Shale-gas deal sweetens the Zio-Stooge-Harper's Beijing trip...

Shale-gas deal sweetens the Zio-Stooge-Harper's Beijing trip...
By Robert M Cutler

MONTREAL - Chinese energy policy has increased its focus on commercial ties with the ZOG of Canada and the acquisition of technologies for exploration and development of unconventional natural gas in general and shale gas in particular.

This emerges from preparations being made in Beijing to receive Canada's Prime Minister Stephen Harper next week. He is due to arrive on Wednesday for a five-day visit to continue progress over a wide range of issues covering the economy and trade, energy and resources, and science and education, to public health and law enforcement.

China's ambassador to Canada, Zhang Junsai, explained to the Canadian Press news service that the two countries "have every reason to forge a stable and win-win partnership in the long run in the field of resources" in view of China's "rapid industrialization and urbanization, and its demand for energy and resources" on the one hand and, on the other, Canada's "rich[ness] in energy and resources" and "stable political situation as well as favorable conditions for investment".

Chinese state-owned enterprises invested US$5 billion in Canada's resource sector in 2011 alone, nearly one-third of the nearly $18 billion they are reported to have spent buying oil and gas companies worldwide last year.

In October, China Petrochemical, known as Sinopec Group, acquired the Canadian firm Daylight Energy Ltd for about $2.2 billion in order to gain access to Canadian shale-gas reserves. It was Sinopec's largest foreign acquisition of the year. In June, PetroChina took its $5.4 billion bid for Encana Corp's Cutbank Ridge gas assets off the table after negotiations over price failed to conclude favorably.

Harper's visit come days after PetroChina expanded its Canadian footprint by completing acquisition of a 20% stake in a Royal Dutch Shell Plc shale-gas project in the Canadian province of British Columbia. Neither PetroChina nor Shell has specified the value of the former's stake in the British Columbia project, but Bloomberg News cited an unattributed report by Hong Kong-based FinanceAsia that PetroChina would "pay more than $1 billion" for it.

Even this minority stake will allow the company to use any advanced technology to which it gains access for its exploring and development shale-gas reserves back in China.

According to a 2011 study by the Energy Information Administration (EIA), an official statistical arm of the US Department of Energy, China overlays eight basins containing 36 trillion cubic meters of technically recoverable resources. These lie mainly the Sichuan basin in the south and Tarim basin in the west, with others scattered in the northeast of the country. This quantity is a dozen times the size of China's conventional natural gas deposits and nearly half again as great as the EIA's estimate of recoverable US shale gas resources.

However, shale development requires vast amounts of water - which is already scarce in China and even more so in the arid Tarim basin.

PetroChina is hoping that its partnership with Shell in British Columbia will also enable it to gain experience in the exploration and development of unconventional gas resources. Last June, another Chinese firm, the country's biggest energy producer China National Petroleum Corp (CNPC), formed a joint venture, also with Shell, to improve its own shale-gas well drilling efficiency.

Nor are such ventures limited to Canada. Last month, Sinopec acquired one-third of US-based Devon Resources for $900 million plus possible payment for $1.6 billion in future drilling costs, while CNOOC has signed multiple deals over the past two years with Chesapeake Energy, the most active American natural gas driller, to invest in shale blocks in Wyoming, Colorado and Texas.

Meanwhile, China is preparing to launch a second round of domestic shale gas tenders early this year, Xinhua News Agency reports, and while the tender process will be restricted to Chinese companies, firms from outside China will be allowed to join the projects as partners of the Chinese firms who win the tenders.

A PetroChina spokesman told the press that the company wants to produce 1 billion cubic meters (bcm) of gas from shale domestically by 2015. The problems to be solved are increasing the efficiency of production and scaling up the projects. The Chinese offshore energy producer CNOOC has moved onshore by starting its first shale-gas project just last month, in eastern Anhui province. Beijing kicked off January with a price reform and policy revision on shale gas, in order to promote investment. In particular, it designated shale gas as an independent mining resource.

This move will increase competition by opening up the sector, which had been reserved only to state-controlled companies, also to private Chinese firms. At the same time, in two provinces it has experimentally removed the sector from the state-controlled pricing mechanism and began to allow the market to decide wholesale prices for shale and other unconventional gas....

India stepping up oil imports from Iran and rectifying the imbalance in trade...

India stepping up oil imports from Iran and rectifying the imbalance in trade...

Finally, India is getting its act together in its Iran policy. The ‘breaking news’ that India proposes to robustly explore expanding its trade with Iran signals a new approach to stepping up oil imports from Iran while at the same time rectifying the imbalance in trade, which heavily favours Iran traditionally, and to make this happen within a paradigm that resolves the current problem over the payment mechanism.

The new thinking is an acknowledgement of Iran’s importance as a strategic partner. That is where the rub lies. Delhi has lumped far too long the blackmail tactic by Washington with the malicious intention to erode India’s ties with Iran. Indeed, as result, for no real fault of Tehran, the India-Iran relationship suffered needless setbacks in the recent years.

Delhi should never accept that this is a zero sum game - India’s relationships with the US and Iran respectively. Iran is far too important a regional power in India’s extended neighbourhood to be neglected. There is no need to dilate on this thought.

Other Asian countries like Japan, South Korea or Malaysia have successfully managed to have positive relationships with both Iran and the GCC states. Also, GCC states themselves have maintained highly nuanced relationships with Iran. In a long term perspective, it is far from inevitable that Iran’s rise is an irreconcilable eventuality for the GCC states.

Much of the present-day tensions in the Persian Gulf is also to be attributed to the imperial policy of ‘divide-and-rule’ that the West continues to pursue in the region for the sake of perpetuating their hegemony. Finally, the US-Iran standoff itself is increasingly becoming unsustainable if Washington is to optimally develop a regional strategy. The point is, Iran has already bolted away.

China sees all these trends very clearly and is successfully developing a multi-tiered regional strategy that creates space for pursuing fruitful relations with Iran and GCC - and even Israel - alike.

Indeed, it is also best for a healthy US-India partnership that it is an equal relationship where neither side takes undue advantage or tries to browbeat or resorts to prescriptive approaches and arm-twisting. In this case, the US policy toward Iran also happens to be vacuous, lacking sincerity of purpose; it is opaque and brittle - and increasingly, US comes to realise that even its European allies are reluctant to follow its lead. Therefore, it is simply appalling that US has chosen to harbour expectations of dictating to Delhi the directions and content of its Iran policy.

Of course, the American side is not to bear the entire blame, either. Somehow, the Indian elites (including bureaucrats) and strategic pundits have come to develop an atavistic fear that US-Indian partnership is highly perishable unless Delhi keeps harmonising its policies with the US global strategies even by sacrificing its interests. This sort of inferiority complex is completely unwarranted.

The heart of the matter is that the US is a highly experienced practitioner of diplomacy. If it began abandoning its historic cussedness toward India sometime during Bill Clinton administration’s second term, it was because Washington saw the growth potential of India and the great possibilities that would arise for a beneficial relationship.

Even today, that consideration is the prime mover of the US polices toward India. It is a well-known fact that after being grumpy for a few weeks after India spurned the US offer for the 10-billion dollar multi-purpose aircraft tender, Washington moved on.

