China debt crisis

Fears of a looming China debt crisis 

Equities around the world got dinged and the yen jumped Wednesday after Chinese money-market rates spiked and a Bloomberg story said China’s biggest banks had tripled debt write-offs. So, what is going on?

Given concerns earlier this year about the Chinese shadow banking sector it would appear that the acknowledgement that there is a problem and Chinese authorities are starting to deal with it has seen some investors take some money off the table in case there are a lot more provisions to come,

It’s no wonder officials and investors are keeping a close eye on the situation. A major hit to the Chinese banking sector is likely to have massive ramifications across the G-20 universe and could have a deflationary impact on global growth. Little wonder then that Aussie saw so much selling pressure in overnight trade as it will likely suffer the most from any drop off in Chinese demand.

After falling sharply in recent days, especially yesterday after the disappointing jobs data, the US dollar is broadly higher today, with the yen the main exception.  It has strengthened by almost 1% today.  

Many are attributing the price action to news that the five largest Chinese banks tripled the bad loans written off in the first half of the year to CNY22.1 bln (~$3.65 bln). Yet, tellingly and importantly, the Chinese banks had already made the provisions and thus did not, reportedly, impact the record profits (~$76 bln) in H1.  

There is some speculation that this is a precursor to a wave of defaults, but in itself writing off the bad loans is a very important step in its own right.  It is a step toward modernization and liberalization.  Provisioning for bad loans and then drawing on those provisions is part and parcel of a modern banking system.    

Precisely why one would sell, say the New Zealand dollar, the weakest major currency today, losing about 1.4% through the European morning, or the Mexican peso, which, with a 0.8% loss is the weakest among the emerging market currencies, in response to Chinese banks writing off bad loans in the first half of the year, is not immediately self-evident.   Indeed, not writing off bad loans, we would argue, was part of the problem.  Writing off bad loans is part of the solution.  For the record, the yuan itself rose to a new 20-year high against the dollar.  

There is another liquidity squeeze in China today.   Corporate tax payments are draining liquidity and thus far the PBOC has not deemed it necessary to counter this.  However, after money market rates jumped the most since July, the PBOC is likely to respond tomorrow.  The 7-day repo jumped 47 bp to 4.05% and the 1-day repo rose 72 bp to 3.80%.  

The PBOC's ability to manage the liquidity conditions seems clumsy and often responding belatedly to clear signals of important imbalances.  Admittedly, at times, the PBOC may be trying to send a signals of displeasure, like it did earlier this year, about wealth management products and shadow banking.  That does not seem to be the intent now.  

The firmer headline CPI, though still concentrated on food prices and not the general price level, and rising house prices has spooked some investors who feared a policy response.   The rise in money markets is not a prelude to a rate hike or a snugging of monetary policy.   That is in fact, the point, there is no policy implication, except to reinforce the perception of the PBOC's difficulty in managing liquidity.  

The rise in money market rates may be a key spur to the largest decline of small company share prices in a year and a half.  The ChiNext index of small companies fell 2.9% today, more than twice the decline of Shanghai Composite.  In comparison, Japan's JASDAQ fell 0.8%, while the Nikkei lost almost 2%.  

It strikes us that many observers seized upon the story to explain the price action throughout the capital markets.  We suspect that if the markets were advancing, many would cite Chinese developments too.  Instead, we suggest there have been some large moves in recent days, and the new positions were in weak hands.  That is to say, the dollar and yen's bounce and the pullback in shares is more a function of market positioning than Chinese banks finally writing down bad loans four months ago, for which provisions were already made. 

RUSSIA CALLING ! part 2

РОССИЯ ЗОВЕТ ! - RUSSIA CALLING ! 

Putin seeks to double labor productivity to end ‘oil needle’ reliance

Speech at the Russia Calling! Investment Forum:

The speech here

At Russia Calling two years ago, Putin summed up Russian society in a sentence. He said the country has faced economic disasters many times and always came back.  Russia is always waiting for the worse to happen.  One of the reasons Putin is in power is because he’s basically made a promise never to take Russia over the edge again.

That the worst is happening next door in Europe, and farther away in the U.S., doesn’t help.  The investment sentiment of wealthy Russians is in decline. There’s a lot of wealth in Russia, but on balance, those with money are not putting it to work.

This year President Vladimir Putin to the usual standing-room-only crowd at Russia Calling said “Our problem is that we are not efficient, our economy is as big as Germany’s. Our per capita income is as high as some European countries. But the good news stops there.”

The Putin smirk. (call it his Mona Lisa smile). The Russian president said the economy was "inefficient" during VTB Capital's Russia Calling!

The Russian economy is operating well below its potential and a 3.1% labor productivity rate is intolerably low for the country poised to become Europe’s biggest, President Vladimir Putin told the 5th Russia Calling! investment forum in Moscow.

“The key bottleneck for the Russian economy is its low efficiency. In terms of GDP, Russia is poised to become Europe's number one economy and the fifth biggest in the world, adding that Russia is on a par with other countries in the EU in terms of per capita GDP and consumption.

However, labor productivity is now less than half the level of most developed economies – at 3.1 percent. In coming years, productivity must increase by 5%-6% a year, twice the current rate. "Only in this way can we overcome the efficiency gap," the president said. "I am confident that we are capable of doing that," he concluded. 

The current abyss between consumption and productivity is dangerous, Putin said. “Living off rent from natural resources, at the expense of future generations, unearned wealth cannot be stable or long term," he added. 

Oil and gas revenues now provide for more than a half of Russia’s budget, with various institutions repeatedly warning that such a oily black hole could soon swallow the country’s economy.

Comfort in store for investors in Russia

Hopes for a rapid recovery of the world economy were not justified; the recovery of the global financial system will be prolonged. And only concerted actions of states and new sources of development can speed it up. This came as a statement by Vladimir Putin during his speech at the "Russia Calling!" investment forum, which was held in Moscow on October 1-3.

