Ukrainian economic woes and Eurozone fears could lead to negotiated solution with Russia

ucraina-150105074501_fotogalleryThe economy in Ukraine is collapsing and inflation has reached 17%. Its currency, the Hryvnia, has suffered the worst performance of the year, losing 48% against the US Dollar, in the world and, unless foreign aid arrives promptly, a default is expected. Ukraine’s civil has had tragic effects on the economy and expectations of GDP having fallen 7.5% in 2014 are optimistic, while the central Bank expects even worse performance in 2015. In order to avoid a sovereign default, the European Union estimates that Kiev would need a USD$ 15 billion injection and Prime Minister Arseniy Yatsenyuk has already found it very difficult to obtain even a fraction of that as he considers the holding of a donors’ conference. In this scenario, the International Monetary Fund has already allocated a USD$ 17 billion rescue package. What is especially troubling is that, despite the desperate financial condition, the government has forecast an increase in military spending of 5.2% and a cut in social spending to ease the burden on the state budget, while the imports “non-essential” duties will be doubled to 10%. Ukraine’s dire economic situation plays into a complex geopolitical scenario that contains the seeds of a thaw in relations between itself and Russia and Russia with the West.

In recent weeks it has also learned that Ukraine has almost completely dried up its gold reserves from March to today, demonstrating the seriousness of the financial and currency crisis. Gold reserves in Ukraine are at the lowest levels since August of 2005, a decrease of 45% in 8 months. In contrast, while Ukraine has almost wiped out its gold reserves, Russia has continued to buy back, coming to 1,187.5 tons in November. Since 2005, Moscow has tripled its gold reserves, bringing them to the highest levels since 1993, suggesting that central banks, beyond Western Europe and North America, still have appetite for the shiny metal. Therefore, as hard as the situation may be for Russia, facing international sanctions and de-facto isolation from the West, Ukraine’s financial situation is far worse. Indeed, the new government, which replaced the one led by former President Yanukovich a year ago in a US and European Union supported coup, Ukraine has proven unable  to control and stabilize the internal political and economic situation, while becoming a virtual tool of foreign geopolitical interests and machinations. The good news is that, given its precarious financial condition, Ukraine will be forced to reach some kind of negotiated settlement with Russia in 2015 rather than risking default and the spreading of the conflict. Russia shares this interest because, the pursuit of a more intense military option is out of the question – apart from the cost, it would risk inviting additional encroachment from NATO powers. Surely, Russia will be in recession, but it should be able to avoid a default despite a predicted 4% drop in GDP for 2015.

President Putin said that Russia’s economy will adjust gradually to the new level of oil prices. Therefore, while Russians can continue to expect bad economic conditions in 2015, a recovery should start in 2016; neither Ukraine or Russia stand to gain militarily or politically from a perpetuation of the war while the European Union will be overly preoccupied with ‘Euro’ exits to continue sustaining Ukraine. European investors – and voters – are weary of the volatility and increased risk resulting from a very possible Greek exit from the Eurozone: a ‘Grexit’ as some have called it. Doubtless, Greece represents a very small part of the Eurozone economy but even the departure of a small economy from the Euro would generate several problems from the ‘mathematical’ standpoint in the short term. The prospect of a Greek exit is a kind of ‘black hole’ of risk, because no one has ever come out from the Euro, and no one has ever suggested the release of the Eurozone economy. This uncertainty creates market volatility, a self-feeding mechanism that will inevitably force the European Central Bank to intervene to calm the markets. This possibility will reduce the appetite for foreign adventurism in the EU, leaving Ukraine more isolated. Russia, in turn, will fare better later in 2015 because the low oil prices that have so fiercely targeted its resource economy are unsustainable in the long term, despite recent Saudi rhetoric.

The price of oil is too low for OPEC, which will surely cut production in order to cause prices to rebound to at least USD$ 70-80 per barrel – it seems to be a fairly realistic number in the medium term. Therefore, Russia will be in a stronger position than Ukraine, which will be left with the ultimate responsibility to find a solution, even if it means leaving a part of itself to Russia. The conditions point to such a solution to emerge before the end of 2015 but, in geopolitics, there are many uncertainties and it could take longer. The more optimistic timeline for a solution is backed by the fact that France has already stated that it would stop sanctions against Russia in view of a continued diplomatic effort aimed at easing dialogue between Kiev and Moscow. Last December 6, France’s President Hollande held a surprise meeting with Putin in Moscow upon returning to Paris from a trip to Kazakhstan. Many other EU powers are eager to lift sanctions as well and it will not be difficult to convince the EU as a whole to suspend or ease sanctions in order not to cripple Russia in return for the intensification of negotiations with Kiev. On January 15, there will be a big test in this direction as the French, Russian and Ukrainian will shake hands to create a compromise to restore peace. That solution, which should be satisfactory to the White House (if not a Republican interventionist Congress), will likely see a deal whereby Russia will stop supporting pro-Russian Ukrainian separatists in exchange for full recognition of Russia’s ownership of the Crimean peninsula plus any eventual reparations (in the form of gas supplies?). And then the ice between Russia and the West will break.