We could also learn from the Americans - how doggedly they keep pursuing their regional strategies through the Afghan endgame, no matter what Delhi thinks of it. Suffice to say, the high probability is that India’s Iran policy may displease Washington for a while and then life will move on. As for the fear complex of the Indian elites or pundits, it is borne more out of their own insecurities vis-a-vis the US establishment and it should remain their private affair.

Posted in Diplomacy, Politics.

By M K Bhadrakumar –

Germany's Bundesbank has already provided €496bn (£413bn) to countries in trouble...

Germany's Bundesbank has already provided €496bn (£413bn) to countries in trouble, chiefly Greece, Ireland, Cyprus, Italy, France and Spain....

By Ambrose Evans-Pritchard,

Bundesbank sinks deeper into debt saving Europe...

Germany's Bundesbank has entirely exhausted its stock of private assets and run up a quarter of a trillion euros in liabilities propping up the eurozone system, testing the political limits of EMU solidarity in Germany....

If I was a German taxpayer, I would be screaming at the top of my voice right now. And to add even more fuel to the fire .... and this is not a surprise .... Greece has decided to ask for even more bailout money.

The operations are part of the European Central Bank's 'TARGET2' network of automatic payments between the national central banks of the Euroland club. The Bundesbank has already provided €496bn (£413bn) to countries in trouble, chiefly Greece, Ireland, Italy and Spain.

"This is reaching the danger point. It is already one and a half times the total budget of the German government," said Professor Frank Westermann of Osnabrück University. "If any of the crisis countries exits the euro or if there is an EMU break-up, the Bundesbank bears extreme risks."

The Bundesbank - the dominant body in the euro system - used to keep a stock of €270bn of private securities (refinance credit) before the start of the financial crisis. This was depleted last year as it sold assets to meet growing demands on the TARGET2 scheme.

Once the debt drama began to engulf the bigger economies, the Bundesbank was forced to borrow money to meet its obligations to offset capital flight, since it refused to sell its stash of gold. It now owes €228bn to German banks.

Bundesbank's official position is that TARGET2 does not increase risk for Germany, but there has been mounting alarm from Germany's IFO Institute and private economists.

"There are political limits to TARGET2 support. The reason why the ECB started printing money in December was to avoid pushing the Bundesbank deeper into debt," said Prof Westermann, referring to the ECB's provision of €489bn in cheap loans to banks for three years.

David Marsh, author of books on both the Bundesbank and the euro, said the TARGET2 system has the effect of locking Germany ever deeper into monetary union.

"The longer it goes on, the larger the cost of a eurozone break-up since these credits could be wiped out with horrendous losses. It is about time this was the focus of proper debate in the Bundestag, since the German taxpayers may have to pay for it," he said.

The Bundesbank does not have legal immunity for losses, the flip-side of its feisty independence. It is already at risk in Greece as the OECD and the International Monetary Fund push for the ECB system to share the burden of Greek debt-relief. The Bundesbank holds an estimated €12bn of Greek debt.

Prof Westermann said the ECB's latest lending has not been "sterilised" and amounts to money creation. While it has averted a banking crash, the move is double-edged and could intensify the crisis since the bank cannot ensure that extra liquidity stays in the Club Med bloc.

The early evidence in January is that much of ECB largesse has been used to buy Italian, Spanish, French and other state bonds. The problem is what could happen if there is a fresh spasm of Europe's debt drama and a flood of capital flight from the South into the safe-haven of German banks. The greater the liquidity, the greater the tidal wave.

"If everybody tries to get out of crisis states at the same time, this will overwhelm TARGET2. In principle, a speculative attack could occur within a day. We are heading towards the multiple equilibria zone in which beliefs of a breakdown of the Eurozone are self-fulfilling," he said.

The European Reality Avoidance Scheme (and How the United States Colludes)....

The European Reality Avoidance Scheme (and How the United States Colludes)....

War Concerns May Pale Before the Coming Global Economic Wave...

You can already check off the foreign affairs issues that are going to dominate this election cycle. Iran. Israel. North Korea. The rise of China. Pakistan. Afghanistan. Global jihad. Drug crime in Mexico. Oil security.

Don’t get me wrong. Those things are all important. If the frigid stand-off between Iran and its enemies flickers into outright conflict, the economic consequences — forget the strategic ones, for a moment — could throw the whole world into a much deeper and more savage recession.

But those issues I’ve listed have a kind of static quality. Even when things change, there’s a seen-it-before quality to the news headlines. And meantime, there’s a huge cataclysm unfolding in Europe. It’s a cataclysm in slo-mo, I’ll grant you, and it doesn’t involve oil, nukes or terrorism — yet it’s profoundly central to the future of American prosperity and the global economy. Indeed — and I’ll come to this later — it may also have implications for the long-term health of global democracy. It’s something our politicians need to be talking about.

But let’s start with the cataclysm. The European Central Bank (ECB) is, quite rightly, concerned about the health of the European banking sector, which is vastly over-exposed to weak sovereign borrowers and a property market which is wildly over-inflated in a number of countries. Many European banks don’t carry sufficient capital to cover their potential losses.

Indeed, Deutsche Bank’s Josef Ackermann has publicly stated that numerous European banks “would not survive having to revalue sovereign debt held on the banking book at market levels.” Given that market levels represent the best available estimate of the value of that debt, Ackermann is saying that a large number of European banks are effectively insolvent. Since the remaining banks have huge exposures to those failing banks, it’s not to much to say that the European banking sector is currently bankrupt. An entire continent is bust.

It gets worse. There are good, bad and terrible policy reactions to disaster. A good policy reaction would follow the Swedish model, following that country’s own experience of debt crisis in the early 1990s. Bad private sector debts were rapidly eliminated via default and bankruptcy. Lenders who made bad credit decisions lost money. If they made terrible lending decisions, they went out of business. Via these tough measures, private sector debt dropped rapidly. Although public sector debt rose in response to the crisis, fiscal discipline was rapidly restored and the need for austerity communicated effectively to the Swedes. There was broad political and popular acceptance for the measures necessary.

Europe, however, has ignored its own ‘Nordic model,’ preferring instead to pioneer its own uniquely awful road to collapse. In the Eurozone today, it’s become an inviolable rule of policy that stupid credit decisions must never be punished. Bad lenders must be allowed to remain in business, subsidized by the taxpayers . Sovereign borrowers cannot be allowed to default. This is moral hazard elevated to profound political principle.

So, for example, the ECB recently lent €489 billion (around $643 million) to the continent’s banks. The loans are priced at a stunningly attractive rate of just 1%. The collateral requirements imposed by the ECB have been deliberately weakened to the extent that they’ve become more or less meaningless. (I estimate that some 37,000 different securities are now acceptable as collateral.) Because banks have nowhere useful to put their money (even they’re not dumb enough to lend to each other now), they are increasingly willing to buy sovereign debt, no matter how huge and obvious the problems faced by those sovereign borrowers.

So there’s the carousel. The ECB lends cheap money against bad collateral to insolvent banks who use their cash to prop up mortally wounded sovereign borrowers. For all the (German) talk of austerity and responsibility, all that has actually happened in practice is that a massive bailout program is being handled by the ECB under the guise of ordinary lending activities. Germany, meanwhile, as the only strong nation in a fractured continent is calling the shots to an increasingly unhealthy degree.

