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PUTIN SHAKES THE PETRO-DOLLAR REGIME
OPEC appears to be willing and eager to join in new alliances to undermine the US domination from owning the world reserve currency. Enormous consequences follow, which lie completely in US blind spots. A strange contrasting parallel might exist between the United States and Russia, regarding relationships with large energy companies. The USA has evolved into a cooperative collusion with big companies like Halliburton. Russia has broken down into a confrontational situation steeped in confiscation with big companies like Yukos. The USA seems to work constructively with large firms, with governmental support. This is seen in sponsored foreign grain sales, in development of petro-chemical plants, in defense contracts for the military complex, in permissiveness toward software monopolies, in protection of the steel industry, and elsewhere. Russia seems to work in adversarial roles to steal back and forth with their big firms. RUSSIAN ASSAULT ON FREE ENTERPRISE Russian legal treachery embodies a big insult to free enterprise and rights to property. One might say Yukos Oil began as a company with stolen property, or cozy deals to gather in several purchases from state-owned regions, or tax scoffs at Russian authorities enabled growth. Fine, whatever. My attention is trained on current methods, which can be aptly labeled as legal warfare, and trends which betray private property. The Yukos tax & fine bill submitted was revealed to be $18.5 billion, which exceeds the company’s annual revenue, and goes far beyond the level where embarrassment is profoundly clear. The Russian government has established a modus operandi, i.e. method of operation. A company is targeted for seizure. It is charged with tax evasion. Their assets are then frozen, pending investigations and legal outcomes. Cash flow is interrupted, only to put debt service repayments in jeopardy. The courts declare debt default, a fresh new problem for the targeted company, whose stock declines in value, and possibly sharply. Under financial duress, a deal is cut, as taxes are paid as a fraction of the original demand in return for a sale of large tracts of the company’s properties to the Russian govt. Charges are reduced or negotiated along with the distress sale of their property. Such a pattern has shown itself clearly with the Yukos case. Moreover on the front tied to cooperative agreements, Russia’s treachery is wholly evident in its dealings with western firms. Pan Am Silver was severely victimized, via dissolution of a partner firm and reconstitution of a new corporate entity Polimetall with those mining rights, leaving the US firm out in the cold Siberian winter. PanAm Silver appears not to be in line to share profits where silver production is forthcoming. The original company was dissolved, and along with it, all contracts with PanAm. Czarist gamesmanship with western energy companies is now in focus. British Petroleum is at risk with older contracts, while others like Conoco Philips are at risk with newer contracts. British Petroleum could be in the midst of a bold double-cross, for the craziest of sounding reasons. They exceeded licensed production amounts! To the casual non-discerning observer, Putin appears to offer much needed support to President Bush, as seen in bilateral meetings in Texas that included a horseback ride photo op. A closer examination reveals more ominous overtones in recent geopolitical events and high-level discussions. The summertime tragedy at the children schoolhouse in Chechnya triggered an international outcry of criticism. The US State Dept issued public statements to the effect that the Russian govt might have acted with too much force, a vivid reminder of their action taken in the Moscow theatre taken hostage a year ago. Each incident, the theater and the school, resulted in over 200 fatal victims. Putin was rankled by the criticism. Last month, after a visit by a leading US legal team to Russia, and upon urgent pleas made to the US State Dept once again, our prestigious ministry issued more criticism of Putin for their harsh legal approach to Yukos and denial of property rights, not to mention due process travesties. Several US firms have longstanding contracts with Yukos, which are now in confusion or jeopardy. Once more Putin has been angered. RUSSIA-EUROPEAN AXIS EVOLVES Putin is in the midst of taking steps very harmful to the petro-dollar foundation of international commerce. In late October, the Moscow Times reported that President Vladimir Putin might order Russia to switch its trade in oil from denomination in USDollars to the currency flowing in the European Union, the euro. Such a move could have far-reaching repercussions for the global monetary system and its balance of power. Few US-based analysts even discuss the stability of the petro-dollar, which is assumed a fixture never to be tampered with. Not here. Few again discuss the impact of changes in basis to link the USDollar to crude oil. Implications would add fresh momentum and force to the three-year bear market in the USDollar. What harms the USA would enhance the European Union and its economy. Putin’s words and actions are telling, a key revelation of his awareness of how important the stakes are, and how Russia holds a strong poker hand with respect to the United States. At a joint news conference with German Chancellor Schroeder in Yekaterinburg, Putin strongly suggested that Russia could switch its trade in oil from dollars to euros. He said “We do not rule out that it is possible. That would be interesting for our European partners. But this does not depend solely on us. We do not want to hurt prices on the market.” The importance of the