The world economy has already lived through its worst days, but it is clear that a quick recovery is not to be expected. The structural crisis of the global financial system had its effect, Vladimir Putin noted.

"The acute phase of the crisis is overcome; the current risks are more or less taken under control. However, hopes for a quick recovery of the global economy, if there were any, are not justified. The crisis of the existing economic model is structural, which means it has a long-term character."

Concerted steps and new sources of development are needed. According to the President, this very approach was laid in the basis of the Russian G20 chairmanship, and then enshrined in the final St. Petersburg plan of action. Vladimir Putin stressed that the G20 countries had found mutually acceptable solutions of many issues.

"A specific program of the G20 work aimed at improving the investment climate and encouraging long-term financial investments was developed and is already being implemented. The key issue at the summit was the problem of a tax policies reform aimed at dealing with tax evasions, including the use of off-shore zones. We have adopted a fundamental decision on this issue. A joint plan of actions for combating the dissolution of the tax base was approved. We have also agreed on standards of information sharing for tax purposes."

Vladimir Putin has also touched upon foreign trade matters at the “Russia calling!” forum. Its volumes are decreasing, but working together, the G20 will be able to resist it.

“The Group of Twenty has reaffirmed its support of the trading system. We have agreed to extend the commitments of our countries to limit protectionism in the global trade until the end of 2016. I must tell you, it was a difficult task to persuade all the participants of this meeting to agree to this decision.”

However, some countries continue to use protectionist measures and put a spoke in the wheels of Russian producers. Russia could not but react to violations of the regulations of the international trade, the Russian leader said.

“As examples of protectionist measures I’d like to cite “energy adjustments” used by the European Commission while conducting anti-dumping investigations into Russian exports, as well as the notorious “Third Energy Package”, quotas on supplies of agricultural products and tariff policy in respect of rail transportations through the territory of some EU countries. We will learn to defend the rights of the national business, and actively use the WTO mechanisms as the old-timers of this organization do”.

Vladimir Putin gave a commission that the government together with the business community should start the procedure of protecting the interests of Russian producers on foreign markets in the framework of the WTO.

The President has specially dwelled on the topic of attracting investors to Russia. The volume of direct foreign investments in the Russian economy is growing: during the first half-year it reached $ 55 billion. This is three times more, than during the similar period of 2012.

In order for these investments to increase further, Russia intends to develop private-public partnership.

“The state will share the risks of private investors, putting up money on a repayable and reimbursable basis. I’d like to emphasize that both the first and the second are money from the National Wealth Fund. Mechanisms of concessions, co-financing, and other forms of private-public partnership will be widely developed. These changes in the legislation are being worked out currently.”

Private-public partnership will be applied during the implementation of major infrastructure projects: modernization of the Trans-Siberian Railway and BAM, construction of the Central Ring Road and high-speed Moscow - Kazan railway. It is in these projects that the money from the National Welfare Fund will be invested. Vladimir Putin has cited Abu Dhabi, which intends to invest up to $ 5 billion in the construction of Russia's infrastructure, as “the first robin” of private-public partnership with foreigners. One of Russia's advantages in attracting foreign investments is reduction of inflation, which, according to the President, has all the chances to be below five percent next year.

RUSSIA CALLING ! part 1

РОССИЯ ЗОВЕТ ! - RUSSIA CALLING ! 

VTB Capital Investment Forum 2013

The “Russia Calling!” Investment Forum provides a platform for developing dialogue between Russian business and the international investment community. Prominent political and business community figures from around the world are taking part in the event. The forum is examining development trends in the Russian and global economies and the state’s role in an investment model for growth. 

This year  winter came early over the Russian Capital with light snow showers in this begining October. Sitting here in the 12th floor in a tower in Moscow looking down on a cold, wet and white city.. It's definitely sad. 

The first flakes are unmistakable. They don't fall like the fluffy white powder of December, so much as slap you in the face with the full force of October's wet promise of the six months of gloom that lie ahead. So it was at 11.30am on Tuesday. The immediate response is confusion – why is my coat turning white? Then comes denial – is it just oddly coloured rain? And finally, acceptance – here we go again.

Winter is, of course, Moscow's natural state. The slightest hint of frost brings Russians fumbling for their furs, checking skating rink schedules, ensuring soup ingredients are in full stock. And yet there are constant attempts to challenge its inevitable path.

And it is the same for the general state of the economy and the Russian situation the later months. We can only hope that Christmas is getting closer.

See our last year report here
Find more on our site daily brief

Opening the forum, Economic Development Minister Alexey Ulyukaev said that being there reminded him of an old joke that says: We don't have culture, but we do have a Culture Minister, and he feels really well! 

"Practically, there is no economic development [in Russia]," Ulyukaev said, paraphrasing the joke, "but the Economic Development Minister is here, in front of you!" But unlike the minister in the joke, he is feeling poorly, Ulyukaev added. 

Ulyukaev is one of those Russians that match perfectly the American idea of the Russian archetype. The man’s a bear with short, gray-spiked hair. In the three years I’ve been coming to Russia Calling!, I’ve never once seen him smile.

The morning sessions were full, and every door was guarded by a stone faced bouncer. 

It seemed the size of his arms reflected the degree of importance of the attendees.

A take it away economy 

Perhaps he has a reason. Foreign direct investment into Russia, the measure of foreign capital coming from corporates and portfolio flow, has gone from $74.7 billion in 2008 to $51.4 billion in 2012. That’s down from $55 billion in 2011, according to the International Monetary Fund.

“There is a very low participation of private Russian capital in our economy,” said Alexei Moiseev, the Deputy Finance Minister. “It resembles an old Soviet left over. I know a lot of people in the government would disagree with me. The truth is, we are aware of this problem and are doing something about it.”

