2011 annus horribilis?

2011 annus horribilis?

1. European debt saga continues?

Bailout-Bingo will continue in Europe with Italy, France, and Belgium prime candidates for review.

2. Apple loses it's cool?

Being the biggest player on the block is going to cost them. Investigations, power abuse, shady subcontractors, patent disputes, lawsuits. Nonetheless the earnings powerhouse is sure to continue.

3. China Bubble?

State control and currency manipulation are undermining stability. With millions of smart youngsters unemployed, food prices sky-rocketing and cheap manufacturing spilling over the border, can China keep its cool?

4. U.S Recovery?

Politically and economically America will remain a lame duck. Although corporate profits are promising it has not yet translated in jobs and housing. Joe the plumber, ain't got no cash. If they don't fix the budget, they aint got no credit.

5. Commodity Value

The only commodity becoming worth-less is paper money. The rest is up.

Gold will continue it's upward climb as people try to hedge devaluation.

Oil has been cheap, but so is the dollar, so time for oil and other dollar indexed commodities to go up. BRIC currencies will continue to show strength.

6. Taking the R out of BRIC

Russia will continue to struggle to re-engineer its commodity driven industry. Not enough wealth trickling down and a stagnant population. If it can trickle down the wealth and dramatically improve rule of law and gaping infrastructure then there is promise.

7. Sony's last trick pony

Now that Sony's PS3 gaming and media platform is finally earning money perhaps it can turn around other parts of the business or launch a new one. Divestment or (hostile) take over will be on the minds of the executive board.

8. Real Estate

With bank balance sheets under pressure due to new regulation, lending growth to sectors such as real estate will not pickup in the developed world. This will translate into higher borrowing costs, bankruptcies and restructuring going forward. Deleveraging in banks will translate to deleveraging of both households and business. More equity, more risk, lower asset values.

More on real estate in 2011 friends,

All the best and Quaerere Verum

The Weekend Economist

#75 Japan Forced to Rethink Its Energy Policy

The red hot Indian and particularly Chinese economies are unquestionably having a major impact on the world. While discussions often rage about whether or not this is a good thing (e.g. with environmentalists pointing out the devastating effect this is having on the environment and business leaders arguing it provides for opportunities not seen in decades), there are a myriad of micro areas where the effect of their growth is clear for all to see. One such interesting area is in Japan's energy policy.

For centuries Japan has been the largest economy in Asia, as well as the dominant political player (this has more to do with their financial muscle than with actual influence exerted). Subsequently, the country experienced a hunger for natural energy resources such as gas and oil that far surpassed that of any of its neighbors. With the rapid growth of India and China, this is beginning to change. While, according to the CIA World Factbook, Japan is still the world's second largest (after the USA) importer of oil with 5.43 million barrels of oil per day, China follows closely with 3.18 million and India with 2.01 million. More interestingly, China already consumes more oil than Japan, with China's consumption standing at 6.53 million barrels per day, Japan's at 5.6 million and India's at 2.5 million (the USA is still the world's largest consumer of oil). This means an increasingly larger portion of China's oil has to come from abroad, which directly and adversely affects Japan's supply. Given the fact that Japan's demand for oil has remained and, according to projections, will continue to remain steady for the coming years, the country is justifiably worried that it is no longer as interesting a market as the rapidly growing Chinese and Indian ones are for petroleum exporting countries.

Japan imports a whopping 90% of its oil from the Middle East (Saudi Arabia is Japan's largest oil supplier, shipping 458 million barrels, or 30% of Japan’s total import; UAE second with 387 million, or 25.4%; Iran third with 176 million, or 11.5%; and Qatar fourth with 156 million, or 10.2%). Japan - the world's largest importer of liquefied natural gas (LNG) - is similarly dependent on one geographical location for its gas imports (three quarters of Japan's imports come from Australasia: Indonesia, Malaysia, Brunei Darussalam and Australia. Qatar is Japan's fourth largest supplier after Indonesia, Malaysia and Australia).

In the meanwhile, China and India have been scavenging the world - particularly Africa - for new areas from which to secure their oil supply. China has been so successful in Africa that it has even managed to create a very balanced oil importing picture (in 2006, the Middle East accounted for 45% of China's crude oil imports, Africa for 32%, the EU and the Americas for 18.3% and Asia Pacific for 4%, according to the Chinese General Administration of Customs). All the while the oil prices have been skyrocketing, allowing for countries like Russia and Venezuela to play their oil cards and flex their muscles.