No such carousel can last for ever. On the contrary, with every turn of the wheel, debt increases. Sovereign borrowers increase their liabilities. Banks increase their exposures to precisely those assets they should most avoid. The ECB’s own balance sheet is deteriorating all the time. Europe is staggering ever further into bankruptcy. When the meltdown comes — and meltdowns always arrive in the end — the impact will be on a vastly larger scale than the Lehman collapse. Bear in mind that Lehman failed with net debt of ‘only’ $129 billion. Italy’s outstanding debt is around twenty times that amount.

The United States is no more immune from that forthcoming tsunami than Europe was from the collapse of the US subprime market in 2008. Indeed, because the sums involved are so much larger today, the likely consequences will be substantially greater too.

Naturally, the US cannot direct European policy, and US election debates are only feebly heard in Europe. Nevertheless, American policy is at present woefully collusive. Take, for example, Bloomberg’s recent revelation that the Federal Reserve conspired to lend as much as $1.2 trillion to a variety of banks – many of them desperately weak European lenders — during the crisis of 2008. Those loans were not approved by Congress. Indeed, they were not even revealed to Congress.

The Fed has also been offering cheap currency swap lines to European central banks, with the deliberate aim of helping weak European banks from facing up to market realities. In effect, the Fed is doing all it can to assist European policy makers in their truth-avoidance strategy. If the euro fails, the Fed — or rather, the American taxpayer — will own a fine portfolio of defaulted bonds in a dying currency as a reward for its efforts.

Meantime, the Fed is printing money, thereby putting pressure on the ECB to do the same. And the federal government is borrowing money in seemingly limitless amounts, thereby giving some kind of cover to the Eurozone’s ludicrous plans for massively leveraging the (already excessive) bailout fund. Economists such as Paul Krugman lend academic respectability to this kind of nonsense by trying to cut-and-paste theoretical solutions from the Great Depression, some eighty years ago. Those solutions have never been tested in the real world and make no sense in the vastly different climate of today.

These things matter hugely. Over the next four years, no area of foreign policy will impact American prosperity more than these issues — and to date, every single major policy move has been profoundly wrong.

And democracy is at risk. Why was the Fed able to lend $1.2 trillion without informing the American people? Or place the US Taxpayer dollars at risk in the event of a Euro collapse? Why are there no elected politicians in the Italian government? Why is Angela Merkel, the German chancellor, planning to campaign on French President, Nicolas Sarkozy’s behalf? Why was George Papandreou removed from high office in Greece because he insisted on putting a euro-bailout package to a popular vote?

These things are all abuses of democracy — and they’re becoming more common. Iran, Israel and all those other policy challenges matter for sure, but they’ve long been on our policy radar and our options and dilemmas are well-known, well-discussed. The current problems in Europe are utterly new. They threaten economic catastrophe on a scale that the United States hasn’t known since 1929. And at the moment our solutions, all of them, are dangerously wrong.

Mitch Feierstein is the author of Planet Ponzi and blogs at www.PlanetPonzi.com.

Despair in the air at Davos...

Despair in the air at Davos...
By Peter Lee

Chinese heavy hitters did not make it to the World Economic Forum at Davos this year. Apparently, spending Lunar New Year at home was more important than huddling with the West's movers and shakers in the Alps.

Those Western guests in Switzerland were, well, shaking as they confronted a crisis of confidence - and they are reaching out to an unlikely savior: the absent Chinese.

Spooked by the intractable European debt crisis and a looming recession, and deprived of the reassuring spectacle of nouveaux riche Chinese clamoring for admission to their billionaires' club, the lords of Davos declared that capitalism itself was in crisis.

The forum's founder, Klaus Schwab, stated: "Capitalism, in its current form, no longer fits the world around us." [1]

David Rubinstein of Carlyle Investment concurred:

I think we have three to four years in the West to improve the economic model that we have, and if we don't do that soon I think we've lost the game ... If we don't do that soon, when we are here in three to four years ... the game will be over for the type of capitalism that many of us have lived through and thought was the best type of capitalism. [2]

Actually, capitalism is doing quite well as the organizing principal and driving force of the world's economy, and as a vehicle for keeping the rich and powerful rich and powerful. As far as I can tell, North Korea, Cuba and Somalia are the only nations genuinely inhospitable to millionaires with gigantic sacks of cash.

If the global retreat of capital-unfriendly national social welfare and regulatory policies - and the rise of the austerity-uber-alles solicitude toward the interests of bondholders in the middle of the global economic downturn - are any guide, capital is stronger, freer, and more powerful than ever.

For instance, Rubenstein's Carlyle Group - a "private equity" shop along the lines of would-be US president Mitt Romney's very-much-in-the-news Bain Capital - is doing pretty well, with net revenues of US$980 million in the first nine months of 2011 on equity of $2.2 billion. Past performance is no guarantee of future returns, but it would appear that Carlyle is looking at a 2011 return on equity of over 50%. [3]

Rubenstein took home $3.8 million in executive compensation, salary and bonus only in 2011, not including any revenues from his ownership share in Carlyle. His share of Carlyle's profits netted him an additional $134 million. [4]

What isn't doing OK is capitalism's political handmaiden, globalization: a tenet of free-market economic theory, almost an article of religious faith, meant to reassure the rest of us that the interests of nations and their citizens can be synonymous with the interests of globalized capital.

Capitalism, once released from its regulatory cage, has recently shown an unfortunate disloyalty toward the Western nations that originally fostered, nurtured and cherished it; instead, it has roamed off to seek higher returns in the likes of Brazil, Russia, India, China and South Africa - aka the BRICS nations - while returning primarily to feast on vulnerable European economies via the bond market.

Financial capital is free to travel the world in search of optimal returns; but human capital isn't. The theoretically correct solution requires an effective dissolution of national sovereignties so we can all turn into pure economic nomads, pursuing free market bliss across our global field of dreams.

In realty, local populations are, for the most part, stuck with the nation they are born in and display a somewhat rational desire to favor the economies of their home states rather than the cause of global economic efficiency. Dissolving national sovereignty for the sake of economic union is rather difficult even for Europe, as the recent uproar over German Chancellor Angela Merkel's proposal to put the Greek budget under adult - ie European Union supervision - indicates.

For the rest of the world, it is an even bigger stretch.

When Deng Xiaoping was told China would have to abide by liberalized emigration rules (like those the US demanded of the Soviet Union) in order to obtain Most Favored Nation status with the United States, he famously replied, "How many Chinese do you want?"

The bottleneck is on the US side; the answer to Deng's question in 2010, by the way, was 67,634 (the number of China's emigrants obtaining permanent US residence status). [5]

Certainly we're a long way from a situation in which tens of millions of Chinese vote with their feet and dollars and flood into the United States to express their disgust with the Chinese regime and put irresistible pressure on the Chinese government to liberalize its economic policies, free its savers from the fetters of underdeveloped markets for investment and consumer goods, and usher in a global democratic/free market nirvana.

And the world is a long way from achieving the seamless internationalization of capital, trade and labor that would make globalization a win-win instead of zero-sum game.

The reassuring assumption in the West was that, if the globalization game was still zero sum, then at least the advanced democracies, with their advantages in capital, currency, infrastructure and innovation (and immigration restrictions), would stay on the winning side. The trend, at least for now, is running in the opposite direction.

