Russia has been hit with a triple-whammy since the beginning of the global financial crisis: Falling oil prices, a lack of demand for exports, and a pandemic of capital flight.

Even before the crisis reached its zenith, rattled investors were pulling their money out of Russia. Capital outflows totaled $21 billion in the two weeks ended Aug. 22 – the two weeks following Russia’s Aug. 8 invasion of Georgia – according to Goldman Sachs Group Inc. (GS).

Of course, even more money found legs out of the country late last year as the financial crisis intensified. Deputy Prime Minister and Finance Minister Alexei Kudrin told a meeting at the Federal Tax Service that net capital flight stood at around $130 billion in 2008.  Addressing the service earlier Kudrin said that some $200 billion had been taken out of Russia from October 2008 through to late January 2009.

An additional $80 billion in capital could flee the country this year, said Russia’s Economy Minister Elvira Nabiullina. The external debt of Russian companies widened drastically from $175 billion to $500 billion in 2008, and interest would have to be paid this year, according to Nabiullina.

Meanwhile, a drastic decline in oil prices has put a kink in the country’s most vital economic lifeline. After hitting a record high of more than $147 a barrel last year, Russia watched the value of its lifeblood dip below $40 a barrel. At one point, crude had lost an astonishing 80% of its value, forcing the government to rethink last year’s budget outlays.

The new 2009 budget estimates that oil will average $41 a barrel, versus $95 a barrel in the original. Government revenue will tumble 39% to $195 billion (6.7 trillion rubles), while spending will rise 7% to $282 billion (9.7 trillion rubles).

However, Minister Kudrin estimates that Russia’s budget deficit may exceed 8% in 2009.

“This may happen if we do not distribute budget spending differently or change the structure,” he said.

Kudrin indicated that the government would be forced to “make a number of tough decisions regarding budget spending,” as the revenue of the federal budget for 2010-2011 would be 33% lower than in 2009, according to his estimation.

And even if the price of oil holds on to the gains it has made in recent weeks, Russia’s gross domestic product is set for a significant contraction.

“GDP will fall, even if oil prices climb not to $41 per barrel, but $44, $50, or $55,” Kudrin said.

In light of the challenges facing the economy, even the 6.6% GDP growth forecast for 2020 is “too optimistic,” he added.

Russia’s economy shrank 7.3% year-over-year in February, a slight improvement from January’s 8.8% decline.

Russia’s MICEX stock index and the ruble have taken their lumps as a result of the economy’s downward trend. But while both the Russia’s currency and stocks have shown some signs of life, unemployment continues to soar and shows no sign of abating.

Russia’s total number of unemployed jumped 20.6% year-over-year in February to over 6.4 million people, or 8.5% of the economically active population, according to the Federal State Statistics Service. That represents a 4.9% increase from January 2009.

The rising level unemployment and bleak outlook for Russia’s economy have stirred rumors of social unrest that have grown increasingly audible, even in the nation’s repressed mainstream media. And some analysts and officials believe the former president and current prime minister Putin could be the scapegoat for Russian oligarchs eager to maintain their influence, as well as Putin’s handpicked successor Dmitry Medvedev

The Growing Putin-Medvedev Rift

Gleb Pavlovsky, a pro-Kremlin political scientist and adviser, said earlier this month that the economic crisis poses a growing threat to both Putin and Medvedev, whom he suggested could also be swept away in an uprising financed by Russia’s oligarchs. Pavlovsky warned of a “remake” of the 1991 street protests that helped bring down the Soviet Union, and the 2004 Orange Revolution in Ukraine.

“The transition of the [economic] crisis into the political arena has already begun happening,” Pavlovsky wrote in Russia’s Moskovski Komsomolets. “The sources of social protest should be sought in the corridors of power.”

With so much at stake, tensions at the Kremlin are beginning to rise and even the 20-year relationship between Putin and Medvedev, his 43-year-old protégé might crumble.

Over the past few months, Medvedev has struck a far less aggressive, less nationalistic tone than the ex-KGB agent. Medvedev has scaled back a bill to expand the definition of treason and resurrected a dormant human rights council. He’s also taken a more lenient stance towards protests and free speech.

On March 15, Russian protestors held a sanctioned, peaceful march in Vladivostok, the very same city where just months earlier they had been beaten and arrested for similar actions. And in his monthly television addresses, Medvedev has also acknowledged that unemployment in Russia is actually closer to 6 million than the 2 million officially reported.

Medevedev is also building his own political powerbase, which consists of mainly of economic liberals – the archrivals of the siloviki, the military security officials grouped around Putin.

The Kremlin announced in February that it was establishing an advisory group to address the current financial crisis. The group, called the “Golden 100″ will eventually grow to 1,000 and ultimately supplant many holdovers from Putin’s administration.

“Medvedev is building his own power base, up to a certain point,” Alexander Khramchikhin, a senior researcher at the Institute for Political and Military Analysis told TIME.

What’s more is that both Medvedev and his team of liberal economists have both in recent weeks ramped up their rhetoric against Putin and his old guard.

