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Tom Kirkman

Russia Needs to Borrow 1 Trillion Roubles More to Cover Revenue Shortfall

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On 4/26/2020 at 4:48 AM, Tom Kirkman said:

PGNiG is seeking to replace Russian gas with imports from other countries. Poland is already importing LNG from the United States.

This will be just like how Ukraine stopped buying gas from Russia, they just bought Russian gas from a third party at a 25% markup.  It did not affect Gazprom's total export volume at all.   Whatever US based company is contracted to deliver PGNiG  LNG, they will quickly figure out that the profit margin on that contract is a lot better when they fill up their ship 700 miles away from the destination near Saint Petersburg Russia,  than 5,600 miles away in Houston Tx.   Gazprom's LNG trains on the Baltic sea will be operational in 2023. 

https://www.gazprom.com/projects/lng-leningrad/

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" Shipments of Russian crude oil to China increased more than 30 percent in March compared to a year earlier while Saudi imports of the commodity sank, Reuters reported, citing Chinese customs data. "

And the reason is geopolitics and geography Russia and China have become close allies, and the oil and gas from Russia can not be cut off by the west.  

"Russia knew from the get go that China will have to reposition herself towards Russia's energy (and not just oil) because neither tanker oil, nor LNG can compete with pipelines, especially the ones which are already built and operational, not to speak of a cluster of gigantic Russian processing plants being built right on China's threshold to provide all needs not only in crude and gas but in high value added products of hydrocarbons processing. You know, like Amur Gas Processing Plant. And then, and then... there are Indian Ocean SLOCs which cannot be defended by China once mighty US Navy's submarine force is given the order to interrupt Gulf's oil supplies to China. And yes, there is always Russia and her Armed Forces which can secure supply of necessary energy to China."    https://smoothiex12.blogspot.com/2020/04/one-doesnt-need-to-be.html

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11 hours ago, Wombat said:

That could be the US and Europe as well in 5-10 years time?

Yes, it could be, but if it so in the US and EU, it is quadruple the problem in China. 

US is highly leveraged BECAUSE of leakage of leverage out of China. NOT because of domestically originated credit issue. 

Capital escape from China and induced leverage in the Eurodollar banking system comes 85% out of China. Nobody else had much of a hand in it. China accumulated $4 T in reserves through the exact same trading desks the FOMC uses to do precisely what the FOMC does. This was posted as collateral for loans and futures and forwards contracts for commodities in oil copper other industrial commodities and grains. That allowed producers (OPEC, Brazil, Australia...) to secure prices and invest to meet those contracts, for which they borrowed, thus expanding Eurodollar money supplies and global credit. Most of the China credit and monetary expansion at home translated into both domestic tier 1 real estate prices and volumes of tier 2 and 3 housing, and externally in financing purchase of high end real estate - as you probably are keenly aware  happened intensely in Australia. This forced homebuyers to rent or lever up on debt. Traditional local and global real estate investors were pushed out to other locations where Chinese were not buying.  

China's M2 growth is in Red. This does not include off the books credit, and the unreal "bond" market composed of Banks trading their own bonds among themselves and Central government bonds. SIV provincial and local project debt has been running at a 9-12% of GDP clip in expansion this decade, attempting to replace private consumption other than real estate investment, that has fallen in China, and only marginally recovered. The WMP and AMPs that the shadow banking companies issue to their clients are off the books. They serve to fund the private economy and the official bank's products in WMP and AMP serve as a trash can for toxic assets to unload them on the public. 

fredgraph.png?g=qPaD

Since China stopped supplying M2 values in Sep 2019, I added the near equivalent deposit number here, for reference. It is in dollar terms, k=$1Billion, and yes, it is $29 Trillion, about double where US M2 was in Mar 2020, 

?type=area&from=2019-04-01&to=2020-03-01

I like to use this chart to point out how the expansion of the China bubble displaced investment into the US to fund all manner of financial chicanery and credit excess. The obvious point is that the Fed was powerless to do anything about it just as it was insane on Volcker's part to try to control inflation through the US banking system, that was simply not a substantial contributor to it (that was Japan, Korea, Brazil, Italy, Spain, Argentina, Portugal Greece etc. where money supply was growing at 20-30% or more annually, it never stayed above 10% in the US during the inflation period) 

fredgraph.png?g=qPb7

It shows how US banks were overwhelmed by foreign investments into the US coming in from Euroe and EMs in the 1990s, and then through the China bubble 1999-2014. US banks never exceeded 5% of GDP in new credit since Volcker, while incoming foreign capital reached a peak of 17% of GDP (SAAR) in 1 quarter in 2007.  The US was overwhelmed in its ability to absorb investment. 

