DPC “Broad Street and curb market, New York” 1906
The Saudis are the guys who know what demand is like out there.
• OPEC Will Not Cut Output However Far Oil Falls: Saudi Oil Minister (Reuters)
Saudi Arabia convinced its fellow OPEC members that it is not in the group’s interest to cut oil output however far prices may fall, the kingdom’s oil minister Ali al-Naimi said in an interview with the Middle East Economic Survey (MEES). OPEC met on Nov. 27 and declined to cut production despite a slide in prices, marking a shift in strategy toward defending market share rather than supporting prices. “As a policy for OPEC, and I convinced OPEC of this, even Mr al-Badri (the OPEC Secretary General) is now convinced, it is not in the interest of OPEC producers to cut their production, whatever the price is,” Naimi was quoted by MEES as saying.
“Whether it goes down to $20, $40, $50, $60, it is irrelevant,” he said. He said that we “may not” see oil back at $100 a barrel, formerly Saudi Arabia’s preferred level for prices, again. He said Saudi Arabia is prepared to increase output and gain market share by meeting the demands of any new customers, adding that lower crude prices would help demand by stimulating the economy. Brent was last down about 80 cents to $61 a barrel. It’s declined more than 46% from the year’s peak in June above $115 per barrel. U.S. crude was down more than $1 to $56 a barrel. “We are going down because you have some OPEC ministers who come every day making statements trying to drive the market down, said Olivier Jakob, an oil analyst at Petromatrix Oil in Zug, Switzerland.
“They come every day to convey the message that they are not doing anything to restrict supplies and that they basically want oil prices to move lower to reduce production in the U.S.” OPEC’s decision not to reduce production at a meeting in November sped up the decline in already falling oil prices. Prospects for a cut in the near future look remote. While analysts said Brent would likely remain above $60 a barrel this year, they said further large jumps in price were unlikely. Analysts said the price drop would have only a gradual impact on the outlook for production. “Given the lead time in permit approval and rig construction ahead of oil production, a sizeable negative U.S. supply response given the price drop is unlikely to take place until late 2015, which places further downward pressure on oil prices in the first six months of next year,” National Australia Bank said in a note.
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Isn’t that just lovely?
• On Fuel, Airlines Gambled And You Lost (Reuters)
With Christmas a few days away, we are in the heart of the holiday traveling season, and most people have already decided their mode of transportation after weighing expense versus convenience. On the topic of expense, earlier this month, Senator Charles Schumer called for a federal investigation into airfare prices, asking why tickets remain so expensive when gas has become so (relatively) cheap. Since fuel prices account for half of airlines’ costs and gas prices have been steadily falling, travelers should be seeing trickle-down savings, he reasoned. But fueling-up an airplane isn’t just a matter of pulling up to the nearest ExxonMobil station and filling up on unleaded.
For starters, it’s an entirely different kind of fuel, although some people seem intently obtuse on the subject. More importantly, because they purchase jet fuel in such huge quantities, many airlines take a different approach to their purchasing strategy than the average driver. They use financial derivatives to hedge their bets against rising fuel prices. In July, American Airlines stopped hedging, deciding that hedging risk was more risky than the gamble on fuel prices itself. As The Motley Fool explains, ”Most airlines hedge with call options, which allow them to cap their fuel costs without locking them in if oil prices happen to fall. The downside of this strategy is that the airline has to pay a premium for each call option.
Unless oil prices rise by a significant amount before the option expires, the airline will lose money on the hedge.” As this Reuters graphic shows, that’s what is happening to many carriers now. Oil prices have been falling since June, causing many to absorb the cost of premiums without enjoying the benefit of hedges against higher prices, so for these airlines lower prices aren’t actually great news. In the case of American Airlines, Schumer is correct, as control over ticket prices serves as a natural hedge to the ebb and flow of fuel prices. But since airlines generally mimic one another when pricing tickets, American has been happy to pocket the money it’s saving rather than reducing prices.
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The future of the ‘industry’.
• Billionaire Shale Pioneer Cuts Spending 41% on Oil Crash (Bloomberg)
Billionaire Harold Hamm, whose early adoption of shale drilling in North Dakota helped usher in a U.S. energy renaissance, plans to cut spending by 41% at his company after the plunge in oil prices. Continental Resources and other U.S. producers can adjust quickly to the crude collapse and will be able to withstand the downturn better than many producing countries, which face economic “ruin,” Hamm said in an interview. “The oil and gas industry has lowered the cost of gasoline to consumers in this country,” Hamm, chairman and chief executive officer of Continental, said yesterday. “It’s been good for America, this increase in supplies that we have here. We don’t want to see it all go for naught.”