Given all these worrisome facts, the Japanese government decided it was time to prioritize the securing of the country's energy supply. In May 2006, the Japanese Ministry of Economy, Trade and Industry (METI) published a revealing document entitled "The New Energy Strategy." In it (and in later documents and high level speeches even more so), we find some key shifts away from their old policy. As Jan-Hein Chrisstoffels, a Japan specialist at the Netherlands Institute of International Relations Clingendael, points out, the formerly abundant references to liberalization, globalization and the free market are nowhere to be found. The new pillars are: Strengthening of bilateral relations with oil and gas producing countries; Increasing imports from oil and gas projects that are led by Japanese firms abroad; Decreasing the use of oil in the transport sector; Using more nuclear energy; And cooperation with China in the field of energy.

Another major shift in policy is the increased role that the Japanese government seeks to play. Japan feels Chinese oil firms have an unfair advantage given a government that pumps money into seemingly economically unprofitable extraction projects simply in order to secure supply. Therefore, the Japanese government has now set out to increase subsidies to Japanese oil firms and provide more favorable loans and investment guarantees. In other words, there is to be little left of the free market policies and non interference from the government that took the overtone until now. Much like China - which woos potential oil suppliers by promising preferential loans, the building of large infrastructure projects and a policy of non-interference in internal affairs - Japan has embarked upon a quest of securing her energy supply through tit-for-tat policies. One success story can already be found in former Prime Minister Junichiro Koizumi's visit to Kazakhstan in August 2006, followed by Economy, Trade and Industry Minister Amari Akira's visit this year. They ensured that Kazakhstan's (which has the world's second-largest uranium reserves after Australia) current supplies of only 1% of Japan's uranium imports will jump to 30-40% in the near future, in exchange for Japanese expertise in uranium enrichment.

It appears India and especially China are having a major impact on the policies of other nations such as Japan, which in this case can be considered as a blow to proponents of the free market. It is even likely to extend beyond the oil and gas sectors, as this year China - the world's largest consumer of coal - for the first time became a net importer thereof. The country imported 4.7 million metric tons of coal in January, a rise of 81.1% from a year ago, according to figures from the customs bureau. Although Japan is not at all a major consumer of coal, it might very well affect other formerly free market adhering countries.

#74 Chavez’ vs. Putin’s Freedom of Speech Crackdowns

The events of the recent weeks surrounding the scandalous closure (and the reopening of its unfortunately less far-reaching and accessible cable/satellite version) of an opposition-leaning Venezuelan TV channel, RCTV have revealed that, in addition to Mr. Chavez showing alliance propensity gyrating around controversial nuclear ambitions, weapons, oil and even gas arrangements with the aspirant “outsiders” such as China, Iran and Russia, lately he also proved to employ, even though in a somewhat maladroit approach, some of those countries’ leaders’ “tried-and-proved” censorship maneuvers.

In the midst of the RCTV crisis, hardly anybody seemed to recall a similar - though more perversely masked as compared to Chavez’ frankness - scandal that revolved in 2000-2001 around a privately held Russian TV channel, NTV.

The evolvement of the Russian, much more craftily performed analogue, started in June 2000 with the controversially executed arrest ordered by the prosecutor-general of Vladimir Gusinsky - charged with embezzlement - head of the Media-Most group that owned NTV (Russia’s first independent TV station), a newspaper and an openly opposition-leaning radio “Echo Moskvy,” which even President Bill Clinton favored during his visit to Moscow earlier that month, ignoring any Russian state-run radio or television during his visit. Media-Most publications, especially through its most widely accessible and highly popular TV channel NTV, had at the time openly refused to be loyal to the Kremlin. NTV, through its daily news, political programs, and a satirical puppet show, has broadly criticized the policies of the Kremlin and president Vladimir Putin, brought to light alleged atrocities during the Chechen war and other social issues in Russian life often ignored by state-owned channels.

A month later, in an informal deal, the charges against Gusinsky were dropped after signing an agreement with the minister of media, under which Gusinsky was to sell Media-Most to a state-dominated Gazprom, which already possessed a 30% share in NTV since 1996, for a price forced by Gazprom, in return for a guarantee that Gusinsky would not be prosecuted. After Media-Most itself refused to comply with the agreement, Gazprom publicly announced its acquisition of a controlling stake in NTV and the voting rights of a minority stake held by Media Most were frozen by a court decision.