There is a lesser circumstance of the same nature in Australia, UK and EMU. The core of this since 2000 is China's gas filled finance. It is the Hindenburg looking for a spark. 

The Chinese government was attempting to deliver the message in 2019 to its investing public that it DOES NOT stand behind all those WMPs, AMPs, and not even bank balances, see Baoshang bank's collapse. It was not well received, as China's depositors are numerous, loud, and do go into the streets when the bank accounts get a haircut. So China now has to resort to massive money printing to plug the holes, which is only going to reflect in price inflation as money supply saturates people's willingness to sit on it. The PPP discount in China will evaporate and turn into a premium as transaction velocity picks up.  

This is a favorite chart from Malinen in Finland's GNS economics

By the end of 2017, the assets of the shadow banking sector stood at a mind-boggling 367% of GDP. The commercial banking sector has also become extremely levered, posting over 500% growth in credit since 2008.

https://gnseconomics.com/2020/04/08/the-worst-economic-collapse-ever/

China-bs-asset-blog.jpg

Another very good one is TFP

China-TFP-19-blog.jpg

Which actually overstates results for the last 2 years due to over-reporting of GDP figures, which have gone from mildly rosy estimates to blatant fiction. 

=================================

To sum it up, the demographics of OECD pretty much made certain a depression would happen in 2000 and forwards in EMU and past 2008 in the US, and EMs other than China. It was exclusively China that drove money growth, credit growth, productivity growth, industrial volume expansion and thus the credit of the global financial system. In its collapse, whether the Chinese admit to it or not, China will take the rest of the world with it. But China is structurally the most cyclical economy the world has ever seen, and will bear the brunt of the demand side damage, while its financial system is most likely to evaporate first among the majors because its investment flows turn negative and aggressive money printing will blow up inflation. As Von Mises pointed out, purchasing power of the money supply declines faster than the money supply can grow in a hyperinflation. 

 

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4 hours ago, Gregory Purcell said:

" Shipments of Russian crude oil to China increased more than 30 percent in March compared to a year earlier while Saudi imports of the commodity sank, Reuters reported, citing Chinese customs data. "

And the reason is geopolitics and geography Russia and China have become close allies, and the oil and gas from Russia can not be cut off by the west.  

"Russia knew from the get go that China will have to reposition herself towards Russia's energy (and not just oil) because neither tanker oil, nor LNG can compete with pipelines, especially the ones which are already built and operational, not to speak of a cluster of gigantic Russian processing plants being built right on China's threshold to provide all needs not only in crude and gas but in high value added products of hydrocarbons processing. You know, like Amur Gas Processing Plant. And then, and then... there are Indian Ocean SLOCs which cannot be defended by China once mighty US Navy's submarine force is given the order to interrupt Gulf's oil supplies to China. And yes, there is always Russia and her Armed Forces which can secure supply of necessary energy to China."    https://smoothiex12.blogspot.com/2020/04/one-doesnt-need-to-be.html

I think that is precisely why Saudi attacked Russian offtake points in Europe and China, etc. to clog up their system. The shut in of Russian oil is only partially reversible. The portion coming off the permafrost regions will not be able to resume production for up to a decade, perhaps longer. The idea is that by the time these projects are online, the oil production to fill them will not be available for a number of years into the future. So far, it seems that due to its own shutdown and that of Europe, coupled with Saudi flooding of Rotterdam and Mediterranean markets and China, the Russians have only 4 mob/d of disposal capacity while the production was heading to 11 mob/d. That means that most of their production will have to be shut down, whether within an OPEC++ arrangement or without.  Meaning permanent damage to some of their wells.

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(edited)

 

Russian currency reserves are $ 570 billion, liquid assets are $ 216 billion and the budget is balanced at $ 40.

At the end of the first quarter, total foreign debt amounts to USD 450 billion, which makes Russia a member of an elite club of only 6 countries in the world whose foreign reserves are higher than the total external debt.