Creating investing rules that are in accordance with that of the Organization of Economic Cooperation and Development is a starting point.

Let’s not forget, Russian capitalism is only 21 years old. If you start with the dissolution of the Soviet Union in January 1992 (officially was Dec. 26, 1991) as the start of Western-style economic practices being incorporated in the Russian economy, then you’ve got a capitalist system that turns 22 the day after Christmas 2013.

To use a drinking metaphor, by U.S. standards Russia is one year in to being legally able to handle its liquor. Bottom’s up.

Top Down

The macro view of Russia is a mixed bag. The investment view is a bag full of holes .

“We’re now trapped in an intermediate level of development,” said Moiseev. “This is not a cyclical slowdown in Russia. This is a structural one and it concerns us all.”

Last year, the Russian government spent around $1 billion on the world’s longest suspension bridge in Vladivostok, the peninsula that juts into the Sea of Japan. The Russky Island Bridge was built to help Russia tend to a number of big events happening in the east, like the Asia-Pacific Community Summit.

Russia has the Sochi Olympics to tend to this coming winter.

The Sochi airport terminal, which is expected to cater to 3,800 passengers an hour during the Olympics, is undergoing renovations to the tune of around $200 million. Basel Aero is doing the work, a company owned by metals tycoon.

Russia launched a new investment strategy for civil aviation this year. The investment volume is estimated at $9 billion, with over 100 sites currently undergoing reconstruction and modernization with help from both the private and public sector.

Ulyukaev is hopeful. “We expect and forecast a serious increase in investment and hope it reaches 4% in 2014, 5.5% in 2015 and over 6% in 2016,” he said. Wait…did he just smile?

If Russia can sell itself better — never an easy task for an amateur at 22 years of age — then more institutional money will flow. New policies will liberate big investors like pension funds to invest long term. It’s not going to happen over night, but neither did China’s move from $2 a day laborers pouring cement in Shanghai, to $50,000 a year Shanghai one-percenters shopping at Huang Shu Chi in Xintiandi.

The United Arab Emirates is taking note. The Abu Dhabi Department of Finance, the capital city’s long term investment vehicle, said last month it will invest $5 billion in Russian infrastructure projects over the next seven years.

Why Russia Is 'China In Reverse'

One of the Conference theme was that the actual situation of the Russian economy is the reverse of what the Chine has been implementing.

In the fun-house mirror of the global economy, Russia is the mirror opposite of China.

China consumers are the driving force behind the market. Russian consumers are hobbling along and maybe stuck in a middle income trap. China needs less investment. Russia needs more.

China used to be all about infrastructure investment: new roads, new bridges and airports. Now it's Russia's turn.

The kind of investment Russia needs doesn’t lend itself to a lot of sex appeal. We’re not talking about oil and gas giant Rosneft investing billions in Arctic drilling.  This is about roads and very big bridges.

“Russia is a reverse-China,” Alexei Yakovitsky, global CEO of VTB Capital said. ”China is a consumer theme for investors today,” he said, noting that not too long ago, investment was China’s theme. Now, investment is Russia’s theme. Years ago, it was the consumer. “Russian consumers still have room for growth, but that is no longer the story here. The story in Russia today is investment,” he said last Tuesday on the sidelines of VTB’s Russia Calling!, an annual investor’s forum in Moscow.

Consumers were the main growth driver in Russia for more than a decade. That was mostly because Russian consumption was bouncing off such a low base from the 1998 financial crisis, known as the “Russian flu”.  An overvalued currency, a war in Chechnya, and a bloated government led Boris Yeltsin to default on a $5.5 billion loan.  Russia was nothing but one big junk bond. Yields on its debt was stratospheric. Cosmonaut Yuri Gagarin could have seen them from space at 47%.

Consumers were the story again when Russia used its oil wealth to pump around $60 billion into banks and the stock market. Financial transfers in the form of higher wages and big pension fund gains thanks to government stimulus kept Russia’s economy whistling while everybody worked.

The whistling has stopped. There’s barely a  hum. The economy has grown just 1.5% so far this year, where a normal growth rate is closer to 3%.  The consumer story is stable, but waning.  While China shops and spends less on infrastructure, Russia retail sales are benign to flat. For the last three years, retail sales growth month over month averages about 0.6%, according to the country’s Federal Statistics Service. It reached a record low of -26.3% in January of this year.  China retail sales averaged about 1.18% month over month from 2010 to 2013, according to China’s National Bureau of Statistics. Its worst month in that period was a gain of 0.19%, recorded in January 2012.

If VTB’s China comparison is correct, then investors should expect Russia to remain slow and steady. They’ve already come to expect the government to be extra cautious.

Despite a weak investment climate, the ruble remains strong. Their current account has a surplus. The federal budget deficit is almost zero, and will be minimum for the next three years, promised Finance Minister Anton Siluanov.  The country’s debt to GDP ratio is under 11%, around seven times less that of the United States. “We’ve based our budget on just 1% GDP growth. We’re not exaggerating our opportunities here,” said Siluanov.

Private capital outflows re-accelerated in the third quarter to $12.9 billion from $7.9 billion in the same period last  year. That lifted the 12 month rolling total to $56.5 billion from $51.5 billion in the second quarter.

The reverse China theme better settle in quick if Russia is to ever shake off its last place status among the big four emerging markets.

Russia's Growing Pains Not All Europe's Fault

Russia Minister of Economic Development Alexei Ulyukaev: government could do better.

In 2013, Russia is getting worse. For some, it’s all Europe’s fault. Others prefer to lay the blame on the Kremlin, including top government officials.

A normal growth rate in Russia would be around 3%, but now it’s growing by half that, at 1.5% this year so far and expected to end the year under 2%.

