from the low starting base. 

Hey, anyone heard of any corruption convictions at the Four Courts recently?

16/12/17: Dancing towards the end of QE

My article on the Super Thursday: monetary policy decisions by ECB, the Fed, PBOC, Norges Bank, SNB et al for Sunday Business Post:
https://www.businesspost.ie/opinion/dancing-towards-end-qe-405054.

17/1/17: Russian Economic Policy Uncertainty 2016

In the previous post (link here), I covered 2016 full year spike in economic policy uncertainty in Europe on foot of amplification of systemic risks. Here is the analysis of Russian index.

As shown in the chart above, 2016 continued the trend for downward correction in Russian economic policy uncertainty that took the index from its all-time high in 2014 (at 180.4) to 160 in 2015 and 142.5 in 2016. All data is rebased to 1994 - the first year for which Russian data is available. However, at 142.5, the index is still well above its historical average of 94.1 and stands at the fifth highest reading in history.

Much of the reduction in economic policy uncertainty over 2016 came over the fist seven months of the year, with index readings rising into the second half of 2016 and peaking at 251.1 in December.

In simple terms, while the peak of 2014 crisis has now passed, questions about economic policies in Russia remain, in line with concerns about the sustainability of the nascent economic recovery. Moderation in economic policy uncertainty over the course of 2016 appears to be closely aligned with:

1. Variations in oil prices outlook; and
2. External geopolitical shocks (including the election of Donald Trump, with raw index data spiking in August and September 2016 and November and December 2016, while falling in October, in line with Mr. Trump's electoral prospect).

In other words, relative moderation in the index appears to reflect mostly exogenous factors, rather than internal structural reforms or policies changes.

18/2/15: IMF Package for Ukraine: Some Pesky Macros

Ukraine package of funding from the IMF and other lenders remains still largely unspecified, but it is worth recapping what we do know and what we don't.

Total package is USD40 billion. Of which, USD17.5 billion will come from the IMF and USD22.5 billion will come from the EU. The US seemed to have avoided being drawn into the financial singularity they helped (directly or not) to create.

We have no idea as to the distribution of the USD22.5 billion across the individual EU states, but it is pretty safe to assume that countries like Greece won't be too keen contributing. Cyprus probably as well. Ireland, Portugal, Spain, Italy - all struggling with debts of their own also need this new 'commitment' like a hole in the head. Belgium might cheerfully pony up (with distinctly Belgian cheer that is genuinely overwhelming to those in Belgium). But what about the countries like the Baltics and those of the Southern EU? Does Bulgaria have spare hundreds of million floating around? Hungary clearly can't expect much of good will from Kiev, given its tango with Moscow, so it is not exactly likely to cheer on the funding plans… Who will? Austria and Germany and France, though France is never too keen on parting with cash, unless it gets more cash in return through some other doors. In Poland, farmers are protesting about EUR100 million that the country lent to Ukraine. Wait till they get the bill for their share of the USD22.5 billion coming due.

Recall that in April 2014, IMF has already provided USD17 billion to Ukraine and has paid up USD4.5 billion to-date. In addition, Ukraine received USD2 billion in credit guarantees (not even funds) from the US, EUR1.8 billion in funding from the EU and another EUR1.6 billion in pre-April loans from the same source. Germany sent bilateral EUR500 million and Poland sent EUR100 million, with Japan lending USD300 million.

Here's a kicker. With all this 'help' Ukrainian debt/GDP ratio is racing beyond sustainability bounds. Under pre-February 'deal' scenario, IMF expected Ukrainian debt to peak at USD109 billion in 2017. Now, with the new 'deal' we are looking at debt (assuming no write down in a major restructuring) reaching for USD149 billion through 2018 and continuing to head North from there.

An added problem is the exchange rate which determines both the debt/GDP ratio and the debt burden.

Charts below show the absolute level of external debt (in current USD billions) and the debt/GDP ratios under the new 'deal' as opposed to previous programme. The second chart also shows the effects of further devaluation in Hryvna against the USD on debt/GDP ratios. It is worth noting that the IMF current assumption on Hryvna/USD is for 2014 rate of 11.30 and for 2015 of 12.91. Both are utterly unrealistic, given where Hryvna is trading now - at close to 26 to USD. (Note, just for comparative purposes, if Ruble were to hit the rates of decline that Hryvna has experienced between January 2014 and now, it would be trading at RUB/USD87, not RUB/USD61.20. Yet, all of us heard in the mainstream media about Ruble crisis, but there is virtually no reporting of the Hryvna crisis).