Continental and rivals including ConocoPhillips and Apache plan to trim spending and move rigs to more profitable areas while prices remain under pressure. Crude has fallen by almost 50% since June to a five-year low as demand forecasts fell amid a glut in supply fed in part by the shale revolution. Saudi Arabia and OPEC allies have declined to cut output to stave off price declines. U.S. prices are expected to average $63 a barrel in 2015, according to the U.S. Energy Information Administration. U.S. producers have trimmed billions from 2015 spending plans as the price decline eroded potential profits from drilling in shale rock, a technological breakthrough that helped boost production to the highest level in almost 30 years. Spending at Oklahoma City-based Continental will fall to $2.7 billion and the company will increase production by as much as 20% next year.
That’s a decline from a previous growth forecast of as much as 29%, the company yesterday said in a statement. “We’re a company that’s not out over its skis with people or commitments,” said Hamm, the chairman and chief executive officer of Continental. “We’ve been through about half a dozen of these in my lifetime. We can do it.” The cut comes six weeks after Hamm said he liquidated the company’s oil hedges because the price slump was going to be a temporary. Continental will average about 31 rigs in 2015, down from 50, and will drill an estimated 188 wells in the Bakken formation and about 81 wells in the south central Oklahoma formation. In the Bakken, about 70% of rigs aren’t profitable with oil prices at $60 a barrel, according to a note to investors today from ITG Investment Research. In the past two years, producers have needed an average of $57 a barrel while drilling in south central Oklahoma to make a 10% profit, according to ITG.
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“The point of sanctions is to inflict consequences on the entities designated, not for companies to find loopholes to get deals done.”
• Morgan Stanley, Rosneft Oil-Unit Deal Fails On Sanctions (Bloomberg)
Morgan Stanley’s failure to complete the sale of its oil storage, trading and transport unit shows the chilling effect U.S. sanctions are having on Russian companies including Rosneft. The U.S. bank and Rosneft, the Russian state-owned oil giant, said Monday that their deal, for an undisclosed amount, had expired after the companies failed to win regulatory approval. Morgan Stanley had warned in October that the agreement might not be completed. U.S. sanctions against Rosneft explicitly prohibit selling certain oil-exploration equipment to the company or giving it long-term debt financing. The sale of Morgan Stanley’s oil-trading unit didn’t appear to trigger those prohibitions. Even so, such a sale would have undercut the broader U.S. goal of isolating the energy company. “It’s appropriate to stop deals with companies that have been targeted in one form or another,” said David Kramer, a former U.S. assistant secretary of state and now senior director for human rights and democracy at the McCain Institute for International Leadership in Washington.
“The point of sanctions is to inflict consequences on the entities designated, not for companies to find loopholes to get deals done.” The failure strikes a blow to Rosneft’s aspirations to become a more global oil company. When the deal was announced a year ago, Igor Sechin, Rosneft’s chief executive officer, said it would “spearhead the company’s growth in the international oil and products markets.” The sale didn’t gain permission from the Committee on Foreign Investment in the United States, an inter-agency panel known as CFIUS that examines acquisitions of companies by foreign investors for national security concerns, according to a person briefed on the matter who asked not to be identified because the review is confidential. The pact also needed other regulatory approvals that never came, the person said.
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Simple: too expensive at present rate of return.
• If Shell Backs Out, Arctic Oil Off the Table for Years (Oilprice.com)
The next several months may be pivotal for the future of oil development in the Arctic. While Russia has proceeded with oil drilling in its Arctic territory, the U.S. has been much slower to do so. The push in the U.S. Arctic has been led by Royal Dutch Shell, a campaign that has been riddled with mistakes, mishaps, and wasted money. Nearly $6 billion has been spent thus far on Shell’s Arctic program, with little success to date. Now, 2015 could prove to be a make or break year for the Arctic. Shell may make a decision on drilling in the Chukchi and Beaufort Seas by March 2015. If it declines to continue to pour money into the far north, it may indefinitely put Arctic oil development on ice (pun intended).
