Russian Economics in the Global Economy

It what's bad for Russia, bad for us too? In our global economy, we're all connected:

The ruble's collapse is disastrous for Putin - and bad for you too

[...] Given President Vladimir Putin’s status as the West’s new bogeyman, the temptation to rejoice in the abrupt collapse of his regime’s economic clout is acute. Many will want to congratulate themselves at the success of economic sanctions, the aim of which was to punish Putin for his annexation of Crimea and its covert sponsorship of a civil war there.

They shouldn’t get carried away.

For one thing, it doesn’t make Russian concessions on Ukraine any more likely: the worse the economic pressure, the more the Kremlin’s propaganda will drum home the message that it is the Evil West, denying Russia its holy Crimean birthright, that is to blame. Opinion polls suggest that the vast majority of Russians still accept this version of events.

As such, Ukraine will remain a running sore, infecting both the European economy and, through it, the world’s. Moreover, Ukraine itself is on the verge of a default that will send shock waves through European and global financial markets, amplifying the effect.

A financial crisis in Russia would have much larger negative consequences than a Ukrainian one: western banks (mainly European ones) will have to write off more loans, western companies will have to write off investments. And that’s even if contagion doesn’t spread to other vulnerable emerging markets such as Indonesia or Brazil, both big recipients of western investment.

For the moment, the signs are that Putin is gambling on the oil market turning round, trusting to the legendary endurance of the people while his government keeps the plates spinning as long as it can.

In the meantime, the loyal will be taken care of. Covert bailouts to the country’s biggest banks from the country’s rainy-day fund are already getting more frequent. VTB and Gazprombank, two lenders that are “too-big-to-fail”, have already had their capital levels topped up.

But that is nothing compared to the egregious piece of money-printing that was agreed last week, when the central bank agreed to lend money against 625 billion rubles (still over $10 billion, even after Monday’s mayhem) of bonds freshly printed by Rosneft, the oil company headed by Putin confidant Igor Sechin. The aim is to let Rosneft hoard its export dollars and meet a $10 billion loan repayment later this month (and another $4 billion in February).

The realization that Rosneft, one of the biggest players on the foreign exchange market, would be buying far fewer rubles with its export dollars appears to have been one of the reasons for the ruble’s drop Monday (the failure of the central bank’s half-hearted rate hike and intervention last week also being partly responsible).

If the central bank shows anything like the same generosity to other companies, then the ruble’s debasement will be complete. The central bank now estimates that the economy will shrink 4.5% next year if oil stays at $60/barrel, and that is something that would certainly trigger a wave of corporate defaults.

Unless the ruble bounces back sharply, inflation is heading much, much higher than the 10% the CBR is already forecasting. Specifically, food, which makes up over 30% of Russian disposable income, is going to get more expensive (Russia imports over 40% of its food and has made a rod for its own back by banning relatively cheap produce from the E.U.).

Moreover, since over 80% of retail deposits are now held in rubles, devaluation means that the savings that Putin’s voters have accumulated as they came to trust their own currency over the last 14 years will be devastated. Already Monday, the yield on the 10-year bonds of a government that hasn’t run a deficit in 14 years hit 13%–anything but an expression of trust.

This is a recipe for social instability far greater than the tame, middle-class, metropolitan protests at Putin’s tainted election victory in 2012.

But what does an authoritarian leader do in such a situation? Back down or crack down? There is no evidence from this year to suggest Putin has suddenly become the backing-down kind. Repression seems the likelier option. If that doesn’t work, then doubling-down with another foreign policy adventure to distract from domestic problems hardly seems fanciful any more: in the summer, Putin cast doubt on the statehood of neighboring Kazakhstan, which doesn’t have the NATO guarantee that the Baltic States enjoy.

Either way, the consequences are too miserable to contemplate, both for Russia and for the world in general. [...]

Something to look forward to in the New Year? See the original article for embedded links and more.

     

No Peak Oil. Peak Anything Else?

Peak Everything -- Why Everything Costs More

Peak Oil -- No Longer the Right Question

A Shell Oil geologist named M. King Hubbert predicted in 1956 that U.S. oil production would peak in the early 1970s. When it did, Hubbert became the geologist equivalent of a rock star and gave the young environmental movement evidence for something it was seeking: a limit to growth.

