Posts Tagged ‘Russia’

New urgency for action against Iran

Wednesday, October 7th, 2009

Two years ago, we mulled over the possibility of an Israeli strike on Iran. Back then, even though it was already strongly suspected that Iran had the intention to build nuclear weapons, a working bomb was still years away.

Just a few days ago, there were a couple of developments (that we learned from that will bring in a new urgency for action. Over the weekend, there were two leaks:

  1. The New York Times reported that an unreleased report from the International Atomic Energy Agency (IAEA) discovered that Iran is closer to building nuclear weapons than previously thought.
  2. The Sunday Times reported that the purpose of Israeli Prime Minister Benjamin Natanyahu’s secret visit to Moscow in early September was to provide the Russians with a list of Russian scientists and engineers working on Iran’s nuclear program.

These two leaks were significant developments:

  1. Many initially believed that Iran is still far away from a working nuclear weapon. This leak busted that wrong belief.
  2. It’s thanks to the Russians that development (1) happened.

Now, there’s a renewed urgency to the threat of Iran’s nuclear ambition, especially from the perspective of Israel, who is facing an existential threat from Iran.

Assuming that these leaks were true, coordinated and planned, it can be interpreted to send a message to the Russians and the Iranians. To understand why, consider why would the Israelis gave the Russians a list of their scientists and engineer currently in the Iranian nuclear program? Surely, the Russians do not need that list because they should know where their personnel are and what they were doing (given their highly competent intelligence service). By giving the Russians a list of names that they already knew, the Israelis essentially blew the cover of their intelligence operation. The only explanation of the Israelis’ action is that they already knew what they needed to know and the point of that list was intended to surprise the Russians of the extent of the Israeli intelligence. The message to the Iranians is that their deception of the extent of their nuclear program was penetrated and that they faced military actions soon.

With the Iranians getting the signal that they are facing war and the Russians put on notice that their relations with Europe and the US can potentially descend into a crisis, there are two possible outcome:

  1. Russians pull their scientists and engineers out of Iran and join in sanctions against Iran, which will force the Iranians to abandon their nuclear program.
  2. Russians will play dumb and continue goading the West, which will invite war.

Assuming that the leaks were intended by the US/Israel, then it means they are throwing the ball into the court of the Russians.

Should war break out, it is likely that oil and gold prices will surge while stock prices will tumble. Perhaps even US Treasury bond prices will rise too.

Fighting for resources in the Caucasus

Thursday, August 14th, 2008

As we know, on the day of the Beijing Olympics 2008 opening ceremony, a war was brewing between Georgia and Russia. We do not know what the quarrel between Georgia, Russia and the disputed provinces of South Ossetia and Abkhazia was all about. Claims of genocide by Georgia on South Ossetia were made by the Russia, while Georgia claimed that Russia was trying to bully its tiny neighbour. Who is in the right?

We do not know.

But as we said before in Are we in a long-term inflationary environment?,

The implication is extremely unpalatable: some nations will have to rise at the expense of the others, which may result in armed conflicts (touch wood, heaven forbid!).

We believe the conflict was at the root about jostling and pushing for the influence and control of natural resources. Russia is an energy rich nation- much of Europe is dependent on Russia for its gas supplies. It also has abundant reserves of oil too. And disturbingly, Russia has shown to have no qualms in using energy to bully its neighbours and settle disputes.

In terms of natural resources, the Caucasus is a very strategic region. As this map in the Wikipedia shows,

Detailed map of the Caucasus region (1994), including locations of economicaly important energy and mineral resources: South Ossetia has reserves of lead and zinc, Abkhazia has coal, and Georgia has oil, gold, copper, manganese, and coal.

In terms of oil, this article from The Age explains,

While Georgia does not produce oil itself, US and European energy firms have counted on the pro-Western country – sandwiched between Russia and Iran further south – to host a conduit for oil and gas exports from Azerbaijan.

Since President Mikheil Saakashvili took power in 2004 two new pipes have been built, and the explosion of violence between Georgia and huge northern neighbour is threatening those, notably the Baku-Tbilisi-Ceyhan (BTC) pipeline.

Transporting oil through the Caucasus is designed to make the West less dependent on supplies from Russia, which has shown worrying willingness to close the taps in disputes with other ex-Soviet states in recent years.