Thanks to colossal financial and fiscal mismanagement and political gridlock, Western economies are struggling with problems of their own devising. The fact that everyone is yearning for the Chinese, at the very least, to goose the world economy with another stimulus and possibly step up as financial backstop to the International Monetary Fund and debt-burdened European governments has been officially upgraded from interesting paradox to galling conundrum.

Some analysts are heroically wrestling with the cognitive dissonance of simultaneously groveling to the Chinese for a bail-out and lecturing them on the right way to run their economy. But it doesn't seem to be working very well.

At Foreign Policy, Ian Bremmer pointed out that this is probably not the year that China will heed the advice of the West's economic masterminds to dismantle state capitalism in favor of a lean-and-mean free market system. He wrote:

The Economist argues that "both for their own sake, and in the interests of world trade, the practitioners of state capitalism need to start unwinding their huge holdings in favored companies and handing them over to private investors. If these companies are as good as they boast they are, then they no longer need the crutch of state support. " It's no surprise that The Economist would argue against the use of this system. Pretty much everyone here at Davos who is not part of the Chinese, Russian or Gulf Arab delegations would agree. I know I do. But The Economist is telling China's leaders to immediately begin shedding the system that has made their economy the second largest in the world while helping them maintain their monopoly hold on political power - and to opt instead for the brand of capitalism blamed for the financial crisis, the global recession which followed, America's economic malaise, and the Eurozone's current crisis of confident [sic]. [6]

If China escapes the third day of international economic reckoning - the first being the hedge-fund instigated Asian collapse of 1997, the second being the Great Recession triggered by the derivatives implosion, the third, the looming sovereign debt default drama playing out in Europe - it becomes increasingly difficult to attribute Chinese success to cheating and dumb luck.

New York Times columnist and Nobel economics prize winner Paul Krugman may fulminate about the distortions that China's neo-mercantilist policies introduced into the world economic system, but the fact remains that - to paraphrase the apocryphal Lenin analogy - global capital, fixated on the unrivaled growth and profit potential of Asia, sold the rope to hang the West with to China again and again and again.

This situation seems to have completely flummoxed conservatives and lured them into some pretty ugly places. The Daily Telegraph's Jeremy Warner wrote from Davos: It's Now Up to China to Save Capitalism.

[Th]e [ongoing eurozone] crisis [is] now squarely blamed on failings in European governance rather than on finance and economics. This is not an economic crisis, said one Chinese policy maker, but a political and institutional one.

It's easy to see what he means. Failure to resolve the crisis is causing business to become frozen in time, not just in the troubled eurozone periphery, but increasingly in the core countries too. Everyone knows what has to be done - some form or debt mutualisation - but political leaders are afraid to confront the reality, for fear of the backlash from their electorates. …

One of the disappointments of Davos so far this year is that I've not yet heard a single policy maker, banker or business leader make the case for the sort of radical deregulation and supply side reform vitally necessary in Western economies to kick start investment and growth.

Instead, an air of "capitalist guilt" hangs over this high Swiss Alpine resort, like low hanging cloud on the mountain tops. Apology for the market failures of the past is the order of the day, and few dare challenge it. Western capitalism is cowed.

Of course it is right that markets are made more responsible, and of course better ways of sharing the spoils of economic growth more equally have to be found. But advanced economies are finished unless they relearn some of the free market disciplines from which they sprung.

Warner acknowledges that the world's economic future lies in Asia; however, he seems totally oblivious to the fact that the Asian economies are largely united in a) their commitment to state capitalism, b) their abhorrence of "radical deregulation and supply side reform" and c) sharing an understanding that unthinking fealty to "free-market disciplines" is what drove the world's economy off a cliff.

That makes his peroration seem rather non sequitur:

Capitalism saved China, it is sometimes said; it's now up to China to save capitalism, for there is depressingly little sign of Western nations standing up for it.

If it is possible to extract some surviving sense from the intellectual rubble, Warner's point appears to be that China's one-party dictatorship will show the world how to run its business properly, without the pointless democratic pettifogging and disregard for the delicate sensibilities of capitalism now crippling Europe.

The root of the world's problems, according to Warner, isn't trickle-down economics; it's trickle-up democracy. In other words, the 1% had better forget about democracy and look toward an authoritarian regime, China, where the 1% is free to run the country as it sees fit.

Western drift, dismay, and newfound fascination with the Chinese model are music to Beijing's ears. People's Daily ran a commentary from Economic Daily, which made the approving observation:

The [Davos] organizers chose "The Great Transformation: Shaping New Models" as the theme of this year's annual meeting in order to explore new models for global economic development.

In recent years, the whole world has witnessed China's high-speed economic growth. China's successful methods of coping with the international financial crisis have also offered valuable experience for the global economic development to refer to.

Therefore, it is not hard to understand that the annual meeting of the forum regarded China's economy as the main content while discussing the "transformation" and "rebuilding a new mode". People all want to find "good medicines" from China's economy to solve current global economic issues. [7]

For years, Western governments have deluded and consoled themselves with the idea that China's mixed capitalist/command economy was doomed to collapse. Maybe it is. But vindication may come too late for the Western democracies that uncritically hitched their wagons to global capital's cold and distant star.

Notes
1. See here.
2. here.
3. here.
4. Rubenstein's doing OK. Capitalism is doing OK.
5. here.
6. here
7. here


Peter Lee writes on East and South Asian affairs and their intersection with US foreign policy.

France's Dassault beats BAE Systems to clinch Indian government fighter jet contract...?

France's Dassault beats BAE Systems to clinch Indian government fighter jet contract...?

Is this a simple nudge for Sarkozy's flailing election campaign by Zioconned India, a big announcement of sorts, which is easily broken after the election is over in France....????

http://articles.economictimes.indiatimes.com/2012-02-14/news/31059442_1_p8-chinook-helicopters-boeing


Britain has suffered a major industrial setback after the Indian government chose French manufacturer Dassault as its preferred partner for an $11bn (£7bn) contract to supply fighter jets.

By Graham Ruddick and Dean Nelson

The Dassault Rafale has been named as the lowest-priced compliant bidder ahead of the Eurofighter Typhoon and the company has entered exclusive talks with India to provide 126 aircraft.

Trade union Unite warned the selection of the Rafale could have "serious implications" for BAE Systems and the UK aerospace industry. It is estimated that 40,000 UK jobs are supported by the project.

The Typhoon is made by Britain's BAE, European giant EADS, and Italy's Finmeccanica. The UK accounts for 37.5pc of production with the aircraft assembled at BAE's aerospace facilities in Lancashire and suppliers including GKN, Ultra Electronics and Rolls-Royce.

Last year, BAE cut 3,000 jobs in the UK, partly because it had won fewer export orders for the Typhoon than planned.

"We are concerned about the serious implications this decision may have and want urgent talks with the company about future plans for the workforce," Ian Waddell, national officer for aerospace and shipbuilding at Unite, said.

The deal with France is a blow to David Cameron, because the contract could lay the groundwork for a strategic partnership with India. Mr Cameron personally lobbied Indian prime minister Manmohan Singh last year while Britain's Air Chief Marshal Sir Stephen Dalton met his Indian counterpart in Calcutta.

The Typhoon had been widely considered the favourite to win the India contract, one of the biggest-ever overseas defence orders.

It is a more modern aircraft and has already been acquired by Saudi Arabia. However, Dassault is understood to have undercut the Typhoon partners on price by roughly $5m per aircraft.

