By J Mulraj
Dec 4-10, 2022
Curiouser and Curiouser, unbelievably stupid decisions by world leaders
Just as Alice exclaimed, some decisions made by the collective west are getting curiouser and curiouser. At the October/November 2021 Glasgow COP world leaders made pledges to achieve a zero carbon emission level by varying dates. These were forgotten barely 3 months later, after Russia invaded Ukraine, when its pleas to NATO to not admit Ukraine into it, as it posed a threat to Russia, were ignored.
The collective West imposed severe sanctions on Russia and froze assets of its Central bank, trying to bring Russia to its heels. Russia retaliated by reducing its supply of energy, viz. oil and gas. If you pick a fight with your bullet supplier (energy) then you run out of bullets first. Europe ought to have built alternative supplies of energy before foolishly embarking on an sanctions attack on its main provider, Russia.
The Environmental Conundrum:
Europe, as a result, ran into WYDSIWYG! What you don’t see is what you get! A bizarre consequence of Europe stopping purchase of Russian energy is that Germany had to dismantle a wind farm (renewable energy it was seeking to promote) to make way for a coal mine (fossil fuel energy it was trying to phase out)!
What about the pledges made at the Glasgow COP 26 Well, they are Gone With the Wind, and, ironically, a wind that can’t help generate electricity, as the windmills are dismantled. That’s about as Kafkaesque as you can get.
It gets curiouser and curiouser! The collective west is now seeking, as buyers of energy, to impose a price cap on a supplier of energy! How can they do that? Yes, together they can aver that they will buy crude oil only up to a price of $60/b, which is the cap they seek. But how can they enforce it? They try to do so by denying insurance and ships to any cargo of crude oil invoiced higher. But there will be enough ways to get around that.
Russia has countered by saying that it will sell its crude only to friendly countries, or those who don’t impose on it sanctions or price caps. Private sector Indian refiners, like Reliance and Nayara Energy (earlier Essar Oil, bought by Rosneft of Russia), that can produce winter grade diesel oil, have been approached by Europe to supply it. It is rather ironic that the effort to punish Russia through a price cap, is aiding its largest oil company, Rosneft.
What will (and is) happen is that the collective west will buy Russian crude from those friendly countries, at a higher price. This higher price will bankrupt the poorer nations who can’t afford to pay it. Another Kafkaesque situation!
The Economic conundrum:
All economies need energy. Period. Without it factory output will be affected, the price of commuting will go up, inflation will rise and the cost of heating a home will become unaffordable without subsidy. This is basic common sense, not rocket science!
In its fight to uphold the right of another country to join NATO, the collective west has brought onto itself an economic nightmare. Europe is facing high inflation, and is entering into a recession. It is expressing displeasure at its partner, America, for goading it to stand against Russia, cutting the purchase of cheap Russian oil/gas, and then benefitting from higher LNG prices in sale to Europe!
What’s more Kafkaesque is the colossal waste in infrastructure. The cheapest, safest and most environmental friendly way to supply gas from one country to another is via pipeline. These pipelines are expensive to build, and, as they are built from one destination to, and for, another, the buyer and seller are umbilically tied through a long term contract. A lot of Europe’s economic success was premised upon getting cheap Russian energy. Now that it’s stopped, the world’s largest chemical company, BASF, finds its German operations to be unviable, and is contemplating a shift to China! You can’t make this up!
So the various Russian pipelines to Europe are unused. It’s building new ones to China. Meanwhile Europe, in its desperate hunt for energy sources, is relying on liquefied natural gas, and building infrastructure for it. LNG is transported in a liquid state, at low temperature, in cryogenic vessels. It is converted at source from gas to liquid, at a liquefaction plant, and re-converted to gas, at destination, at a regassification plant. Europe is investing in such regas plants, even while the existing pipeline infrastructure is lying, disused. What a waste of resources.
The geopolitical conundrum:
The geopolitical strategy of America ought to have been to keep its biggest economic competitor, China, and its biggest, nuclear armed, competitor, Russia, apart. Also, after deciding not to exploit its shale oil, on environmental grounds, it ought to have nursed a long relationship with Saudi Arabia, which was also its biggest buyer of military equipment.
What has transpired is that, due to the obduracy of not talking to Russia about its concerns over NATO expansion to its border, Russia, the main military competition to USA, and China, the main economic competition, have joined hands. China, not Europe, is getting Russian oil/gas, even as Europe faces an energy winter.
Besides, just last week, President Xi, of China, visited Saudi Arabia, where he was awarded a red carpet welcome, in contrast to the cold shouldered fist bump and poor welcome given to Biden. So Biden has somehow managed to coalesce the interests of two foes and a former ally. Even Franz Kafka wouldn’t have imagined that!
The financial conundrum:
All this wasteful spending and discord is diverting funds from constructive use to destructive use. Countries had earlier printed money to help citizens fight Covid, now they are printing it to fund wars. Excess money supply, combined with lockdowns under a zero-tolerance to Covid policy, leading to supply chain bottlenecks, has funneled inflation. Central banks are hiking interest rates to help fight inflation, after having earlier blithely terming it as transitory. The next hike in USA is in mid Dec.
With the yield on 2 year US T-Bills being higher than the yield on 10 year bonds, this inverted yield curve forecasts a recession. So, the economies of several developed countries are in, or entering, a recession.
If the moves of several countries to de-dollarise, by selling products in another currency, gathers momentum, the ability of the US to keep printing money and borrowing more, will be weakened. The over use of ‘sanctions’ has created the angst that has led to the move to de-dollarise the global financial system, and create an alternative mode of payment for trade.
All the above four conundrums are negative for economic growth and for stock markets. And all arising from an conflict that could have been avoided by getting off the high horse and sitting on a negotiating chair. More’s the pity.
India, however, sits in a sweet spot. It’s economy is growing faster than most others, and its Stockmarket is hitting new highs, driven by huge inflows from retail investors. They are diverting household savings from fixed income, paying low interest, to equity, where returns are far higher than inflation. So large selling by foreign investors is not denting stock prices nor investor sentiment.
India is, in fact, the best performing emerging market in US $ terms!
In infrastructure, the Delhi-Vadodara-Mumbai expressway, partly built, will cut driving time from Delhi to Mumbai to 12 hours, less than the 15 1/2 hours on the fastest train. Airtel has joined hands with Meta to bring 2Africa Pearls, the world’s longest subsea cable network, to a landing station in Mumbai, boosting bandwidth capacity.
Should there be a global recession, as seems likely, India, too, would be impacted, since the share of external trade (imports and exports of goods and services) is 43% of GDP. But India is attracting foreign investment, both direct and indirect, and, if the capex investment cycle kicks in, the Indian stock market will boom.
The BSE Sensex ended the week at 62181, down 727 over the week.
The long term India story is good. But a global recession can bring down markets before that.
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