Now, keep in mind the latest macro figures from Ukraine are horrific.

Q3 2014 final GDP print came in at a y/y drop of 5.3%, accelerating final GDP decline of 5.1% in Q2 2014. Now, we know that things went even worse in Q4 2014, with some analysts (e.g. Danske) forecasting a decline in GDP of 14% y/y in Q4 2014. 2015 is expected to be a 'walk in the park' compared to that with FY projected GDP drop of around 8.5% for a third straight year!

Country Forex ratings are down at CCC- with negative outlook (S&P). These are a couple of months old. Still, no one in the rantings agencies is rushing to deal with any new data to revise these. Russia, for comparison, is rated BB+ with negative outlook and has been hammered by downgrades by the agencies seemingly racing to join that coveted 'Get Vlad!' club. Is kicking the Russian economy just a plat du jour when the agencies are trying to prove objectivity in analysis after all those ABS/MBS misfires of the last 15 years?

Also, note, the above debt figures, bad as they might be, are assuming that Ukraine's USD3 billion debt to Russia is repaid when it matures in September 2015. So far, Russia showed no indication it is willing to restructure this debt. But this debt alone is now (coupon attached) ca 50% of the entire Forex reserves held by Ukraine that amount to USD6.5 billion. Which means it will possibly have to be extended - raising the above debt profiles even higher. Or IMF dosh will have to go to pay it down. Assuming there is IMF dosh… September is a far, far away.

Meanwhile, you never hear much about Ukrainian external debt redemptions (aside from Government ones), while Russian debt redemptions (backed by ca USD370 billion worth of reserves) are at the forefront of the 'default' rumour mill. Ukrainian official forex reserves shrunk by roughly 62% in 14 months from January 2014. Russian ones are down 28.3% over the same period. But, you read of a reserves crisis in Russia, whilst you never hear much about the reserves crisis in Ukraine.

Inflation is now hitting 28.5% in January - double the Russian rate. And that is before full increases in energy prices are factored in per IMF 'reforms'. Ukraine, so far has gone through roughly 1/5 to 1/4 of these in 2014. More to come.

The point of the above comparatives between Russian and Ukrainian economies is not to argue that Russia is in an easy spot (it is not - there are structural and crisis-linked problems all over the shop), nor to argue that Ukrainian situation is somehow altering the geopolitical crisis developments in favour of Russia (it does not: Ukraine needs peace and respect for its territorial integrity and democracy, with or without economic reforms). The point is that the situation in the Ukrainian economy is so grave, that lending Kiev money cannot be an answer to the problems of stabilising the economy and getting economic recovery on a sustainable footing.

With all of this, the IMF 'plan' begs two questions:

1. Least important: Where's the European money coming from?
2. More important: Why would anyone lend funds to a country with fundamentals that make Greece look like Norway?
3. Most important: How on earth can this be a sustainable package for the country that really needs at least 50% of the total funding in the form of grants, not loans? That needs real investment, not debt? That needs serious reconstruction and such deep reforms, it should reasonably be given a decade to put them in place, not 4 years that IMF is prepared to hold off on repayment of debts owed to it under the new programme?

Note: here is the debt/GDP chart adjusting for the latest current and forward (12 months) exchange rates under the same scenarios as above, as opposed to the IMF dreamt up 2014 and 2015 estimates from back October 2014:

Do note in the above - declines in debt/GDP ratio in 2016-2018 are simply a technical carry over from the IMF assumptions on growth and exchange rates. Not a 'hard' forecast.

12/1/2015: Euro Area vs US Banks and Monetary Policy: The Weakest Link

Cukierman, Alex, "Euro-Area and US Banks Behavior, and ECB-Fed Monetary Policies During the Global Financial Crisis: A Comparison" (December 2014, CEPR Discussion Paper No. DP10289: http://ssrn.com/abstract=2535426) compared "…the behavior of Euro-Area (EA) banks' credit and reserves with those of US banks following respective major crisis triggers (Lehman's collapse in the US and the 2009 [Greek crisis])".