When is -- or was -- peak world oil production? It's just not the right question anymore. Deepwater drilling, tar sands extraction, and the shale gas boom have extended the supply of hydrocarbon fuels. The new question: What's the smartest way to use them?

The iconic Peak Oil example has inspired parlor-game questions about other resources. Some, like coal, are finite; others, like water, are renewable but have limits to how quickly reserves can be replenished. Can Earth keep up with our demand? Call it Peak Everything. [...]

The article goes one to examine a bunch of other resources, and why they might peak - or why they won't.
     

Euro Crisis an excuse for consolidation of power?

A Greece euro exit could make Lehman's collapse 'look like a tea party'

London (CNN) -- The wheels are coming off the wagon. The fat lady is about to sing. The proverbial is about to hit the fan. It doesn't matter which saying you use, the facts are inescapable. Greece's membership of the eurozone is untenable under the current conditions and everyone knows it. Some like Hungary's finance minister say openly Greece will leave the euro. The only question is what catalyst will force it out and when. The nearest deadline to hand is the country's June 17th elections, when the Greek voters will decide whether to support parties who will adhere to the bailout agreements or those who want to tear them up.

[...]

Obviously now everyone has Spain in their sights. And there is where the real problem lies. Spain is too big to fully bail out a la Greece and definitely too big too fail. If Spain gets into too much trouble "Project Euro" is likely over. From all my private talks with European officials it has become clear -- Spain is the line in the sand. Greece may be too far gone and be allowed to fall, but Spain will be defended till the bitter end. So I fully expect European leaders to give Spain something to take the boot off the throat of austerity in the coming weeks. Probably the same for Portugal.

European officials have made mistakes in their dealings with Greece. The austerity measures were too harsh. They shouldn't have been nearly so brutal, and that lesson has been learnt. Now with the election of Francois Hollande as France's new president everyone can change course slightly and pretend they meant to do it all along (they didn't). Expect a growth pact to be agreed between Germany and France to sit alongside the main Fiscal Compact, which Germany will not allow to be re-opened.

I could speculate for hours about which solution will be found, what formula they will adopt to keep the whole thing moving -- and frankly, it would be useless. This crisis is now moving too fast and has taken on a life of its own. The firewall is starting to smolder. The austerity plans are starting to fray. The European Central Bank is cutting loose several Greek banks it does not consider solvent. The eurozone is all but back in recession. There are some uncontrollable aspects (the Greek voters for instance) which make forecasting the future direction just about impossible.

I still believe that the single currency will survive in some shape and form. I just cannot see the eurozone surviving in its present form -- not without the most drastic re-organization towards fiscal union, a federation of states with a central bank and treasury. [...]

The crisis they themselves created, becomes the excuse to tighten their grip and consolidate their power.
     

Are we are moving beyond peak oil and into "peak everything."?

Exactly one year ago, I posted about peak oil. But can that concept be applied to ALL the worlds resources? Someone thinks so:

The Earth is full

(CNN) -- For 50 years the environmental movement has unsuccessfully argued that we should save the planet for moral reasons, that there were more important things than money. Ironically, it now seems it will be money -- through the economic impact of climate change and resource constraint -- that will motivate the sweeping changes necessary to avert catastrophe.

The reason is we have now reached a moment where four words -- the earth is full -- will define our times. This is not a philosophical statement; this is just science based in physics, chemistry and biology. There are many science-based analyses of this, but they all draw the same conclusion -- that we're living beyond our means.

The eminent scientists of the Global Footprint Network, for example, calculate that we need about 1.5 Earths to sustain this economy. In other words, to keep operating at our current level, we need 50% more Earth than we've got.

[...]

Even the previous heresy, that economic growth has limits, is on the table. Belief in infinite growth on a finite planet was always irrational, but it is the nature of denial to ignore hard evidence. Now denial is evaporating, even in the financial markets. As influential fund manager Jeremy Grantham of GMO says: "The fact is that no compound growth is sustainable. If we maintain our desperate focus on growth, we will run out of everything and crash." Or as peak oil expert Richard Heinberg argues, we are moving beyond peak oil and into "peak everything."