Igor Yurgens, director of the Institute of Contemporary Development, a new thinktank created by Medvedev, has criticized Putin for restricting freedom of the press and stressed that “the most honest and independent opinions on Russia’s problems are coming from the liberal wing, rather than from the so-called statist patriots.”

Even Medvedev himself has taken some thinly veiled shots at Putin, saying at a recent meeting with economic officials that criticized Putin’s response to the financial crisis as “unacceptably slow” and said that instead of action on promised reforms there had been only “talking and talking.”

“Medvedev has got the whiff of power in his nose and he likes it,” Mikhail Delyagin, an analyst and former government adviser on economic policy, told the The Guardian. “He’s given tacit approval for his administration to engage in an information war with Putin’s apparatus.”

Critics continue to allege that Medvedev still has nowhere near enough political muscle to take on Russia’s iron politician, but there is also evidence that Medvedev’s popularity is growing and that Putin is past his political peak.

According to a February 2009 national survey, 73% of those polled said they trust Medvedev, a substantial increase from 56% in 2006. Putin continues to enjoy popularity among the public as well, but his political capital seems to be deteriorating along with the economy.

“Putin used to act as an arbiter standing above the two main clans – the siloviki and the rational economists,” Dmitry Oreshkin, a leading political analyst, told the The Guardian. “Now he’s been dragged down into the fight and he’s under fire from both sides. The siloviki say he’s a weakling incapable of imposing his will and showing the economists their place, while the economists in turn are consolidating around Medvedev.”

Putin is also falling out of favor with Russia’s powerful aristocracy. Russia’s top 10 billionaires alone lost an estimated $150 billion last year, according to the The Guardian.

“It is very conspiratorial,” Vladimir Milov, former deputy energy minister and a leader of the Russia’s Solidarnost political group, told the Financial Times.  “But, for the first time, they are putting the question that perhaps Putin should go, to prevent him from pulling everyone else to the bottom.”

How Might Medvedev Pull the Trigger?

If Putin does go, many believe Medvedev will be the one to show him to the door. One of the many policy changes arranged by Medvedev in recent months has been an orchestrated crackdown on political corruption that dates back to May 2008.

Medvedev’s new anti-corruption measures prohibit conflicts of interest, require government officials to report income and property, and further mandate coworkers to report any noncompliance.

Now, analysts are beginning to wonder whether some of these new laws, shepherded through parliament last December by Medvedev himself, will be his weapon of choice in ousting Putin.

According to Foreign Policy, Stanislav Belkovsky, a Russian political analyst and insider, gave sensational interviews in November 2007 to Die Welt and The Guardian, stating that Putin was worth approximately $40 billion. Belkovsky said Putin was the beneficial owner of 37% of Surgutneftegaz OAO ($18 billion), 4.5% of Gazprom OAO (OTC: OGZPY) ($13 billion), and half of a Swiss-based oil-trading company Gunvor ($10 billion), run by a former St. Petersburg KGB agent. If true, Putin would not only be one of the richest people in the world, but one of the most corrupt.

As Foreign Policy points out, it was Putin who, after being transferred temporary presidential responsibilities a decade ago, sealed his fate as a modern-day tsar by granting former-President Boris Yeltsin and his family lifelong immunity from criminal prosecution, administrative sanction, arrest, detention, and interrogation.

Should the economy continue to falter, it’s possible that Medvedev could end up offering Putin the same deal.

Source: With Russia’s Economy in a Deep Freeze, Is Medvedev Gearing Up to Give Putin Das Boot?

What makes him so confident?

The answer might lie in a fascinating article in the Moscow Times, an English-language daily.  Now I can’t speak to the publication’s credibility; according to Wikipedia, it’s under foreign ownership and isn’t afraid to take an anti-Kremlin line.  But the Wikipedia article is thin, to say the least.  So if all of what follows turns out to be a crock, I won’t be too surprised.  But it’s too intriguing to ignore.

The paper reports the president of Sakha Republic, in Siberia, came calling on Putin recently.  Vyacheslav Shtyrov brought ill tidings: The swoon in world energy markets has hit Sakha hard.  But rather than continue to paraphrase the article, l’ll let the rest of the story unfold on its own:

Sakha is having trouble keeping up with its investment goals for 2020 and the region’s labor market is suffering, Shtyrov said at the meeting.

Putin listened and then took a breath.

“Vyacheslav Anatolyevich,” he said, addressing him by his patronymic, “the global prices of coal, gas, metals and even diamonds have fallen. But the price of gold is rising — and gold is mined on your territory.”

When Shtyrov called attention to miners’ problems with creditors, he was once again rebuffed. “We’ll solve the problem with gold mining,” Putin said. “Especially since — I’ll say it again — I’m well aware that the price of gold is rising on world markets.”

The paper attributes this account to a transcript of the meeting released by the Kremlin.  Assuming this is correct, and the transcript is accurate, Putin is making a remarkable bet here, not just for Sakha, but for his whole country: What low energy prices have taken away, high gold prices will restore.