Make no mistake about this: in the years to come, countries that own and control energy reserves (and natural resources in general) will be the ones calling the shots. As we said before in The Problem that can throw us back into the age of horse-drawn carriages,

… supplying environmentally sustainable energy indefinitely at a rate fast enough is a colossal global problem that must be solved. If not, the latter generations will not live better than the current generation.

Many of the oil fields located in US-friendly oil producing nations are in decline. The implication is that as the years goes by, more and more of the world’s energy are produced in nations that are not so receptive to the US and its Western allies.

It is no coincidence that we are seeing conflicts in such regions of the world.

Example of a secular trend- commodities and the upcoming rise of a potential superpower

Wednesday, March 19th, 2008

In the 19th century, Great Britain was the superpower of the day. She was an empire with colonies, commercial interests and trading posts all over the world. Her navy was unrivalled, patrolling the world’s seas. Her currency, the Pound Sterling, was much of the world’s primary reserve currency during the 18th and 19th century.

The 20th century saw the secular decline of the British Empire. Two world wars and economic weakness resulted in the Pound Sterling losing the reserve currency status. At the same time, the 20th century saw the secular rise of the United States into an arguably, empire.

It has been said that today’s 21st century will see the secular rise of China. During the 20th century, China endured non-stop revolutions, civil wars, invasions, social upheavals, ideological experiments (e.g. Cultural Revolution, Great Leap Forward). It was the last couple of decades of the 20th century that China began to slowly emerge from her self-imposed shackles to catch up with the West. Napoleon once said that China is a sleeping giant that will shake the world when awaken. Today, despite the breakneck growth of the Chinese economy, China still have a lot of catching up to do in order to attain the same level of affluence, standard of living as the West- there are still hundreds of millions of peasants in China that is still relatively poor by Western standards.

Now, take a look at the United States today. With only a few hundred million people, the US consumes more oil than any other country in the world. China, with four times the population of the US, still does not consume as much natural resources as the US. What if China is to attain the same level of affluence and standard of living as the US? Imagine the amount of natural resources that will be consumed! We are not even sure whether the earth has enough resources to accommodate a nation that is equivalent to four United States in terms of population.

At this point, we still have not yet included Russia, Eastern Europe and India into the picture. Assuming that all these nations are to rise towards the level of the West as China is doing right now, imagine the strain their demands will be imposed on Mother Earth!

It has been said that demand for commodities follow a cyclical pattern. During recessions, the demand for commodities decline and during booms, demand rises. For example, copper is nicknamed the metal with ‘PhD in economics.’ The demand for copper is said to follow the business cycle.

Then there are people like Jimmy Rogers who believe that commodities are now in a upward super-cycle. Of course, there are sceptics to this super-cycle theory because of their underlying conviction that commodity demand still follows a cyclical trend. But what is the underlying belief of the commodity super-cycle theory?

Armed with the understanding from our previous article, Understanding secular vs cyclical, you can see that the rise of China (and India, Russia, etc) that we just described is a secular trend. Thus, the demand for commodities that supports this secular trend must also follow a secular trend too.

But does that automatically mean that commodity prices will go up and up for ever and ever for a very long period of time? From the short-term bubble in metal prices in 2006, it is obvious that there are many speculators who misapplied the commodity super-cycle theory to the extreme. For example, copper prices climbed so rapidly in the short-term that by mid-2006, after having risen in a parabolic path, its prices suffered a major correction.

Now, cast your eyes back to the 1930s in the US. With hindsight, we can easily see that the Great Depression was a traumatic setback in the secular rise of the US in the 20th century. But in the end, the US survived and went on to become a world superpower. The same goes for China. Although we believe China may be facing a major correction down the years (see Can China really ?de-couple? from a US recession?), it does not necessarily mean that her secular rise in the 21st century will come to an end, unless something really drastic happens to plunge China back into the dark ages of the 20th century. As such, her demand commodities will always rise in the long run. The best phrase that explains this point is from our previous article, Understanding secular vs cyclical:

 Sometimes, within a larger secular trend, there are cyclical sub-trends.

As long-term investors, we should not lose sight of this big picture. Sure, commodity prices can even correct 50% in the short to medium term, but do not let the cyclical sub-trends cloud your understanding of the underlying secular trend.