Russia's public debt-to-GDP ratio is 14.6% of GDP, making Russia the least indebted of the world's 20 largest economies.

So really, if you want to look for a country which will be the first to go bankrupt in this crisis, I will tell you that this is not the direction.

Russian stats

And as for LNG for Poland, my calculations show that it is about 30% more expensive than Gazprom gas, which everyone can check by by studying the delivery prices on the EIA website.

https://www.eia.gov/dnav/ng/ng_move_poe2_a_EPG0_PNG_DpMcf_m.htm

Given that Poland is still despite economic boom among the three poorest members of the Union, together with Romania and Bulgaria, this does not seem to me a sound economic policy.

Fortunately, I only use gas to heat soup on a gas stove, but a lot of people in Poland heat houses with gas and we also have large fertilizer production plants in Police.

Quote

 

In January 1996 the ruble was trading at 4.7 to the US dollar.   Today it is sitting at 74 to the dollar.  the peak was a few months ago at 87 to the dollar.  

 

Quote

 

The purchasing power of the Ruble has sunk by a factor of 16 to 1, in 24 years.  That is a disaster for the average Russian.  Their money is not buying anything on the worlds stage.  The collapse of the Ruble seems to parallel the rise of the Oligarchs and their looting of the country, and that includes the very active participation of Mr. 50% himself, good old Vladimir.  Just lovely. 

 

 

 

 

During 1999-2016 russian economy grew by 216 % which make it the fastest-growing economy in Europe before Poland, growing by 203%. The average salary in Russia in 1999 was less than $ 80. Last year, even after a devaluation of around $ 700 and by PPP of almost $ 2,000.

So If you claim that the Russians are living worse now than ever before I advise you to go to this country and get real that you won't convince anyone who is conscious to such a claim.

https://www.ceicdata.com/en/indicator/russia/monthly-earnings

Quote

Russia's Monthly Earnings stood at 740 USD in Feb 2020, compared with the previous figure of 755 USD in Jan 2020. Russia Monthly Earnings data is updated monthly, available from Jan 1993 to Feb 2020, with an average number of 408 USD. The data reached the an all-time high of 1,205 USD in Dec 2013 and a record low of 33 USD in Jan 1993. CEIC converts Monthly Earnings into USD. Federal State Statistics Service provides Average Nominal Wages in local currency. The Central Bank of the Russian Federation average market exchange rate is used for currency conversions.

 

unnamed.jpg

Edited by Tomasz
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(edited)

31 minutes ago, 0R0 said:

I think that is precisely why Saudi attacked Russian offtake points in Europe and China, etc. to clog up their system. The shut in of Russian oil is only partially reversible. The portion coming off the permafrost regions will not be able to resume production for up to a decade, perhaps longer. The idea is that by the time these projects are online, the oil production to fill them will not be available for a number of years into the future. So far, it seems that due to its own shutdown and that of Europe, coupled with Saudi flooding of Rotterdam and Mediterranean markets and China, the Russians have only 4 mob/d of disposal capacity while the production was heading to 11 mob/d. That means that most of their production will have to be shut down, whether within an OPEC++ arrangement or without.  Meaning permanent damage to some of their wells.

 

I'm sorry buddy, I'll refute your theory

Russia sells oil in long-term contracts via pipelines to Europe and Asia especially China. Currently to  China about 2 million barrrel per day and growing year after year.

It would be good to know about that if someone wants to speak on the subject of the world oil market.

Edited by russian oil trader
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32 minutes ago, russian oil trader said:

Russia sells oil in long-term contracts via pipelines to Europe and Asia especially China. Currently to  China about 2 million barrrel per day and growing year after year.

Yes it true that Russian state run companies prefer long term contracts for oil and gas, many of those contracts have a take or pay clause for some minimum volume.  (which is a great thing to have right now) but they do sell on the spot market as well.