According to the article, Russian mining firms have been at least as attractive since last fall as names more familiar to Western goldbugs’ ears.  Shares in Polyus Gold have risen 172% since bottoming on November 18; Polymetal is up 207% since its low on November 20.  By comparison, the HUI index is up a little under 80% since its lows last October, the XAU up a little over 65%.

I have no idea whether Putin’s big bet is true, or whether it’s plausible.  But it’s out there.  And it’s fascinating.

Source: Putin’s Fascinating Bet

A drop in the price of oil, the war in Georgia, and a gas-export dispute with the Ukraine have put a huge dent in the Russian economy, which now teeters on the verge of recession.  The devaluations reflect the new reality of low prices and falling demand for oil and other exportable commodities.

In order to contain the damage, the central bank is accelerating the ruble’s slide. Policymakers devalued the ruble every trading day last week except for Tuesday (Jan. 13), letting it fall an average 1.7% a day versus a basket of currencies. By comparison, November and December averaged two devaluations a week, according to Bloomberg News data.

In order to cushion the ruble’s fall, Russia has spent $245 billion since August, as policymakers sold over a quarter of the country’s gold and foreign-currency reserves. That has some economists calling for a free-float or a big devaluation to avoid depleting all of the reserves. Russia’s reserves, the world’s third largest, stood at $426.5 billion on Jan. 9, according to BNP Paribas SA.

Russia is intervening in the currency markets to prevent sharp swings that move people to withdraw their savings. Prime Minister Vladimir Putin pledged last month to use the nation’s foreign-exchange reserves to prevent huge moves and to promote calm in the Russian heartland.

Investors have reacted by pulling back from the currency.

“Fear of another devaluation means nobody wants to buy rubles right now,” Lars Rasmussen, an emerging markets analyst in Copenhagen at Danske Bank A/S told Bloomberg News. “The ruble has begun to look more and more overvalued because of the fall in the oil price.”

Meanwhile, downward spiraling oil prices continue to exert pressure on the overall economy.  Russia’s main oil export, Urals crude, has declined 69% to $44.43 a barrel from record highs in July. Analysts estimate the price needs to reach $70 a barrel for the government to balance the budget this year.

The government wants desperately to avoid another run on the central bank, like the one in 1998, when investors fled the market by selling rubles and Russian assets. That crisis forced Russia to spend its foreign reserves to defend the ruble, further eroding investor confidence and undermining the currency. Eventually, the ruble fell 71% against the dollar before finally stabilizing after the government defaulted on $40 billion of debt.

Despite government efforts, there are signs that remembrances of the 1998 crisis are spurring people to sell rubles.

“Of course I have changed my savings into foreign currency. I don’t want to lose my wealth,” Alexei, a Russian banker, told Reuters outside an exchange point in snowy central Moscow.  Others were busy changing money into dollars in anticipation of increasing prices for food and medicine.

Banks and companies are also hoarding foreign currencies, Evgeny Nadorshin, senior economist at Moscow’s Trust Investment Bank, told Bloomberg.

“All the attention of the people is focused on the Forex market,” Nadorshin said. “Companies aren’t buying supplies, they’re investing their rubles in dollars instead because the play is too attractive.”

But some analysts believe the devaluations may soon be over.  As the cost of money rises, and supply tightens, policymakers may be forced to halt the ruble devaluation.  Russia’s Moscow Prime rate, the average interest rate banks charge to lend money to each other, rose to a two-month high of 12.5% yesterday, Bloomberg reported.

Mark Mobius, the well-known globetrotting investor and the executive chairman at Templeton Asset Management Ltd., said he expects Russia’s currency will begin to stabilize, meaning the central bank may slow devaluations as the ruble approaches fair value.

“It’s not as overvalued as it was,” said Mobius, who manages more than $24 billion in emerging-market assets. “I know some commentators think further devaluations can be expected, but I’m not too sure about that.”

Source: Ruble Hits 11-year Low As Russia Accelerates Devaluation

In a recent interview with Bloomberg Television, Mobius said there are “terrific bargains all over the place” and his biggest holdings are in Asia, adding that he is “aggressively” purchasing Chinese stocks.

Emerging market stocks have nosedived this year at a much faster pace than indices from larger, more affluent economies. So far this year, The MSCI Emerging Markets Index, a benchmark for equities in 24 developing nations, has fallen 53% – driven mainly by falling commodity prices and a freeze in credit globally.

Russia’s stocks were slugged the hardest; its equities have dived 72% this year. India’s stocks have fallen 65% this year. Brazil and China stocks are down 56% and 52%, respectively, this year, MarketWatch reported.

“We’re beginning to see this bottoming situation,” said Mobius, who oversees about $26 billion in emerging-market stocks as executive chairman of Templeton Asset Management Ltd. “I sincerely believe that next year we’re going to be beginning the next bull phase. The amount of money going into the system has to find a home.”