Oil Price Tumble – The Action of Cunning Devils

Over the last month oil prices have been in a serious swoon and this then was projected onto equity markets as some sort of evidence that global economies are in a serious slowdown, after what has been a rather anaemic recovery from the 2008 slump. This rationale shows a disturbing intellectual flaccidity on the part of this concept’s propagators and shows that analysis for some commentators rarely goes much beyond the end of the nose on their face.

For a start the global economy has been laboring under high oil prices since pre-2008, and in some ways we might interpret that the events of 2008 were in slight part caused by and certainly exacerbated by high oil prices. The recovery has certainly struggled under this burden with a massive transfer of resources from the Western economies (and developing nations) to oil producers. One only needs to see the jewel-bedazzled cell-phones of the burqa-clad ladies gliding through London’s Selfridges to realize who are the haves and have-nots during this period of high oil prices.

Ulterior Motives

Therefore why should oil prices take a tumble if not from global economic exhaustion? Well, while there was a live-and-let-live attitude by the US during this long period of high prices, it saw that the high prices, instead of being a burden, were empowering. They fed the fracking boom and led to the almost unimaginable dream that the US might be within reach of energy independence. Finally the US was in reach of kicking the very expensive millions of barrels a day habit that had bled the US economy since the 1970s and led to entanglement in the many miseries of the fractious Middle East.

However, high oil prices have also empowered a bevy of international miscreants that have created intractable problems that either require military intervention or prompt a hands-off stance that can spiral into contagion. Over the longer span there has been Venezuela and Iran as relatively low-level threats but still troublesome and trouble-causing which have both been able to get away with their actions with more latitude than usual due to the relatively strong export incomes they have gleaned from oil sales. More sinister though has been the actions of the Russians in the Ukraine and the eruption of the ISIS phenomenon.

The Devil Makes Work for Idle Cash

ISIS didn’t start out enormously well-padded with cash, but what it had is widely regarded as having come from generous donors in the Gulf States and, dare we say it, Saudi Arabia. That all changed when it managed to bag itself a swathe of Iraqi and Syrian oil-producing assets and turn them into revenue generators for its military efforts and to fund its “administration”. Meanwhile over in the Ukraine, Putin’s advance had proven impervious to Western pressure or opprobrium, despite selective economic sanctions, due largely to the export revenues from oil and gas. Moreover the Europeans had eschewed against really effective action because spurning Russian gas exports would have been like cutting off the nose to spite the face.

Thinking Smart (For Once)

Eisenhower in his parting words as President warned against the Military-Industrial Complex which was particularly poignant coming from a general (and a Republican). Since that time the tool of first employment has tended to be military with a string of adventures that rarely seemed to achieve the stated goal and always ended up costing fortunes in materiel and lives. More recently, the globalized economy has meant that the economic sanctions have become the stick of choice when a hard to get at donkey on the international stage has proven to be recalcitrant. However, in recent times, the obvious targets have proven to be impervious to the long-reach of the US Treasury or the Fed.

The point of vulnerability for the Russians, ISIS and its sponsors is one and the same, the oil price. While the mouthpieces of the financial media (much less discriminating in swallowing a story hook, line and sinker than even the White House Press Corps) started spouting that the oil price decline was due to “global slowdown” we looked around us and wondered “where?”. China is still bubbling along, and is not using less oil.. The US economy is not exactly ebullient but was doing quite nicely.. the UK is very healthy and the European economies are a mixed bag with the major ones, excepting France and Italy doing fairly well. This is scarcely fertile ground for an Apocalypse Now scenario in oil demand.

There is however another version. This version has it that the action to sink the oil price was a concert party between the US and Saudi Arabia with the goal being the destabilizing of the various “baddies” that have not been responding to the usual reverse stimuli. The means to do this are obviously in the hands of these two parties.

The goal is to financially destabilize the already weakened Russian financial structure and frankly it seems to have worked with the Rouble in freefall and a recent front page of the Financial Times trumpeting an imminent meltdown in the domestic financial system. The US is not wrong in divining that the best way to a Russian oligarch’s heart is through his pocketbook and so that is where the oil price squeeze has its most poignant effect.

With ISIS you have a situation where the largely besieged Caliphate sells its oil into the murkier corners of the global energy trade at a significant discount to reigning prices. Some reports we have heard say they are receiving as low at $30 per bbl. A tumbling global oil price has the potential to push this price received even lower and even might make production loss-making. The last thing a putative pseudo state needs is its largest industry to be a loss-leader.

As for sponsors of ISIS, whether they be states in the Gulf or wealthy donors from the same area, declining oil prices mean less disposable income and what is the more worthy cause, a rocket-launcher for the cause or another shopping trip to Harrods? That is no contest….