 

 

 "BEIJING/SINGAPORE, April 26 (Reuters) - China's March crude
oil imports from top supplier Saudi Arabia fell 1.6% from a year
earlier, while purchases from No.2 supplier Russia rose 31%,
Reuters' calculations based on customs data showed on Sunday.
    China's March crude oil imports rose 4.5% year on year to
9.68 million barrels per day (bpd) as refiners stocked up on
cheaper cargoes despite falling domestic fuel demand and cuts in
refining rates due to the impact the COVID-19 pandemic. 
    Shipments from Saudi Arabia were 7.21 million tonnes, or 1.7
million bpd, data from the General Administration of Customs
showed.
    That was down from 1.73 million bpd a year earlier and
average daily imports of 1.79 million bpd during the first two
months of this year....."    https://www.reuters.com/article/china-economy-trade-oil/chinas-march-crude-imports-from-saudi-slip-russia-up-31-customs-idUSL3N2CB2S4

 

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(edited)

 

I would suggest reading this short summary of the best analytical institute for Russia and the former USSR if the discussion is to be conducted at some level

https://cerbanet.org/resources/Documents/National events online/Eurasia Briefing CERBA - April 2020.pdf

Quote

 

Economy.

The economy is taking a very big hit in 2Q20. What happens in 2H20 and for 2021-22 will depend on Covid-19 and Oil.

We use scenariosto assess the impact over the medium term

Better placed coming into this crisis. Russia isin a better financial position that it wasin previous crisis. A lot of thisis because of the need to adaptto sanctions and lower oil receiptsfrom 2014

There is money available. The economy should be able to avoid a financial crisis or deep recession. The issue will be mostly aboutsecuring jobs and the legacy growth impact

SMEs and Banks. The major problem areas will be consumer sectors, SMEs and Banks. The former is most exposed to the economic decline and job losses. Banks may not have liquidity available to fund recovery or resume normal lending after the crisis and for several years

  National Project priorities are expected to change. Inevitably there will be a change in priorities and, very likely, a slowdown in spending across most categories

  Carrot and stick. Localization will be an even greater priority than before and companies will be both incentivized to invest while also facing greater restrictionsif they do not

 

Previous crisis helped prepare for this one.

Russia is much better positioned today than in previous crisis. The government was forced into unexpected fiscal tightness and policy flexibility as a result of the 2014 sanctions and oil price fall

Savings are high. Financial reserves are high: The Central Bank had $563 bln in FX + Gold Reserves ($160 bln as at March 31st). The value of the National Welfare Fund was $160 bln at March 1 st

Debt is low. National Debt is equal to 15% of GDP and External State Debt is 3%. Total external debt (banks, industry, state and people) isless than the FX reserves

Less dependant on oil. The Budget is much less vulnerable to oil than it used be because of the Budget Rule. Thisrequires the budget to assume a $42 p/bbl oil price only

Ruble has helped imports … the weak ruble has greatly reduced consumer imports and cut inflation risk

…and exports. Sectors, such as agriculture and food, have benefited from the weak ruble

Ruble is free-floating with oil. The Central Bank (CBR) is not intervening to support the ruble. It learned that expensive lesson in early 2015

  Medium term target is RUB65/US$1. The government hopes for an average rate of RUB65/US$1 over a three-year period, but only when the oil price startsto recover

Expected to delay further rate cuts. The CBR cut the Key Rate by 50 bps at its April 24th meeting and made clear it plans additional cuts.

Inflation is generally low. Inflation is expected to rise this year, but much less than seen in 2015 as the import basket is different and the CBR has better control over domestic pricing

Good start to 2020. The economy appeared to be headed for a 2-2.4% GDP growth this year based on the 1-2M data. Retailsales and construction were both very strong

Big hit in 2Q20 expected. The lockdown and suspension of most project work means that the economy may contract by up to 10% YoY in April and by close to 10% for 2Q20. What happens in 2H20 will depend on how quickly the economy can reopen and where oil trades

Consumer sectors will take the biggest hit. Consumers are again in the firing line and job losses could be as high as 4 mln

Russia: Macro Trends & Medium Term Forecasts Base Case Scenario

2016 2017 2018 2019 2020E 2021E 2022E

GDP, US$ bln $1,347 $1,635 $1,592 $1,633 $1,568 $1,742 $1,946

Growth, real % YoY -0.2% 1.5% 2.3% 1.3% -2.5% 2.0% 2.4%

Inflation - year-end, % YoY 5.4% 2.5% 4.3% 3.0% 5.5% 4.8% 4.0%

Central bank key rate, % (eop) 10.0% 7.8% 7.8% 6.3% 4.5% 4.5% 4.0%

Real disposable income, % YoY -5.9% -1.7% 0.1% 0.8% -2.5% 0.2% 1.5%

Unemployment, % EOP 5.4% 5.0% 4.7% 4.6% 6.0% 5.2% 4.8%

Budget, balance % of GDP -3.4% -1.4% 2.7% 1.8% -2.0% -0.2% 0.2%

Current account, % GDP 1.9% 2.1% 7.1% 4.3% 1.0% 1.8% 2.4%

RUB/US$, year-end 64.5 69.7 79.5 69.5 83.0 77.0 71.0

RUB/EUR, year-end 67.0 58.1 62.8 64.8 72.0 70.0 67.0

Brent, US$ p/bbl, average $45 $55 $72 $63 $36 $48 $56


 