The crossroads comes at an awful time for Shell. Oil prices, hovering around $60 per barrel, are far too low to justify Arctic investments. To be sure, offshore drilling depends on long-term fundamentals – any oil from the Arctic wouldn’t begin flowing from wells until several years from now. That means that weak prices in the short-term shouldn’t affect major investment decisions. Unfortunately, they often do. Just this week Chevron put its Arctic plans on hold “indefinitely,” citing “the level of economic uncertainty in the industry.” Chevron had spent $103 million on a tract in the Beaufort Sea in Canadian waters, but weak oil prices have Chevron narrowing its aspirations. This development is illustrative of the predicament facing major oil companies. They need to spend billions of dollars now to realize oil output sometime next decade.
However, they also must conserve cash in the interim. Oil companies across the world are slashing spending in order to shore up profitability. And Arctic oil is expensive oil, some of the most expensive in the world. It is on the upper end of where prices need to be in order to be profitable. By some estimates, oil prices would need to be in the range of $80 to $90 per barrel for Arctic oil to breakeven; other estimates say as high as $110 per barrel. That means that even before the oil price drop, Arctic oil development looked tenuous. Statoil and ConocoPhillips had already scrapped their plans to drill in the Arctic, even when oil prices were nearly double where they are now, because of high costs. And when oil prices drop, these marginal projects get the ax.
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Pressure on Paris.
• Biggest Arctic Gas Project Seeking Route Around U.S. Sanctions
Total and its partners will use a record 16 ice-breaking tankers to smash through floes en route to and from the Arctic’s biggest liquefied natural-gas development. They’re still looking for a way around a freeze in U.S. financing. With 22 wells drilled, and a runway and harbor built for the $27 billion project in Russia’s Yamal Peninsula, where temperatures can reach 50 degrees below zero Celsius, Total, Novatek and China National Petroleum Corp. have little choice but to push ahead. The U.S. Export-Import Bank this year halted a study into funding the plans to ship gas from Yamal, or End of Earth in the native Nenets tongue, to buyers around the world as President Barack Obama’s administration imposed sanctions on Russia. The action by the bank, which offers credit assistance to companies buying the nation’s goods and services, effectively blocked the project from borrowing in the U.S. currency.
“The issue is in the financing because this can’t be done in dollars,” Arnaud Breuillac, Total’s president of exploration and production, said in an interview. “It’s more complex. We are working on it.” European governments, reliant on gas from Russia, have had to tread a fine line in their relations with the country since its annexation of Ukrainian Crimea led to sanctions. The U.S. and Europe have mostly targeted the Russian oil industry and individuals with ties to President Vladimir Putin rather than impose measures that could strangle the nation’s gas exports. That means one option for Paris-based Total is to look for help from home. Coface is France’s answer to the U.S. Exim bank. “We’ll get it in other currencies such as euros through credit agencies like Coface,” Breuillac said. In the meantime, the project’s timetable has slipped. Total has said it’s no longer counting on output starting in 2017. Commissioning of the first LNG unit, or train, was to begin in 2016 and commercial production the following year.
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This is where a lot of the losses will be felt down the line.
• Outlook Sours for Europe’s Oil Titans on Crude Slump (Bloomberg)
The U.S. shale-oil industry has made another enemy: Europe’s largest crude explorers. Standard & Poor’s Ratings Services revised its outlook to negative for Shell, Total and BP as the oil-market rout driven by weakening demand and a flood of supply from American shale fields threatens cash flow into 2016. The credit-rating company also cast a dim eye on Houston-based ConocoPhillips, saying it’s facing similar cash flow pressure, and said it may cut the ratings on Eni SpA and BG’s BG Energy Holdings. S&P cited “the dramatic deterioration in the oil price outlook” and the 50% increase in debt loads and dividend commitments for the biggest European oil producers since the end of 2008. Oil has slumped about 21% since OPEC decided against cutting its production target last month.
United Arab Emirates Energy Minister Suhail Al Mazrouei said non-OPEC suppliers should cut “irresponsible” output. Prices of Brent, the European benchmark crude, have fallen about 45% this year, setting the stage for the largest annual drop since 2008. The major European oil explorers are hamstrung by heftier investor payouts than their U.S. rivals that leave them less room to maneuver during cash crunches. BP has an indicated dividend yield of 6.85%, followed by 5.7% for Total and 5.25% for Shell. By comparison, Exxon Mobil and Chevron dividend yields are 2.95% and 3.83%, respectively. The European companies also are burdened with relatively inflexible capital spending budgets because most contracts require cash infusions into oil and gas projects, S&P said.