The Squeeze is On

A whole bunch of nations are junkies hooked on oil export revenues. Frankly the collection does not look like the most worthy recipients of the charity of Western oil users. The following chart from The Economist was brought to our attention and it says it all about who is nearest to the edge when oil prices go into decline. We don’t feel our lachrymal ducts overflowing as we go through the names.


It would seem that quite a lot of countries have been living beyond their means and that the chickens are now coming home to roost. Most of them are now acutely vulnerable to a fall in the oil price. If these numbers can be believed then some of the more ornery ones (at least by State Department thinking) are now well under water. To keep things on a relatively even keel at home they will need to cut back on foreign adventures (state-sponsored terrorism amongst them) and put the squeeze on some of their high-rollers (which will in turn choke some of the private sponsors of the likes of ISIS, or fellow-travellers amongst the oligarchs in the Ukrainian “venture”).

If the US was looking for a moment to apply the electric cattle-prod to the private parts of trouble-causers, that moment is now and the oil price is the cattle-prod of choice.


When cash flow is taken away from one group (oil producers) that have had a surplus and churned it into markets, then they withdraw from those markets in whole or part, particularly if they find themselves in kind of budgetary stress shown by The Economist’s chart. The result therefore is a tumble in the markets which, lo and behold, we have seen. That is until the beneficiaries of the redistribution (i.e. Western and emerging market end-users) start to accumulate benefits in the form of surplus income in their own savings and that starts to make its way into the markets. In this we find nothing disturbing, in fact it is rather comforting. Perversely it’s the Marxist dictum of “From those according to their abilities, to those according to their needs”. Maybe the irony of that might be lost on Russians (ironically) and ISIS probably wouldn’t understand it anyway. Let the redistribution to long and fruitful!

World demand for gold is strong, despite a price drop to the lowest level in four years

imagesThe market rallied, leaving gold behind. The strong US Dollar and an apparently positive economic outlook for the United States have caused the price of gold to reach its lowest level in over four years last Friday, touching USD$ 1,174.18/oz. – the lowest since the end of July 2010. Analysts have placed the blame for this drop on “surprisingly strong growth” in the United States, prompting a greater prospect of a prompt tightening of monetary policy.  There was some surprisingly good economic data from the US: gross domestic product (GDP) grew at an annualized rate of 3.5% in the third quarter, which is far better than expected, confirming the Fed’s optimistic outlook in the days preceding the announcement. The apparent accuracy of that prediction muted the demand for gold as a safe haven. Moreover, the strong economic performance has reduced the market’s fears that Fed is unable to manage inflation as the former Fed Chairman, Alan Greenspan, had warned just days before the big market rally. It appears the market is very happy to ignore gloomy inflation predictions and this has not been good news for gold investors, as Greenspan urged Americans to buy gold.

The higher chance of a GOP win in the congressional elections on November 4, moreover, have fueled predictions of a very bullish reaction from Wall Street, marked by a rise of industrial and energy stocks, which will likely continue to keep gold in the doldrums. The rise of the US Dollar in response to the sharp increase in bond purchases by the Bank of Japan have also been a burden for the price of gold. Yet the price of gold is actually enduring the effects of very ‘messy’ markets and uneven economic growth. There are, in fact, few assurances that the Fed will raise interest rates to control inflation because economic growth has been lackluster overall and there is still a long way to go before it will be strong enough to prompt a sharp turn in current monetary policy. A lower price of oil has also deflated inflationary tendencies. Geopolitical tensions are also very pronounced and precedent suggests that such conditions tend to buoy, rather than sink, the price of gold. Those geopolitical tensions are not exclusively related to the rise of the Islamic State in Iraq, Syria and beyond or to Russia and Ukraine.

The geopolitical situation has been made all the more uncertain because of the ever worsening economic conditions in the European Union. Even Germany is starting to feel a hit of recession and Washington, Republican or Democrat, will not feel sufficiently optimistic to lift the economic stimulus measures just yet, which should eventually generate some lift for the price of gold. More significantly, gold can also benefit from sustained, and even rising, demand from key markets such as China and India, where the recent September wedding season coincided – perhaps prompted – imports of gold rising by a remarkable annualized rate of 449%. Moscow has also continued to demand physical as the Russian central bank has raised its reserves to a record level. As mentioned in InvestorIntel last week, a referendum in Switzerland to be held at the end of this month, could greatly affect greatly the outlook for gold prices. Swiss citizens are called upon to decide on the extent to which their country’s central bank will have to replenish its reserves.