event was not lost on strategic energy agencies, but hardly made a sound bite within the US financial circles. The European Union has long objected to the financial hegemony of the United States in its dominance of global commerce and money supply. Nowhere is the battle more bitter than in reaction to the chronic abuse of the USGovt in irresponsible spending disconnected from accountability. Europe has complained for many years about the realized exploitation by the USA in expanding federal spending, domestic tax rate cuts, advocated consumer spending, mortgage finance support, and wartime expeditions. Behind these trends and excesses is the petro-dollar system, whose US$ status as world reserve currency basically means “anything goes.” We have taken advantage of the situation, much like an undisciplined teenager who with impunity wrecks cars, collects traffic violation fines, goes on drunken benders, destroys property, assaults people, and expects the world’s savings account to pay for all the bills and cleanup costs. The analogy might seem off the mark, but not really. Most foreign trade surpluses find their way quickly into the US Treasury market, the Fanny Mae & Freddy Mac mortgage market, and US corporate bonds which finance their retail credit operations. Resentment has grown perhaps to a critical level, where reaction is to be soon expected. The Putin statements in the Urals Summit highlight the drawn out campaign by European Union leaders to encourage increased commerce and banking operations in the euro currency. This is a natural response to the USDollar decline. European exports have been forced to endure price hikes from currency exchange impact alone, only to stress their economies. European bank reserves have suffered a decline in value from that same currency exchange impact, only to stress their banking systems. EU leaders obviously seek two changes: more commerce priced in euros, more reserves held in eurobonds. Many regard Russia to be in the enviable position to extract concessions, to demand more prominent geopolitical stature, in return for agreements to broaden ties to Europe. In doing so, they would break links or weaken links to the USA. It is my analysis that the USA-Russian relationship will degrade into open hostility, but in stages of deterioration. Yesterday a story was reported on a new advanced weapon system to be deployed by Russia. Its targets are uncertain, while the risks are clear. As the world’s #1 oil producer, ahead of Saudi Arabia, Russia holds much new clout. An agreement by them to embrace European currency aspirations could provoke a chain reaction among other oil producers, thus stabilizing the crude oil price IN THEIR WORLD. My analytic forecast in May 2003 for crude oil to become priced in euro denomination is slowly taking root, with broad implications. As the eurobonds grow in held reserves, the euro will gradually unseat the USDollar and claim exalted status as the world reserve currency, first in de-facto action then in actual deed. US financial markets seem asleep on the issue and its frightening risk to the US Economy. SOME THOUGHTS INSIDE RUSSIA In the grand chess game of global clout, Russia wants to become a stronger player on the European continent and in the Middle East. These guys know chess and craft. USA knows force and muscle. At a Helsinki meeting in 1999, Putin showed his original intention to switch oil pricing to euros as part of a grand package which included security issues. According to Alexander Rahr, an expert on Russia at the German Council on Foreign Relations, “Putin is very much interested in changing the structure of OPEC and he cannot do that without the United States… And, he wants to get contracts for the Russian oil industry in Iraq -- for this, too, he needs the United States.” We Americans tend to forget the growing commercial ties between Russia and the 300 million people who occupy the European Union plus Eastern Europe. That entire region is slowly being embraced by the EU. Yevgeny Gavrilenkov, chief economic advisor to Putin, said debate is growing on a move to the euro as Russia mulls siding with the EU. “Such an idea is really possible. Why not? More than half of Russia's oil trade is with Europe. But there will be great opposition to this from the United States.” The impact to Russia would be much less than to Europe, which now feels the sting of a rising euro. Putin is playing a huge bargaining chip, or else he is bluffing in order to gain inroads into Iraqi oil production contracts. A sure benefit to Europe from a wider acceptance of the new petro-euro would be lower EU interest rates, like what the USA enjoys now (temporarily). How about a word from Russian big oil? The opinion of Lukoil vice president Leonid Fedun is worthy of note. Three or four giant energy companies dominate in Russia, including Gazprom and Lukoil, rivals of Yukos. Fedun acknowledges that any switch to euro payments would mean only a minor difference in actual transactions and cost changes. For observers it is important to focus not on the small value differences in the commerce, but on the large tectonic shift in the system which links that commerce to the monetary system itself. The political price tag and shift of financial power matter much more. Fedun is quoted by Interfax as saying “We are ready to move to the euro if the country will be included in a visa-free regime with Europe. It's a bargaining chip.” By “visa” he means passports, not credit cards. Talk is rampant that Putin is playing his chess pieces in the tradition of smart Russian masters, vying for EU concessions and World Trade Org inclusion. ASIA GETS A WORD IN Bank of Japan Governor Fukui said if a strong rival to the USDollar as a key global currency were to emerge, a