The paper shows that, "although the behavior of banks' credit following those widely observed crisis triggers is similar in the EA and in the US, the behavior of their reserves is quite different":

• "US banks' reserves have been on an uninterrupted upward trend since Lehman's collapse"
• EA banks reserves "fluctuated markedly in both directions". 

Per authors, "the source, this is due to differences in the liquidity injections procedures between the Eurosystem and the Fed. Those different procedures are traced, in turn, to differences in the relative importance of banking credit within the total amount of credit intermediated through banks and bond issues in the EA and the US as well as to the higher institutional aversion of the ECB to inflation relatively to that of the Fed."

Couple of charts to illustrate.

As the charts above illustrate, US banking system much more robustly links deposits and credit issuance than the European system. In plain terms, traditional banking (despite all the securitisation innovations of the past) is much better represented in the US than in Europe.

So much for the European meme of the century:

1. The EA banking system was not a victim of the US-induced crisis, but rather an over-leveraged, less deposits-focused banking structure that operates in the economies much more reliant on bank debt than on other forms of corporate funding; and
2. The solution to the European growth problem is not to channel more debt into the corporate sector, thus only depressing further the reserves to credit ratio line (red line) in the second chart above, but to assist deleveraging of the intermediated debt pile in the short run, increasing bank system reserves to credit ratio in the medium term (by increasing households' capacity to fund deposits) and decreasing overall share of intermediated (banks-issued) debt in the system of corporate funding in the long run.

7/9/2014: What do PMIs Signal on Global Growth?..

Here's an interesting point raised recently by @phil_waechter: the global growth that is supposed to accelerate in H2 2014 is really not happening and worse, compositionally, the prospect of such growth is heavily reliant on one country's fortunes: the U.S.

Things are not pretty, but they are not as ugly as the above chart shows, at least in the short run of the last 2 months. Here are the summaries for global growth by index:

In Services, there is weakening growth, but still levels are relatively robust, with New Business accelerating, marginally, while Future Activity expectations moderating.

And in Manufacturing, there is marginally stronger growth, with new orders slipping by just 0.1 points.

Composite indicator shows some pressures to the upside in growth forward: backlogs indicator showing a rise, new orders similarly showing some very modest support up.

Emerging markets are generally improving in August, with exception of Brazil. Russia breaking downward trend, but this remains to be confirmed in September-October before any serious turnaround can be called. South Africa is weak, Brazil weak, although net is still more positive than in May-July:

So the longer term trends are weak, when it comes to the likes of the euro area, but are reasonably ok. The real weakness is in the euro area. Here is the summary of just how much the euro area performance across all PMIs is weighing down on the global growth:

Just another reminder, this is supposedly the European Century...

28/7/2014: Double Down or Stay Course in Ukraine: the Only Rational Alternatives for Moscow?

The latest reports from the U.S. strongly suggest that Russia is perceived as an un-yielding adversary in Ukraine and that Moscow is about to 'double-down' on its gambit in Ukraine (see here).

The point is that if so, then why and then what?

Why? Russia has currently no exit strategy from the conflict in Ukraine. Forcing complete and total closure of the separatists operations is

1. Infeasible for Moscow (the separatists are not directly controlled troops that can be withdrawn on orders and indications are, they are not all too well coordinated and organised to be following any orders);
2. Were it even theoretically feasible, will be immediately visible to the external observers. Note that, for Moscow, (1) means political benefits of such an action will not be immediately apparent, while (2) means political costs of such an action will materialise overnight.
3. As sanctions escalate, the marginal returns of domestic political support become more important, since external economic benefits from cooperation vanish, but marginal costs remain (see below).

On marginal external benefits: it is absolutely uncertain what exact conditions Russia must fulfil to completely reverse the sanctions: is it

• (a) compel the rebels to surrender unconditionally to Kiev troops? 
• (b) compel them to surrender to either official troops or pro-Kiev militias, unconditionally? 
• (c) compel them to surrender conditionally - without any conditions set and without any mechanism to enforce these in place? 
• (d) compel them to declare a ceasefire - without any conditions set and without any guarantees of enforcement by the opposite side? 
• (e) compel the separatists to engage in peace talks - not on offer by Kiev? 
• (f) compel the separatists to stand down - in some fashion - and enter into negotiations with Kiev on Crimea? 
• (g) Is Crimea at all on the table? and so on...