"We were told the determining factor was cost and nothing should be read into to it as a reflection on the bilateral relationship," British High Commission sources said.

India wants the first 18 aircraft to be built overseas, before taking a greater control of production. Nicolas Sarkozy, the French president, said the deal will include "major transfers of technology guaranteed by the French state".

Mr Sarkozy, who claimed on Monday that Britain has "no industry, said India's selection of the Rafale "goes far beyond the company that makes them, far beyond aerospace – it is a vote of confidence in the entire French economy".

However, industry experts said the contract was yet to be signed and the Typhoon consortium still had a chance of winning the work.

James Hardy at IHS Jane's Defence Weekly, said: "Both Germany and the UK invested a lot of time in pushing the Typhoon so this will hurt. However, it is important to note that this is just the first step – Rafale has been selected as preferred bidder but any student of Indian procurement knows that this means nothing until the contract is physically signed." LOL

Smaller 'stans fret at Russia's dominance...

Smaller 'stans fret at Russia's dominance...
By Fozil Mashrab

TASHKENT - Tajikistan and Kyrgyzstan, Central Asia's two smallest economies, are discovering that breaking free of Russian domination is a hard task, particularly when they lack their own hydrocarbon resources and struggle to forge good relations with other neighbors that might make up for that shortage.

Russian oil supplies meet more than 90% of Kyrgyzstan's and Tajikistan's oil needs, but Uzbekistan, Kazakhstan and Turkmenistan are rich in hydrocarbon resources and could potentially overtake Russia as the two smaller countries' main source of petroleum and other fossil-fuel supplies.

Russia, however, also offers an important destination for millions of Central Asian migrant workers, giving the Kremlin powerful leverage over its southern neighbors whenever these countries cross "red-lines" by pursuing policies perceived to be detrimental to Russia's interests in Central Asia.

"Red lines" include diversifying security relations and establishing military ties with Western countries by inviting them to open military training and other facilities in their respective countries; hostile actions by host governments towards Russian investors and overall Russian economic interests; and not least, reasserting national identities by reducing the role of the Russian language in their respective societies.

In April 2010, Russia imposed duties at an initial US$200-plus per ton on all oil exports to countries that were not part of the Customs Union (Russia, Kazakhstan and Belarus); over two years, the duties gradually increased to $406 per ton (as of December 2011).

Though the measure was introduced largely as an internal requirement to prevent Russian domestic oil producers from exporting most of their produce and starving Russian refineries while the domestic market was also experiencing severe petroleum shortages, the immediate collateral damage of this measure was a sharp increase in petroleum prices in Kyrgyzstan and Tajikistan.

Although Tajikistan was able to survive this sudden "petroleum shock", neighboring Kyrgyzstan was less lucky; this latest punitive measure by Russia helped to ignite a popular revolution against the authoritarian regime of then president Kurmanbek Bakiev, who was toppled on April 7, 2010, just a week after Russia imposed the oil export duties.

Ever since, the duty-free Russian oil supplies to Kyrgyzstan have played the role of a barometer in the bilateral relations of the countries. Later that year, new Kyrgyz authorities were able to persuade Russian Prime Minister Vladimir Putin to resume duty-free petroleum supplies to Kyrgyzstan "in view of the hard economic situation in the country" which was caused by the violent regime change and bloody ethnic clashes in the southern part of Kyrgyzstan.

In return for Kremlin's goodwill gesture, the Kyrgyz parliament named one of the mountain peaks in the country after Putin while the new Kyrgyz government, led by the then prime minister and now president, Almazbek Atambaev, promised to honor the various pledges made by former president Bakiev but apparently never fulfilled.

These included handing over to Russia a majority stake in the Soviet era "Dastan" torpedo manufacturing and testing plant located in Issyk-Kul lake in return for writing off more than US$100 million of Kyrgyz debt, and allowing Russia's GazpromNeft to become a senior partner in the lucrative new oil supplying joint venture company GazpromNeft-Aero-Kyrgyzstan, which was contracted by the Pentagon to provide 50% of the aviation fuel supplies to the US military base at Manas International Airport in Bishkek.

President Atambaev also pledged to lead Kyrgyzstan into the Russia-led Customs Union, and not to renew the lease of Manas air base to the United States come 2014, when the current lease agreement would expire.

At that time, Kyrgyz authorities hailed the establishment of the Kyrgyz-Russian fuel supply company GazpromNeft-Aero-Kyrgyzstan as a major victory for the new Kyrgyz government as this venture would bring US$4.5 million in revenues to Kyrgyz government every month, thus helping to shore up badly depleted Kyrgyz finances. Meanwhile, the Russian company would also earn handsome revenue out of this business.

If Kyrgyz authorities were able to resume duty-free petroleum supplies from Russia soon after the heavy duties were imposed, even if at the cost of some of their sovereignty, matters did not revert in the same manner for Tajikistan.

Tajik leaders refused to give in to Russian pressure, instead playing hardball by proudly announcing that in a year's time they would fundamentally diversify their oil supplies away from Russia. At the same time, it had been reported that Tajik Prime Minister Akil Akilov had written several letters to his Russian counterpart requesting that Russia grant Tajikistan the same exemptions that were offered to Kyrgyzstan.

Throughout the past year, Russia has not only continued to ignore the Tajik government's repeated requests but has also thought it necessary to apply strong pressure on the Kyrgyz government to ensure that none of the 1 million tons of "subsidized" Russian fuel per year meant only for domestic consumption in Kyrgyzstan makes its way to Tajikistan - particularly through their ill-guarded border in the Kyrgyz province of Batkent in the Fergana Valley.

Regional observers claim that thousands of tons of subsidized Russian fuel still found their way to Tajikistan since Kyrgyz authorities could not resist making quick cash from the process while publicly pledging to put an end to such practices if they indeed existed. During 2011, an election year in Kyrgyzstan, some of the prominent presidential candidates traded accusations claiming that the rival candidate was providing a "political roof" for fuel smugglers.

For almost two years, Tajikistan has been receiving petroleum supplies at much higher rates than Kyrgyzstan, burdening the Tajik economy and driving up prices across the board for many consumer products. Some visiting European observers commented that some consumer goods in Tajikistan were more expensive than in European Union countries.

High petroleum prices have also helped to widen Tajikistan's trade deficit and weaken the national currency, the somoni, which had to be saved from free fall by central bank intervention, at the cost of millions of US dollars, throughout 2011.

Now with the benefit of hindsight it seems that all these hardships experienced by Tajikistan for the past two years only increased the country's misery while the government has not been able to "fundamentally diversify" Tajikistan's oil supplies away from Russia.

As of December 2011, Tajikistan was still receiving 84% of its fuel supplies from Russia, which means that Tajikistan has reduced its dependence on Russia by only some 10%.

On January 25, Energy Minister Sherali Gul made a working visit to Russia carrying yet another letter from the prime minister requesting that the Russian government provide 1 million tons of duty-free fuel supplies to Tajikistan this year. Russia agreed to provide only 179,000 tons - a quarter of Tajikistan's annual fuel needs.

Russian observers believe the Kremlin will extend the same exemptions to Tajikistan only if the Tajik government agrees to a number of political demands from Russia. These include the return of the Russian border guards to the Tajik-Afghan border, the lease of Ayni military air base to the Russian Air Force free of charge, and the extension of the stay of Russian military bases (in total around 6,000 personnel) in Tajikistan for another 49 years free of rent.