stabilizing effect on the global financial system would result. Fukui referred to the dangers associated with allowing any single currency to dominate global commerce, mentioned its disruptive influence, and indirectly criticized the US financial management. Fukui told a recent conference “In such a situation, the economy of the key currency is easily tempted to focus its economic policy on domestic considerations… In today's globalized economy, this could lead to undesirable ripple effects on the rest of the world, through the fluctuations of the external value of the key currency.” The message is clear. We have been warned, but our bond market seems in total indifference. Asians, with their collective $1900 billion in foreign exchange reserves, stand to lose significant capital in their banking systems, since the majority of these reserves are in US$-based securities. Asians, most notably Japan and China, find themselves in an awkward position. If they extend deeper support to the US$, their risk rises. If they diversify or withdraw with more conviction, their capital losses could be staggering. For certain, rhetoric both in Asia and Europe is bubbling over. A severe backlash is coming for the USDollar for its profligate abuse and irresponsible management. We have used the world currency US$ as an agent for bubble generation and Ponzi Economics. This topic receives sparse coverage in the US press & media, with little or no appreciation of importance. OPEC HAS SOMETHING TO SAY Youssef Ibrahim is the managing director of the Strategic Energy Investment Group in Dubai and a member of the US Council on Foreign Relations. His words included the word “catastrophe” in recent quotes. His voice carries great influence, perhaps as much in the European-Arab petro world as Alan Greenspan in our world. Ibrahim speaks from the world of the petro system and its root in tangible world of trade, while Greenspan speaks from the world of the monetary system and its roots in inflationary financial engineering. Between 60% and 70% of world currency reserves, from trade surplus and oil export, are kept in the form of USDollars and US$-denominated securities such as USTBonds. Since surpluses are stored in the US$ system, the US Economy enjoys a risk-free benefit, and sidesteps all market mechanisms in response to imbalances. The USA should have interest rates prevail to 3% to 5% above the rest of the world, from a current account deficit basis alone. Instead, Asia and the Persian Gulf emirates keep our rates artificially low. The USA should have a currency exchange rate 20% to 35% lower than current rates, from a current account deficit basis alone. A world euro foundation would enable development of its poorer eastern provinces such as Hungary, Czech Republic, Poland, Romania, perhaps even the Ukraine and western Russia. In the last several years, the US$ standard has encouraged mindless US consumer spending, oversized home construction, housing speculation, stock & bond speculation, and more. Those days will see a sunset. They represent the legacy of US indulgence, greed, and corruption of the system. Ibrahim warns that “There are already a number of countries within OPEC that would prefer to trade in euros.” He speaks of a growing fallout from the Iraqi War, that traditional ally Saudi Arabia might switch also, though its government has not come down firmly on one side. First come the hint from rumblings, then comes the denial. After backroom preparation for change, finally we see the reality of change in action. What follows must be heard closely, as it carries extreme significance regardless of your political position. Iraq has changed the geopolitical stage and its alignment. “There is a revision going on of its [Saudi] strategic relationship with the United States. Already, they are buying more [French-made] Airbuses," Ibrahim said. “The Saudi Crown Prince [Abdullah Bin Abdul Aziz Al-Saud] visit to Russia was of great significance and the regime is talking about closer cooperation with Lukoil and other Russian companies.” One must consider a secondary motive in why the US attacked Iraq, related to preservation of the petro-dollar. Such a view is totally out of the field of vision by American observers and analysts. He went on with “There is a great political dimension to this. Slowly more power and muscle is moving from the United States to the EU, and that is mainly because of what happened in Iraq.” CONCLUSION The implications are vast, worthy of discussion. In the last 15 years, the USA has learned through positive reinforcement a bad lesson in economics. The current administration, it appears, operates under the notion that twin deficits are stimulative and positive. So is cardiac electrical shock with paddle boards stimulative to a heart attack victim flat on his back. It is not positive. A catastrophe is in the making, as the USDollar loses its world reserve status. Many inexperienced watchers proclaim SO WHAT??? Well, the answer is that soon, the US Economy will witness the consequences of fiscal and financial irresponsibility in the form of higher interest rates, as well as higher production costs and energy costs!!! No more carte blanche, blank check, free ride, endless freedom, unleashed behavior. To some degree, a petro-dollar system shields the US Economy from higher prices for crude oil, diesel, heating oil, and gasoline. Foreign nations like Japan, and trading blocks like the European Union must collect large tranches of USDollars in order to conduct transactions for energy supplies. In doing so, they accumulate US$-based reserves. This phenomenon has softened the decline in the US$. Removal of the petro-dollar foundation will both push the US$ lower and lift the crude oil priced in US$ higher.