Almost a year later, in April 2001 Gazprom took over NTV's old board of directors by force in a boardroom coup and replaced its director. Fearing that the Gazprom takeover would lead to government censorship, demonstrations of several thousand people in Moscow and St. Petersburg showed their support for NTV staff. Although the protests were weak when compared to the recent Caracas’ demonstration, they were incredibly brave by the practically non-existent Russian protest standards. Nevertheless, the majority of the prominent journalists have since left the channel, while the rest were been fired soon afterwards. Furthermore, rather conspicuously, two other independent channels were shut down in the next several years.

These events, which were critically commented on by former German Chancellor Gerhard Schroeder, the Council of Europe, and by former White House spokesman Joe Lockhart, for some reason have been swiftly forgiven of Putin.

How damaging are such freedom of speech crackdowns for the future of these countries?

The answer most likely lies in the countries’ past. A principle difference between the two is that since 1958 Venezuela has been evolving under an incessant period of democratic government; whilst Russia, except for a short period of Yeltsin’s laissez-faire unprecedented freedom (which was most likely due not to his proclaimed democratic aspirations, but to his inability to adequately manage the Russian chaos of the 1990’s), have been living under constant, multi-dimensional fear and rigid totalitarianism for at least the last 80 years. As opposed to the turmoil of the past decade, Putin brought in “order” – an archaically authoritarian “order” the nostalgic Russians are willing to give up many freedoms for; freedoms they probably never even owned in the period of modern history.

Thus, while Chavez acted in a military-background induced, atrociously blunt, and prospectively self-detrimental manner, having openly and ruthlessly commented on and pronounced the (upcoming) closure, Putin, owing to his KGB - the single most efficient Soviet-generated structure - experience, proceeded more furtively, and consequently more “effectively” in the long run, which makes it even more appalling and daunting.

Since this cunning de facto elimination of the only opposition-channel almost 8 years ago, there have virtually been no more attempts to reinstate any similar channels in Russia ever since; and no remembrance of these events, as if they were something insignificant, seems to currently permeate the discontent of the existing opposition.

Compared to Putin’s slyness and carefully premeditated conspirative approach, Chavez’ clumsy shutting of a dissident channel from the public system, which triumphantly reemerged soon afterwards in independent cable broadcasting (and even YouTube) following the logically predictable strong international reaction, seems just a poorly calculated whim, regardless of how intrinsically erroneous it is.

What is obvious is easier to confront and has a tendency to backfire eventually.

Optimistically, the support for Chavez and his “revolutionary” policies is just a temporary Venezuelan poor’s “nervous breakdown” and the nouveau riches’ “folly” that - under favorable circumstances of the opposition’s effort supported by a strong-willed, though diminishing, middle class that has been manifesting great dissatisfaction with and spirit to oppose Chavez - can theoretically be reversed.

Unfortunately for the Russians - even the younger and notably increasingly more prosperous ones - continuing complacence with a latent, concealed and consequently more enduringly perilous governmental “iron-fist” seems to be metaphorically an almost genetically inherent mentality trait.

- This article was written for and provided to the Weekend Economist by Julia Socolov

#65 Political Tectonics: The Slow Drift

The recent souring of EU-Russia relations and U.S.-Russia relations is a greater cause for concern for the post Cold War status quo than most people realize. Gone are the Yeltsin years of warm rapprochement between nuclear super powers Russia and America. The realities of multipolarity are beginning to dawn on the recently predictable Pangaea world of diplomacy. The post 911 world has shaken the "stable" world order on its foundations. What we are in fact witnessing is the start of a slow drift to a truly multipolar world. A world of divided power and divided interests.

This divided world comes at a rather bad time in world history. Humanity needs to make a series of concerted, fundamental global changes in an array of areas ranging from energy security to climate change and poverty. Instead of focusing on these critical issues that are beneficial to the well being of all mankind, we are increasingly distracted by the deplorable and volatile political situation in Iraq and the Palestinian territories.

The gradual but steady shift in Latin American political attitudes vis a vis the United States should also not be underestimated. In the case of Venezuela, Chavez is not only talking the talk, but clearly walking it as well. The recent moves to nationalize the oil industry and pull out of multilateral institutions such as the World Bank is a vivid example of how the combination of self interest and anti-Americanism is shaping a new diplomatic paradigm in world politics. The trend of resource nationalization is a trend that should be followed with absolute caution, be it in Russia, Myanmar, Bolivia, or Venezuela.

In fact, we are only at the beginning of a long energy squeeze that is bound to exacerbate, in great part due to the current climate of global political fragmentation. The up and coming leadership change in the White House comes at a critical moment in time: can a new President repair the years of void respect for American political leadership and lack of Democratic enlightenment?