According to regional observers, the Tajik government's desperate efforts in the past two years to court other oil producers in the region to provide fuel supplies have not been successful as Kazakhstan and Turkmenistan have offered only to supply fuel based on international market prices - which were higher than the cost of Russian fuel even with the heavy export duty surcharge.

Iran, Tajikistan's cultural and linguistic cousin, seemed to offer some hope, as Iran was "willing to flood" relatively the small Tajik market with cheap Iranian crude - but Tajikistan lacks refining capacity while Iran itself is a net importer of refined oil products.

During his visit to Tajikistan in September 2011, Iran's President Mahmud Ahmadinejad promised to build an oil refining facility in Tajikistan at some point in the future. It is also believed that one of Tajikistan's local tycoons close to President Emomali Rahmon has been investing in an oil refining facility near the capital, Dushanbe, with an annual capacity of 100,000 tons of crude oil and which is expected to start functioning in autumn this year.

But even if Tajikistan develops its indigenous refining capacity, it will still face the problem of ensuring stable crude oil supplies. Its own oil resources are extremely limited and only recently started to be developed by the likes of Russia's Gazprom and Canada-based Thethys Petroleum.

Moreover, these oil companies' continued interest in Tajik oil reserves will be subject to sustained high (above US$100 per barrel) international oil prices since extracting Tajik oil is more costly than in other Central Asian countries as the oil field works involve deep drilling.

Developing domestic oil refineries might be a long-term solution and could even alleviate Tajikistan's crippling dependence on Russia in the short and medium term, but for years to come they will provide only a fraction of Tajikistan's domestic needs while much of the required fuel will still be delivered by Russia.

Developing domestic refining capacity also seems to be on the agenda for the new Kyrgyz government led by its business-friendly prime minister, Omurbek Babanov, a former oil man. He has invited Azerbaijan's state oil company, SOCAR, to build an oil refinery in Kyrgyzstan.

According to the latest agreement signed between the Kyrgyz government and SOCAR in Bishkek, Azeri Oil Co will build a refinery with a capacity of 2 million tons of crude oil per year. It is scheduled for completion in 2013.

Importing Iranian oil to Tajikistan and Azeri oil to Kyrgyzstan might appear to carry the promise of lessening the dependence of both Kyrgyzstan and Tajikistan on Russian oil domination, but these projects also face hurdles.

Iranian oil is already under US-led sanctions and if Tajikistan starts importing Iranian crude in a big way to feed its soon-to-be-built refineries it might also be targeted by US sanctions. Tajik officials are already apprehensive that Iranian investments in the Tajik economy might dry up in 2012 as a result of US sanctions.

So far, the US has largely ignored and spared Tajikistan's economic dealings with Tehran, considering them insignificant and in an attempt to secure Dushanbe's continued assistance to deliver logistical supplies to US and North Atlantic Treaty Organization troops in Afghanistan.

SOCAR's investment in the Kyrgyz refinery project will boil down to whether the venture will be profitable for the Azeri company, as most of the crude oil will have to be imported from other countries (adding extra transportation costs) including from Azerbaijan, which is not Kyrgyzstan's immediate neighbor.

Regional observers believe there is a third way for both Kyrgyzstan and Tajikistan to lessen their dependence on Russian fuel supplies - this would require an improvement in the relations of these two countries with their downstream, hydrocarbon-rich neighbors. In particular, Tajikistan has to improve its ties with Uzbekistan and Kyrgyzstan with Kazakhstan over long-standing disputes over regional water resources.

Turkmenistan can also play a positive role by partly meeting Tajikistan's fuel needs at "brotherly discount rates". In the past, Turkmenistan has offered such a deal to Tajikistan if the latter agrees to abandon its plans to build the controversial Rogun dam, which if completed will affect water supply to the agricultural sectors of both Uzbekistan and Turkmenistan.

However, the Tajik government politely rejected the Turkmen offer while some hot-heads in Tajikistan demanded that the government sell the water of rivers that originate in its territory to downstream counties as these are not willing to provide natural gas and petroleum free.

Relations between Kyrgyzstan and Kazakhstan also seem to be undergoing some sort of crisis, especially after the overthrow of Bakiev in April 2010; before he was toppled, Kazakhstan invested heavily both politically and economically in Bakiev.

Kazakhstan, one of the world's largest oil producers and with huge refining potential, could easily meet Kyrgyzstan's need - or for that matter other Central Asian countries' combined demand - for fuel. However, it has faced periodic fuel shortages as most of the foreign oil companies involved in the country prefer to sell their output to overseas markets rather than at below market rates to domestic Kazakh refineries.

Unlike Russia, the Kazakh government is not in a position to impose exorbitant export duties on foreign oil companies operating in its territory. More fundamentally, Kazakhstan seems to have given up on its ambition to be a dominant player in Kyrgyzstan after the overthrow of Bakiev, thus allowing itself only to play second fiddle there to Russia.

One way or another, both Kyrgyzstan and Tajikistan have to look for solutions that will help them lessen their present crippling dependence on Russian oil. Otherwise, their political and economic independence will be increasingly at stake for years to come.

Fozil Mashrab is a pseudonym used by an independent analyst based in Tashkent, Uzbekistan.

China's resources policy attracts attention of congress...

China's resources policy attracts attention of congress...
By Benjamin Shobert

The congressional US-China Economic and Security Review Commission (USCC) last Thursday focused its attention on, as they put it, "China's Global Quest for Resources and Implications for the United States". As Commissioner C Richard D'Amato said when the hearing began, the USCC wants to learn more about China's pursuit of "water, fuel and non-fuel mineral resources, and fish". Each of these presents questions about what lengths Beijing is willing to go in order to ensure access to precious raw materials.

D'Amato went on to state "These are the resources upon which the Chinese 'economic miracle' depends. Although Mao-era policy emphasized economic, energy, and political self-reliance, China's endowment of natural resources no longer sustains its massive population and export-driven economy."

Aware of the extreme domestic natural resource limitations China faces, policy makers in Beijing have aggressively sought out alternatives. In doing so, the country has turned towards others like Iran and Venezuela which have been largely ostracized by the developed West.

As China would have these moves be understood by the international community, decisions to do business with countries such as Iran are ones born of extraordinary necessity. These decisions can also be seen as China going where other more developed nations have either chosen not to go, or are prohibited from going in the first place.

However, critics of China believe that much of what animates Beijing's willingness to do business with Chavez's Venezuela and Ahmadinejad's Iran is that China shares a similar distrust of modern democratic governments and Western institutions as do the leaders of these two countries.

In this vein, the opening statement of Commissioner Daniel Slane pointed out the many areas where China's pursuit of natural resources has, as he put it, "had significant security consequences worldwide". Referencing the numerous recent instances where China's involvement in Africa has drawn either formal sanctions or criticism from human rights groups, Slane noted that Beijing will not hesitate to use whatever leverage is at its disposal in order to continue its pursuit of those critical natural resources it requires.

Additionally, as China's power has grown in the world, it has come to understand that one of its few natural resources that the world desperately needs - rare earths in particular - can be used as a very effective tool at the negotiating table.