On marginal costs: the costs of sanctions are tied to Russia delivering some sort of compliance with Western demands. Can someone, please, point to me a website where these demands are listed in full and the states that imposed sanctions have signed off on a pledge that once these conditions are satisfied, sanctions will be lifted?

Thus, in simple terms, current Western position leaves little room for Moscow not to double down in Ukraine. The only other viable alternative for Moscow currently is not to escalate. De-escalation, as much as I would like to see it take place, is not within rational choice alternatives. The core reason for this is that when one constantly increasing pressure in forcing their opponent into the corner without providing a feasible exit route for de-escalation, the opponent's rationally preferred response, at certain point in time, becomes to strike back and double down.

Update: interestingly, Reuters editorial today (29/7/2014: http://www.reuters.com/article/2014/07/29/us-ukraine-crisis-putin-analysis-idUSKBN0FY1AC20140729?feedType=RSS&feedName=topNews&utm_source=twitter) provides very similar lines of argument on costs and incentives for Moscow to de-escalate the situation in Eastern Ukraine.

17/7/2014: More Russia Sanctions, Same Pains, Same Strategies

Another set of sanctions and another tumble in Russian shares. This time around, sanctions have impacted major Russian companies with significant ties to the global economy. However, no broad sectoral sanctions were introduced.

The following companies are hit:

• Rosneft - largest oil producer in Russia
• Gazprombank - largest bank in Russia outside retail sector
• VEB - Vnesheconombank 
• Novatek - largest independent natural gas producer
• Federal State Unitary Enterprise State Research And Production Enterprise Bazalt, 
• Feodosia Oil Products Supply Company (in Crimea)
• Radio-Electronic Technologies Concern KRET 
• Concern Sozvezdie
• Military-Industrial Corporation NPO Mashinostroyenia  
• Defense Consortium Almaz-Antey
• Kalashnikov Concern
• KBP Instrument Design Bureau
• Research and Production Corporation Uralvagonzavod 

Full list here: http://www.treasury.gov/ofac/downloads/ssinew14.pdf

The U.S. Treasury Department said that under new sanctions, the U.S. companies are only prohibited from dealing in "new debt of longer than 90 days maturity or new equity" with the listed non-defence firms. There are no asset freezes, no prohibitions or restrictions on export/import transactions. The sanctions do not impact U.S. and other multinationals' work in Russia, unless Moscow retaliates with such measures (which is unlikely).

This contrasts with previous sanctions under which sanctioned companies were prevented from conducting any transactions, including export/import and clearing with the U.S. firms.

So we are having a clear attempt to undercut some Russian companies' access to the U.S. debt and equity markets, while preserving their ability to trade.

VEB will unlikely feel the pinch. The bank converted the National Wealth Fund deposits into capital recently, so it can offset the shortfall on foreign funding.

Gazprombank is a different issue. Last month, Gazprombank raised EUR1 billion at 4% pa in the foreign markets via a bond sale on the Irish Stock Exchange. Gazprombank has one of the largest exposures to international funding markets of all other Russian financial institutions - it has 78 outstanding eurobond issues demented in a number of currencies. So the real problem with the sanctions is that they may open the way for EU to follow, which can shut Gazprombank from the Euro-denominated debt markets too.

When it comes to Rosneft, sanctions are weak. The U.S. simply cannot afford shutting flows of Russian gas and oil to global markets. Reason? Imagine what oil price will be at, if Rosneft was restricted from trading. The company is responsible for roughly 40% of the total Russian oil production which runs at around 10.5-10.9 million barrels per day. Get Rosneft supply access cut and you have an equivalent of entire Iraq's 2013 output (that's right - total output of Iraq is lower than that of Rosneft alone) drained from the global production. Rosneft pumps more oil than Canada and more than double the output of Norway.

You can read on geopolitics of Russian oil & gas here: http://trueeconomics.blogspot.ie/2014/07/1772014-geopolitics-of-russian-gas-oil.html

The real target of the sanctions are pre-paid contracts that Rosneft and Novatek have on future supplies of oil and gas. These are de facto forward loans, repayable with future oil and gas supplies. Rosneft exposure to these currently sits at around USD15 billion. Another target: long term funding for energy companies. Rosneft raised USD30 billion in two loans in 2012 and 2013, in part to co-fund buyout of TNK-BP which cost Rosneft USD55 billion in 2013.