“We do not expect any serious improvement in the overall market situation in Russia,” said Economic Development Minister Alexey Ulyukaev during VTB Capital’s annual Russia Calling! investment conference in Moscow on Tuesday.

Investment is shrinking this year. Industrial production has been a disaster, negative in January, February, May, June and July. August IP grew 0.1% on an annual basis. The only thing growing is consumer spending and that’s mainly because of rising government wages, which is actually a problem for the government budget because a large portion of Russia’s economy are state employees. The growth of fiscal volume of goods and services is primarily coming from inflation. Inflation here is around 6.5% currently.

Labor costs are up for three years in a row. Russia has had an increasing share of labor in GDP while the share of savings and investments are in decline. That combination of demand constraints and increasing costs — be it worker salaries or higher electricity bills — has created a situation where the performance of Russian companies are in decline.

Take natural gas behemoth Rosnef.They’ve been spending on acquisitions and signing joint ventures deals from Vietnam to Venezuela, but their net income is falling. In 2011, their net income was $12.4 billion. In 2012, it was $10.9 billion. Forecasts for this year are better, at $11.4 billion, but falling to $11 billion next year and $9.7 billion in 2015.

Falling net income constrains the capacity for Russian companies to fund investment projects which is one of the factors hurting demand for investments in Russia in the first place. Bad sentiment on Europe doesn’t help.

A week before, Prime Minister Dmintry Medvedev blamed much of Russia’s lackluster growth on the E.U., their chief trading partner.

“The European economy is teetering on the edge of recession, and has slowed growth in all BRICS countries. The U.S. economy cannot fully recover with high unemployment, and many individual Americans are just beginning to crawl out of debt,” Medvedev wrote in the official address on the state of the economy available on the Kremlin’s website if you can read Russian.

During the G-20 meeting in St. Petersburg this month, Vladimir Putin even said the “R” word: recession is back on the table.

Maybe not in Russia, but if Europe does worse than expected next year, it will surely hurt Russia’s plans.

Not that they have gangbuster plans here either.  This is a very conservative economic administration. Public debt to GDP is around 11%, lower than any of the big four emerging markets and light years lower than that of the budget-busting United States, which recently closed down Washington because they don’t now how to count. While ridiculous expectations are an American forte, lowered expectations are Russia’s thing.

The reduction in the investment scene is problematic, but not leading to Russia’s demise, said Anton Siluanov, Russia’s Finance Minister and one of the brains behind Russia’s recent budget cuts.

“Despite a weak investment flow, our currency is strong, the budget is strong, the budget deficit is almost zero, and will be minimum for three years to come,” he told investors at Russia Calling! this morning on a chilly October morning.  ”Plus, we’ve based this budget on just 1% GDP growth. We’re not exaggerating our opportunities.”

Investors may be growing tired of the usual Russian juggernauts. The Rosnefts and Gazproms are government entities, distributing profits throughout the budget and not using it to invest in growth as much as investors would like.  Things are changing, but at a tortoise pace and investors can be impatient. 

Privately held search engine, Yandex, has seen its net income double in two years from around $125 million in December 2010 to $265 million in December 2012. It gets better: first quarter net income was $295.2 million rising to $325 million in the second quarter.  The stock is up 31.72% in the last three months.

See part 2 President Putin Address

Syria : A Question of Gas

Syria : Gas Ranks First in Middle East Struggles

South Pars, whose gas reserves lie in a huge field that is divided between Qatar and Iran in the Gulf, is believed to be the world’s largest single gas field [14]. De facto it would be a Shi’ite gas pipeline from Shi’ite Iran via Shi’ite-majority Iraq onto Shi’ite-friendly Alawite Al-Assad’s Syria.

Adding to the geopolitical drama is the fact that the South Pars gas find lies smack in the middle of the territorial divide in the Persian Gulf between Shi’ite Iran and the Sunni Salafist Qatar.
Qatar apparently has other plans with their share of the South Pars field than joining up with Iran, Syria and Iraq to pool efforts. Qatar has no interest in the success of the Iran-Iraq-Syria gas pipeline, which would be entirely independent of Qatar or Turkey transit routes to the opening EU markets. In fact it is doing everything possible to sabotage it, up to and including arming Syria’s rag-tag “opposition” fighters, many of them Jihadists sent in from other countries including Saudi Arabia, Pakistan and Libya.

Further adding to Qatar’s determination to destroy the Syria-Iran-Iraq gas cooperation is the discovery in August 2011 by Syrian exploration companies of a huge new gas field in Qara near the border with Lebanon and near to the Russian-leased Naval port of Tarsus on the Syrian Mediterranean [16]. Any export of Syrian or Iranian gas to the EU would go through the Russian-tied port of Tarsus. According to informed Algerian sources, the new Syrian gas discoveries, though the Damascus government is downplaying it, are believed to equal or exceed those of Qatar.

See full article : Syria, Turkey, Israel and a Greater Middle East Energy War

Targeting Syria has never been far away from the struggle over gas in the world in general and the Middle East in particular. At a time in which there seemed to be a collapse in the Euro Zone accompanied with an extremely crucial economic crisis which led the U.S to be indebted for $ 14.94 trillion; i.e., 99.6% of the GDP, and at a time in which the global American influence reached a minimum in encountering emerging powers like China, India and Brazil, it has been so clear that searching for the potential of power no longer exists in the nuclear and non-nuclear military arsenal. That potential lies there, where energy harbours. This is the point which clearly manifests the Russian-American struggle.

After the fall of the Soviet Union, Russians began to feel that the struggle for armaments had exhausted them, especially in the absence of the necessary energy sources needed by any industrial country. The American presence in the oil zones had for some decades enabled them to grow and have control over international political decision-making without much struggle. Therefore, the Russians turned toward energy sources, oil and gas. Since the international apportionment does not bear much competition in oil sectors, Moscow sought to manipulate gas in the areas of gas production, transportation, and marketing on a large scale.

