Category Archives: Financial Markets

Britain, Economic, Europe, European Union, Financial Markets, Government, Politics, Society

The sanctions on Russia should not be borne solely by London…

EUROPE

Germany and the rest of the Eurozone trade far more with Russia than Britain does. Our European partners buy billions of pounds worth of oil and gas, hugely profitable cash-flows which props up the regime of Vladimir Putin.

Yet, Europe’s proposed sanctions on Russia have been carefully designed to inflict as much damage as possible on the City of London, while shielding other economies from collateral damage. The stench of hypocrisy fulminates through the corridors of power.

The aim of the European establishment is to punish Mr Putin, whose behaviour has been appalling. But the cost should not be borne solely by London. According to Europe’s plans, German companies will still be able to sell their wares with relative impunity; Italy will continue to receive their energy supplies courtesy of Moscow; and, France will deliver its warships to Russia as promised. The bulk of the cost will be paid for by British workers who will lose their jobs to satisfy Europe’s desire to be seen to be acting and doing the right thing.

This is the latest example of the European elites showing their expertise in turning every crisis to their advantage. The higher echelons of the European establishment are clearly seeking to use the need to punish Russia as an excuse to intensify their long-standing campaign against the City.

The EU often makes grandiose claims about being a global force for democracy and human rights. Splendid as those values are, time and time again the EU reveals itself as merely an alliance of competing national interests. On matters of global conflict, Brussels not only struggles to produce a united front, but also often ends up pursuing its own internal vendettas instead. This prejudice is seen within the corporatist view of the Eurozone elites when, for example, they are happy enough to sign massive energy deals with corrupt and authoritarian regimes, but don’t either like or understand the workings and mechanisations of genuine free markets. The creation of the single currency too saw much of the financial activity previously conducted in Frankfurt and Paris shift to London.

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Effective sanctions should mean moving beyond the freezing of Russian assets in EU capitals and foreign travel bans on Mr Putin’s inner circle. Financial services, defence, and energy are some of the areas that should come under tighter sanction.

Financial sanctions operate in two ways. They restrict the access of Russian companies to working and investment capital, impeding not just their growth but their continuing activity, so hurting the Russian economy. They also make overseas investors much less likely to continue investing in Russia, with a similar effect. Defence sanctions, essentially the sale of Russian military equipment to other EU members, has the same consequence with the additional value of Russia becoming increasingly isolated. Sanctions on energy can range from tougher regulatory action to an effective blockade on the sales of oil and gas to the EU. Germany’s recent withholding from Gazprom of permission to use a pipeline is illustrative of the effectiveness of such action.

Further sanctions like these would, however, act like a two-edged sword. Certainly, they will injure Russia’s economy, but they will also wound Europe. Some parts of Europe could not get through a winter without severe difficulties if homes and offices were not heated by Russian gas. Some economies remain distinctly shaky and probably wouldn’t want to commit to a sanctioning agenda that would likely rebound on their own trading position.

Of course, it is only right that where Mr Putin’s regime can be targeted, given his ongoing refusal to face up to the consequences of his support for Ukraine’s separatists, such action be taken. Weaning Europe from its addiction to Russian gas is one real way to punish the Russian president and his cronies. Germany gets around a third of its gas and oil from Russia. Given that energy accounts for around 68 per cent of Russia’s exports, an opportunity to hit the regime hard should have been taken by now.

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Economic, Financial Markets, Government, Politics, Society

The global economy and the threats it faces…

FLASHPOINTS AND THE GLOBAL ECONOMY

Never has the world been subject to a constant flux of shifting alliances as it is in modern times. The world is once again in turmoil, from Iraq to the West Bank and from the Ukraine to the South China Sea. The geographical stakes and risks are extraordinarily high leading some strategic thinkers to compare the global landscape to that which preceded the First World War a century ago.

When the International Monetary Fund (IMF) produced its April 2014 forecast of 3.6 per cent global output for the current year it added an important caveat. It warned that geopolitical factors, at the time mainly thought to be the turmoil in Ukraine, posed a potential threat to its projections.