He’s got a point. The BRIC economies – Brazil, Russia, India and China – each unveiled stimulus plans aimed to spur domestic consumption and boost GNPs.

• Brazil’s government called for $3.6 billion in tax cuts on personal income, consumer loans and automobiles.

• In November, Russia Prime Minister and former President Vladimir Putin unveiled a $20 billion stimulus, which included a cut in profit tax.

• India’s government said in early December it would spend $4 billion more from December to March 2009 than previously planned.

• China’s $586 billion economic stimulus plan is one for the record books. The infrastructure overhaul will pump boatloads of money into low-income housing, water and energy projects, airports, disaster relief and new railroads over the next two years.

And those stimulus plans are on top of several interest rate cuts from each BRIC economy.

“What you are going to see is a reversion to emerging markets first because those markets are the cheapest” and the economies are growing faster, Mobius told Bloomberg. “There’s no reason why, going forward, they shouldn’t be the first ones to get the attention of investors.”

Source: Emerging Markets – Especially BRIC Economies – “Bottoming”

More from Money Morning:

Four months ago, it appeared that three economic “bad actors” were triumphant in their disregard of economic laws and contempt for the United States: Russia, Venezuela and Argentina. Today, while the iron laws of economics have taken a bite out of all of us, they have taken an especially big chunk out of the economies of these bad actors. Unlike most of us, they will not be quick to recover.

That is good news – for U.S. foreign policy, and for those of us who hope that the more befuddled emerging markets will figure out how to run their economies before Malthusian population pressures overwhelm them.

The world does not need to see bad behavior – political or economic – rewarded.

Let’s consider a few of the worst players.

Russia’s Tactics Backfire

Russia, first, invaded Georgia in August and appeared ready to use its oil-and-gas wealth to rebuild the Soviet military machine, as well as making Western Europe entirely dependent on the whims of its state controlled energy company OAO Gazprombank.

Gazprom’s attempts to control energy supplies to Europe included blocking the Nabucco gas pipeline and striking a deal with Libya, Europe’s main non-Russian potential supplier. Russian defense spending, too, has quadrupled since 2001 and was continuing to increase rapidly – by 26% in 2009, to more than $50 billion (bear in mind that Russia gets more bang for its ruble because its soldiers are both cheaper and require less maintenance than pampered US and EU forces).

Not any more. The decline in oil prices, halving in three months, has thoroughly destabilized the Russian economy and wrecked its budget picture. Russia has been forced to promise $100 billion to its banking system, without any certainty that this capital injection will solve its problems. Inflation is running at 16%, and will rise further as Russia’s foreign exchange reserves are used to prop up the banks. Oleg Deripaska, Russia’s richest oligarch, has been forced to sell assets to meet market calls.

Most pathetically, Belarus, previously Russia’s most reliable poodle ruled by a wholly unreconstructed autocrat, is making promises of “reform” – if it can get access to International Monetary Fund (IMF) cash.  The RTS stock index is down by around 75% from its peak in June – that makes the roughly 30% decline in the Standard & Poor’s 500 Index seem no more than a gentle correction.

Chavez Feels the Pinch

Russia’s the most dangerous of the bad actors, because of its nuclear weapons and belligerent foreign policy attitudes, but it’s not the only one to face hard times. Venezuela is also facing the pinch – although this Latin American player found the benefits of $147 oil were so fleeting that even President Hugo Chavez had failed to spend up to his income (though a 26% increase in dollar spending in the 2009 budget shows he means to try). Inflation is 36%, around the level at which it becomes an overwhelming problem, while oil output has been falling since Chavez replaced the senior management of the oil company Petróleos de Venezuela S.A. (PDVSA).

The cash crunch has not yet hit home – Chavez is desperately trying to postpone any hardship until after the Nov. 23 local elections. The stock market is down only 40% from its January 2007 high – although the nationalization of electricity, telecoms and cement has removed a number of stocks from active trading.

Nationalization also hasn’t helped electricity service – the country has suffered three nationwide power blackouts this year. You can expect further bad economic news from Venezuela in early December, after the local elections.

Cry For Argentina

Finally, Argentina, which is dependent on a broad range of commodities, has also run into trouble. Argentina defaulted on its international debt in 2002, before forcing bondholders to accept new bonds worth about 30% of face value. It also seized most of its residents’ dollar savings: This country seems to succumb to that particular kind of bad-actor behavior about every 10 years.

However, vice had appeared to be rewarded, with 8% annual growth for Argentina in 2003-2007. Inflation is currently running about 25%, but the government solved that problem by forcing out the head of its statistics bureau and making up new inflation numbers, thereby ripping off holders of its inflation-linked bonds.  With the decline in commodity prices, however, the government of Cristina de Kirchner was running into trouble, since it had $20 billion of debt to repay by the end of 2009, even on its written-down schedule.

The government’s solution was simple – it nationalized the $30 billion private pension scheme, set up in 1994 by the previous government – to much IMF and economic reformist applause. So much for pensions privatization – in Argentina, it simply gives the government an additional pot of money to steal. With an additional $30 billion available, the Argentine government can carry on spending for at least another year – at the cost of condemning its middle classes to a penurious old age, since few of us have the foresight to save in more than one pension scheme.

