Notes From Underground: Putin, you wily rascal?

Last week we wrote about the need for Russia to create some mischief in the world. Lo and behold, we have two stories out of Moscow that could be unsettling to the politics and thus economics of the global economy.

First, Russia is still threatening to cut off of oil supplies that are delivered to Europe through the Ukrainian pipeline. This action is brought to the fore as Russia is unhappy with the Ukraine’s demands for higher transit fees on oil shipped from Russia to Europe via pipeline. The threat is not nearly as great as the disruption of natural gas, as the amount of oil is much less relative to natural gas. It seems that the Russians are only getting Europe’s attention as next month’s Ukrainian elections will limit Gazprom’s ability to act. The Kremlin is trying to prevent the election of Viktor Yuschenko, who the KGB poisoned in London, while supporting the present Ukrainian ruler, Yulia Tymoshenko. It seems that little action will take place as they don’t wish to provoke an anti-Russian vote, which would go to Yuschenko.

After the election, in the midst of the coldest part of winter, we will see how Russian energy demands are put in to action. If Tymoshenko loses, we can be sure that Russian belligerence to the Ukraine and Europe will increase. The primary concern for the Ukraine is the need for higher transit fees on energy to support a government budget that is in severe imbalance. Similar to the rest of Eastern Europe, the global downturn left the Ukrainian economy in tatters and they have already turned to the IMF for help. The Russians will remind Europe and the Ukraine that they are still a strong voice and their ability to disrupt the European economy is very great.

Second, out of Russia comes word that Prime Minister Putin raised the issue about restraining hot capital inflows into Russia.The vast amount of money that has flowed in has put upward pressure on the ROUBLE, which the Russian Central bank has attempted to stem by lowering interest rates several times this year. These rate cuts have not been successful in halting the ROUBLE‘s rise, forcing the central bank to buy dollars and adding to Moscow’s burgeoning foreign reserves. Putin hinted that the restrictions would not be like Brazil’s but would act to inhibit the inflow of funds. The potential action has not been implemented yet, but this is another move to restrain the flow of international capital at a time of great financial fragility.

In addition, the U.S. moved to create more trade friction as it announced tariffs on the imports of Chinese steel grating. The amount of steel affected is minimal, but it is one more action that is causing friction in the global system. We get the feeling that after the Copenhagen Summit, relations between the western powers and China are severely strained. Global equity markets,presently riding a wave of nirvana, are not prepared for events like exchange controls and other trade impediments. These uncertainties that continue to arise justifies our desire to maintain a bullish GOLD bias against all FIAT currencies.We are one misstep away from a major crisis.

Interestingly, we report that the FOOTSIE index closed above the Lehman debacle highs from September 15-22, 2008. It is the first major equity market able to do so. We are not sure why but it may be that the flexibility of the POUND has lent some support to the British economy. The depreciation of the POUND since the Lehman bankruptcy has been substantial. It has also given the BRITS a pricing advantage versus its European trading partners. Also, it has meant that British assets have become cheap on a relative currency based valuation. It supports our view that equity markets are riding high even as the threats to the global financial system continue to grow.

Just food for thought as we enter the new year.

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9 Responses to “Notes From Underground: Putin, you wily rascal?”

  1. George Coyle Says:

    Logic and history would dictate the Ruble should appreciate under these circumstances (strong Bal of payments, FDI, rising currency in the face of rate cuts and government selling the currency). Warren Buffett actually bought the BRL under a similar circumstance (the Brazilian government was selling BRL buying USD– article below). Russia is the #2 producer of oil in the world ( so it stands to reason their economy and currency should appreciate with a related rise in crude. Those supporting the peak oil thesis have another piece of ammo to get long Russia and the RUBUSD cross. However investments in Russia have generally proven difficult (even Soros, with his connections, took a bath there– article below) and fighting central banks can prove financially painful. Russia is notorious for having a less than squeaky clean reputation…I am curious if anyone has thoughts on why this time might be different? Also, thinking in bigger picture terms how can one know when to fight the central banks vs. follow their lead?

    Buffett on BRL:

    Soros Russia:

    • Yra Says:

      As to the Soros malinvestment in Russia showed, the developing world is always a bumpy road. As for central bank intervention, it is much easier to sell a country’s currency when the central bank wants a weaker currency. But a central bank struggles to stem the rise of a currency that investors deem to be undervalued. The history of central bank intervention is littered with failed attempts to stem a currency’s appreciation.

  2. Igor K Says:

    I am not even sure how many facts were wrong in the second paragraph…. The dispute has already been settled. Same day as the news came out. Yuschenko was not poisoned in London (if at all – a much more plausible version is circulating among the locals). And as to Ukrainian politics, that’s all wrong too

  3. Rodney Says:

    “The Kremlin is trying to prevent the election of Viktor Yuschenko…” Yuschenko is polling about 3.5%. The Kremlin isn’t going to have to work very hard to prevent his election. No one needs to poison someone polling at these numbers. It’s just a variation of the supposed 2004 poisoning of Yuschenko. Yuschenko has severe health problems that can be exarcebated by alcohol.

    Did Yushchenko Poison Himself? By CHAD NAGLE

    On the Polls:

  4. IndianaJohn Says:

    In today’s RT the story is told very differently. Also I don’t hear the axe grinding on the stone there.

  5. Uncleeegz Says:

    Mr. Harris, you have the basic facts of the Ukrainian current political situation all wrong. Yuschenko’s poll ratings are so low they are within the statistical error margin, he is a spent force and is not taken seriously by anybody in Ukraine or abroad. You haven’t even mentioned Yanukovich who is a far more likely candidate to win the presidency than Timoshenko who is lagging far behind him.

    The Kremlin doesn’t support any of the three for some purely political reasons, rather they are ready to deal with any leader who is reasonable enough to conduct normal business, without politically motivated hostility or expectations for preferential treatment. The simplistic view of how “the Russian bear will clumsily throw its weight behind any pro-Russian anti-Western candidate” may have been good enough for omnivorous Western TV audiences back in 2004 but I’d think someone like yourself should be able to keep abreast of the real situation much better. Yanukovich is no more pro-Russian than Timoshenko but either one of them would be better for both Ukraine and Russia because even despite their complete lack of principles and morals they are not cave nationalists like Yuschenko whose almost religious anti-Russian fervor did more to discredit the very idea of “pro-Western” Ukrainian nationalism than anything the Kremlin could have done over the five years since the “Orange Revolution”.

    Even with the higher transit fees revenues, the Ukraine is essentially bankrupt and was only able to carry on business as usual throughout 2009 because of IMF emergency funding, so in this particular case the matter of transit fees would be a difference of being 25 cents richer when one is a thousand dollars short.

    I follow your insights on the market with great interest and hope that your comments involving geopolitics become just as well-researched and informative. Best wishes for the New Year!

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