Despite this emerging understanding, the growth concept is so deeply ingrained in our thinking that we will keep pushing economic growth as hard as we can, at whatever cost is required.

As a result, the crisis will be big, it will be soon, and it will be economic, not environmental. The fact is the planet will take further bludgeoning, further depleting its capital, but the economy cannot -- so we'll respond not because the environment is under great threat, but because the science and economics shows that something far more important to us is jeopardized -- economic growth.

[...]

So when this crisis hits, will we respond or will we simply slide into collapse? Crisis elicits a powerful human response, whether it be personal health, natural disaster, corporate crisis or national threat. Previously immovable barriers to change quickly disappear.

In this case, the crisis will be global and will manifest as the end of economic growth, thereby striking at the very heart of our model of human progress. While that will make the task of ending denial harder, it also means what's at risk is, quite simply, everything we hold to be important. The last time this happened was World War II, and our response to that is illustrative of both the denial and delay process and the likely form our response to this crisis will take. [...]

It's not all grim. The author seems to think we may get through it somehow, if we adapt.

It's food for thought. But consider, what if the "peak oil" theory is completely wrong:

Fossil Fuels: They've only just begun

Is the financial crisis really being caused by growth, or is growth just going to be the official scapegoat?
     

Is lsrael really ready to strike Iran? Why now?

Just a bluff? Fears grow of Israeli attack on Iran

[...] Is Israel bluffing? Israeli leaders have been claiming Iran is pursuing nuclear weapons since the early 1990s, and defense officials have issued a series of ever-changing estimates on how close Iran is to the bomb. But the saber-rattling has become much more direct and vocal.

[...]

Israel views Iran as a mortal threat, citing Iranian calls for Israel's destruction, Iran's support for anti-Israel militant groups and Iranian missile technology capable of hitting Israel.

On Friday, Iran's supreme leader, Ayatollah Ali Khamenei, called Israel a "cancerous tumor that should be cut and will be cut," and boasted of supporting any group that will challenge the Jewish state.

When faced with such threats, Israeli has a history of lashing out in the face of world opposition. That legacy that includes the game-changing 1967 Middle East war, which left Israel in control of vast Arab lands, a brazen 1981 airstrike that destroyed an unfinished Iraqi nuclear reactor, and a stealthy 2007 airstrike in Syria that is believed to have destroyed a nuclear reactor in the early stages of construction.

Armed with a fleet of ultramodern U.S.-made fighter planes and unmanned drones, and reportedly possessing intermediate-range Jericho missiles, Israel has the capability to take action against Iran too, though it would carry grave risks.

It would require flying over Jordan, Saudi Arabia, Iraq, Syria or Turkey. It is uncertain whether any of these Muslim countries would knowingly allow Israel to use their airspace.

With targets some 1,000 miles (1,600 kilometers) away, Israeli planes would likely have the complicated task of refueling in flight. Iran's antiquated air force, however, is unlikely to provide much of a challenge.

Many in the region cannot believe Israel would take such a step without a green light from the United States, its most important ally. That sense is deepened by the heightened stakes of a U.S. election year and the feeling that if Israel acts alone, the West would not escape unscathed.

The U.S. has been trying to push both sides, leading the charge for international sanctions while also pressing Israel to give the sanctions more time. In recent weeks, both the U.S. and European Union have imposed harsher sanctions on Iran's oil sector, the lifeblood of its economy, and its central bank. Israeli officials say they want the sanctions to be imposed faster and for more countries to join them.

Last week, The Associated Press reported that officials in Israel — all of whom spoke on condition of anonymity because they were not authorized to discuss Iran — were concerned that the measures, while welcome, were constraining Israel in its ability to act because the world expected the effort to be given a chance.

Even a limited Israeli operation could well unleash regionwide fighting. Iran could launch its Shihab 3 missiles at Israel, and have its local proxies, Hezbollah in Lebanon and Hamas in the Gaza Strip, unleash rockets. Israel's military intelligence chief, Aviv Kochavi, warned last week that Israel's enemies possess some 200,000 rockets.

