Montag, 31. Juli 2017
With the U.S. preparing to confront China and go to war with North Korea, Russia is an indispensable ally for the U.S.
4 Financial Components to Improved Russian Relations
With the U.S. preparing to confront China and go to war with North Korea, Russia is an indispensable ally for the U.S.
There are huge implications on capital markets as these hegemonic powers continue to edge toward war.
Here’s an overview of some of the financial implications of improved relations with Russia…
1: The End of OPEC and the Rise of the Tripartite Alliance
On energy, a new producer alliance is being created to replace the old OPEC model. This new alliance will be far more powerful than OPEC ever was because it involves the three largest energy producers in the world — the U.S., Russia, and Saudi Arabia. This Tripartite Alliance is being engineered by former CEO of Exxon and Secretary of State Rex Tillerson, with support from Trump, Putin and the new Crown Prince of Saudi Arabia, Mohammad bin Salman.
This alliance is perfectly positioned to enforce both a price cap ($60 per barrel to discourage fracking) and a price floor ($40 per barrel to mitigate the revenue impact on producers). Supply cheating by outsiders, including Iran and Nigeria, can be discouraged by directing order flow to the alliance members, which denies the cheaters of any revenue.
As a result, energy will trade in the range described. Traders can profit by buying energy plays when prices are in the low 40s and selling when prices hit the mid-to-high 50s.
2: Improved U.S. Relations with Russia and Sanctions Relief
Following Russia’s annexation of Crimea and intervention in eastern Ukraine, President Obama imposed stringent economic sanctions on Russia, its major banks and corporations, and certain political figures and oligarchs. The EU joined these sanctions at the behest of the U.S. Russia responded by imposing its own sanctions on Europe and the U.S. in the form of banning certain imports.
The sanctions have been a failure. They have had no impact on Russian behavior at all. Russia still acts freely in Crimea, eastern Ukraine, and in other spheres of influence such as Syria.
This failure was predictable. Russian culture thrives on adversity. Russians understand that their culture is distinctly non-western and has its roots in Slavic ethnicity and the Eastern Orthodox religion.
The benefits to Europe from sanctions relief would amplify what is already solid growth and monetary policy normalization there. This paints a bullish picture for the euro and the ruble as trade and financial ties expand beginning in 2018.
A review of Russia’s place in the world and its prospects would not be complete without an analysis of its monetary policies and positions.
Russia’s hard currency and gold foreign exchange reserves have been on a roller coaster ride since mid-2008, just before the panic of 2008 hit full force. Reserves were $600 billion in mid-2008 before falling to $380 billion by early 2009 at the bottom of the global contraction.
Reserves then expanded to over $500 billion by mid-2011, and remained in a range between $500 billion and $545 billion until early 2014.
Russia’s reserves nosedived beginning in mid-2014 due to the global collapse of oil prices, which fell from $100 per barrel to $24 per barrel by 2016. The Russian reserve position fell to a low of $350 billion by mid-2015, about where they were at the depths of the 2008 crisis.
Reserves then began a second recovery in late 2015 and today stand at around $420 billion. This recovery is a tribute to the skill of the head of the Central Bank of Russia, Elvira Nabiuillina, who has twice been honored as the “Central Banker of the Year.”
When U.S.-led sanctions prohibited Russian multinationals, such as Gazprom and Rosneft, from refinancing dollar- and euro-denominated debt in western capital markets in 2015, those giant companies turned to Nabiullina. They requested access to Russia’s remaining hard currency reserves to pay off maturing corporate debt.
Nabiullina mostly refused their requests and insisted that the reserves were for the benefit of the Russian people and the Russian economy and were not a slush fund for corporations partially controlled by Russian oligarchs.
Nabiullina’s hard line forced the Russian energy companies to make alternative arrangements including equity sales, joint ventures, and yuan loans from China (which could be swapped for hard currency) to pay their bills. As a result, Russia’s credit was not impaired and its reserve position gradually recovered.
3: Watch Russia’s “Gold-to-GDP” Ratio
Another critical aspect of Russia’s reserve management under Nabiullina is that, even at the height of the oil-related drawdown in mid-2015, the Central Bank of Russia never sold its gold. In fact, it continued expanding its gold reserves. This meant that gold reserves as a percentage of total reserves continued to grow.
The Russian reserve position today consists of approximately 17% gold compared to only about 2.5% for China. (The U.S. has about 70% of its foreign exchange reserves in gold; a surprisingly high percentage to most observers who never hear any positive remarks about gold from U.S. Treasury or Federal Reserve officials).