Russia is probably the most seriously affected by the oil-price decline, because its ambitions were most expensive. In Venezuela, trouble hasn’t really hit yet – or Chavez is keeping it hidden until after the local elections. In Argentina, meanwhile, the bad-acting government has found yet another way to make the middle class pay for the leadership’s misdeeds.

However, if oil prices stay below $70 for the next few months, and commodity prices are likewise subdued, we can be confident that even Russian Prime Minister Vladimir Putin, Hugo Chavez and Cristina Kirchner will suffer a very cold winter indeed.

PS. At the other end of the scale, some foreign markets have great recovery potential. Martin Hutchinson picks four markets most likely to “bounce big” after this financial storm.

Source: Trouble Comes Home to Roost for the “Bad Actors” of the Global Economy

Here’s a quote from the New York Times:

“The price of oil this year will turn on several developments around the world, among them the rise of China’s economy, whether the United States dollar continues falling as many in the industry expect and political uncertainty in nations with substantial oil reserves: Iraq, Russia, Venezuela and Saudi Arabia.”

Here’s the paragraph that followed that one:

“Major developments in any of these areas could cause the price of oil to rise from its current $32.52 a barrel for light crude on the New York Mercantile Exchange. Barring any unexpected or calamitous events, many analysts say it is even possible that the price will slip slightly, possibly to $27 to $30. But the price is expected to remain relatively high.”

Oh yeah, that quote is from a story The Times ran on Jan. 4, 2004.

Now, try this quote on for size. It’s from Time Magazine:

“And just as oil is seen driving American foreign policy, so too are China’s geopolitical strategies increasingly influenced by the country’s inability to meet its energy needs solely through domestic production. Last week Russian President Vladimir Putin began a state visit to China, during which Chinese President Hu Jintao was expected to press for the swift approval of several proposed billion-dollar, oil-and-gas joint ventures between the two countries, including a pipeline to connect Russia’s oil fields with China’s main domestic distribution network.”

Ripped from today’s headlines, right?

Nope. It’s from Time’s, Oct. 18, 2004 issue.

And, by the way, the New York Times was wrong. The price of light crude didn’t drop in 2004. By Oct. 18, it was making big news when it edged to $55 a barrel.

Of course, sooner or later, you know I am going to use a quote from fresh story. Maybe it’s this one. After all, it’s about the President’s reaction to something that’s been in the news as recently as last week.

“President [Bush] rejected suggestions Wednesday that he release oil from the government’s strategic reserve in a bid to ease the price of gasoline, accusing Democrats of “playing politics” over soaring gas prices.

“Bush said he “fully understands” how the rise in prices “affects American consumers, how it crimps the budgets of moms and dads who are trying to provide for their families, how it affects the truck driver, how it affects the small-business owner.”

But, guess what? That’s old news, too – Los Angeles Times May 20, 2004.

You see, my point is this – look around your world and ask yourself what’s really changed in the past four years… what’s really driving the price of oil up?

From where I sit, the answer is pretty much “not much that I can see,” unless you also consider how vast the leadership vacuum in Washington has become. Or, you consider oil company CEOs as national leaders.

And, before you Presidential apologists get all scrunchy nosed at the mere mention of Washington and leadership vacuum, I picked 2004 just to be fair. It represents four years of President Bush and fours years of a Democratic controlled Congress… four years that flashed by since these quotes were published.

Four years of zip, zilch, zed, zero on the leadership front when it comes to oil policy. That is, unless you call it leadership when oil executives whine to Congress on a regular basis about how their hands are tied when it comes to prices and anyway, “we’re always concerned about shareholder value.”

I love that last one by the way, like we’re so dumb that when they say “shareholder” they think we hear stakeholder.

The Truth Will Bust You Flat Broke

But, sometimes those oil executives do tell the truth, though blaming global demand is not part of that truth.

You see, the US burns about 21 million barrels of oil a day, of which close to 12 million barrels are imported. China only goes through about eight million barrels a day, of which four million must be imported.

But, the truth is that oil executives were correct back on April 1, when they told congress that the price of a barrel of oil should be about $55 (it was mere $100 then).

According to the oil executives, the price discrepancy – one that continues today – is due to oil futures speculators running the price up.

Yesterday BP and the Russian shareholders were forced to acknowledge differences over strategy, with the Russian billionaires who own 50% of the company arguing that TNK-BP, Russia’s third-largest oil producer, should be able to expand abroad even if that meant its coming into direct competition with BP itself.

There have been months of speculation in Russia that the state-controlled energy company Gazprom wants to buy a majority stake in TNK-BP. Neither BP nor the Russian shareholders say they are prepared to sell.

“Like other cash-rich sovereign wealth funds, or SWFs for short,” says Justice Litle in Taipan Daily, “Russia plans to invest its massive pile in high-quality foreign stocks around the globe.