ConocoPhillips was among the first oil producers to slash its 2015 spending plan two weeks ago when it announced a 20% budget cut and plans to defer some projects. Even with those cuts, ConocoPhillips’s net debt may balloon during the next two years as it funnels some cash into “its sizable common dividend,” S&P said in a separate note to clients.
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Who said Arabs have no sense of humor?
• Arab OPEC Sources See Oil Back Above $70 By End-2015 (Reuters)
Arab OPEC producers expect global oil prices to rebound to between $70 and $80 a barrel by the end of next year as a global economic recovery revives demand, OPEC delegates said this week in the first indication of where the group expects oil markets to stabilize in the medium term. The delegates, some of which are from core Gulf OPEC producing countries, said they may not see – and some may not even welcome now – a return to $100 any time soon. Once deemed a fair price by many major producers, $100 a barrel crude is encouraging too much new production from high cost producers outside the exporting group, some sources say.
But they believe that once the breakneck growth of high cost producers such as U.S. shale patch slows and lower prices begin to stimulate demand, oil prices could begin finding a new equilibrium by the end of 2015 even in the absence of any production cuts by OPEC, something that has been repeatedly ruled out. “The general thinking is that prices can t collapse, prices can touch $60 or a bit lower for some months then come back to an acceptable level which is $80 a barrel, but probably after eight months to a year,” one Gulf oil source told Reuters. A separate Gulf OPEC source said: “We have to wait and see. We don’t see 100 dollars for next year, unless there is a sudden supply disruption. But average of 70-80 dollars for next year yes.
The comments are among the first to indicate how big producers see oil markets playing out next year, after the current slump that has almost halved prices since June. Global benchmark Brent closed at around $60 a barrel on Monday. Their internal view on the market outlook will provide welcome insight to oil company executives, analysts and traders, who were caught out by what was seen by some as a shift in Saudi policy two months ago and have struggled since then to understand how and when the market will find its feet. For the past several months, Saudi officials have been making clear that the Kingdom s oft-repeated mantra that $100 a barrel crude is a fair price for crude had been set aside, at least for the foreseeable future. At the weekend, Saudi Oil Minister Ali al-Naimi was blunt when asked if the world would ever again see triple-digit oil prices: We may not.
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Or is it the other way around?
• Cheap Oil Is Dragging Down the Price of Gold (Bloomberg)
Gold, the ultimate inflation hedge, isn’t much use to investors these days. Oil is in a bear-market freefall that began in June, spearheading the longest commodity slump in at least a generation. The collapse means that instead of the surge in consumer prices that gold buyers have been expecting for much of the past decade, the U.S. is “disinflating,” according to Bill Gross, who used to run the world’s biggest bond fund. A gauge of inflation expectations that closely tracks gold is headed for the biggest annual drop since the recession in 2008. While bullion rebounded from a four-year low last month, Goldman Sachs and Societe Generale reiterated their bearish outlooks for prices. The metal’s appeal as an alternative asset is fading as the dollar and U.S. equities rally, and as the Federal Reserve moves closer to raising interest rates to keep the economy from overheating.
“Forget inflation – all of the talk now is about deflation,” Peter Jankovskis at OakBrook Investments said Dec. 16. “Obviously, oil prices dropping are adding to deflationary pressures. We may see a rate rise next year, and we could see gold come under pressure as the dollar continues to move higher.” Even though there’s been little to no inflation over the past six years, investors have been expecting an acceleration after the Fed cut interest rates to zero% in 2008 to revive growth. Those expectations, tracked by the five-year Treasury break-even rate, helped fuel gold demand and prices, which surged to a record $1,923.70 an ounce in 2011. Now, inflation prospects are crumbling, undermining a key reason for owning the precious metal.
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And with printed money to boot.