There are, however, five major geopolitical flashpoints which currently pose a threat to economic stability:

  • The ISIS advance in Iraq

That a small ragtag of some 30,000 jihadists born out of Syria’s civil war could be a threat to Iraq, with its American trained forces and weaponry, would have seemed inconceivable just a few weeks ago.

But ISIS is well funded, as a result of wealth created from kidnappings on the Turkish border, secret donations from Sunni Gulf states and the seizure of bank deposits in Mozul. It is also battle hardened from Syria.

Its seizure of refineries in Northern Iraq threatens the country’s oil production of 3.4m barrels a day or 11 per cent of the world’s current supply.

Brent Crude has exceeded, once again, $113 a barrel. So far the valuable fields of Baghdad, including those operated by BP, remain in operation. But that cannot be guaranteed even with any form of US-led intervention.

  • Middle East peace process

The recent unification deal between Hamas and the Palestinian Authority led by Mahmoud Abbas led to deadlock with Israel over future negotiations. Then came the kidnapping of three Israel youths from a bus stop on the West Bank; murdered in haste after being wrongly identified as Israeli soldiers. Tit-for-tat followed which has ultimately led to high level tensions in the Middle East with the Government of Binyamin Netanyahu amassing 40,000 troops who appear ready for a land invasion and incursion into the Gaza Strip.

The risk now is of Israel escalating the current difficulties into a much wider conflict with the threat, for example, to Middle Eastern oil lanes and production.

  • Iran nuclear talks

The July 20 deadline set for Iran to relinquish its nuclear ambitions fast approaches.

Despite some rather conciliatory language from President Rouhani of Iran, intelligence suggests little ground has been given on vital issues such as reducing the numbers of centrifuges and ending experiments with intercontinental ballistic missiles.

The US tilt at diplomacy with Iran has been met with heavy resistance in Congress. President Obama has been finding it hard to persuade Capitol Hill to ease the financial and economic sanctions that brought Tehran to the bargaining table in Geneva.

Western oil and banking interests are champing at the bit for an end to sanctions that could re-open Iran as a lucrative market.

  • Ukraine-Russia

Flashpoints continue on the borderlands of Western Europe. President Putin shows no signs of backing down from his efforts to infiltrate and recolonize Russian speaking enclaves in Eastern Ukraine.

The so-called ‘Putin doctrine’ – the idea that Moscow is planning to retake areas of vital Russian interest reaching into the Baltics – is almost certainly a myth because that would mean directly confronting NATO.

But the threat to gas supplies following cut-offs to Ukraine is a clear and present danger that will become worse as time moves on.

The crisis already has led to a Russian pivot towards Asia in the shape of the Chinese natural gas deal in which London-based Glencore is involved in financing.

Creating a secure environment in Ukraine, in which Western assistance is co-ordinated by the IMF (where monies can be released), is proving extraordinarily difficult to enact.

  • South and West China Seas

Many strategic experts see this as the theatre for the next great strategic rivalry with China and the US – that has moved much of its navy into Pacific waters – eventually clashing.

At present the dispute is manifesting itself in proxy stand-offs between Japan and China and Vietnam and China.

There are overlapping claims to islands such as Senkaku in the Okinawa Sea that are claimed by both China and Japan.

Similarly, South Korea and Japan have clashed following large scale Korean naval operations in the region.

There are fears that a collision of war ships, an attempt to run blockades or guns fired in error could provoke an all-out war.

The tensions, serious as they are, could be unexpectedly good news for BAE Systems and other defence firms as surplus Asian nations rebuild their rundown defences.

Nevertheless, a conflict in the region – the locomotive of manufacturing output – could be devastating for Western economies.

General Western Outlook

The immediate highest risks for Western economic output come from an interruption of oil supplies in the Middle East and gas supplies from Russia via the Ukraine.

However, America’s increased oil and gas fracking activities together with new gas finds – such as those off the coast of Israel – make the world a little less vulnerable than it was after the Yom Kippur war in 1973 and the first Iraq war of 1990-91.