While sustained rocket and missile fire would certainly make life uncomfortable in Israel, Barak himself has said he believes casualties would be low — suggesting it would be in the hundreds.

Iran might also try to attack Western targets in the region, including the thousands of U.S. forces based in the Gulf with the 5th Fleet.

An Israeli attack might have other unintended consequences. A European diplomat based in Pakistan, permitted to speak only under condition of anonymity, said that if Israel attacks, Islamabad will have no choice but to support any Iranian retaliation. That raises the specter of putting a nuclear-armed Pakistan at odds with Israel, widely believed to have its own significant nuclear arsenal.

To some, the greatest risk is to the moribund world economy.

Analysts believe an Israeli attack would cause oil prices to spike, since global markets so far have largely dismissed the Israeli threats and not "price in" the threat. According to one poll conducted by the Rapidan Group, an energy consulting firm in Bethesda, Maryland, prices would surge by $23 a barrel. The price of oil settled Friday at $97.84 a barrel.

"Traders don't believe there's anything but bluster going on," said Robert McNally, president of Rapidan and an energy adviser to former President George W. Bush. "A potential Israeli attack on Iran is different than almost every scenario that we've seen before."

McNally said Iran could rattle oil markets by targeting oil fields in southern Iraq or export facilities in Saudi Arabia or Qatar — and withhold sales of its own oil and natural gas from countries not boycotting.

Iran also could attempt to carry out its biggest threat: to shut the Strait of Hormuz, a strategic waterway through which a fifth of the world's oil passes. That could send oil prices soaring beyond $200 a barrel. But analysts note Iran's navy is overmatched.

If a surge in oil prices proved lasting, financial markets would probably plummet on concerns that global economic growth would slow and on the fear that any conflict could worsen and spread.

For the U.S. economy, higher gasoline prices would likely result in lower consumer spending, which accounts for 70 percent of U.S. economic activity. That could have devastating consequences for an incumbent president seeking re-election.

Nick Witney, former head of the EU's European Defense Agency, said "the political and economic consequences of an Israeli attack would be catastrophic for Europe" since the likely spike in the price of oil alone "could push the entire EU, including Germany, into recession."

He said this could lead to "messy defaults" by countries like Greece and Italy, and possibly cause a collapse of the already-wobbly euro. Witney, a senior fellow at the European Council on Foreign Relations, added that "the Iranians would probably retaliate against European interests in the region, and conceivably more directly with terrorism aimed at Western countries and societies."

Oil disruptions or higher oil prices will also dent growth in Asia. China, India, South Korea and Japan all buy substantial amounts of Iranian crude and could face temporary shortages.

China's fast-growing economy, which gets 11 percent of its oil from Iran, has urged all sides to avoid disrupting supplies. Any impact on China's economy, the world's second-largest, could send out global shockwaves if it dented Chinese demand for industrial components and raw materials.

Why is the issue coming to a head with such unfortunate timing, with the U.S. election looming and the global economy hanging by a razor's edge?

The urgency is fueled by a belief in Israel that Iran is moving centrifuges and key installations deep underground by the summer — combined with doubts about whether either Israel or the United States have the bunker-busting capacity to act effectively thereafter. [...]

But the global repercussions of trying to stop it, are enormous. Could the be a case of the cure being worse than the disease?
     

Where the "Debt Crisis" is going

This is one of the most concise and direct explanations I've read:

How The Debt Crisis Will End

It became increasingly clear this month how the debt crisis will end - and it is not going to be comfortable.

The latest phony solution is for the large, "responsible" countries to demand more fiscal responsibility from the smaller and purportedly "less responsible" countries. In Europe, Germany's Angela Merkel and France's Nicolas Sarkozy are demanding that other European states give up some of their sovereignty and agree to strict limits on their deficit spending.

President Obama and Treasury Secretary Timothy F. Geithner, as well as British Prime Minister David Cameron, have been lecturing the European Union about being more fiscally responsible. How odd and hypocritical, based on their own behavior.

Given normal growth of roughly 3 percent, annual deficits of 3 percent or less tend not to be a problem. Small deficits tend not to increase the ratio of debt to gross domestic product (GDP) and debt service as a percent of GDP. That is why the annual deficit limit under the European Union Maastricht Treaty was set at 3 percent.