The starting point was in 1995 when Putin set the strategy of Gasprom Co. to move within the area in which gas exists starting from Russia through Azerbaijan, Turkmenistan, Iran (for marketing), and the Middle East. Certainly, the projects of the Nord Stream and South Stream will be a historical order of merit/insignia given to Vladimir Putin for his efforts in bringing Russia back to the international arena and for tightening the grip on the European economy which will depend, for decades, on gas as an alternative for oil or gas as well as oil, yet with prioritizing the first; i.e., gas. At this point, it was a must for Washington to hasten to create its peer project, Nabucco, to compete against the Russian project as to gain an international apportionment on the basis of which the next century will be politically and strategically determined.

Gas is the main source of energy in the twenty-first century whether as an alternative for oil, due to recession in oil reserves, or as a source of clean energy. Therefore, having control over the zones of gas reserves in the world is considered to be, for the old as well as modern powers, the basis of international conflict in its regional manifestation.

Obviously, Russia read the map well and learnt the lessons well, for the lack of world energy resources that are needed to inject industrial institutions with money and energy, and which were not under the control of the Soviet Union, was the reason behind its collapse. Therefore, Russia learnt that the source of energy of the coming century; i.e., the 21st Century, was GAS.

An initial reading of the gas map reveals that gas locates in the following areas, in terms of quantity and access to consumption areas:

1. Russia: beginning with Vyborg and Beregvya.

2. Annexed to Russia: Turkmenistan.

3. The near and further roundabouts of Russia: Azerbaijan and Iran.

4. Captured from Russia: Georgia.

5. Eastern Mediterranean: Syria and Lebanon.

6. Qatar and Egypt.

Moscow hastened to work on two strategic lines; the first of which is setting up a Russian-Chinese (Shanghai) century based on the economic growth of the Shanghai Bloc, on the one hand, and the control of gas resources, on the other hand.

Thus, Moscow set the grounds for two projects: the South Stream and the Nord (North) Stream in an attempt to face an American project that aimed at seizing the gas of the Black Sea and the gas of Azerbaijan; the Nabucco Project.

There is, then, a strategic race between two projects so as to have control over Europe and the gas resources.

• The American Project (Nabucco) which centres in Central Asia and the Black Sea and its surroundings. Its storage places are in Turkey while its path starts in Bulgaria, and moves through Romania, Hungary, Czech, Croatia, Slovenia and Italy. It was due to pass through Greece, but this idea was dropped for the sake of Turkey.

• The Russian projects — the Nord and South Streams:

a) Nord Stream: It starts in Russia and goes directly to Germany, and from Weinberg to Sasnetz across the Baltic Sea without penetrating Belarus. This helped ease the American pressure there.

b) South Stream: It starts in Russia and moves towards the Black Sea and Bulgaria, then it goes into Greece and then goes towards South Italy, Hungary, and Austria.

The Nabucco project was supposed to compete with the two Russian projects, but due to technical problems the project was delayed until 2017 though it was scheduled for 2014. This resolved the race in favor of Russia, at this stage in particular, and urged for the search of supplementary areas supporting either project:

1) The Iranian gas which the U.S. insists on making supportive of the Nabucco gas pipeline in the sense that it passes in parallel by Georgia’s gas pipeline (and Azerbaijan if possible) to reach an assembling point in Erzurum, Turkey. 

2) Gas of the Eastern Mediterranean: Syria, Lebanon, and Israel.

Iran took a decision, the result of which was signing a number of agreements in July 2011, to transport gas through Iraq to Syria. These agreements make Syria the centre of assembly and production in conjunction with the reserves of Lebanon. This is a space of strategy and energy that geographically opens for the first time and extends from Iran to Iraq, Syria, and Lebanon. Though it was banned and was not allowed for many years, it now shows the degree of struggle over Syria and Lebanon at this phase, and shows the emerging role of France that considers the Eastern Mediterranean as a historical region of influence and everlasting interests. The French role now goes along with the French absence ever since the World War II. In other words, France wants to have a role in the world of (gas) from which it has gained (a health insurance) in Libya and wants to gain (a life insurance) in both Syria and Lebanon.

Now, Turkey feels it is going to be lost amid the struggle for gas as long as the Nabucco project is late. Since the Nord and South Streams exclude Turkey, Turkey knows quite well that the gas of the Eastern Mediterranean has become distant from the influence of Nabucco, and so has Turkey.

History of the Game

For the Nord and South Stream Projects, Moscow established the company of Gazprom in the early 1990s. Remarkably, Germany who wanted to escape, once and for all, the repercussions of the World War II, prepared itself to be a party to the project and a partner of it, whether in terms of establishment, a terminus of the north pipeline or the storage places of the south Stream in the Germanic roundabouts, especially Austria.

Gazprom

Gazprom was founded with the cooperation of Hans-Joachim Gornig, Moscow’s German friend, who was a former vice president of the German Oil and Gas Industrial Company and who supervised the construction of the pipeline network of GDR. The one who headed Gazprom until October 2011 was Vladimir Kotenev who was a former Russian ambassador to Germany.

Gazprom signed qualitative and easy transactions with German companies, on top of which comes the companies cooperating with the Nord Stream as the giant (E.ON) company for energy, and the giant (BASF) for chemicals where the (E.ON) gets preference to buy amounts of gas at the expense of Gazprom when gas prices go up. This is considered to be a kind of (political) support of the German energy companies.