 

Edited by Tomasz
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LNG can't compete with Russian gas, but, I do not know what the Russians are charging.

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54 minutes ago, russian oil trader said:

 

I'm sorry buddy, I'll refute your theory

Russia sells oil in long-term contracts via pipelines to Europe and Asia especially China. Currently to  China about 2 million barrrel per day and growing year after year.

It would be good to know about that if someone wants to speak on the subject of the world oil market.

I am not saying that they have not sold anything. As @Gregory Purcell says, the China sales in Mar were not affected. The Saudis were complaining loudly about their waiting offshore while Russian carriers come in and offload immediately. I presume that the Chinese oil companies have filled their obligations to Russian contracts and are buying their spot needs from Saudi, as Saudi is not complaining recently.

The long term contracts in Europe are no longer enforceable. Just as the long running arbitration of the dispute with Poland over NG has resulted in substitution of market prices for the contract price that Poland's gas carrier was charged. Since Russia has no means to enforce these contracts, and there is an actual force majeure event, those contracts are not in force. It is up to the customers to decide to honor them, and it appears that many that were still doing so in Mar have abandoned them in Apr. 

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2 minutes ago, HermitMunster said:

LNG can't compete with Russian gas, but, I do not know what the Russians are charging.

They were charging on a % discount to Brent, at about double the LNG rate in Jan. New contracts reference gas indices in Europe instead of Brent, and those are arbitraged to US LNG and the Henry Hub price. 

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(edited)

2 hours ago, HermitMunster said:

LNG can't compete with Russian gas, but, I do not know what the Russians are charging.

Gazprom says:  Average Gas Price for 2018  (net of VAT excise tax customs and duties)  per a million cubic meters

In Russia proper $63.30   In Former Soviet Union countries $162.20  And the "Far Abroad" which is western Europe  $246.40

Obviously each contract is different and today's pricing is very different but the important thing I see here is Gazprom can profitably sell gas in Russia for 25% of the price they were selling it for in Western Europe,  how  the lower price affects the government's  tax revenue is a separate matter.     

  https://www.gazprom.com/f/posts/67/776998/gazprom-in-figures-2014-2018-en.pdf

Edited by Gregory Purcell
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7 hours ago, Tomasz said:

So If you claim that the Russians are living worse now than ever before I advise you to go to this country and get real that you won't convince anyone who is conscious to such a claim.

 

That is hardly the case, Russian's lives have improved substantially since the recovery from the Soviet collapse and the Looting during Yeltsin's time. No doubt about it. However, Putin did setup the economy to be oil and gas focused and took his time cleaning out corruption in the police, regulatory agencies and prosectution and at the courts. So when 2014 rolled about, and the Ruble collapsed into rubble, the economy went with it, as food prices rose and people, even in the rural lands, decided on having fewer children, once again bringing Russia onto a demographic death spiral path. The current oil price collapse is again drawing food out of Russian's hands with the low Ruble and that had prompted the Russian Central Bank to intervene to stabilize it. 

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If it isn't obvious, the low Ruble means that the ag export that Putin so promoted gets bigger orders at lower dollar prices so farmers and merchants sell abroad and prices rise at home. 

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4 hours ago, 0R0 said:

If it isn't obvious, the low Ruble means that the ag export that Putin so promoted gets bigger orders at lower dollar prices so farmers and merchants sell abroad and prices rise at home. 

Agreed that the low Ruble helps the diversification of the economy and the tax base. Farmers have mostly oil and ruble costs rather than euro/dollar costs. Russia showed in the last downturn that they could rearrange the economy to manage lower oil prices and they should be able to do it again. Of course, we haven't added in COVID costs yet so there's a variable that we can only guess at.

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