One of the measures that will have to be adopted in case of a ‘yes’ victory – which the polls predict to be likely for the time being – will see the Swiss National Bank (SNB) having to maintain at least 20% of its assets in gold bullion, meaning it (SNB) would be forced to buy about 1,500 tons of gold within 5 years, which, in practice, means that 10% of global production would be absorbed by Bern. Not to mention that such an initiative could be adopted by other countries – including the United States – setting off a chain reaction. Meanwhile, China, based on the weekly statistics of the Shanghai Gold Exchange, continues to experience good demand for gold, which was very strong early in 2014 only to wane from March to August and now seemingly set to rise again. The latest figures show that China has purchased 68 tons in a period of just two weeks, a sign that suggests that Chinese demand is soaring and there can be no doubt that, at present, India and China are buying gold at a rate sufficient to absorb most of the available supply of physical gold in the market. Considering that they are not the only countries buying, the real puzzle remains why gold prices are dropping in the international market. Surely, the time has come for gold to resume an upwards path

Sanctions against Russia ignore the real politik of the markets

putinThe crisis in Ukraine, which started around last November, has intensified and exacerbated tensions between Russia and NATO to a degree unknown since the pre-Gorbachev Soviet Union.On September 30, The European Union decided to renew and add new sanctions against Russia, claiming that the peace plan in Ukraine has not yet been respected. Brussels had hinted that it would consider revoking the sanctions had there been progress by September 30 toward a ceasefire. The EU will continue to “closely monitor developments on the ground,” but failed to issue another deadline. Should the EU consider the ‘situation on the ground’ to have stabilized, it will consider amending or revoking the sanctions, in whole or in part. The EU, in effect, is looking for any possible excuse to scrap the sanctions as even the most critical EU member states were reluctant to enforce sanctions while others continue to demand a softer approach toward Moscow.

Russia, meanwhile, has taken the first steps to comply with the EU demands, agreeing to a ceasefire with Ukraine, even as it has enforced its own, ongoing, retaliatory embargo against a number of European agriculture-food sector products. The ceasefire is holding tenuously but there is great uncertainty and fear because Ukraine aspires to join NATO and the European Union within the next six years. There is very little chance Russia would allow this to happen without its own retaliation, especially about the issue of NATO membership. The Russian Foreign Ministry has been controversially referring to Ukraine’s ‘restive east’ as Novorossiya, the territory that once consisted of what in today’s terms would be Odessa, Mykolaiv, Kirovograd, Dnepropetrovsk, Kherson, Zaporizhya, Donetsk, and Luhansk.

The EU’s sanctions Russia concern companies operating in the energy, finance and defense sectors, including the oil giant Rosneft and the weapons manufacturer Kalashnikov. The EU has also imposed assets freeze and a ban on granting visas to travel to a number of officials and business personalities considered to have close ties to President Vladimir Putin and pro-Russian rebels in eastern Ukraine and in Crimea, annexed to Russia. NATO military command said that while the first phase of the ceasefire saw a significant withdrawal of Russian forces in Ukraine, there are still hundreds of troops, including special forces, in Ukraine. The conflict between pro-Russia rebels and Kiev’s own troops has now claimed more than 3,000 lives.

The crisis worsened last July 18, when (still unconfirmed) pro-Russia rebels accidentally shot down a Malaysian Airlines Boeing 777 airliner, (Flight MH-17) sparking a slew of allegations against Russia and its reckless arming of the rebels. Evidence suggesting that the rebels had Russian ‘Buk’ surface to air missiles, which were deployed against Ukrainian fighter jets and helicopters, amounted to a “massive escalation” of the crisis said Jonathan Eyal, director of the UK’s Royal United Services Institute. It should be noted that while Flight MH-17 served as the premise to bolster Western resolve against Putin, the Ukrainian government holds the actual technical fault because it failed to shut down its airspace at a time of aerial warfare. In fact, the families of that flight’s German victims plan to sue the government of Ukraine, rather than Russia’s, in accordance with that failure.

The international response was to boost sanctions against Russia that had been rather tepid until that point. However, the US State Department, and the neo-conservatives that still have influence there, primarily one Ms. Victoria Nuland, the US Assistant Secretary of State in charge of Europe and Eurasian Affairs, played a rather important role in fomenting the crisis. Nuland was secretly filmed as she addressed Ukrainian business and political leaders at a Washington meeting that the United States had spent “USD$ 5 billion to develop Ukrainian Democratic Institutions”. Nuland was evidently rather involved, then also in the successful coup (and it was a coup, regardless of one’s feelings about the previous Ukrainian leadership) against the democratically elected, but pro-Russian President Viktor Yanukovych. Indeed, the situation in Ukraine is not at all as clear as the Western media and diplomacy hawks have presented it; that is, one where Russia is bullying a ‘democratic’ neighbor, trying to improve its fortune by looking toward alliances with the ‘West’ rather than staying ‘East’. Many commentators have ignored the huge role played by the United States and its allies in prompting the Ukrainian crisis in the first place, ignoring, in the process, the very real risk of it escalating into a more wide reaching war.