NEWS TIDBITS The dollar turned higher on Thursday afternoon, rallying from all-time lows against the euro when traders took profits in the euro zone currency ahead of a G20 finance minister meeting in Berlin this weekend. The US currency earlier hit a record low against the euro for the second straight day, around $1.3074, but has since climbed back during the day. Output growth at US Mid-Atlantic factories eased in November but still suggested the manufacturing sector was operating at a healthy clip. The Philadelphia Federal Reserve business survey said its business activity index fell to 20.7 in November from 28.5 in October, below economist forecasts for a smaller drop to 23.5 from last month. The regional measure has shown expansion (a reading above zero) for 18 months. But the pace of growth has slowed recently as exports tapered off and consumer spending on long-lasting durable goods declined. The number of Americans filing first-time claims for unemployment benefits dipped three thousand to 334k last week, matching economist forecasts. A key forecasting gauge of future US economic activity fell for a fifth straight month in October. The Conference Board said its index of leading indicators fell 0.3% in October to 115.1, a fifth straight monthly decline. The index fell by a matching 0.3% in both September and August. The September figure was downwardly revised from a previously report of a 0.1% drop. The OPEC cartel revised down its expectations of oil demand growth for next year and projected a rare big winter inventory build if the group keeps producing at current levels. The group estimated likely demand for its oil to average 28.2 million bpd over the fourth quarter this year and first quarter 2005, some 2 million bpd below its estimated October production, according to its monthly Oil Market Report. The figures imply an unusual increase in inventories at a time when heating demand will be peaking during the northern winter. Last year world oil stocks fell 350,000 bpd in the same period. Oil prices were steady on Thursday as concern over lean heating fuel supplies in the United States and Europe ahead of winter stemmed price declines of nearly $10 since late October. A decline dragged the oil price from record highs at $55.67 a barrel. Government scientists are chasing a possible new case of mad cow disease in the United States, with final results on a suspicious slaughtered animal expected in coming days. The US Dept of Agriculture said rapid screening tests had returned "inconclusive" results and triggered a more sophisticated final round of tests to determine if a suspect animal has mad cow disease. If it does, it will be the second US case of the malady, after one was discovered last December. Florida has found the highly contagious soybean rust fungus in one of its soybean fields on Wednesday, becoming the third infected US state in a week. The soybean rust outbreak has quickly spread throughout Louisiana and into Mississippi since it was first discovered. The wind-borne disease does not harm humans but can cut soybean crop yields by up to 80%. Exchange Traded Gold has a new tradable stock-like vehicle, under the symbol of “GLD.” Given the full name of “Street Tracks Gold,” the security enjoyed volume of 5.88 million shares today. Movie box office news for last weekend is four days old, now obsolete. TODAY’S MARKET Today the Dow Jones Industrials rapped up at 10572 (+23), S&P at 1183 (+1.6), Nasdaq at 2104 (+4.6), TENS yield 4.117% (-2.7 bpt). Currencies closed with Euro at 129.75 (-0.64), JYen at 96.21 (-0.12), and the world’s strongest currency Can$ at 82.95 (-0.73). Metals finished with gold at 442.9 (-1.7), silver at 755.2 (-11.0), copper at 142.50 (+1.15). Energy ended with crude oil at 46.22 (-0.64), natural gas at 687.5 (-40.8), unleaded gasoline at 123.60 (-2.00). Prices are at major futures contracts. Jim Willie CB
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