Moscow benefited from the liberalization of the European gas markets monopoly to force those markets to disconnect the distribution networks from production facilities. These clashes between Russia and Berlin turn a page of historic hostility to start a new phase of cooperation on the basis of economy as well as repudiation of a heavy weight put on Germany’s shoulders; i.e., the heavy weight of the debt-overburdened Europe that is under the thumb of the U.S. Germany considers that the Germanic Group — Germany, Austria, Czech and Switzerland — has the priority in being the core of Europe, but it should not bear the consequences of the aging of a continent nor the fall of another giant.

Gazprom’s German ventures include its Wingas joint venture with Wintershall, a subsidiary of BASF which is Germany’s largest oil and gas producer and controls 18% of the gas market. Gazprom has given its top German partners unrivaled stakes in its Russian assets. BASF and E.ON each control almost one-quarter of the Yuzhno-Russkoye gas fields that will provide most of the supplies for Nord Stream at a time, which is not a mere coincidence or simulation, when the peer of Gazprom in Germany — called “The Germanic Gazprom” — expands to own 40% of the Austrian Centrex Co., which is specialized in gas storage. The latter has qualitative expansion into Cyprus, an expansion with which Turkey may not be content.

Turkey dearly misses assuming a tardy role in the Nabucco Gas Company whereby it is supposed to start storing, marketing, and transferring about 31 billion m³ of gas which can go up to 40 billion m³ — at a later stage — in a project that makes Ankara more and more subjugated to Washington and Nato decisions without having the right to insist on joining the European Union that has rejected it several times.

As a matter of fact, the strategic ties through gas become even more strategic in politics where Moscow lobbies effectively on the Social Democratic Party of Germany in North-Rhine Westphalia, the major industrial base that is home to the RWE (Neurath power plant) for electricity utilities and E.ON subsidiary.

Such an influence is recognized by the head of energy policies in the Green Party, Hans Joseph Fell, that four German companies related to Russia play a role in formulating the German Energy Policy through a very complicated network that lobbies ministers and manipulates the public opinion via the Eastern European Economic Relations Committee that represents German companies and has close business relations in Russia and countries of the Former Soviet Union Bloc.

Therefore, there is an indispensible silence on the part of Germany vis-à-vis the accelerating Russian influence. This silence is based on the necessity to improve the so-called “energy security” in Europe.

Remarkably, Germany now considers the policy of “easing and pacifying,” suggested by the European Union to cover the Euro crisis, will hinder the Russian-German investments for a long time. This reason, together with other reasons – e.g., German dawdling in saving the Euro laden with European debts. However, it should be taken into consideration that Germany and its Germanic bloc can bear those debts alone.

Every time Europeans oppose Germany and its policy regarding Russia, Berlin asserts that the Europe’s Utopian plans are unenforceable and may push Russia to sell its gas in Asia. This will, definitely, eighty-six energy security in Europe.

This Russian-German engagement was not simple when Putin could employ the legacy of the Cold War regarding the presence of three million Russian-speakers living in Germany who comprised the second largest group after the Turks. Putin was also adept at employing a network of Eastern German officials who had been recruited to look after the interests of the Russian companies in Germany, let alone recruiting a number of ex-Eastern German State Security Service agents (ex-Stasi agents). This includes Gazprom Germania’s director of personnel and its director of finance and director of finance of the Nord Stream Consortium, Matthias Warnig, who the Wall Street Journal reported as having helped Putin recruit spies in the eastern Germany City of Dresden when Putin was a young KGB operative.

To be fair, Russia’s employment of its former relations was not unripe; rather, it was for the benefit of Germany as a whole. That made the clash between the two countries not possible as long as interests were attained by both parties without having one dominating the other.

The Nord Stream Project, the major link between Russia and Germany, has been inaugurated recently with pipeline costing 4.7 billion euros. Although the Nord Stream Pipeline links Russia and Germany, Europeans’ recognition that such a project would be part of their Energy Security made France and Holland hasten to declare it a European project. In this regard, it is good to mention that Lindner of the Committee on Eastern European Economic Relations said without hesitation that it was a European not a German project and that they would not lock Germany into greater dependence on Russia. Such a declaration indicates the apprehension of the expanding Russian influence in Germany; however, the project of the Nord Stream, in structure, represents Moscow’s plan not the EU’s.

Russians can cripple energy distribution to Poland and other countries the way they like and will be able to sell gas to whoever pays more. However, the importance of Germany to Russia lies, practically, in the fact that it constitutes a platform from which to launch its strategy across the continent where Gazprom Germania has stakes in twenty-five joint projects in Britain, Italy, Turkey, Hungary, and other countries. This — actually — leads us to say that Gazprom will — after a while — become one of the largest companies of the world if not the largest.

Not only did Gazprom leaders build this project, they also tried to interfere in the Nabucco Project that will — as aforementioned — be delayed until 2017, taking into consideration that the latter constitutes a serious challenge. Therefore, Gazprom — which owns 30% of a project designed for building a second major huge pipeline that reaches Europe roughly along Nabucco’s route; a project even Gazprom supporters call “political” — began a political auctioneering to show its muscles by stopping Nabucco or crippling it.

Nevertheless, Moscow hastened to buy up gas in Central Asia and the Caspian in a bid to starve Nabucco at the same time it is ridiculing Washington politically, economically, and strategically.

Outlining Europe’s and – later – the world’s Map

Gazprom operates gas facilities in Austria; i.e., facilities in the strategic Germanic roundabouts. It also leases facilities in Britain and France. However, the growing number of storage facilities in Austria will be the basis for drawing the energy map of Europe since it is going to provide the Slovenian, Slovakian, Croatian, Hungarian, Italian, and somewhat German benefiting from a newly established repository called Katrina, which Gazprom builds in cooperation with Germany with the aim of exporting gas to the hubs of Western Europe.