The crisis has actually been rather less about Russian aggression in Ukraine than a Western attempt to lure Ukraine into NATO and the European Union, while weakening the political future of Russia’s President Putin. Victoria Nuland’s previously mentioned meeting proves that Washington invested many US tax payers’ dollars to finance Kiev’s Maidan public protests and the coup against President Yanukovych, who had been democratically elected. Russia sees NATO’s creeping into Eastern Europe as a challenge to Russia, which had been assured of its continued influence – free of NATO troops – in a formal agreement signed by Presidents Mikhail Gorbachev and the George H. Bush at the time of German reunification in 1990. NATO, meanwhile, has announced it will build five new bases in Eastern Europe last August. This cannot but deepen tensions between the Kremlin and the West. Meanwhile, Ukraine has gained nothing since its new ‘democracy’ started. Kiev needed, says the IMF, some USD$ 35 billion in aid last May; the IMF has revised that amount to USD$ 55 billion, while economist Desmond Lachman says it now needs “closer to USD$ 100 billion”. Moscow has not done so, but it could shut off supplies of its gas to Ukraine as winter approaches. The fact is that the most democratic solution would be to allow a referendum in the pro-Russian Ukrainian provinces to vote whether to stay in Ukraine or join Russia.

Many of the opinions heard so far, enforced by sanctions and materialized through the deceptive use of campaigns costing billions of dollars, have come from people living far beyond the borders of Russia or Ukraine. Meanwhile the sanctions continue; are they effective? The last package of sanctions Treasury USA and the EU takes aim at Russian banks, the energy industry and the military. Sberbank, the largest bank in Russia, will not have to Western long-term capital (that is any loan lasting over 30 days). The USA and the EU want to cease the development of exploration projects in Siberia and the Russian Arctic, preventing the West’s oil majors from selling equipment and technology for deepwater shale gas projects. Exxon and Shell, therefore, can no longer do business – building pipelines for instance – with such energy sector giants as Gazprom, Gazprom Neft, Lukoil, Rosneft and Surgutneftegaz.

The United States Secretary of the Treasury, David Cohen, has insisted that the sanctions package “isolate” Russia further from the global financial system. Interestingly, nationalist Russian shareholders have seen to it that the shares of the companies on the list of sanctions go up rather than down while the shares of the oil majors in the United States have gone down!  Oh, and because Russia has been isolated from Western capital, Russia will simply not be importing goods and services both from the USA and the EU – finding alternatives through its BRICS (Brazil Russia, India, China, South Africa) partners and beyond. Moscow is simply dealing in local currencies with its other business partners and this could hurt the West and its currencies in the long term, because other developing countries might start to do the same.


Russia may sell its energy resource in any currency except USD and EUR while importing clothes, technology, hi-tech electronics, computers, agricultural goods and raw materials it needs from Asia and South America. There are serious doubts, moreover, as to how long the EU member states, in absence of a shared energy policy, will last without Russian gas even if they manage to secure alternative supplies from other countries (Azerbaijan, Qatar, Libya?). The West is still banned by another set of, rather counterproductive, sanctions against Iran, which means that it cannot import oil or gas from there to meet the Russian shortfall. The markets are less ‘irrational’ than they are motivated by profit and profit is based in reality. The current intentional politics practiced by the West against Russia express very little ‘reality ‘and much ideology. Russia has a huge surplus of foreign capital – and can protect itself from the economic storm. The EU is still in austerity mode and failing to recover; even Germany, the Union’s strongest economy, is hurting with recent growth rates noted at -0.2%. Markets respond to realpolitik and the economic wars launched by Washington and Brussels against Moscow will hurt the markets of the former rather than the latter.

Gold price catalyst for ‘mysterious stock performance’

Carlisle Goldfields Limited (‘Carlisle’, TSX: CGJ | OTCQX: CGJCF) says that it has no material explanation to account for the recent drop in its share price. On September 9, Carlisle stock reached a yearly low of CAD$ 0.03/share only to rebound to CAD$ 0.04/share on Wednesday and holding on to that level today, September 11.

Carlisle completed a preliminary economic assessment (PEA) for the Farley Lake Project on April 15, showing intersections of 20.3g/t gold at over 6.0m of depth, which is higher than expected. The PEA covers two of the five deposits being explored by Carlisle and it suggests the project will be characterized by very favorable economics including a 34% internal rate of return and a very significant asset value of about CAD$ 250 million. Moreover, the mine itself has the potential to produce 145,000 ounces per year at an average grade of 2.2 grams, which makes it one of the highest grade open pit deposits in North America. Carlisle has even a conservative economic model for the PEA, assuming a gold price of USD$ 1,100/ounce rather than the current USD$ 1,300/ounce level. Surprisingly, even at that discounted price of USD$ 1,100/oz, Carlisle would still get a 34% internal rate of return. These are excellent economics, which add to the mysterious stock performance of the past few days. The mystery appears less daunting when Carlisle’s performance is set against the competing forces that have been affecting the price of gold over the past few weeks.