• Ruble Swap Shows China Challenging IMF as Emergency Lender (Bloomberg)
China is stepping up its role as the lender of last resort to some of the world’s most financially strapped countries. Chinese officials signaled on the weekend they are willing to expand a $24 billion currency swap program to help Russia weather the worst economic crisis since the 1998 default. China has provided $2.3 billion in funds to Argentina since October as part of a currency swap, and last month it lent $4 billion to Venezuela, whose reserves cover just two years of debt payments. By lending to nations shut out of overseas capital markets, Chinese President Xi Jinping is bolstering the country’s influence in the global economy and cutting into the International Monetary Fund’s status as the go-to financier for governments in financial distress.
While the IMF tends to demand reforms aimed at stabilizing a country’s economy in exchange for loans, analysts speculate that China’s terms are more focused on securing its interests in the resource-rich countries. “It’s always good to have IOUs in the back of your pocket,” Morten Bugge, the chief investment officer at Kolding, Denmark-based Global Evolution A/S who helps manage about $2 billion of emerging-market debt, said by phone. “These are China’s fellow friends and comrades, and to secure long-term energy could be one of the motivations.” [..] China and Russia signed a three-year currency-swap line of 150 billion yuan ($24 billion) in October, a contract that allows Russia to borrow the yuan and lend the ruble. While the offer won’t relieve the main sources of pressure on the ruble – which has lost 41% this year amid plunging oil prices and sanctions linked to Russia’s annexation of Crimea — it could bolster investors’ confidence in the country and help stem capital outflows.
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It’s still at least a full third of the credit system.
• China’s Shadow Banking Thrives Even As Rules Tighten (Reuters)
New players in China’s shadow banking sector are growing rapidly despite attempts to clamp down on opaque lending, taking advantage of a regulatory anomaly to prosper but also raising the risks of a build-up of debt in the slowing economy. Authorities have sought to rein in the riskiest elements of less-regulated lending after a series of defaults, including a 4 billion yuan ($640 million) credit product backed by Evergrowing Bank in September, because of the danger such debts could pose to the health of the world’s second-largest economy. And a government measure created in 2011 to capture shadow banking, total social financing (TSF), shows some success, with shadow banking contracting in the second half of 2014 to roughly 21.9 trillion yuan ($3.5 trillion), according to a Reuters’ analysis of central bank data.
But that fails to capture as much as 16 trillion yuan ($2.6 trillion) of financing mostly created in the past two years by firms overseen by the China Securities Regulatory Commission (CSRC) rather than the banking regulator, according to a Reuters calculation based on third-party statistics. When including that financing, shadow banking is roughly equivalent to more than 45% of loans in the conventional banking system. “We can observe this, but we don’t have concrete statistics, so we’re unclear on the scope,” said Zeng Gang, director of the banking department at the Chinese Academy of Social Sciences, a think tank that advises the central government. Shadow banking is therefore harder to regulate, he said. Indeed, the State Council called on the central bank last December to develop new statistics to measure shadow banking.
In shadow banking’s new incarnation, brokerages and fund management companies can pool retail investor funds or invest funds already gathered by a bank, acting as an intermediary rather than the actual investor. “China’s credit landscape is just simply evolving too quickly, so TSF doesn’t provide as comprehensive a picture as it used to do,” said Donna Kwok, an economist at UBS. Shadow banking, defined as non-bank credit and off-balance sheet bank lending, is an important part of banking systems around the world. In China, it has helped smaller, private companies access credit and offered investors better returns than bank deposits. The central bank has said the benefits of the sector are undeniable. But it can also fund risky or unproductive investments, building up risks in the banking system.
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Kudrin is in line to be Russia’s next PM.
• Russia Faces Full-Blown Crisis Says Former Finance Minister (FT)
Russia faces a “full-blown economic crisis” next year that will trigger a series of defaults and the loss of its investment-grade credit rating, a respected former finance minister has warned. Real incomes will fall by 2-5% next year, the first decrease in real terms since 2000, said Alexei Kudrin, a longtime ally of President Vladimir Putin and widely tipped to succeed Dmitry Medvedev as prime minister. His warning came as Russia’s central bank was forced to prop up a mid-sized lender in a sign of the strains on the banking system. “Today I can say that we have entered or are currently entering a full-blown economic crisis; next year we will feel it in full force,” Mr Kudrin said in Moscow on Monday. In unusually blunt comments for an establishment figure, he also called on Mr Putin to do what was necessary to improve relations with the west:
“As for what the president and government must do now: the most important factor is the normalization of Russia’s relations with its business partners, above all in Europe, the US and other countries.” His bleak forecasts for the Russian economy come after a week of high drama in which the ruble fell by as much as 36% in one day, rattling popular confidence in the government. On Monday, the ruble rose 5.1% to 56.5 to the dollar following a series of measures announced in the second half of last week to shore up confidence in the banking system The central bank said it would inject 30 billion rubles ($530 million) into Trust bank, the country’s 28th-largest lender by assets, “to prevent bankruptcy”.