In any case the new presidency faces a number of tough challenges. A new administration and President in the United States is going to face a much harsher international diplomatic climate for reaching consensus. Unilateralism is surely a no go area now, something which even current President George Bush Jr. has understood given the precarious international political climate that has arisen in large part due to this unilateralism. The imminent talks with Iran are a good example of this. They are by no means a stroke of enlightened political leadership, but rather a measure of acute desperation.

#37 Turkmenbashi Lives On

With the death of Turkmen "President-for-life," Saparmurat Niyazov, last December, hope emerged that maybe Turkmenistan would be able to finally get a taste of Democracy. The election as new President last Sunday of heir-apparent, Gurbanguly Berdymukhamedov - who won with the surreal number of 89.23% of the votes in a matter of only four hours of voting, with a 95% turnout according to the Central Election Commission - has put a quick damper on such hopes. On a more positive note (for Turkmenistan, that is), the continuation of Niyazov's legacy will mean that Turkmenistan will likely become neither a Russian nor a European proxy state.　

There was talk that the death of Niyazov provides a golden opportunity for the European Union to lessen its dependency on Russian gas, while also allowing for Russia to regain some of its lost Cold War influence in the hermit state. With Turkmenistan being home to the fifth-largest natural gas reserves in the world (proven reserves of 3 Trillion Cubic Meters) and substantial oil reserves as well (Turkmenistan has proven oil reserves of 546m barrels, estimated reserves of more than 2 bn barrels, and large areas that are yet to be explored), the Central Asian nation is of extreme interest particularly to the EU. It could serve as the perfect partner in the realization of an energy corridor from Central Asia to Europe.　

There are, however, doubts about Turkmenistan's oil and gas reserves, or at least the potential to make use it. Former vice Prime Minister and head of the Central Bank of Turkmenistan, Khudaiberdy Orazov, noted that "Everyone had to make do with information from Niyazov about Turkmenistan's gas reserves, which were said to be 22 trillion or even 44 trillion cubic meters. But in reality the only gas field in Turkmenistan was opened under the USSR and has been being exploited ever since...It is completely possible that Turkmenistan has a lot of gas. But first it has to be found, a gas field has to be opened, and extraction has to begin. And no one has done that for 15 years, and in the meantime the Geology Ministry has been disbanded and many specialists have left for Russia or let the profession lapse."

If we are to assume that the country is capable of becoming a major player in the world's energy market, recent signs provide no clue as to who will benefit most. Turkmenistan is scheduled to continue providing Gazprom with 50 billion cubic meters of gas a year at below-market prices through the old Soviet-era pipeline and, starting from 2009, the Chinese are to receive 30 billion cubic meters of a gas a year. On the political front, the current festivities in the Turkmen capital, Ashgabat, don't provide any hints either, as they are attended by leaders and senior diplomats from a wide range of countries, including European officials, Russian Prime Minister Mikhail Fradkov, US Assistant Secretary of State Richard Boucher, a vice-chairman of China's parliament, Turkish Prime Minister Tayyip Erdogan, the leaders of Ukraine and Georgia, and even Iranian President Mahmoud Ahmadinejad.

Turkmenbashi lives on for now, meaning little change within the country and no foreseeable near term impact on the energy and geopolitical chess boards. However, in the hopeful words of an unnamed Western Diplomat in Ashgabat who defended the policy of engagement, "You can take an obese person and tell them that they need to lose weight. Until you see the pounds coming off there's so proof they've absorbed the message...but a crash diet is bad, because you're looking for sustainable change." In other words, the West is choosing to grant Berdymukhamedov and co. the benefit of the doubt for now, allowing for time to implement the necessary changes. Or if you look at it another way, they are hoping to befriend the new leader so as not to alienate the gas-rich nation and increase their own chances of striking some juicy deals.

See also Post #5 Turkmenistan up for Grabs

#35 Cold War Resurgence?

While action from Russia such as helping Tehran build a nuclear reactor in Bushehr and selling them anti-missile systems is commonplace, recent talk from Moscow has become increasingly anti-American as well.　

Of all people, Russian President Vladimir Putin blasted the United States recently for the "almost uncontained" use of force in the world, and for encouraging other countries to acquire nuclear weapons. He went on to say that, "One state, the United States has overstepped its borders in all spheres - economic, political and humanitarian, and has imposed itself on other states...this is very dangerous; nobody feels secure anymore because nobody can hide behind international law." Whether he has a point or not, the old saying "get your own house in order before preaching to others" should really carry more weight.　