In reality, while short- and medium-term borrowing costs for two Russian energy companies is likely to rise, the effect in the longer term will be to push more and more trade and finance away from the U.S. dollar and U.S. markets. Plenty of potential substitutes are open: Hong Kong and Singapore being the most obvious ones. London is a less likely target. For example, in June partially state-owned UK Lloyds Bank cancelled a USD2 billion prepayment facility with Rosneft. The loser is, of course, Lloyds as it foregoes substantial revenues, while Rosneft can secure (albeit also at a price) similar funding from any number of larger trading companies it deals with, e.g. Glencore, Vitol or Trafigura.

Bloomberg covers some of the immediate reactions in corporate debt markets here: http://www.bloomberg.com/news/2014-07-17/rosneft-bonds-sink-most-on-record-as-sanctions-shut-debt-markets.html

All in, there is still ca USD60 billion worth of maturing corporate debt that Russian companies need to roll over before the end of 2014. This is a bit of a tight spot for Russian economy going forward, but it can be offset by releasing some of the liquidity accumulated on Russian banks balance sheets in 2013.


There is a bit of a silver lining for Russia from the U.S. sanctions too. To-date, higher oil prices worldwide (primarily driven by the Middle East mess, but now also with a support from the latest Russia sanctions) pushed up Federal Budget surplus to 1.4% of GDP (see latest arithmetic here: http://trueeconomics.blogspot.ie/2014/07/1772014-geopolitics-of-russian-gas-oil.html) over January-May 2014. This means Moscow can afford a bit more of a stimulus this year, offsetting any sanctions-related adverse effects on its economy in the short run.

On another positive side, sanctions have triggered renewed interest in Moscow in developing domestic enterprises with a view of creating a buffer for imports risks (http://en.itar-tass.com/world/741073). Imports substitution is a norm for Russian economy during strong devaluations of the ruble. This time around, we can expect a push toward more domestic investment and enterprise development to drive imports substitution growth to compensate not for Forex changes, but for the risks of deeper and broader sanctions in the future.


So I would re-iterate my previously made call: 

1. Russian economy is in a short- medium-term decline in terms of growth
2. Growth slowdown is compounded by rising borrowing costs and adverse news flow
3. With correct course of actions (monetary & fiscal policies and potentially some regulatory changes), Moscow can steer the economy into recovery in 2015
4. Ukraine crisis abating during the rest of 2014 is likely to support (3) above

All of the above suggest the markets will be oversold by the time Russian equities corrections hit 8-10% mark, assuming, of course, no further escalation in Ukraine (both with and without Russian influence, Ukraine's internal problems have now been firmly pushed by the EU into Russian domain).

There has been no cardinal change in the Western strategy with respect to Ukraine (support at any cost of Poroshenko push East) and with respect to Russia (blame at any opportunity for anything happening in Ukraine). The latest sanctions are simply a replay of the previous ones, which means that the U.S. is relatively satisfied with the progress in Ukraine, while the EU has moved to the back seat, having finalised the association agreement and unwilling to expand on this.


As a side note: there are implications building up for Western companies, relating to the U.S. and EU sanctions:

• Bloomberg reports (http://www.bloomberg.com/news/2014-07-16/as-ukraine-heats-up-exxon-to-airbus-eye-growing-risks.html) on Exxon Mobil Corp, Airbus Group NV and Daimler AG risks;
• ITAR-Tass covers the cases of Caterpillar and Bombardier: http://en.itar-tass.com/world/741083

On political front, here is an interesting report on President Putin approval ratings: http://en.itar-tass.com/russia/740817. I have not seen the original study cited in the report, yet.

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.

15/7/2014: Covenant-lite Debt Mountain & the Great Unwinding...

Recently, I wrote about IMF findings that the corporate and household debt mountains in the euro area remain unaddressed. Here is the World Gold Council chart on issuance of new covenant-lite corporate debt in the US:

The new age of complacency is emerging, defined by the ease of debt raising and low volatility:

Which, of course, can mean only two things:

1. There will be reversals out of status quo.
2. Low volatility implies reduced returns on investment and capital. This, in turn, implies lower investment and capital, which means lower growth and higher inflation into the future

With a caveat that we do not know the timing of the above changes, one has to keep in mind that the longer the status quo pre-1&2 remains in place, the worse 1&2 will be.

So there it is, a set up for gradual, painfully stagnant and prolonged unwinding of the extraordinarily accommodative monetary policies of the recent past...