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““One of the lessons from the Great Financial Crisis is that large changes in prices and exchange rates, and the implied increased uncertainty about the position of some firms and some countries, can lead to increases in global risk aversion, with major implications for repricing of risk and for shifts in capital flows.”
• IMF Raises Fears Of Global Crisis As Russian Bank Forced Into Bailout (Guardian)
The International Monetary Fund warned on Monday of the risk of Russia triggering a fresh phase of the global financial crisis as the plunge in the value of the rouble claimed its first banking victim. On the day that Russia’s central bank threw a $530m (£340m) lifeline to Moscow’s Trust Bank, the IMF said its generally upbeat assessment of the impact of falling oil prices on the global economy could be upset by investors taking fright at what is happening to Vladimir Putin’s energy-rich country. Alexei Kudrin, Russia’s former finance minister, said 2015 would be a tough year for the economy as he blamed the Kremlin for failing to act quickly enough and said the country’s debt would be downgraded to “junk” status. “Today, I can say that we have entered or are entering a real, full-fledged economic crisis. Next year, we will feel it clearly,” Kudrin said. Predicting a wave of corporate failures and state bailouts of the banks, he added: “The government has not been quick enough to address the situation … I am yet to hear … its clear assessment of the current situation.”
Olivier Blanchard, the fund’s chief economist, and Rabah Arezki, head of its commodities research team, said: “Oil prices have plunged recently, affecting everyone: producers, exporters, governments, and consumers. Overall, we see this as a shot in the arm for the global economy. Bearing in mind that our simulations do not represent a forecast of the state of the global economy, we find a gain for world GDP between 0.3% and 0.7% in 2015, compared to a scenario without the drop in oil prices.” But they said their optimistic analysis came with a warning. “One of the lessons from the Great Financial Crisis is that large changes in prices and exchange rates, and the implied increased uncertainty about the position of some firms and some countries, can lead to increases in global risk aversion, with major implications for repricing of risk and for shifts in capital flows. This is all the more true when combined with other developments such as what is happening in Russia. One cannot completely dismiss this tail risk.”
Trust, which uses the Hollywood star Bruce Willis to advertise its credit cards, ran into trouble after its policy of offering attractive savings rates and consumer loans fell foul of Russia’s economic slowdown. The country’s central bank said it was providing up to 30bn roubles to help the medium-sized bank in what is thought likely to be the first of a series of bailouts made necessary by the near-halving of the global price of oil and the sharp fall in the value of the rouble. Russian MPs rushed through a bill last Friday authorising a 1tn-rouble recapitalisation of the country’s banks, which have suffered big losses as a result of the currency crisis.
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Collapse before the new year? Or shall we wait for January? See if we can find a way to blame Putin.
• Belarus Blocks Online Sites, Closes Stores To Stem Currency Panic (AFP)
Belarus blocked online stores and news websites Sunday, in an apparent attempt to stop a run on banks and shops as people rushed to secure their savings. In a statement Sunday, BelaPAN news company, which runs popular independent news websites Belapan.by and Naviny.by, said that the sites were blocked Saturday without any warning. “Clearly the decision to block the IP addresses could only be taken by the authorities because in Belarus the government has monopoly on providing IPs,” it said. Other websites blocked Sunday were Charter97.by, BelarusPartisan.org, Udf.by and others with an independent news outlook. The blockage started on December 19, when the government announced that purchases of foreign currency will be taxed 30% and told all exporters to convert half of their foreign revenues into the local currency. “Looks like the authorities want to turn light panic over the fall of the Belarussian ruble into a real one,” Belarus Partisan website wrote, calling the blockages “December insanity.”