U.S. reaction has been quite diplomatic, with Secretary of Defence Robert Gates commenting, "Like your second speaker (Putin) yesterday, I have a career not in Diplomacy, but in the spy business. And I guess old spies have a habit of blunt speaking…But I have been to re-education camp." U.S. Republican senator and presidential hopeful, John McCain, was a little more stern, saying "In today's multi-polar world, there is no place for needless confrontation, and I would hope that Russian leaders understand this truth."

Whether today's world is uni-polar or not is a different matter, but McCain certainly has a point when mentioning Russian confrontation. Sure, global U.S. action garners so much attention that it seems they are the instigators of countless conflicts, but other large players such as Russia and China are no angels. Where do you think the bulk of the weapons found in countries like Sudan, Zimbabwe, Uganda, Ethiopia, Eritrea, Algeria, Syria, Myanmar and Iran come from?　

As for Putin's call for honouring "international law," lest us not forget Russia's spats with countries such as Ukraine and Georgia, or even their recent gas dispute with arch ally Belarus. NATO's expansion eastward has been a major point of contention in Russia's relationship with the West, as it cannot accept the loss of any more influence in former Soviet territory. Within her own borders, the handling of the Chechen issue certainly does not pale compared to U.S. policy in the War on Terror.　

The speech brought out into the open a major Russian grievance: that the country no longer enjoys the international clout it once did. Putin touted Russia's resurgence as a major player on the international stage capable of standing up to the United States and/or being a worthy alternative to the American giant. Such talk is clear provocation, as it calls for division rather than collaboration. This is especially so since a more likely candidate for global superpower, China, is pursuing a more measured foreign policy.　

Backing up his calls for a multi-polar world, Putin, who is soon to step down as President, has become the first Russian head of state to visit Saudi Arabia, Qatar and Jordan; all traditional U.S. allies. Given the long history of warm Russia-Middle East relations, the need to visit these three states in particular is not exactly pressing. It is therefore no coincidence that these visits coincide with his increasingly vocal anti-US rhetoric.　

Putin's speech comes on the backdrop of a recent U.S-Russia space row, when deputy head of the Russian space agency Roskosmos, Vitaly Davydov, sharply criticized what he said were U.S. plans to deploy weapons in space. While the White House has stated the policy does not call for the development or deployment of weapons in space, Russian Defense Minister Sergei Ivanov threatened retaliatory steps if any country put weapons in space.　

Quite possibly what has held the U.S. and Russia together is the friendship of Bush and Putin. With both men gone in just over a year, relations might begin to sour at the top level as well. It seems the stage has been set.

#29 The Oil Tsars Part 2

In an oblique way, Russia stands to benefit from an escalated crisis in the Middle East. As long as the U.S.-Iranian standoff continues, Russia's military industrial complex stands to pocket handsomely from Iranian fears of US invasion. Indeed, Iranians are well received customers of Russia's bargain bin defence industries.

Another positive by-product of Middle East tension is high energy prices: 30% of Russia's budget comes from the export of energy products. It is no surprise that, besides the economic benefits, high oil prices fill both government and oligarch coffers substantially. Russian oligarchs and Kremlin officials must be asking themselves "why deescalate the crisis when we profit so handsomely from it?" consequently, it is not in Russia's interest to resolve the American-Iranian standoff.

Most significant Russian enterprises, military-industrial firms, banks and energy giants such as Gazprom are so closely tied to the state that there are in fact almost no boundaries between business and the Kremlin. In fact, you could go as far as to coin an entirely new term for these enterprises, namely "Kremlinprises:" the money machines of Russia's well connected oligarchic elite.

Turning to the political perspective, America's desperation in the Middle East has given Putin a carte blanche to deal with his own pestering fundamentalist problems in Russia's caucus powder keg of Islamic nationalists. For a country as large as Russia, remarkably little news finds it way to the press, unless it concerns energy of course.

The Russian bear seems to finally be waking up from its democratic and free market hangover of the wild 90's. The current nationalist and authoritarian reflex is one that has gone by with remarkable support, albeit at the expense of freedom and equality. Nonetheless, Putin has managed to charm much of the world, using not only his own charm, but borrowing heavily from the grandeur and symbolism of old Tsarist times as well.

With new splendor, power and determination, Russia is once again present on world stage as a worthy global power. Within this reborn diplomatic fervor, Putin is striking deals and renewing bonds with old allies such as India. If during the cold war Russian alliances and diplomatic interests where based on ideology, today they are based on business. With business and state affairs so closely connected in the Kremlin, Russia is basically one giant state enterprise, though one in which top level managers reap a significantly larger portion of the benefits. Russia's neighbors are feeling the pinch of the surgent Kremlin corporatism. Tough renegotiated oil contracts show that the regime favors money more than it does old compatriots (witness the recent standoff with arch ally Belarus).