“In case you haven’t noticed, the truly exciting growth these days is no longer confined to the U.S. and Europe. Instead it’s found in countries like China, India, Brazil, Malaysia, Taiwan, Turkey, South Africa and so on. Emerging market economies are growing by leaps and bounds.

“In this 21st-century world that looks so very different from the 20th, the best combination of safety and growth can be found in strong international companies… the same type of companies that Russia will be plowing its cash into.”

Manraaj Singh in Profit Watch says, “Russia is storming ahead.”

“The economy grew by 8.1% last year and should grow by 6.8% this year. And the average Russian will earn 75% more this year than he did in 2006. The average income was just $6,924 in 2006, but it should reach $12,013 this year. And that should hit $25,091 in just five years, according to the IMF.

“And that’s not all… Yesterday, Prime Minister Vladimir Putin approved Russia’s biggest spending project since the collapse of the Soviet Union. They’re going to spend US$570 billion to overhaul and expand the country’s transportation infrastructure over the next seven years. And about time as well.”

It affects all energy projects, plus all other capital-creation efforts. It’s a long-term theme in my view of things. It means that capital creation will become much more difficult, in an era when it is of utmost importance. Central Planning, anyone? Maybe we all ought to re-read Vladimir Putin’s PhD Thesis — much of which he plagiarized — on the subject of central planning.

The vertically integrated steel companies will survive, and likely prosper. Heck, a good steel millll will become a national asset, like Yellowstone Park or Gracieland. The “tier” metals-players, who bought into the niche theory, will struggle to find suppliers — let alone just-in-time suppliers
(Ha!!!) — and to pass through costs to the customers hemorrhaging from sticker shock.

Close to home, in the 1990s all the investment bankers told US Steel to sell off those “non-performing assets” like the coal reserves and iron ore facilities. Former CEO Tom Usher took unholy hell from the alleged “financial” community for his stubborn refusal to dismember the firm that Andrew Carnegie built. After all, we all know how smart those Wall Street guys are, right?? Now in hindsight, Usher is a genius of the proportions of Albert Einstein, or at least of Leslie Groves who weaponized Einstein’s bright idea. (And I knew Tom Usher when he used to eat a humble club sandwich on Pullman Bread for lunch at the Duquesne Club.) Coal? Iron ore?
Dolomite? “Non-performing assets” my ass. It all depends on your time frame. Usher was thinking of the future, and avoided selling good natural resources for bad US dollars. US Steel will be around for another century unless some idiot comes along to screw it all up.

The article mentioned below makes good reference to the Dept of Energy’s Hirsch Report (2005). As a nation, we are just plain blowing our time window for advance mitigation. There are endless tasks just to begin, let alone to accomplish. One of the big efforts in the advance period has to be to educate the people about the severity of the crap-train that is coming down the tracks. On that, the US media gets an “F-” grade.

Instead, we have the sordid scene of GW Bush flying the Big Blue Jet to Saudi, hat-in-hand like Oliver Twist, asking for “more please.” And the Saudis don’t even offer sympathy. The first answer is “No.” The second answer is, “Oh by the way, we increased output by 300,000 barrels back on May 10, in response to requests from our customers.” So take that, Mr. President of the US of A. And so much for the 75-year special relationship. (Indeed. Beware such insult, King Abdullah. Heavy is the head that wears the crown.)

Still, how unseemly this is. Not only is the US losing time, we are losing face. I don’t know what is worse.

By comparison, it takes a 7.9 magnitude earthquake, with 50,000+ dead before China even begins to think of allowing “foreigners” into the country with body-sniffing dogs just as a token of humanitarian aid. And the US sends its president to beg from those Arabian devils when gasoline costs $3.75 per gallon. Boo-hoo. This is a nation of whiners.

Meanwhile, we in the US won’t drill offshore. We won’t drill in Alaska. Forget about drilling ANWR. And the Dept of Interior just issued a “10 year moratorium” on new leasing adjacent to the National Petroleum Reserve near the North Slope. And it declared polar bears to be an “endangered species.” (In China, they eat bears.) Thanks, guys. We sure dodged the bullet on
that one, eh? For some weird reason (CO2, they say) we won’t do coal-to-oil — not even a pilot plant to see if the technology works. We have nothing resembling a national passenger rail system, while the airline system flies towards its own version of Silent Spring. (Hey, if the jets
leave the skies, how will all the cocaine get from South America to the streets of West Hollywood and Greenwich Village?)

Back on the home front we have the Great Senator Gasbag from Oz, Chuckie Shumer, threatening to block arms sales to Saudi if they don’t sell us more oil (which we in the US cannot refine with the limited refining capacity we have.) As if the Russians or Western Euros would not leap at the chance to sell guns to the Wahhabis? Really, kids.