Internet shopping websites were also blocked en masse. Thirteen online stores were blocked Saturday for raising their prices or showing them in US dollars, deputy trade minister Irina Narkevich said, Interfax reported. The government announced a moratorium on price increases for consumer goods and ordered domestic producers of appliances to “increase deliveries” and keep prices the same at the risk of their management being sacked. Belarussians lined up for hours to clear out their bank accounts and swept store shelves to secure their savings, stocking up on foreign-made appliances and housewares. The Belarussian ruble has lost about half of its value since the beginning of the year, having been hit hard by the depreciation of the Russian ruble since its economy is heavily dependent on its giant neighbour. With foreign currency swiftly depleted in exchange offices, Belarussians even launched a black market website dollarnash.com where individuals could buy and sell dollars and euros.
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• Market-Rigging Laws Will Also Cover Currency, Gold, Oil And Silver (Guardian)
Laws to make the manipulation of market benchmarks a criminal offence – sparked by the Libor rigging scandal – will also cover currency, gold, oil and silver markets by 1 April, the government has said. The move announced on Monday is the latest by the coalition government to clamp down on malpractice in the City of London, whose reputation has been further tarnished this year by the exposure of traders colluding to manipulate currency rates. “Ensuring that the key rates that underpin financial markets here and around the world are robust, and that anyone who seeks to manipulate them is subject to the full force of the law, is an important part of our long-term economic plan,” George Osborne said. Under the law, people found guilty of manipulation can be jailed for up to seven years.
It was originally introduced to cover the London interbank offered rate (Libor) market after a global manipulation scandal which resulted in banks being fined billions in 2012. The Treasury said seven benchmarks including the dominant global benchmark in the $5.3tn-a-day currency market – the WM/Reuters 4pm London fix – would be subject to the law, pending a consultation by Britain’s financial watchdog. The EU has criminalised the rigging of financial market benchmarks after the Libor scandal, but those laws will not take effect until 2016. A former City trader was arrested last week in connection with a criminal investigation into allegations that bank traders tried to manipulate currency markets. According to the Financial Times the trader had worked for Royal Bank of Scotland.
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Ukriane is being robbed blind by its own people.
• Ukraine Cuts Gold Reserve to Nine-Year Low as Russia Buys (Bloomberg)
Ukraine reduced gold reserves for a second month to the lowest since August 2005 as Russia bought bullion for an eighth month to take its holdings to the highest in at least two decades, according to the International Monetary Fund. Ukraine’s holdings fell to 23.6 metric tons in November from 26.1 tons in October, data on the IMF’s website showed. Reserves in Russia climbed to about 1,187.5 tons in November from 1,168.7 tons a month earlier, according to the data. Holdings by Ukraine are shrinking as fighting with separatists in the east of the country slows the economy and weakens the hryvnia. The country is relying on a $17 billion loan from the IMF to stay afloat and stave off a default.
Foreign reserves are at the lowest in more than a decade amid the deepest recession since 2009. Bullion holdings have dropped 45% from a record 42.9 tons in April, IMF data show. The country’s “financial situation has been under pressure,” Steven Dooley, a currency strategist for the Asia Pacific region at Western Union Business Solutions, said by phone from Melbourne. “Its currency has been under pressure as well. Ukraine is definitely a small player. We really haven’t seen any large impact” on the gold market, he said. Bullion for immediate delivery has declined 1.8% this year to $1,179.47 an ounce after slumping 28% in 2013 as investors reduced holdings in exchange-traded products, the dollar strengthened and the U.S. economy recovered.
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It’s by now impossible to say how much gold one of the world’s most corrupt nations has left.
• Ukraine Central Bank Sees $300,000 in Gold Swapped For Lead Bricks (RT)
Cunning fraudsters have conned the Ukraine Central Bank branch in Odessa into buying $300,000 worth of gold which turned out to be lead daubed with gold paint. “A criminal case has been opened and we are now carrying out an investigation to identify those involved in the crime,” a spokesman for the Odessa police force is quoted by Vesti. The news was first reported by Odessa’s State Ministry of Internal Affairs. A preliminary investigation suggests the gang had someone working for them inside the bank that forged the necessary paperwork to allow the sale of the fake gold bullion. It’s also been discovered that bank staff were not regularly checked when entering or exiting the premises.
Since the discovery, the National Bank no longer buys precious metal over the counter, as it cannot be sure of its authenticity, says the First Deputy Head of the National Bank of Ukraine, Aleksandr Pisaruk. The National Bank of Ukraine (NBU) has confirmed the theft of several kilograms of gold in the Odessa region. The cashier involved has apparently fled to Crimea, Vesti Ukraine reports. Criminal proceedings began on November 18, even though the scam apparently took place between August and October. In November, the Central Bank reportedly lost $12.6 billion in gold reserves, putting the total stockpile at just over $120 million. However, the Central Bank reports that foreign currency and gold reserves stood at $9.97 billion at the end of November.