Gold prices have dropped to yearly lows, hovering around the USD$ 1,280/oz. mark. The market appears to be acting counter-intuitively; the summer of 2014 has been characterized by at least three major geopolitical crises: Ukraine, Islamic State (ISIS) and the war in Gaza. Indeed, the crises and the Russian switch away from US bonds to gold ingots (some USD$ 400 million of them in August alone) to retaliate against western sanctions should, and have, supported gold prices. Gold has proven its characteristic as a safe haven, in a context of geopolitical crises; however, gold has also been confronted with pressure from improving economic conditions in the United States, the all-time record highs of the S & P 500. Meanwhile, the good news from the US has come just as geopolitical tensions have started to ease, thanks to the recent truce between Russia and Ukraine, on the one hand, and between Israel and Hamas on the other. The markets have reacted generally favorably to President Obama’s speech on September 10 outlining his government’s strategy to confront the threat from ISIS. This has had the effect – temporary as it may be – of diminishing that threat and the markets need few excuses these days, it seems, to rally. In addition, this optimism has also focused investors’ attention to the increasing strength of the dollar.

All eyes are on the outlook for monetary policy of the United States, since October marks the end of quantitative easing (QE) and is expected to prompt the Federal Reserve to raise interest rates in the first half of 2015. These factors have definitely halted the rise of gold prices – for the time being. The economic improvements from the US have gained momentum such that even the European Central Bank’s decision to inject more liquidity into the financial system, cutting interest rates by 10 basis points, while launching its program to purchase Asset-backed securities (ABS) could not boost the gold price. This is because the ECB’s actions have actually pushed the dollar to the highest level of the past 15 months, making gold – denominated in dollars – more expensive for investors who operate in currencies other than the dollar. Accordingly, this has made gold more expensive for Russia and China, which have been among the biggest gold buyers for geopolitical reasons – of the past summer. Therefore, traders see no compelling reasons to keep gold in their portfolios in the short term and prices appear to have found a base at USD 1,250 USD/oz or so. Nevertheless, the market highs are temporary. Geopolitical tensions are bound to increase again.

There is nothing resolved between Russia and Ukraine and new sanctions came into effect today against Russia, which has not shown any signs of relinquishing its authority over Crimea or what it sees as the pursuit of vital national interests in eastern Ukraine. The US strategy against ISIS and the related international efforts will be pointless without direct ground intervention and it is unclear how the markets will evaluate a ‘return to Iraq’, given all the risks this implies. There is also little permanent about the ceasefire in Gaza. The conditions leading to the war have not changed and a conflict could re-ignite at any time. Therefore, the chances for a gold rebound remain very high. Meanwhile, the World Gold Council (WGC) predicts that physical demand for gold (jewelry, coins and ingots, industrial uses) in China is expected to reach at least 1350 tons at the end of 2017 or some 20% higher than the record level of consumption in 2013. The WGC used fairly conservative economic assumptions (average growth rate of 6% over the 2014-2017 period), which means that Chinese gold demand could increase in larger proportions.

Signs of US recovery while Ukrainian crisis puts pressure on Europe’s economy

russiaThe financial crisis of 2008 led to a ‘Great Recession’ and a sovereign debt crisis in Europe, the consequences of which continue to be felt thanks, also, to the geopolitical fallout from Ukraine, Gaza and the Middle East – not to mention the tensions in East Asia between China and most of its neighbors. The West and NATO are pondering the adoption of tougher sanctions against Russia amid plans to run intensive military exercises that have clearly been announced with President Putin in mind. Most EU countries would rather avoid enforcing sanctions against Russia, which supplies much of the Union’s energy along with several billion dollars of capital to its banks while serving as a key market for western luxury, agriculture and technology goods. As the summer of 2014 comes to a close, the European economy has yet to find respite while the United States, China and Japan have shown signs of health. Tensions abound and they come from all directions, generating a fog that makes it difficult to understand exactly what role the various individual factors, whether structural, political, economic, financial or military are having on the much awaited and often prematurely announced recovery.

The American economy improved in the second quarter, with GDP rising up 4.2% according to the Department of Commerce. The growth contrasts with the slowdown in the first quarter when the economy had contracted by 2.1%. The growth rate in the second quarter may temporarily lift fears of a slowdown or a recession in the American economy after the slowdown of the first quarter, which was such that the average growth rate for the first half of the year is actually lackluster at 1.05%. The confidence of European, and other, observers cannot be very high, considering look that the United States is still the biggest economy in the world and – despite the fact that China is catching up quickly – still the beacon that sets the direction of the international cycle. The USA is still the largest market in the world, absorbing exports from all over the world. There is also a psychological factor such that the world looks to ‘America’ for hope or perhaps at least some comfort that ‘things will improve’. Indeed, this faith in America is not all misplaced.