The table on the right shows the dismal record of the major countries when it comes to hitting the annual deficit target during the 13 years that the euro has been in existence.

Of the 17 eurozone countries, only Finland and Luxembourg have been in compliance all 13 years. The three biggest eurozone countries, Germany, France and Italy, have been out of compliance more years than they have been in compliance. The three big, democratic, non-eurozone countries, the United States, the United Kingdom and Japan, also have had dismal records in keeping their own deficits under the prudent 3 percent rule.

The simple fact is that most democracies are unable to police their own fiscal behavior, let alone the behavior of other countries.

Europe not only is sitting on a fiscal time bomb, which already is starting to explode, but also has a demographic time bomb with a rapidly aging population. Despite the fiscal crisis of the past few years, which is accelerating, most of Europe has done next to nothing to cut back entitlements to a manageable level, which is equally true of the United States.

Looking at the actions of the European leaders, rather than listening to their words, it is obvious that they increasingly are using the European Central Bank to buy the sovereign debt of their members after repeatedly saying they would not. [...]

Read the whole thing, to see the table of countries referred to, and to read the blunt but to-the-point summation of the article. While it's not what most people want to hear, it's none the less refreshing to hear someone being honest about what's really going on, and where it's going. But I would say the details of the "transition" it speaks of, and what comes after, is anyone's guess.

     

What should the Federal Reserve be doing?

From Judy Shelton's interesting lunch with economist Robert Mundell:

Currency Chaos: Where Do We Go From Here?
'The most important initiative you could take to improve the world economy would be to stabilize the dollar-euro rate.'

[...] Mr. Mundell has a knack for boiling things down to simple terms. He grew up on a four-acre farm in Ontario, went on to earn a Ph.D. from the Massachusetts Institute of Technology, and would ultimately challenge the renowned Milton Friedman at the University of Chicago during the late 1960s. Both economists were strong proponents of free markets, but Mr. Mundell disagreed with Mr. Friedman's advocacy of floating exchange rates.

The sound of a buzzer indicates lunch has arrived. Mr. Mundell suggests that we continue our discussion at the table and politely invites his assistant Ivy Ng, who has been taking careful notes, to join us.

"We've been talking about the possibility of global monetary reform," I continue, deciding to switch gears. "Let's talk a bit about domestic monetary policy. What do you think the Federal Reserve should be doing right now?"

It's a seamless transition for Mr. Mundell. "The Fed is making a big mistake by ignoring movements in the price of the dollar, movements in the price of gold, in favor of inflation-targeting, which is a bad idea. The Fed has always had the wrong view about the dollar exchange rate; they think the exchange rate doesn't matter. They don't say that publicly, but that is their view."

"Well," I counter, not particularly savoring the role of devil's advocate, "I suppose Fed officials would argue that their mandate is to try to achieve stable prices and maximum levels of employment."

Mr. Mundell looks annoyed. "Well, it's stupid. It's just stupid." He tries to walk it back somewhat. "I don't mean Fed officials are stupid; it's just this idea they have that exchange-rate effects will eventually be taken into account through the inflation-targeting approach. In the long run, it's not incorrect—it takes about a year. But why ignore the instant barometer that something is happening? The exchange rate is the immediate reaction to pending inflation. Look what happened a couple weeks ago: The Fed started to say, we've got to print more money, inflate the economy a little bit. The dollar plummeted! You won't get a change in the inflation index for months, but a falling exchange rate—that's the first signal."

Clearly on a roll, I press a bit. "You mentioned gold?"

'The price of gold is an index of inflation expectations," Mr. Mundell says without hesitation. "The rising price of gold shows that people see huge amounts of debt being accumulated and they expect more money to be pumped out." He purses his lips. "They might not necessarily be right; gold could be overvalued right now."

Sensing that the soup is getting cold, I decide to cut to the chase: "What would be your winning formula today? What advice would you give to Washington that would help turn around our moribund economy?"

He pauses to think, but only for a moment. "Pro-growth tax policies, stable exchange rates." [...]

Pro growth tax polices sound good. I don't know about stable (fixed) exchange rates. I would like to hear Milton Friedman's argument against it.