More serious long-term threats come from the China seas where a battle for hegemony, not dissimilar to that which caused two world wars, looks to be underway.

Globalisation has produced rich rewards in terms of fast economic development, industrialisation and prosperity.

But it has also brought with it profound new strategic concerns that could damage confidence and crush output at a time when the West is still recovering from the financial and Eurozone crisis.

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Britain, Economic, Europe, European Union, Financial Markets, G7, Government, Politics, Russia, Society, Ukraine, United States

Ukraine: Imposing tougher sanctions on Russia is needed…

UKRAINE

Intro: Sanctions, if stringent enough, could bring pressure to bear on Vladimir Putin

A strongly worded statement by the heads of the G7 leading nations condemning Russia for provoking civil unrest in eastern Ukraine was met with pro-Russian militias kidnapping eight international observers. The statement given, largely as a result of diplomatic protocol, said the G7 leaders ‘have now agreed that we will move swiftly to impose additional sanctions on Russia’. But the response of the pro-Russian activists and gunmen seems to be illustrating the clear ineffectiveness of applying any kind of western sanctions policy on the ground.

Some may well argue that to be the case. We should, however, be clear. Sanctions, if stringent enough, could bring pressure to bear on Vladimir Putin. Pragmatically, there is a limit to what the United States and the European Union can actually achieve.  The guarantors of Ukrainian independence and territorial integrity are not only down to the wishes of the western axis and what they hope for, but also of Russia given its close historical connections in so many different ways that it has with the country.

Travel bans on Russian officials and other minor irritations imposed on Russia are so far much weaker than they could have been, and on this a dichotomy of reasons has been laid bare. On the positive side, a reason for the less than tenuous sanctions applied will be that much of the EU, including Germany, is wholly dependent on Russian gas. Though there has been talk of the US diverting some of its rich supplies of shale gas to Europe in reducing this dependence, to instigate such an operation has neither been practical nor affordable.

On the downside, the reasons are perhaps cowardly. Governments, for instance, including our own, have been sensitive to business lobbying, particularly from those Russian oligarchs who would be severely punished if sanctions were tightened. Last month, a government document was caught on camera by a photographer as an official of the British government was about to enter Downing Street. It suggested that the UK should ‘not support, for now, trade sanctions … or close London’s financial centre to Russians.’

The G7 statement was notable for its absence to specify in detail what ‘additional sanctions’ might or could be. Yet, whilst not mere cowardice that has prompted EU governments to hold back from tougher measures, there is a principled argument, albeit slightly cynical, that Mr Putin is doing so much damage to the Russian economy through his own actions that he needs no help from the West in making it any worse. Mr Putin’s nationalist adventurism has certainly seriously eroded his country’s economic interests. Indeed, if trade and other financial sanctions were imposed, it would allow the Russian president to blame ‘the West’ for Russia’s hardship rather than his own folly.

The problem for Mr Putin now is whether he realises that he is biting off more than he can chew. If he tries to assimilate populations into Russia who do not want to be assimilated he will only add to Moscow’s predicament and costs. Although the West should not have accepted Crimea’s annexation without a fight, its population is mostly Russian. Eastern Ukraine is entirely different; the region is quite against Russia’s interest to incite separatism there.

The historical cynic would no-doubt quote Napoleon and say that the West should not interrupt their enemy when he is making a mistake of this magnitude. Financial markets, for example, have already downgraded Russia’s credit rating to just above junk status. Mr Putin’s assertion of Russian power may have won him the support of his domestic audience at home meantime, but this could well change once the bills start arriving.

Given that Mr Putin’s rhetoric is already turned-up against the West, blaming the fall of Ukraine’s government on US and NATO-backed ‘fascist elements’, the notion that Britain, the EU and the US should hold back for fear that the Russian leader would blame us fails to persuade. Sanctions do not always work, that’s true. But they can work, and there is no other option open to those protagonists who support Ukraine’s independence and integrity. Now that Moscow’s proxies have started to abduct and hold hostage international observers, harsher economic pressure remains the best hope of bringing Vladimir Putin to his senses. There is no good reason for not upping the ante on Russia.

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