The United States was surely hit by a hard recession sparked by debt and unscrupulous banking practices. The solution was to cut debt by promoting more savings, leading to lower consumption, which had the effect of slowing down the economy, given that the ‘austerity’ measures were practiced on a wide scale. Now, economists have suggested that American household budgets have improved and that their debt levels are more manageable even as housing values are recovering. In other words all the elements exist to warrant a healthy growth rate fueled by increased consumption and confidence. If the growth rate average for 2014 fails to inspire, despite some bursts of enthusiasm such as has occurred for the second quarter, it is because the improvements so far have mainly been registered at the individual family level. The extent of the 2008 crisis was such that it forced the State to intervene more directly in the American economy; public sector spending for the past six years has been unprecedented to compensate for the vastly reduced private sector spending. The public sector’s coffers were stretched to the limit, hampering its continued ability to compensate for the absentee private sector.

Now, there is actual room for optimism. Household accounts, including public accounts in the United States have improved and even the federal deficit stands at 2.9% of gross domestic product while it had been as high as 10.8 percent at the peak of the crisis in 2009. So, the United States continue to be alive, and all the more so because technical progress never left; innovation at all levels of industry continued and even capital at the corporate level flowed much more freely than in many parts of Europe. This is the kind of optimism reflected by the record highs of the NY stock exchange, which have kept commodities low, even managing to absorb the heavy geopolitical risk that was supposed to have driven gold prices to new records. Indeed, China, whose slowdown from an average GDP growth rate of around 10% to one closer to 7% was supposed to have had dire consequences, has failed to materialize into a crisis. China certainly has some risks, but these are far more related to the population’s rising demand for civil liberties, of which the right to a cleaner environment is essential. Then, there is Japan, whose economic situation is similar to that in much of the European Union, the much acclaimed ‘abenomics’ ( a package of fiscal reforms and stimulus measures) reforms launched by Prime Minister Shinzo Abe to promote growth have started to choke after an initial sense of success in 2013.

The Tokyo stock exchange has been growing as has GDP but the improvements have come largely as the result of monetary policies favoring inflation (printing more money) and cash stimulus. Structural reform remains an elusive target. Only structural reform can achieve the desired effect of long term growth. Europe continues to loiter in recessionary territory, albeit there is great discrepancy among individual members. The explanation is more geopolitical than economic as any indicators of confidence are waning even in the economic powerhouse of Germany, which stands to lose or gain the most from its proximity to Ukraine. If Germany sneezes, the rest of Europe catches a cold and its economy is suffering the repercussions of tensions even though the actual growth factors remain intact. The policy of military encirclement against Russia, backed by Washington and blindly accepted – if not convincingly absorbed – by European governments, have led to a crisis of trade relations with Moscow, for which Europe’s productive apparatus has paid a great price, especially Germany, which is in turn the EU’s economic locomotive. NATO is planning to increase the effectiveness and visibility of its forces in Eastern Europe in a Cold War like scenario to scare Moscow into reducing its involvement in the Ukrainian civil war.

This does not mean that The United States, Germany and other allies, have plans to increase the number of its troops in the region, which would vastly increase tensions with Moscow. They merely intend to show “unity and readiness” to respond to events in Ukraine. For now, NATO merely wants to make it clear to Moscow that it is ready to send more troops in its bases in Eastern Europe if necessary through a “rapid deployment force”, through the enhancement of existing bases, logistics, supplies and infrastructure. It is doubtful that President Putin will feel any urge to reverse his strategy in Ukraine. However, Britain and six other states have announced they intention to create a multilateral force with at least 10,000 troops to respond to Russia in Ukraine according to the Financial Times. The official announcement is expected to be issued later this week at the NATO summit. The countries currently involved in the force, which will include naval units and ground troops, are Denmark, Latvia, Estonia, Lithuania, Norway and the Netherlands. Meanwhile, the Kremlin continues to deny any involvement, even though rumors abound that Russian speaking separatists in Ukraine are preparing to attack two key areas of Maryupol and Volnovakha in order to open a corridor between Donetsk until the Crimea. Should this be the case, NATO has stacked the deck too high in order to back down from taking more significant punitive actions with Moscow. This will only raise tensions in Europe, putting pressure on growth.

Canada’s anti-Russian rhetoric counterintuitive for US approval of Keystone XL pipeline

Stephen-HarperWhat do climate change, US President Obama, Canadian Prime Minister Harper, Russian President Vladimir Putin and the Russia-Ukraine crisis have in common? Not much at first glance. Barack Obama is far more charming than Harper and Putin could run rings around them in a chess match (geopolitical and the actual game) all the while emitting less carbon dioxide. No, the answer may lie somewhere between Alberta and Texas, in argument to approve or cancel the proposed Keystone XL pipeline (‘the Keystone’). The pipeline should extend almost 2,700 km Keystone XL from Hardisty, Alberta proposed by the TransCanada Company to deliver synthetic oil and diluted bitumen from the oil sands of Athabasca, in the northeast of the Alberta to multiple destinations in the United States, including refineries in Illinois and to Cushing, Oklahoma. The decision on Keystone ultimately rests on President Obama, who said he would approve the project only if it does not significantly increase emissions of greenhouse gas emissions. The pipeline has received full support from the Canadian government but it has been the subject of intense debate in the United States.

