Gold, Gas And Guns

“It’s time for Europe to start thinking about winter gas supplies,” Russia’s Alexander Novak said, addressing the State Duma on Wednesday.

Make no mistake, Europe is thinking about gas supplies. Just not the way Novak meant. In remarks to German lawmakers, Olaf Scholz said the country’s dependence on oil, coal and gas from Russia “will end.” As for the time table, Scholz was blunt: “As quickly as possible.”

Germany is in talks with Qatar already, and Scholz on Wednesday said the three parties in Germany’s ruling coalition are set to “significantly top up” assistance to households amid the energy crisis. Heating subsidies will double, for example.

The US and Europe were set to dial up sanctions on Russia during a whirlwind of international summits. The Biden administration is readying measures targeting hundreds of Russian Parliament members. More than 300 lawmakers will be sanctioned, US officials told The Wall Street Journal, which reviewed internal documents ahead of meetings in Brussels, where Biden is coordinating next steps with EU and NATO officials.

“The sanctions are working,” Scholz told the Bundestag, describing the draconian steps adopted by the US, the UK, the EU and their allies as “only the beginning.” “We’re continuously sharpening the sanctions further,” he added.

In Washington, US lawmakers are working with Janet Yellen on a plan to effectively freeze Russia’s gold. If you thought Moscow’s bullion was beyond the reach of the US Treasury, you were wrong. No, the US can’t physically seize it all (well, we could, but that would entail a more “invasive” operation). However, Yellen can make it more difficult for the Kremlin to use it.

Axios, which originally reported the bipartisan effort to “lock down” Russia’s $130 billion in gold reserves (figure above), revealed Yellen’s involvement late Tuesday.

“The legislation would apply secondary sanctions to any American entities knowingly transacting with, or transporting, gold from Russia’s central bank holdings,” Sophia Cal wrote. “They’d also face sanctions if they sell gold physically or electronically in Russia.” In remarks to Axios, Angus King said simply, “gold is a fourth of their reserves, and we don’t want them to be able to monetize the gold.”

Even if Congress doesn’t move ahead on the bill, Biden could implement a version of it himself. Although Russia’s gold is technically already covered in existing sanctions, the new measures would go further by attempting to trace bullion that’s been moved or named to another person or entity. It’s steps like those that’ll make it very difficult for Moscow to work through a non-sanctioned central bank to repo their gold for hard currency. Entering into such a deal with Moscow would effectively make the counterparty directly complicit in a scheme to circumvent US sanctions. No central bank will be excited about taking on that risk, especially considering that unless you’re China and you have the need and financial resources to secure massive amounts of deeply-discounted commodities, there’s no incentive to engage in such activity, and every incentive not to.

Speaking of deeply-discounted commodities, Lukoil’s trading arm offered Urals at a -$31.35 discount to Dated Brent in a pricing window organized by Platts. That was a new wide. S&P said “several” Chinese state-owned refiners are back in the Russian spot market, lured by the unprecedented discounts. “The price is quite low,” one source remarked. Another, from PetroChina, noted that “one of the current problems is fixing a ship to carry Russian barrels as not many shipowners are willing to take the risk.”

As for what else the US and Europe can actually do, short of channeling W. and instructing Putin to leave Ukraine or face “military conflict, commenced at a time of our choosing,” options are theoretically limited.

“NATO has already pushed the limits of economic sanctions imposed by European countries, which are dependent on Russian energy and the alliance has largely exhausted most of its military options,” The New York Times wrote, adding that Biden and his counterparts now have “a relatively short list of announcements they can deliver on Thursday after three back-to-back, closed-door meetings.”

Ultimately, the West can wait Putin out, though, even if beleaguered Ukrainians can’t. The Russian economy is going to collapse, it’s just a matter of whether it happens rapidly or in “slow-motion-train-wreck” fashion. Annual inflation was in excess of 12.5% as of March 11, up more than two full percentage points from the prior week.

Do note: It’s not just the FX pass-through. That’ll probably fade. “The main risk now is the emergence of a shortage of basic imported everyday goods,” one expert in Moscow told Bloomberg, noting that “many are no longer available in stores, and prices in online stores have risen sharply.”

It doesn’t even make sense to track the resumption of trading in Russian securities. Earlier this week, for example, yields on ruble debt jumped 250bps. In one day.

As one Moscow-based PM gently noted, it’d be far worse “if there was still a free market.”

As he put it, speaking to Bloomberg’s Lilian Karunungan and Ruth Carson, “the limits on capital flows and currency operations mean you can come up with any exchange rate, key rate or OFZ yield you like.”

Speak your mind

This site uses Akismet to reduce spam. Learn how your comment data is processed.

6 thoughts on “Gold, Gas And Guns

  1. Long term, I see a lot of positives from the current Russian disaster. Hopefully, the disaster part ends sooner rather than later.
    I will only list my top 3 positives, but before I do, I like to remind myself that only 1 in 8 people on planet Earth live in a somewhat democratic, rules based, property rights, less corrupt system.
    The remaining 7 out of 8 people live under autocratic rule with significant corruption, which is not rules- based and property can be taken at the whim of the dictatorship. This group also does not have full access to the worldwide web.
    However, the global GDP is split, roughly 50/50 between those 2 groups.