As Slane put it, "China's unofficial ban on rare earth exports to Japan in 2010 indicated to the world that China was willing to use critical resources as leverage in its diplomatic relationships." A World Trade Organization panel on Monday ruled that China had violated trading rules by curbing exports of raw materials that included bauxite, coke, magnesium, manganese and zinc - but limits on Chinese exports of rare earths were not part of the ruling.
China clearly understands the role natural resources plays in allowing countries to pursue its own domestic strategies and is signaling its willingness to use one of its few advantages in this area for its own gain.

This worries some who recognize that, as David Menzie the chief of the US Geological Survey (USGS) at the Department of the Interior who testified last week, "For many of the more than 80 mineral commodities tracked by the USGS, China ranks as the world's leading producer." Menzie went on to add "In a number of cases, China is not only the leading producer, but dominates world production."

He pointed to three minerals plus rare earths where China has more than 80% of the world's production and an additional 15 where China produces "between 50% and 80% " of the world's total.

Like many perspectives on China, interpreting what drives Beijing's willingness to leverage its natural resources for gain or how it goes about obtaining these needed materials in the first place says as much about the country's actual ideology as it does the frame of reference Western policymakers use when judging China's motives.

Washington is grudgingly coming to terms with a more sophisticated and confident Beijing, one that is more willing to put out and fight for its own interests. For those in DC who thought that China's evolution towards the poorly defined "responsible stakeholder" would mean the country would ultimately come to step in line with Western policies, China's pursuit of natural resources with little consideration of who they are doing business with has been disconcerting.

American and European policy makers certainly wish that Beijing would be more selective in who it chooses to do business with; however, as Mikkal Herberg, the Research Director for the Asian Energy Security Program at the National Bureau of Asia Research shared last week, "Energy security has become a critical political and economic concern for Beijing's leadership."

Herberg pointed out, "China's leaders fear that energy shortages and rising energy costs could undermine the country's social instability." As long-time China watchers know, these fears are central to understanding China's policies. Herberg made this point in his testimony when he stated, "For a regime that increasingly stakes its political right to rule on economic performance and living standard, the threat of economic stagnation could threaten the continued political monopoly of the Chinese Communist Party (CCP)."

Herberg's USCC testimony pointed out what he calls China's "energy nationalism"; namely, as he describes it, "an energy version of economic nationalism and mercantilism prevalent in Asia". He believes that China's fears - one he suggests are shared by other regional players who have similar concerns about access to oil and natural gas - are critical to understand why China acts as it does in pursuit of natural resources internationally.

Beyond how China's rapid modernization impacts the world's supply of natural resources, Beijing's efforts to not only secure supply but ensure safety during transportation into the country are making waves in the South China Sea. Herberg pointed out that "China's growing dependence on oil and liquid natural gas (LNG) flowing through the Indian Ocean, Malacca Straits and [the] South China Sea is also a key driver of its naval modernization and move towards 'Blue Water' power projection capabilities by the PLA Navy."

Experts like Herberg understand and fear that these moves by the PLA Navy are "setting off alarm bells across the region and contributing to a regional naval arms race."

While much of last Thursday's testimony focused on China's pursuit of oil and natural gas, Dr Elizabeth Economy, a Starr Senior Fellow and Director of Asia Studies at the Council of Foreign Relations, pointed towards China's pursuit of water as equally important. According to Dr Economy, "More than 40 mid- to large-sized cities in Northern China, such as Beijing and Tianjin, boast crisis-level water shortages."

Water shortages due to depletion are not the only problem. As she shared last week, "over 90% of groundwater [in China] is polluted by urban sewage, refuse and industrial waste." This means that, according to research by Jon Bowermaster that Dr Economy referenced, "estimates are that 400,000 people are driven from their homes annually as a result of lack of water". As with many challenges the Chinese government must face, this is another that poses a threat to the country's social stability.

In many ways, China's pursuit of each of these natural resources is understandable and should be seen as an inevitable outgrowth of the massive economic gains experienced across the country over the last several decades. The US Congress has at least three fears, as evidenced by last week's hearing.

First, whether China can be convinced to join the developed West in ostracizing countries like Iran specifically, or whether China's pursuit of natural resources will take precedent.

Second, Washington fears that China's model for obtaining natural resources through its national oil companies (NOC) and their "go-out" strategy may be locking up resources to which Western countries will also need access. Because the NOC approach is built on a state-to-state relationship, in many cases it prevents private operators in the West from competing.

China can, and has, brought to bear more than a simple commercial transaction for oil; rather, the NOC can weave together government-sponsored loans, infrastructure projects and other amenities to convince a foreign government to work with China. Washington thus far does not have a good answer to this.

Third, and perhaps most pernicious, is Washington's fear that China's pursuit of natural resources will destabilize the region, whether intentionally or accidentally. This fear might be made real by a military confrontation in the crowded South China Sea, where multiple borders and territorial disputes still exist, or this fear could be realized if China's modernization causes it to damn waterways that nourish the many river deltas throughout Southeast Asia.

Cumulatively, China's pursuit of natural resources brings together many concerns and criticisms about China's current position in the world. However, unlike many areas where outsiders are not clear as to Beijing's decision making or priorities, the country's single-minded pursuit of those commodities necessary to its economic growth are much easier, if no less unsettling, to understand....

Russia's gold loses luster...

Russia's gold loses luster...
By John Helmer

MOSCOW - The future for Russian gold-mining companies this year is bleak - even if the price of gold goes up.

The major Russian gold-miners are all expected to fail to reach their mine output targets, so they will be able to sell less gold at what are expected to be higher costs. But there's worse. In order to qualify for listing on the London Stock Exchange (LSE), Polyus Gold - the property at present of Mikhail Prokhorov and Suleiman Kerimov and Russia's leading gold-miner - will have to sell their shares. This isn't the first occasion in which those two have felled the share price by signaling their desire to sell.

Polymetal, Russia's second largest goldminer, is controlled by four shareholders who are likewise not recognized for being long-term investors - Petr Kellner (21%), Alexander Nesis (18%), Alexander Mamut (10%), and Kerimov's sidekick, Alexander Mosionzhik (4%). Last November they managed a scheme to meet the free-float and share liquidity rules of the LSE, reclassifying Mosionzhik's stake as if it wasn't a controlling one.

Investors don't usually put their money on magic rabbits, so Polymetal's scheming has generated the reverse of confidence in the intentions of its shareholders to retain their shares. One or more of them is thus expected to sell.

Add this negative expectation to what had already been a downward trend for the share prices of Polyus Gold (PLGL), Polymetal (POLY), Petropavlovsk (POG - the property of the Hambro and Maslovsky families), Highland Gold (HGM - Roman Abramovich, Barrick Gold), and High River Gold (HRG - Alexei Mordashov), and this is what the share price picture looked like in mid-January:




Factor into the forecast the way in which gold itself has been moving over the past year, and you may conclude that the peak prices above US$1,800 per troy ounce, registered last August and November, won't be seen again, at least not this year:




The bottom line, according to a report just released by Alfa Bank analyst Barry Ehrlich, is that there will be declines in projected earnings (ebitda - or earnings before interest, taxes, depreciation and amortization) across the Russian board. At best, forecasts Ehrlich, only two out of the five Russian goldminers are likely to see their share prices go above their current levels, while three - Polymetal, Polyus, and High River - will go down or go flat.