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“.. the case’s significance lies in the information it unearthed about what the government did in the bailout — details it worked hard to keep secret.”
• Fresh Doubt Over the Bailout of AIG (Gretchen Morgenson)
“The government is on thin ice and they know it,” a lawyer representing the Federal Reserve Bank of New York wrote in a private email on Sept. 17, 2008, as the federal bailout of the American International Group was being negotiated. “But who’s going to challenge them on this ground?” Well, as it turned out, Maurice R. Greenberg would. Mr. Greenberg, the former chief executive of AIG – the insurance company whose failure threatened to bring down much of the global financial system with it — is not the most sympathetic figure. But the lawsuit he has brought on behalf of Starr International, a large stockholder in AIG, seeking compensation for shareholder losses during those crucial days of the financial crisis, raises troubling issues.
In a 37-day trial that ended in late November, Starr contended that the government’s actions in the bailout, including its refusal to put some terms of the rescue to a shareholder vote, were an improper taking of private property under the Fifth Amendment. It is seeking at least $25 billion in damages on behalf of AIG shareholders. The judge is expected to rule on the case next year. The government rejected Starr’s accusations, contending that its rescue of AIG kept the company from disaster and that AIG’s board agreed to the bailout terms. Those backing the government are indignant over the case. AIG shareholders did well in the bailout and should be grateful for it, they say. And all’s well that ends well, right? AIG repaid its $182 billion rescue loan in 2012; the government generated a profit of $22.7 billion on the deal.
To me, however, the case’s significance lies in the information it unearthed about what the government did in the bailout — details it worked hard to keep secret. And new documents produced after the trial seem to bolster Starr’s case, casting doubt on central testimony by some of the government’s witnesses. The new elements include emails written by the New York Fed’s lawyers during 2008 and 2009 that had been subject to attorney-client privilege and were not produced during the trial. Starr’s lawyers argued that the government’s legal team had knowingly waived that privilege when they put the Fed’s lawyers on the stand at trial; the judge agreed and ordered the government to produce 30,000 new documents.
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“They have succeeded via their dial-tweaking interventions in destroying the agency of markets so that nobody can tell the difference anymore between prices and wishes.”
• If Wishes Were Loaves and Fishes (James Howard Kunstler)
Janet Yellen and her Federal Reserve board of augurers might as well have spilled a bucket of goat entrails down the steps of the mysterious Eccles Building as they parsed, sliced, and diced the ramifications in altering their prior declaration of “a considerable period” (that is, before raising interest rates), vis-à-vis the simpler new imperative, “patience,” with its moral overburden of public censure aimed at those too eager for clarity — that is to say, the assurance that the Fed will not pull the plug on their life-support drip of funny money for the racketeering operation that banking has become. The vapid pronouncement of “patience” provoked delirium in the markets, with record advances to new oxygen-thin heights.
Behind all this ceremonial hugger-mugger lurks the dark suspicion that the Federal Reserve has no idea what’s actually going on, and no idea what it’s doing. And in the absence of any such ideas, Ms. Yellen and her collegial eminences have engineered a very elaborate rationale for doing nothing. The truth is, they have already done enough. They have succeeded via their dial-tweaking interventions in destroying the agency of markets so that nobody can tell the difference anymore between prices and wishes. Coincidentally, it is that most wishful time of the year, especially among the professional money managers polishing their clients’ portfolios as the carols are sung and the champagne corks pop. Ms. Yellen should have put on a Santa Claus suit when she ventured out to meet the media last week.
Not even very far in the background, there is wreckage everywhere as events spin out of the pretense of control. Surely something is up in the Mordor of derivatives, that unregulated shadowland of counterparty subterfuge where promises are made with no possibility or intention of ever being kept. You can’t have currencies crashing in more than a handful of significant countries, and interest rates ululating, without a lot of slippage among the swaps. My guess is that a lot of things have busted wide open there, and we just don’t know about it yet, like fissures working deep below the surface around a caldera. This Federal Reserve is running on the final fumes of its credibility.
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