The US would be wise to take heed of this new transformation and understand the novel role Russia is playing not only in Europe, but also in the Middle East and Asia. While the US is seemingly wasting its resources in a futile bid for control and stability in the Middle East, Russia is biding its time, patiently rebuilding its domestic, political, industrial and economic power base. After nearly a century, Russia has a new Tsar. Funny enough, the pawns, as well the stakes, are the same (if not greater).

Please click here for The Oil Tsars Part 1

#28 The Oil Tsars Part 1

Their regimes might change, but the Russian psyche manages to remain remarkably uniform no matter what. Russians are tough, enduring people, who have proved themselves admirably in the face of countless foes such as the Tartars, Swedes, French, Poles and Germans. Interestingly enough, their biggest enemy has always been from within, irrespective of the form of government (be it Communism, Democracy, Tsarism, etc.). The following paragraphs will uncover some of the putrescent aspects of Russian society, while "The Oil Tsars Part 2" will examine the effect this has on the current global state of affairs.

Democracy stems from the Greek word "demos," which means rule by the people. Sure, Russia is ruled by people; a pretty small group of people, that is. Due to the dangerous collusion between political and economic power in the Kremlin, few people truly have much to say. The real power rests in the hands of a small group; often ex-KGB oligarchs who profited handsomely through the prostitution of state companies and resources during the shock transition to free markets in the 1990's.

Although it seems that the Russian economy is back on track with a vengeance after contracting an estimated 40% between 1991 and 1998, the benefits of the economic recovery are not shared by the majority of Russian citizens. This is in large part due to the inefficiency of the economic system which, due to the corrupt nature of governance, disenfranchises the majority of Russian citizens. This very engine of inequality is polarizing Russian society and sowing the seeds of future instability.

The streets in Russia are also becoming poisoned with ultra right wing nationalism, where gangs and organized crime contest for control. State owned media is for a large part responsible for fueling this nationalist sentiment. The atmosphere is reminiscent of 1930's Nazi Germany, with minority groups being openly blamed and targeted for the social economic turmoil. In the past, being a dissident would get you deported to the Gulag somewhere far away in Siberia. In the new Russia, if you speak out or are perceived to be a threat or nuisance by the ruling elite, you could get the bullet. A professional assassination will only set you back about US$10.000, which for high-rolling criminals, gangs, oligarchs, agents, etc., is really not such a steep price to pay.

Gangsters are not only found in the street. In fact, the biggest gangsters are sitting comfortably in the Kremlin. With no respect for free markets, Russia is bullying out foreign companies who have significant stakes in Russia's oil wealth. Although this is arguably part of a global trend of energy nationalization, it must be said that those countries partaking in such measures are democratically bankrupt.

High oil prices will continue to beguile Russia to nationalize her natural resources. 30% of the Russian state budget comes from exporting energy wealth. Without it, Russia could never keep its expensive, corrupt bureaucracy intact. By using her oil wealth as a strategic state asset, Russia has turned around its economy from being a net debtor to becoming a creditor nation. However, if Russia remains a country where justice, conscience and power is for sale, its citizens will never reap the true potential of mother Russia and her abundant resource wealth.

Please click here for The Oil Tsars Part 2

#14 Transnistria at the Gates of the EU

The ringing in of the New Year has brought the EU two new members: Romania and Bulgaria. While this in itself provides plenty of space for discussion, a different, more obscure issue will undoubtedly begin to garner more attention in the coming years due to this event. The recent enlargement means that the European Union now borders Moldova; a notoriously impoverished country. While mass immigration to Romania and possibly further into the EU is a possible scenario, it is another issue that merits special attention.

In the East of Moldova, bordering the Ukraine, lies an area called Transnistria (also know as Transdniestr, while the official name is Pridnestróvskaia Moldávskaia Respública, or Pridnestrovie in short). It is a sovereign region that sought to remain a part of the Soviet Union and declared independence on September 2, 1990. Internationally Transnistria is considered part of the Republic of Moldova, although de facto control is exercised by a local separatist administration.

Transnistria has a reputation for being a haven for criminal activity such as smuggling and trading weapons, women, drugs, and counterfeit goods. The European Parliament's delegation to Moldova has even named Transnistria "a black hole in which illegal trade in arms, the trafficking in human beings and the laundering of criminal finance was carried on."