Polymetal's share price decline looks to be dramatic. This is explained, Ehrlich says, because its gold output (and gold-equivalent volume of silver) will fall far shorter of the company's target than its Russian peers; because Polymetal is having trouble carting equipment into mines and gold out; because mining costs will jump 34% this year; and because new reserves won't be as numerous as the company has been leading the market to anticipate.

But on top of the particular problems of these goldminers, there's a bigger one that hasn't been well understood until now.

Simply put, because so much of the demand for gold is driven by the Chinese, the price of gold is no longer a stable global hedge against volatility in the marketplace. Instead of conserving value and standing apart, while currency rates and share prices charge up and down, gold is moving in line with the value of everything in the emerging marketplace, China first of all, with India a close second. According to the World Gold Council, 43% of worldwide jewelry and investment demand for gold comes from China; another 27% from India - 70% in all.

Ehrlich expresses the point by demonstrating that the correlation between the price of gold and the movement of the reserve dollar and emerging market share prices has been shifting from a low of 0.2 to a high of 0.8:


Source: Bloomberg: Correlation of 5-day smoothed average daily over 90 days.

What this suggests is that as domestic risks to stable value rise in China and India, such as inflation, nationalization, tax, public protests, and political instability, the demand for gold jumps, and thus the gold price moves in step with the emerging market indexes.

What makes this situation different from the past, reports Ehrlich, "is that when US and European consumers were the driving force in the gold market, consumers would shift to a preference for investment gold only in a weak environment. In other cases, they preferred real investment assets."

If this reading is correct, then there is double or triple uncertainty for shares of mining companies owned by individuals like Prokhorov - first Russian risk, then China risk, then India risk. That gold around the Chinese neck is turning into an albatross around the Russian's.

Azerbaijan: Possible Iran Sanctions Offer Baku No Golden Energy Opportunity...

Azerbaijan: Possible Iran Sanctions Offer Baku No Golden Energy Opportunity...

by Shahin Abbasov

Energy-rich Azerbaijan appears to be quietly backing the idea of tightened international sanctions against its southern neighbor, Iran. But it seems that Baku won’t profit from a potential European Union oil embargo against Tehran.

The EU has stated that it will impose an oil embargo on Iran starting July 1, unless Iranian officials open up the country’s nuclear program to more expansive international oversight. Azerbaijan, as a major oil and natural gas producer in the Caspian Basin, would seem poised to capitalize on any move to cut off Iranian exports. Yet industry insiders in Baku point out that Azerbaijan’s energy production is peaking, and a majority of its supplies are already allocated to current customers.

A senior manager for the State Oil Company of the Azerbaijani Republic (SOCAR), the most influential player in Azerbaijan’s energy industry, told EurasiaNet.org that the conglomerate has not held internal discussions about altering its oil export strategy in the event of EU sanctions against Iran. He added that changes are not expected. “I do not think Azerbaijan would change anything in its export strategy since we already export most of our oil to European markets,” said the manager, who spoke on condition of anonymity.

In general, the topic of Iranian sanctions is a sensitive one in Baku. The government has not released any official comment on recent EU and US embargo initiatives. But in the Caucasus, what is left unsaid can often be more important than what is said.

Baku in the past has criticized sanctions against Iran, which is home to a sizeable ethnic Azeri minority. Over the past month, though, tensions with Tehran have soared over alleged Iranian hacker attacks, an alleged plot against the Israeli ambassador to Baku and the killing of an Azerbaijani writer, Rafiq Tagi, for making comments considered offensive by conservative Muslims.

Those tensions may not surface in any public declaration of Azerbaijani support for the embargo against Iran, but Baku’s stance “will be more pro-Western on this issue,” predicted Elhan Shahinoglu, director of the non-governmental Atlas think-tank.

Washington appears to be treating Baku’s reticence on sanctions as a good sign. US Deputy Chief of Mission to Baku Adam Sterling told reporters on January 30 that the United States “constantly consults with Azerbaijan, and we understand the special position of Azerbaijan” on Iran, the 1news.az news website reported.

Those remarks echoed statements made by US Deputy Assistant Secretary of State Eric Rubin, who held mid-January talks on Iran with President Ilham Aliyev and senior government officials in Baku. “Azerbaijan is with us,” Rubin said at a January 19 news conference, referring to international efforts to prevent Iran from developing a nuclear weapon.

How Baku will show its support for the US embargo campaign remains unclear, but moving in to grab Iran’s lost European oil markets – which accounted for roughly 20 percent of Tehran’s annual oil production -- does not appear to be among the likely scenarios.

Fifty-five percent of Azerbaijan’s 40.2 million tons of exported oil in 2011 went to Europe. Italy, Austria, Germany, the Czech Republic and Switzerland, a non-EU member, were the main customers.

The bulk of production (78 percent) comes from the Caspian Sea fields of the Azerbaijan International Oil Company (AIOC) consortium, a group, led by BP, that also includes SOCAR. The Azerbaijani conglomerate itself produces about 16 percent of the country’s annual output from its own fields. The rest comes from a number of smaller companies.

While Azerbaijan has underlined its interest in increasing exports to European gas markets, oil is a different story. Even if Azerbaijan decided to increase its oil exports to take advantage of a potential rise in EU demand, its oil production has peaked, leaving little ability to increase output or explore new markets, said Baku-based energy expert Ilham Shaban.

Oil production levels in 2011 dropped by just over 9 percent to 45.4 million tons from a 2010 peak of 50 million tons per year. “This year, the government forecasts a tiny increase of just 1.3 percent,” Shaban said.

“Unlike Iraq, … or Russia and Kazakhstan, which also are able to increase production, Azerbaijan cannot do that, even if the price of oil seriously increases [and] Europe needs more oil,” Shaban said. Output is expected to decrease after 2016 or 2017, he added.

Economist Natik Jafarly agreed with Shaban’s assessment, noting that if Azerbaijan’s oil production actually decreased in 2011 when prices were high, a potential Iran embargo later this year would make little or no difference for Azerbaijan’s export capacity.

“The most affected [European country] is Greece, which imported one-third of all of Iran’s exports to Europe. But Greece’s consumption is not so high and could be easily substituted by Azerbaijani, Iraqi, Russian or any other oil supplies,” said Jafarly, who heads the Society of Economic Bloggers in Baku.

Greece’s annual demand for 2.5 million tons of oil “could be easily fulfilled by any large oil exporting country,” Shaban agreed. Azerbaijan would gain little from offering to meet that demand, said Jafarly. “It is a matter of a few additional tankers.”

While increasing its own EU-bound energy supplies seems unlikely, Azerbaijan could nevertheless benefit as a transit nation. If an embargo against Iran takes hold, the Central Asian states of Kazakhstan or Turkmenistan could fill the void. If that happens, oil exports could potentially transit the Caspian region via Azerbaijan to Georgia’s Black Sea ports. In 2011, Azerbaijan earned $53 million from the transit of oil from Kazakhstan and $12.8 million from oil coming from Turkmenistan, according to the State Statistics Committee. “Of course, the transit revenues are much smaller than the profit from exporting its own oil, but, still, it is a possibility,” said Jafarly.

Turkmenistan’s export plans are always difficult to predict. Kazakhstan, meanwhile, has given no indication that it might increase production, in the event of an embargo against Iran. In 2011, though, Ambassador Serik Primbetov commented that an increase in the transit of such oil via Azerbaijan should not be expected before 2016 or 2017, when production at the Kashagan mega-oil field is slotted to get underway.