Gazprom established a joint storage facility with Serbia to export gas to Bosnia and Herzegovina, and Serbia itself. Feasibility studies have been conducted on similar storage ventures in the Czech Republic, Romania, Belgium, Britain, Slovakia, Turkey, Greece, and even France. Such a venture, on the part of Gazprom, strengthens Moscow’s position as a provider of 41% of Europe’s needed supplies of gas. This, undoubtedly, means an substantial change in the relations between the East and the West in the short, mid, and long runs. It also indicates an ebb in the American influence or a collision being prepared, considering the missile shield to establish a new world order where gas is the most essential pillar of its formation. This is a clear indication of the heating struggle in the Middle East over the gas of the eastern coast of the Mediterranean.

Nabucco in a tight spot

Nabucco was conceived to funnel gas 3,900 kilometers from Turkey to Austria and was designed to carry 31 bcm of natural gas annually from the Middle East and the Caspian region to markets in Europe. The Nato-American-French hastening towards decisively ending all matters in the Middle East, particularly in Syria and Lebanon, in a way that harmonizes with their interests, lies in the necessity to maintain calm situations supporting the investment and transportation of gas. Syria responded by signing a contract that aims at transferring gas from Iran to Syria passing by Iraq. As a matter of fact, it is the very Syrian and Lebanese gas that is the focal point of the struggle that aims at annexing it either to the Nabucco gas reserves or Gazprom, thus, the South Stream.

The consortium of Nabucco consists of the German energy companies REW, Austrian OML, Turkish Botas, Bulgarian Energy Holding Company, and Romanian Transgaz.

Five years ago, the initial costs of the rival project of Gazprom were estimated to be $ 11.2 billion and the project was expected to cost less than the Russian one. The costs, however, could reach $21.4 billion by 2017. This raises many questions about the viability of this economic project, in particular taking into consideration that Gazprom has enough deals in various regions — in an attempt to encompass Nabucco — that would feed on the surplus capacity of the gas of Turkmenistan, especially when we know that the ineffective pursuit of the Iranian gas precludes the possibility of achieving the Nabucco dream. This is, in fact, one of the unknown secrets of the struggle over Iran that has gone too far into defiance by choosing Iraq and Syria to be routes for its gas transport, or – at least – part of that route.

Thus, Nabucco’s best hope lies in gas supplies from Azerbaijan’s Shah Deniz 2 field which would almost be the only source of a project that seems to be stumbling from the very beginning. This manifests in the accelerating deals and in Moscow’s success in buying the sources of Nabucco, on the one hand, and the hardships encountered in achieving geopolitical changes in Iran and the Mediterranean (Syria and Lebanon), on the other hand. This comes at a time in which Turkey hastens to claim a share in the Nabucco Project either through signing a contract with Azerbaijan to buy 6 billion cubic metres (bcm) of gas in 2017 or trying to lay hands on Syria and Lebanon with the aim of hampering the transfer of Iranian oil or receiving a share of the Lebanese or Syrian gas affluence (or Syria and Lebanon altogether). The race towards occupying a position in the New World Order escalates through gas and other things ranging from small military services to the strategic domes of the missile shield.

Perhaps what poses a threat to Nabucco most is Russia’s attempt to ditch it through negotiating over more advantageous and competitive contracts of gas supplies in favor of Gazprom’s Nord and South Streams, hampering, thus, any effort to endow the United States and Europe with any kind of influence, political- and energy-wise, whether in Iran or the Mediterranean. Moreover, Gazprom could be one of the most important investors or operators of the new gas fields in Syria or Lebanon. The date of August 16, 2011 was not randomly chosen by the Syrian Ministry of Oil to announce the discovery of a gas well in the Area of Qarah in the Central Region of Syria near Homs. The well has the capacity of producing 400.000 cubic metres a day (146 million cubic metres a year). However, the Syrian Ministry of Oil did not breathe a syllable about the Mediterranean Gas.

The Nord and South Streams lessened the importance of the American policy that appeared to be lagging behind. The bad history between the states of Central Europe and Russia has ebbed, Poland is slowly coming round, and the US seem willing to reconsider since it announced in late October 2011 the shift in the energy policies after the discovery of coal mines in Europe which will lessen dependence on Russia … and the Middle East. This seems to be a far-reaching or long-term goal due to the fact that there is a number of procedures to be taken before starting commercial production of coal. This coal can be attained from unconventional sources in the rocks found at thousands of feet underground by using the techniques of rock fracturing and the hydraulic fracturing of high pressure water. Those techniques are used to pump liquids and sand into a well to release gas. This issue, however, is coated with environmental risks due to the impacts of the fracturing techniques on water reserves.

China’s Participation

Sino-Russian cooperation in the field of energy is the power orienting the Sino-Russian strategic partnership. This is, in fact, what experts point to as the “base” for the double veto in the UNSC that came in favour of Syria.

Cooperation in the energy field is what lubricates the acceleration of the partnership between the two giants. It is not only a matter of gas supplies with preferences to China but it is a process that urges China to participate in gas distribution through selling new assets and facilities, in addition to attempting to have joint control over the executive administrations of the gas distribution networks where Moscow currently shows resilience in prices of gas supplies provided that they are allowed to access the local Chinese markets because of the profits there. It was agreed that Russian and Chinese experts could work together in the following domains:

“coordinating energy strategies in Russia and china; predicting and outlining prospective scenarios; and developing market infrastructure, energy efficiency and sources of alternative energy.”

Despite cooperation in the field of energy, there are other strategic interests that represent in the mutual Chinese-Russian conception of the risks of the American so-called project “Missile Shield.” Not only has Washington involved Japan and South Korea in the Missile Shield, but it has also sent an invitation to India in early September 2011 to be a partner in the very project. Moscow’s concerns intersect with Beijing’s, regarding Washington’s moves to revive the Strategy of Central Asia: i.e., the Silk Road. This project is the same as that initiated by George Bush (Greater Central Asia Project) to roll back Russia and China’s influence in Central Asia in collaboration with Turkey to resolve the situation in Afghanistan by 2014 so as to arrange for the Nato influence there. There are increasing allusions from Uzbekistan to play host of Nato for such a project. Vladimir Putin estimates what can foil the Western invasion on Russia’s back scenes in Central Asia will be the expansion of the joint Russian-Kazakhstani-Belarusian economic space in cooperation with Beijing.