Of the approximately 700,000 inhabitants of Transnistria, almost one seventh is also citizen of Russia. Moldovans, Russians and Ukrainians constitute approximately an equal percentage of the population (around 30% each), only complicating the situation even more. Prior to the Second World War, 8% of Transnistrians were Jewish, but this has dropped to below one fourth of a percent today.

Transnistria is a close ally of Russia and the main reason for the relatively cold relations between Chisinau (the capital of Moldova) and Moscow. It has also caused friction between Russia and the EU, whose views of the status of Transinstria are rather different. On September 17, 2006, a referendum was held in Transnistria. 97.2% voted in favor of 'continued' independence and a free association with Russia, while 95% voted against a possible reunification with Moldova (Tiraspol Times). Voter turnout was 78.6%. The referendum was recognized Russia, but not by the European Union.

Right at the border of Romania, in the south of Moldova, lies another autonomous region known as Gagauzia. The majority of people here are Gagauz; a Turkic people who are predominantly Christian. Fortunately this region is rather peaceful, with the autonomy-granting "Law on the Special Legal Status of Gagauzia" passed by the Moldovan government on December 23, 1994, resolving peacefully the dispute that existed between Gagauzia and Moldova. Indeed, many European human-rights organizations recognize Gagauzia as a successful model for resolving ethnic conflict.

Such a resolution does not seem imminent in Transnistria however, meaning the EU will have to deal with the situation more proactively. This will have to include direct talks with Russia on the matter, which, being EU's main supplier of gas, automatically makes Europe weak kneed. The further East the EU goes, the closer it gets to mother Russia. Let's just hope that the increase in size that the EU gains by expanding eastward will also mean an increase in muscle. While the former Soviet states that are now in the EU were less tacitly influenced by Russia after the collapse of the Soviet Union, it is the territories that are now left between the EU and Russia where Russia's arm is still very strong today. Any move beyond the current EU borders will most certainly provoke a significant Russian response.

Reference

Tiraspol Times, http://www.tiraspoltimes.com/node/216

For an interesting take on the capital, Tiraspol, visit the following website: http://www.lonelyplanet.com/journeys/feature/tiraspol06.cfm

#11 A New Security Paradigm?

The previous bipolar contestation between East and West was based upon which economic doctrine should prevail. Today’s primal security concern is that of energy resources. In Europe, the recent squabble between Russia and Belarus is threatening to disturb the ease with which Western Europe is able to turn up the thermostat in the (so far) mild winter.

The big change is that Russia seems more interested in earning top dollars for its resources, rather than subsidizing its neighbors and allies. Russia is no longer interested in “giving” its gas resources away cheaply when there are well paying, gas hungry customers around the corner. This could be good news for Europe, as this signals the intent of Gazprom to be more of a business partner rather than a political instrument: although in reality it is clearly both.

According to spokesman Sergei Kupriyanov, Gazprom is not Santa Claus. Isolated and dictatorial Belarus was accustomed to buying gas at a nearly 70% discount relative to market prices (around 46$ per 1000 cubic meters). Gazprom wants around 200$ per 1000 cubic meters. In the newly announced deal, Belarus will now pay around 100$ per 1000 cubic meters, which, looking at current prices, can still be considered a sweet deal.

If the re-pricing had been more aggressive, it would have created more pressure on Belarusian president Alexander Lukashenko by effectively ending a multibillion subsidy. Although the re-pricing is a welcome step in the right direction, it is merely Russia flexing its muscles. However, in the long term these are good signals to shareholders who are not keen on Gazprom being used as a political subsidy agent.

Looking at Western Europe, their dependence on foreign hydrocarbon sources remains a critical issue because, as the Economist put it, “a new hegemony, based on pipelines rather than tanks, is advancing”. As Europe's thirst for Russian resources increases, their independence decreases; and this time there is no “Iron Curtain” to hide behind.

#7 The Empire Strikes Back

The value of an oil firm lies in the value of its "proven" reserves. Determining the size, true value and exploitation costs is at best a murky business. The scandal of 2004, when Shell callously over estimated its reserves, has given past hydrocarbon portfolio holders a sour taste. Turning to Russia, the hunger for sweet crude in the Sakhalin fields is going to be bitter at best for foreign investors.

Shell's majority share was just recently bought out for 7.5 billion dollars, which gives Gazprom a 55% majority share in the mammoth fields. In Russian media the deal is noted as a Christmas gift for Gazprom. Although nothing more than a generous extortion, the deal could actually have been worse for Shell. Nevertheless, there will have to be yet another de-valuation of its reserves and hence, the intrinsic value.