    Number1- I am thrilled for our future because the 1/8 group is drawing a line in the sand regarding what behavior the 1/8 will tolerate from the dictators who rule the remaining 7/8. Great news- after all, as recently as 2021, Janet was arranging for $17B of IMF reserves to be given to Russia. Now- the dictators of the 7/8 either fear or should fear Janet (H- not the ‘Janet’ from Rocky Horror Picture Show). Putin poked her a little too hard and she is full of rage. No one wants to be opposite an angry, competent female! And I am female- so I can say that.

    Number 2- energy independence will solve so many problems and, as I have previously posted, I am a believer in SMR’s (small, modular fission reactors). The US government should be printing money to fund private/public research and planning a non-fossil fuel based future. I am more hopeful than ever that this could be a priority for our future. Once that is in place- global peace, global warming, overpopulation etc. will be much easier to achieve or rectify.

    Third, can the US please take several million Ukrainians for our country? We have jobs to fill and we need to grow our domestic economy. I find it uplifting to see how Europe is working together against Putin. Europe can not deal, alone, with the largest immigration inflow since WW2- let’s help!

    1. I agree with you on all counts, EN. Excellent points. All of your suggestions are useful from the US perspective. And it’s true that a line drawn between the 1/8th and the 7/8ths is an opportunity.

      I would say Putin’s actions already imply a line drawn at the borders of the 7/8 countries that abide in forms of autocracy and corruption. But as a country we communicate best by our actions. And the line drawn between “us” and “them” does not ostracize them but clarifies the meaning of the choices those countries offer to their people and how they govern.

      I also feel that the geopolitical circumstances today underscore the need for innovation in power production. I also am a strong believer in small modular fission reactors. Rolls-Royce has developed a dandy version that is in production and available. The Chinese are building thorium molten salt reactors, which do not use water for cooling and cannot melt down. The needs are clear, and the means exist to address them. What better time than now to act?

      And the idea of taking in Ukrainian refugees is excellent. In Chicago we have a substantial area of the city called the Ukrainian Village. Chicago would certainly be ready to support an influx here. But to your point, the broader US could certainly use educated Ukrainians in our economy. The fact is that with each passing year, our ability to support our economy diminishes with the rising average age of our population. By all means, they should come to the United States!

    2. If the goal is to get more immigrants, limiting ourselves to Ukranians is unnecessarily narrow. Let the eager economic migrants and refugees (Syrian, Salvadorian, Russian, Chinese, Indian, Georgian, Venezuelan, etc.) apply online! A civics and language test plus a post-graduate degree from some internationally accredited university in a STEM field should be enough to skip to the front of the line.

      And no, I’m sorry, just because you’re a woman you don’t get carte blanche to be spreading stereotypes. Putin is screwed because Yellen is astonishingly competent, regardless of her gender, creed, national origin, or skin color.

      1. Manuel,
        I agree with everything in your first paragraph.

        I, personally, am drawn to and find (often dark) humor in the space between how the world actually works and how people say they want it to work.
        A prime example is that women, on average, only earn 85% of what men earn for the same job. This does not mean that I think women should only earn 85%. What I find humorous is how many political leaders speak to the equality of women…but allow the rules to exist such that they are only paid at 85 cents on the dollar.
        I did not mean to offend with my strange sense of humor.

  2. Studying and understanding Geopolitics is like playing chess. Hard to not think about it, once you are hooked.

    China is way ahead of the rest of the world in pursuing nuclear. North Korea is going to be in serious trouble when China starts reducing their orders for coal from North Korea. About 70% of North Korea’s exports go to China- and a large chunk of their exports is coal.

    Major changes happening and will continue in my lifetime.
    Change is the baseline- not the status quo.

    1. I like to keep an eye on US politics and global politics because all of it can impact the investment environment. And I reckon there will be some long-lasting economic and political rebalancing and changes for the entire world, due to the Russian debacle in Ukraine. For instance, some writers are saying the Chinese may wish to use Vlad’s invasion of Ukraine as a model for taking advantage of smaller states in Asia – not just Taiwan – to counter the power of the North America and NATO.

      But that particular idea seems silly. I give the Chinese more credit. They tend to be better informed and not so adventurous.

      As we were discussing earlier, it would make a lot of sense that western countries focus more on practical solutions to climate change. Oddly, because we’re a democracy and tend to over-deliberate on important and fundamental changes, we may experience an unexpected benefit from the embargo on Russian oil and gas in the longer term because it compels us to decide more quickly about how to address the challenge. Indeed, we have practical options for addressing climate change. And I hope the misguided actions of Russia’s fearless leader, and their terrible effects, push us to dive more deeply into the growing list of options for addressing climate change.

NEWSROOM crewneck & prints