And waiting in the wings we have………. Sen. Fall-Guy from Arizona. His job is to go out in the ring and make it look like a good fight, but take the dive in the 9th round. (And if he doesn’t take the dive, the referees will look the other way when he gets the rabbit-punch.) The media and
deep-backgrounders have already identified the next POTUS, a true Man-of-the-People (with his prep school preparation, Columbia undergrad and Harvard Law School pedigree), the next-great-thing, the guy offering Hope who is a mind-bending mix of paper-thin resume and blind ambition in a hurry. Oh, and don’t worry about all his radical friends and that Euro-Marxist crap that he utters in his unguarded moments. If he does not understand the concept of capital gains, well, it’s a small price to pay for such a Great Leap Forward.

Bill Bonner has it right. Buy a ranch. Go up into the Andes. Get so far away that even Google Earth can’t find you. Grow cows Then eat them. Wait it out for a couple of generations. Can it get any worse? Well, probably yes.

** Here is the article that I’m referring to…

Best, BWK

Note: Byron King is a frequent contributor to the free e-letter Whiskey & Gunpowder. To receive daily insights into energy, oil, commodities and other natural resources sign up here!

Source: High Steel Prices and ‘Peak Everything’

Judging by the performance of outgoing President Vladimir Putin, Europe should beware: The so-called “links” he’s seeking may resemble those used to chain together prisoners in the Gulag.

On the other hand – though it’s admittedly unpleasant to say so – there’s a point at which the effects of high oil prices are so great that in the short run they far outweigh one’s distaste for the thuggish Russian regime. And at $123 a barrel, we may be at that point.

Politically, Russia has pretty much reverted to the pre-1991 Soviet system.

Today, just like then, there’s only one real party: The United Russia party, which controls 315 of the 450 seats in the Duma (essentially the lower house of parliament) and whose leader is one Vladimir Vladimirovich Putin. There is considerable censorship of the media, and dissident reporters and editors have a habit of disappearing – not that there are many left now. There is huge emphasis on military power, and on throwing Russia’s weight around in foreign policy.

What’s New About the “New” Russia

However, there are a couple of significant economic differences between today’s Russia and the pre-1991 Soviet Union. One key difference is economic: While the state still controls most of the property today, it doesn’t control all of it, as it did before 1991. Even so, foreign investment in strategic sectors of the Russian economy was effectively banned by a decree of May 5. For this purpose “strategic” covers not only the military sector and energy, but also more than half of Russia’s output.

So, if the afore-mentioned difference is one of substance, this next one is all about style. Prior to 1991, Politburo members were relatively impoverished and notorious for their baggy Soviet suits and lack of fashion sense; these days, the top brass – and especially Putin – are snappy dressers with a nice Italian wardrobe, and bank accounts to match.

Putin’s even viewed as a sex symbol: In a recent No. 1 single in Russia, a female pop star cooed that she needed a new boyfriend and that “Takogo kak Putin” (he must be like Putin), and not a useless wimp like her last beau!

If you analyze the economic impact of Putin’s regime since 2000, you’ll find the result has been huge economic growth – an annual average of nearly 10% since that time with growth of 8.1% in 2007. Now a certain percentage of that was due to the proverbial “dead-cat bounce” as the economy recovered from the debilitated state it had reached by 1998-99. An additional portion reflected the benefit of a Ronald Reaganesque tax reform passed in 2001, which produced a “flat tax” income-tax system with a rate of 13%.

That caused many conservative U.S. commentators to favor the Putin regime in its early years, despite the signs of human rights abuses. However, since the arrest and imprisonment of oil company tycoon Mikhail Khodorkovsky and the looting of his company Yukos, it has become obvious that the nominal rate of income tax doesn’t matter much when the state can – and does – seize anything it wants.

Since at least 2004, Russia’s economic growth has been driven almost entirely by high oil prices. At first, oil production increased along with prices, producing real economic progress. Since Putin’s partial seizure of Royal Dutch Shell PLC (RDS.A, RDS.B) concessions in 2006 and BP PLC (BP) earlier this year, it has become obvious that the Russian state will control all economic activity in the energy sector. As a result, output has now stopped increasing and in this year’s first quarter it actually declined slightly.

I wouldn’t want to be a wealthy entrepreneur in today’s Russia, no matter how many bodyguards I surrounded myself with. At the same time, however, there’s also no question that some of the benefits of economic growth have gone to the Russian people – something that was rarely, if ever, true under the old Soviet system.

Consumer spending rose 12% in 2006 and matched GDP growth of 8% in 2007. With a current account surplus of $74 billion in 2007, foreign exchange reserves of $470 billion and ever-escalating oil prices, Russia’s ruble has been strong, making imports super cheap. Given the lack of high quality goods in Russian stores before 1991, and the impoverishment of the country in the 1990s, this consumer boom is not surprising. But it does mean that there are finally investment opportunities in Russia outside the energy sector, in places where the Russian government’s heavy hand is less evident.

As long as global oil prices remain high, or continue increasing as they have in the past five years, Russian energy companies will make record profits and Russian consumers will enjoy a bonanza, producing profits in consumer sectors also. Once energy prices turn around, Russia is in trouble. However, there is no sign of that yet, and at least in the short term, there’s money to be made from the continued advance in energy prices.