More important as a measure of Russia’s gold power are gold reserves as a percentage of GDP. If we take GDP as a metric for the economy, and gold as a metric for real money, then the gold-to-GDP ratio tells us how much real money is supporting the real economy. It is the inverse of leverage through government debt.
For the United States, that ratio is 1.8%. For China the ratio is estimated at 1.5% (China’s ratio is an estimate because China is non-transparent about the amount of gold in its reserves. The actual ratio is likely in a range of 1% to 3%).
For Russia, the gold-to-GDP ratio is a whopping 5.6%, or three times the U.S. ratio. The only other economic power that comes close to Russia is the Eurozone. It consists of the 19 nations that use the euro and they collectively have just over 10,000 metric tonnes of gold.
The gold-to-GDP ratio for the Eurozone is 3.6%; not as high as Russia, but double the U.S. ratio. On the whole, Russia is the strongest gold power in the world.
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Russia is one of the five largest gold producers in the world. Currently Russian gold mining output is sold on the open market and the Russia central bank buys gold for its reserves on the open market. This stands in contrast to the situation in China, the world’s largest gold producer, where gold exports are banned, and are partly diverted to government reserves at below market prices.
However, Russia could easily flip to the China model in a financial crisis. This would rapidly increase Russian gold reserves at low cost, while drastically reducing global physical supply.
Russia and China are well-positioned to execute the greatest gold short squeeze in history. Of course, they have no interest is doing so right now because both are still buyers who favor low prices. At some point, they will flip to hoarders who favor high prices, but not yet.
Russia’s strong gold position combined with a very low amount of external debt leaves Russia in the best position to withstand economic distress without default or a funding crisis in the future. This is one reason U.S. economic sanctions have been relatively ineffective at hurting the Russian economy despite a slowdown and recent recession.
This trend in gold as a percentage of total reserves is highly revealing. It is part of a long-term effort by Russia and China (among others) to abandon the dollar-based international monetary system. They’d prefer a system less congenial to the United States and more accommodating to rising gold powers such as Russia, and rising geopolitical powers such as China.
Gold is not the only factor in the Russian plan to abandon the dollar-based system. Russia has actively promoted the ruble (RUB) as a regional reserve currency. The ruble has no prospect of becoming an international reserve currency for decades, if ever. Yet it is in wider use in bilateral trading payments in eastern Europe and central Asia where Russia is trying to reestablish local economic hegemony along the lines of the former Soviet empire.
4: Russian Relations and Blockchain Technology Will Challenge U.S. Dollar Dominance
Russia is also exploring the use of blockchain technology and crypto-currencies as a medium of exchange and as a payments platform. Recently, Putin met with Vitalik Buterin, the inventor of crypto-currency ethereum.
Buterin was born in Kolomna, Russia and was able to converse casually with Putin in their native Russian language. Here’s how Bloomberg reported the meeting on June 6, 2017:
Ethereum, the world’s largest cryptocurrency after bitcoin, has caught the attention of Vladimir Putin as a potential tool to help Russia diversity its economy beyond oil and gas…‘The digital economy isn’t a separate industry, it’s essentially the foundation for creating brand new business models,’ Putin said at the event, discussing means to boost growth long-term after Russia ended its worst recession in two decades…Russia’s central bank has already deployed an Ethereum-based blockchain as a pilot project to process online payments and verify customer data with lenders including Sberbank PJSC, Deputy Governor Olga Skorobogatova said at the St. Petersburg event. She didn’t rule out using Ethereum technologies for the development of a national virtual currency for Russia down the road.Last week, Russia’s state development bank VEB agreed to start using Ethereum for some administrative functions. Steelmaker Severstal PJSC tested Ethereum’s blockchain for secure transfer of international credit letters. (Emphasis added).
Left unsaid in this report is the fact that the blockchain technology on which ethereum is based has unbreakable encryption. Its message traffic is routed through an infinite number of internet pathways that the U.S. cannot interdict. Any blockchain-based payment system offers a way to run a global payments system independent of existing systems controlled by the U.S. such as FedWire and SWIFT.
Bitcoin and ether boosters were quick to shout about the Putin-Buterin meeting as evidence of Russian support for bitcoin or ether. That’s not exactly right.