There is some good news on the horizon: the threat of under investment was looming and after much haggling, Russia has now finally agreed to a new 20 billion dollar expansion of the mammoth project. Nonetheless, even when the Sakhalin fields get up and running, it is going to be an expensive money machine at best. The price of oil is an important factor in the overall profitability of the venture. The are certainly going to be some hick-ups along the way, notably in the short term.

The predicted weakness of the American Economy is brewing stormy clouds. The American consumer is already feeling the pinch of "expensive" oil as their purchasing power slides with a weakening dollar. And the front for commodity prices such as oil to be denominated in Euros is gaining momentum. Although this would be a welcome move for oil producers who are seeing their dollar assets slide, American consumers would finally be exposed to the real cost of energy and their inherent inefficient per capita mode of production. Higher prices would lead to a slowing American demand (something we are perhaps already starting experience), adding some downward pressure on the inescapable upward trend.

In the short and medium term there is much to be grumpy about and in the future even more to speculate about. Will this be the last wrestling match in Russia for state control of natural resources, or will the empire strike back yet again?

(Sources: Financial Times, NRC Handelsblad, the Economist, The Moscow Times)

#5 Turkmenistan up for Grabs

Although generating surprisingly few headlines, the death of Turkmenistan's authoritarian president Saparmurat Niyazov is a very big deal. Granted, Commandante Fidel's loss (we believe he is still alive of course, but clearly not in a condition to rule the way we are used to of him) is a more high profile case, but Turkmenistan has much more to offer the world in economic terms.

Turkmenistan is home to the fifth-largest natural gas reserves in the world (proven reserves of 3 TCM) and holds substantial oil reserves as well (Turkmenistan has proven oil reserves of 546m barrels, estimated reserves of more than 2 bn barrels, and large areas that are yet to be explored). Niyazov ruled Turkmenistan with an iron fist for 21 years, commanding more than only the post of President of the nation. This has meant that there is now a serious possibility of chaos in the nation as, according to Turkmen law, the president is succeeded by the head of the People's Assembly - a post that was held by Mr Niyazov himself!

A serious possibility is that Russia's long arm will reach deeper into Turkmen affairs, given Russian Foreign Minister Sergei Lavrov's swift response that "We hope a new leadership will act to benefit co-operation with Russia and to benefit the region as a whole." Perhaps all the days, cities, airport and meteorite that were named after Niyazov will now be renamed in the honour of soon to be departing Comrade Putin. The many statues might even suddenly find themselves with blond hair and blue eyes.

But on a more serious note, if Russia does gain more influence in Turkmenistan, this does not bode well for Europe's energy addiction. If, on the other hand, Europe steps in quickly to ensure a swift transition in the country, it might have found itself the perfect alternative to the fix provided by the mafia pushers in Russia. A big plus; Turkmenistan does not need Russia, thanks to her own rich energy resources, and can thus become a loyal ally if Europe plays its cards right...and quick.

See also post #37 Turkmenbashi Lives On

#2 Russian Roulette & Big Oil

(Sources: Economist, BBC NEWS, FT & Reuters)

The Sakhalin II Project is one of Royal Dutch Shell's largest undertakings in history. However, the Anglo-Dutch giant was dealt yet another blow by Russian national "strong arm" tactics.

Russia effectively needed a "casus belli" to re-ascertain its grip on its precious oil resources. This, of course, after 80% of the investments had been made by Shell & consortium. Gazprom & Co. knew very well that Shell was in no position to effectively negotiate or walk away for that matter. Gazprom had been inside the deal from day one; this to ensure political protection. However, Shell effectively paid the burglar to watch his house, only to find it held ransom.

To its credit, Shell has had much experience in extracting oil from regions with substantive political risk (i.e. Nigeria). It should have realized, as little red riding hood did, that offering cookies to grandmother Gazprom could mean that it would be eaten by the big bad wolf (Vladimir Putin) or the Russian bear in this case.

Sadly the oil sector in Russia needs quality investment and the Sakhalin drama comes at a bad time. On the other hand, another oil spike could lead to proportionally more investments into alternative energy solutions as political risks begin to outweigh technological risks.

There is a valuable lesson to be learned here. In fact this should serve as a warning to investors with foreign hydrocarbon portfolio exposure. The legacy of authoritarianism still upholds: if you're in need of a fix, do a favor to the boss. Beware of the big bad wolf. Unfortunately we can expect our appetites for oil to be spoiled by more "bad wolves."

Starring Chavez of Venezuela and Morales of Bolivia (not to mention the desert wolves in Iran and Saudi Arabia).

To be continued