Politically, it’s unclear how much of a difference Medvedev will make, since, after all, Putin will now serve as prime minister (one news report described Medvedev as the “puppet president” of Putin’s).

To be sure, as the former CEO of Gazprom OAO (OTC: OGZPY), Medvedev has at least a basic knowledge of how business works. And it’s likely that he’ll continue to follow Russia’s current “mixed economy” policy, meaning that “strategic” sectors will remain government playthings, while non-strategic sectors such as consumer goods are pretty much left to operate freely – and unharmed. Russia even intends to use its version of a “sovereign wealth fund” to go on a bit of a global buying spree, although it remains to be seen just how aggressive it will be.

Presumably, if Putin had wanted to restore full Soviet Communism he would have chosen someone else; that at least is a consolation.

Cashing in on Russian Capitalism

Does this leave any real plays for U.S. investors? It does, but you must keep in mind that this is a highly speculative market, and that you should be ready to sell if U.S. interest rates are increased. The reason: An upward increase in U.S. interest rates could cause a reversal in energy and commodity prices, which would have a major impact on the Russian economic advance. Here are a few Russian profit plays to consider:

• OAO Gazprom (OTC: OGZPY): This is one of the obvious Russian plays, the state-owned natural gas monopoly with ambitions to control Western Europe’s gas supplies. Since its ambitions don’t yet extend to the U.S. market, it is quoted only on the Pink Sheets. It has a Price/Earnings ratio of 12, based on trailing earnings, but gas prices and Gazprom’s dominance are both rising.
• Lukoil (OTC: LUKOY): The other obvious Russian heavyweight, Lukoil is the largest state-controlled oil company; again, the firm doesn’t care if you buy the stock, meaning it also is only available through the Pink Sheets. This one has a trailing P/E ratio of only 8, and that was based on 2007 earnings when oil prices for the year averaged $80. A good speculative play on a further run-up in oil prices.

Moving outside the oil sector, there are two mobile telephone companies you might look at:

• Vimpel-Communications (VIP): This company has 55 million subscribers and mobile operations in Russia, Kazakhstan, Ukraine, Uzbekistan, Tajikistan, Georgia and Armenia. Right now, it trades at 22 times trailing earnings, but only 13 times forward earnings. It does pay a dividend, but the yield is only 0.9%. I slightly prefer its collection of non-Russian operations to those of MBT (the Russian operator we’ll get to in a moment) – you especially want Kazakhstan, which is oil-rich.
• Mobile TeleSystems OJSC (MBT): This mobile operator has 73 million subscribers and operations in Russia, Ukraine, Uzbekistan and Turkmenistan. It is cheaper than Vimpelcom, trading at only 14 times trailing earnings and 12 times forward earnings, and it has a dividend yield of 2.5%.
• Finally, for a flyer on Russia’s consumer-oriented agribusiness, albeit an expensive one, you might look at Wimm-Bill-Dann Foods OJSC (WBD), which manufactures and sells branded dairy, juice, water and baby-foods products in the Russian market. The shares trade at a pricey 37 times trailing earnings, and the forward P/E of 21 isn’t much of an improvement. The dividend yield is tiny at 0.1%. However, earnings are racing forward as the Russian consumer market opens up to quality branded goods.

Don’t put your retirement savings in the Russian market – Vladimir Putin might get tempted! However, for a modest oil-related flutter, Russia is well worth a look.

The official, Hojjatollah Ghanimifard, told Iranian state-run television today that “the dollar has totally been removed from Iran’s oil transactions,” and that the country has “agreed with all of our crude oil customers to do our transactions in non-dollar currencies.”

The dollar’s spending power, like it or not, is at the mercy of Iranian president President Mahmoud Ahmadinejad, says Addison Wiggan in the 5-Minute Forecast.

“At a November 2007 meeting of the OPEC’s 13-member cartel, , whose country already receives payment for 85% of its oil exports in nondollar currencies, urged other countries to follow suit and ‘designate a single hard currency aside from the U.S. dollar…to form the basis of our oil trade. ‘The empire of the dollar has to end,’ chimed in Venezuela’s Hugo Chavez; his state oil company changed its dollar investments to euros at his order — er, request.

“Rumors are circulating that the Bank of Korea, after selling off $ 100 million worth of U.S. bonds in August 2007, is getting ready to sell $1 billion more, and if Washington forces trade sanctions, China, which threatened recently to cash in $900 billion of U.S. bonds, will probably follow suit.

“In Russia, Vladimir Putin’s dream of a stock market to trade the country’s natural resources in rubles is not so far-fetched; in 2005, Russia, the world’s second-largest exporter of oil, followed South Korea’s lead and ended the dollar peg. And once again, Sudan is hinting that it will impose trade or financial sanctions against companies that do business with the United States — only this time, the words just might have teeth. As other countries follow suit, the dollar — and your spending power — drops. What does this mean? You will need more dollars to buy things than it takes today.”