Putin’s interest is in the blockchain technology, not any particular crypto-currency. With the right technology platform, Russia could launch its own crypto-currency. This could be a digital-RUB or a jointly issued currency with China and other members of the Shanghai Cooperation Organization.
Whichever platform or direction Russia chooses, they all point in the same direction — the displacement of the dollar as a dominant transaction and reserve currency, and the creation of payments systems that the U.S. cannot sanction.
This project will continue on a gradual basis in the years ahead and then suddenly be unleashed in the equivalent a gold and digital Pearl Harbor sneak attack on the dollar.
What Does This All Add Up To?
Absent the phony scandals that have impeded the Russian–U.S. relationship for the past eight months, a substantial improvement in that relationship would have occurred already. As it is, the relationship will improve either because the scandals abate or because Trump pushes the relationship forward despite the scandals.
This is a simple matter of balance-of-power politics. With the U.S. preparing to confront China and go to war with North Korea, Russia is an indispensable ally-of-convenience for the U.S. This emerging U.S.–Russia condominium has implications far beyond China, including common interests in Syria, energy markets, and toward sanctions relief.
Notwithstanding the prospect of improved relations, Putin remains the geopolitical chess master he has always been. His long game involves the accumulation of gold, development of alternative payments systems, and ultimate demise of the dollar as the dominant global reserve currency.
It is up to the United States to defend that monetary ground. However, the likelihood of that is low because the U.S. does not even perceive the problem it’s facing, let alone the solution.
This evolving state of affairs creates enormous opportunities in the months and years ahead.
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Sonntag, 30. Juli 2017
Kim Jong Un: "The Entire US Territory Is Now Within Our ICBM Range"
Kim Jong Un: "The Entire US Territory Is Now Within Our ICBM Range"
Confirming a Friday report by David Wright, physicist and co-director of the UCS Global Security Program, that the newest North Korean ICBM - which on Friday night flew for 45 minutes, reaching an altitude of up to 3,725 kilometers and traveled just under 1,000 kilometers before landing in Japan waters - can strike half the major metro areas on the continental US, overnight North Korea's leader Kim Jong-Un said that “we have demonstrated our ability to fire our intercontinental ballistic rocket at any time and place and that the entire U.S. territory is within our shooting range.”
Quoted by the Korean Central News Agency, he also expressed his “great satisfaction” with the ICBM test - the country's second after an earlier test on July 4 - which reaffirmed that the missile was able to deliver a “large-sized, heavy nuclear warhead" to the United States. The test was part of the "final verification" of the Hwasong-14 missile’s technical capabilities, including its maximum range.
As a reminder, Wright's calculations showed that the ICBM could have a range 10,400 km (6,500 miles), not taking into account the Earth’s rotation, which if added would increase the range of missiles fired eastward. And, calculating the range of the missile in the direction of some major US cities gives the approximate results in Table 1, which showed that Los Angeles, Denver, and Chicago appear to be well within range of this missile, and that Boston and New York may be just within range while Washington, D.C. is just out of range.
Melissa Hanham, a researcher at the James Martin Center for Nonproliferation Studies in California, confirmed the findings saying that the test showed North Korea is now capable of hitting U.S. cities such as Denver or Chicago.
Also on Saturday, Kim said the test was a “serious warning” to the US, which has been “meaninglessly blowing its trumpet” in threatening Pyongyang.
In response, U.S. Secretary of State Rex Tillerson said in a statement that "as the principal economic enablers of North Korea’s nuclear weapon and ballistic missile development program, China and Russia bear unique and special responsibility for this growing threat to regional and global stability." He added that even as the US seeks a peaceful denuclearization of the Korean Peninsula, Tillerson said, “we will never accept a nuclear-armed North Korea nor abandon our commitment to our allies and partners in the region.”
In a late Friday statement from the White House, Trump rejected North Korea's claims that its nuclear program is designed to prevent an attack by the U.S. or other, saying it had the “opposite effect.”
“By threatening the world, these weapons and tests further isolate North Korea, weaken its economy, and deprive its people,” Trump said.
China also responded to the launch, with Foreign Ministry spokesman Geng Shuang saying in a Saturday statement in the People’s Daily newspaper that Beijing also opposes North Korea’s launch and its violations of Security Council resolutions, while calling on all parties to show restraint.