President Obama has been under pressure from many of his voters and fellow Democrats to block the Keystone in the name of climate change prevention. Conservatives have urged for it to be completed. On Monday, ahead of a crucial week in international geopolitics as NATO and G7 leaders gather in Europe, which promises to focus on Russia and the Ukrainian crisis. Climate change and Russia have given politicians of all political convictions much political ammunition to rouse their respective constituents. Obama has fired the first round of heavy artillery; on Monday, he unveiled Monday an outline of a bold plan to reduce greenhouse gas emissions in the United States. The U.S. ambassador in Ottawa promptly urged Canada to do the same.

Obama’s new strategy is targeted towards “a low carbon future, with choices of alternative energy, with greater energy efficiency, and sustainable exploitation of our oil and gas”.  The US ambassador to Ottawa encouraged Canada to join the United States in the fight against climate change: “The abundance of energy found in North America should not distract us from the need to improve our energy efficiency and our fight against climate change. This is not a task we can undertake individually “.  Obama’s new climate change initiative plans to:

  • Reduce 30% of carbon emissions from U.S. power plants by 2015 compared to 2005.
  • Encourage more insistently other countries to take action in the fight against climate change in the context of negotiations on a new international treaty must resume next year.

This is much easier said than done of course. As much as Obama wants to lecture Canadians about CO2 emissions, there is a huge gap between the USA and Canada. Americans consume a lot of coal, much more than Canada and coal is the most polluting energy source; it accounts for close to 40% of all electricity generation in the United States. In Canada coal only supplies 8% of energy. Environmentalists, however, say that the U.S. is currently on track to achieve their goal of reducing emissions by 2020 (even if these will still not be as low as those in Canada), accusing Canada of not working toward achieving its planned greenhouse gas emissions, especially as far as the sands in Alberta are concerned.  This extraction, say some environmentalists, is Canada’s largest source of greenhouse gas emissions.

PM Stephen Harper had written to President Barack Obama in May to propose to collaborate more closely on the regulations governing GHG emissions in an attempt to obtain the approval of the controversial Keystone XL pipeline project – the very same project under threat now by Obama’s new ‘green’ revelation. Harper reportedly offered the White House to establish common standards for the emissions of greenhouse gas (GHG) emissions in North America. Enter Ukraine and Russia:

Stephen Harper believes that Moscow poses a huge threat to world peace since it seized the Ukrainian Crimean peninsula and as pro-Russian unrest persists in eastern Ukraine. Prime Minister Harper stated that this would result in sanctions against the government of President Vladimir Putin. Harper has been the most adamant supporter of sanctions against Putin; indeed, Harper has appeared seemingly completely unaware of Russian and Ukrainian history, its complexity and intricacy, choosing to pose as ‘grand strategist’. Is he is very narcissistic, an ignoramus or could he have another plan in mind? The strident anti-Russia rhetoric suggests that he predicts that an anti-Russia policy may bring benefits to Canada; indeed, the logic may well be related to the Keystone XL Pipeline.

The Harper strategy may be to promote approval of Keystone Xl weaken Putin’s resolve over Ukraine, adding for good measure the expansion of the natural gas industry in the USA leveraging on Putin’s threats to cut off gas (LNG) delivery to Ukraine – and possibly Europe, raising natural gas prices worldwide. Of course, while desirable, pushing for an increase of LNG in the United States, would do very little to stop the crisis in Ukraine. The US could supply some oil but no gas to East European nations and undermine Putin. Of course, Harper’s strategy has much more effect in rhetoric than reality. He wants to present the Canadian government and himself as morally superior and bolder than his G7 and NATO counterparts: the brave face of the West challenging Russian aggression. In fact, Harper has made a mockery of diplomacy and reduced Canada’s diplomatic influence, even with the United States.

Barack Obama may well interpret Harper’s anti-Russian barking as unconstructive in the bigger picture and even as a nuisance. This means Harper may have all but lost any diplomatic currency to push Keystone XL ahead. It would have been a better strategy for Harper and his lap dog minister of foreign affairs Baird to play Canada’s traditional diplomatic role and possibly bring Obama and Putin closer rather than further apart. Europe is where the oil and gas supply calculations are being made. The argument of increasing US oil exports – which in theory could help reduce the USD$ 100/barrel oil price on which Russia relies for its budget – will not work in the short term and it fails to take into account the other geopolitical factors that are contributing to sustaining high oil prices. Finally, US oil output and reserves (said to be growing 15% per year) has increased to such an extent in the past two years that US politicians and environmentalists will not have to face a sleepless night after they put the Keystone XL to rest. And that was the calculus that Obama used to unveil his Green strategy, which will bring more political gains than losses, regardless of how loud Harper cries wolf.