As Reuters subsequently reproted, Marine General Joseph Dunford, chairman of the Joint Chiefs of Staff, discussed “military response options” in a phone call with his South Korean counterpart, his spokesman said in an emailed statement that didn’t elaborate. While Trump hasn’t ruled out a military response, Dunford warned in June that an armed conflict with North Korea would leave the millions of residents in Seoul, South Korea’s capital, to face casualties “unlike anything we’ve seen in 60 or 70 years.” This month he told a security conference in Colorado that “what’s unimaginable to me” is allowing the capability for “a nuclear weapon to land in Denver, Colorado.”
Shortly after the North Korean launch, the US and South Korean militaries responded with their own display of military strength, firing live surface-to-surface missiles from rocket launchers, amid renewed tension on the peninsula. Videos posted by the South Korean Ministry of Defense showed the US-made Tactical Missile System, known as ATACMS, as well as its own Hyunmoo Missile II.
The missiles hit the East Sea on Saturday morning, where North Korea’s ballistic missile is believed to have landed, as part of a live-fire exercise to demonstrate its “precision firing ability,” the US 8th Army said. US Forces in Korea said two missiles were fired from the ATACMS along with two Hyunmoo system missiles. The ATACMS is a Lockheed Martin surface-to-surface missile, with a range of 160km that can be fired from a range of rocket launchers.
The South Korean ministry said it was responding “to provocations of North Korean ballistic missiles.” “The systems can be rapidly employed to provide deep-strike precision capability, enabling the ROK-U.S. Alliance to engage a full array of time-critical targets under all weather conditions,” the 8th Army said on Facebook.
South Korea also said it would deploy four additional THAAD [Terminal High Altitude Area Defense] anti-missile launchers after North Korea’s test. The THAAD deployment had been delayed after South Korean President Moon Jae-in ordered an environmental assessment. Meanwhile, China on Saturday said it had grave concerns about the possibility of more Thaad launchers in South Korea. It called on the U.S. and South Korea to stop the deployment, saying the launchers hurt the strategic balance in the region.
It's Your Money But You Can’t Have It: EU Proposes Account Freezes To Halt Bank Runs
It's Your Money But You Can’t Have It: EU Proposes Account Freezes To Halt Bank Runs
If there is a run on the bank, any bank in the EU, you better be among the first to get your money out.
Although it’s your money, the EU wants to Freeze Accounts to Prevent Runs at Failing Banks.
European Union states are considering measures which would allow them to temporarily stop people withdrawing money from their accounts to prevent bank runs, an EU document reviewed by Reuters revealed.The move is aimed at helping rescue lenders that are deemed failing or likely to fail, but critics say it could hit confidence and might even hasten withdrawals at the first rumors of a bank being in trouble.The proposal, which has been in the works since the beginning of this year, comes less than two months after a run on deposits at Banco Popular contributed to the collapse of the Spanish lender.Giving supervisors the power to temporarily block bank accounts at ailing lenders is “a feasible option,” a paper prepared by the Estonian presidency of the EU said, acknowledging that member states were divided on the issue.EU countries which already allow a moratorium on bank payouts in insolvency procedures at national level, like Germany, support the measure, officials said.“The desire is to prevent a bank run, so that when a bank is in a critical situation it is not pushed over the edge,” a person familiar with German government’s thinking said.The Estonian proposal was discussed by EU envoys on July 13 but no decision was made, an EU official said. Discussions were due to continue in September. Approval of EU lawmakers would be required for any final decision.Under the plan discussed by EU states, pay-outs could be suspended for five working days and the block could be extended to a maximum of 20 days in exceptional circumstances, the Estonian document said.
Spooking Customers
I side with Charlie Bannister of the Association for Financial Markets in Europe (AFME), who says “We strongly believe that this would incentivize depositors to run from a bank at an early stage.”
Why Might Customers Want to Run?
Here are a trillion reasons: Over €1 Trillion Nonperforming EU Loans: EU vs US Percentages.
Non-Performing Loans
Notes
- I am unsure why the graphs sometimes use different country codes than appears in the first column. Where different, I show both symbols. The list of country codes is shown below.
- Forb ratio stands for forbearance ratio.
- Cov ratio stands for coverage ratio: (Loans – Reserve balance)/Total amount of non-performing loans. It’s a measure of how prepared a bank is for losses.
Italy, Greece, Spain, Portugal, and Ireland have a combined €606 billion in non-performing loans.
The entire European banking system is over-leveraged, under-capitalized, and propped up by QE from the ECB. Simply put, the EU banking system is insolvent.
That the EU has to consider such drastic measures proves the point.
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