This image of the international struggle mechanisms allows access to see one side of the process of the New World Order Formation based on struggling for military influence and on holding the backbone of age; namely, energy, on top of which comes gas.

The Gas of Syria

As Israel started oil and gas extraction, it was clear that the basin of the Mediterranean had entered the game and that Syria was either to be attacked or that the whole region was going to enjoy peace since the twenty-first century was the century of clean energy.

What we know about this issue is that the Mediterranean basin is the wealthiest in gas and that Syria would be the wealthiest state, according to the Washington Institute which also speculates that struggle between Turkey and Cyprus would heat due to Ankara’s inability to bear its losses of the Nabucco gas despite the contract Moscow signed with Ankara on December 2011 to transport part of the South Stream gas via Turkey.

Embracing the secret of the Syrian gas will let all know how big the game over gas is. According to China, who controls Syria could control the Middle East, grip on the Gateway to Asia, possess the Key to Russia’ house (as Catherine the 2nd put it), and could set foot on the Silk Road. Most importantly, they who could penetrate Syria for gas have the ability to dominate the world, especially since the coming century will be the Century of Gas. With the contract Damascus signed to transport Iranian gas to the Mediterranean through Iraq, the geopolitical space would open and the gas space would close on the scene of Nabucco that used to be Europe and Turkey’s lifeline. Syria, undoubtedly, would be the key to the coming epoch.

Through Imad Fawzi Shueibi

Syrie : région de transit 

et production énergétiques très convoitée !

Plus que ses réserves de pétrole et de gaz, c’est la position géostratégique du pays qui lui permet de jouer un rôle clé dans le transit de l’énergie dans la région.

Les menaces d’intervention en Syrie font trembler les marchés des matières premières ces derniers jours. Notamment ceux du pétrole. Damas n’est pas un important producteur d’or noir mais sa position centrale dans la région et les risques de débordement du conflit chez les voisins iraniens ou irakiens font craindre le pire. Cette position stratégique est d’ailleurs plus convoitée que les ressources de pétrole et de gaz du pays, relativement modestes par rapport aux voisins.  

• Le pétrole

Question production, la Syrie reste très loin de l’Arabie Saoudite, de l’Iran ou de l’Irak, membres de l’Opep dont la production tourne autour de 3 à 10 millions de barils par jours (bpj). Au plus fort de son activité, à la fin des années 1990, le pays produisait près de 610.000 bpj, selon une fiche du Trésor français, datée de 2011. Depuis, la production d’or noir n’a cessé de décliner. Après avoir atteint 400.000 bpj en moyenne pendant la période 2008/2010, la production a reculé à 380.000 barils de brut par jour au début de la crise en mars 2011, avant de chuter à 153.000 bpj en octobre 2012. Début août, après plus de deux ans de guerre civile, ce chiffre est tombé à 39.000 barils par jour.

Avant les sanctions européennes, ce pétrole était essentiellement exporté vers l’Europe grâce à trois terminaux installés sur la Méditerranée. Le pays tirait une grande partie de ses revenus d’exportations de la vente de son or noir. Les embargos avaient pour but d’accroître la pression financière sur le régime du président Bachar el-Assad.

La Syrie dispose de réserves s’élevant à 2,5 milliards de barils, selon une note de l’Agence américaine d’information sur l’énergie (EIA), datée de février dernier. «Ce n’est pas l’eldorado, souligne Agnès Levallois, consultante spécialiste du Proche-Orient. Ce n’est pas comparable avec l’Irak par exemple. Ces ressources permettent au pays d’assurer une partie de ses besoins». Situés essentiellement dans le centre et l’est du pays, près de la frontière irakienne, les champs pétroliers syriens cachent un pétrole lourd, dont le raffinage est difficile et cher. Les deux plus importantes raffineries du pays, situées à Homs et Baniyas, ont par ailleurs été endommagées par le conflit, réduisant encore les capacités de transformation du pétrole et obligeant la Syrie à renforcer ses importations. Pour cela, le pays peut encore compter sur des contrats signés avec la Russie, l’Irak, l’Iran ou encore le Venezuela.

Le secteur pétrolier est contrôlé par le ministère du Pétrole et des Ressources minières. «Le système économique de la Syrie est très étatique. Il a fait l’objet d’ouverture depuis 10 ou 15 ans mais sans que cela ne touche le secteur clé de l’énergie. Ce dernier a toujours été très politique, comme le prouvait la vente de pétrole par Damas en échange de devises», note Agnès Levallois. Des entreprises étrangères peuvent mener des opérations d’explorations et de production mais seulement via des consortiums avec les entreprises publiques comme la Syrian Petroleum Company. Total était l’une d’entre elles jusqu’en 2011. Le groupe français a dû se résoudre à rapatrier son personnel après la mise en place des sanctions européennes.  

En octobre 2012, les coûts du conflit pour l’industrie pétrolière syrienne étaient évalués à 2,9 milliards de dollars, rappelle l’EIA.



• Le gaz naturel

La Syrie dispose de réserves de gaz naturel de 8,5 trillions de pieds cubes (0,1% des réserves mondiales), situées elles aussi dans le centre et l’est du pays. Avant le conflit, le gouvernement syrien envisageait de lancer des recherches pour des gisements offshores dont le potentiel est fort, comme le prouvent les découvertes au large d’Israël et du Liban. Le gaz naturel syrien, dont l’exploration tombe également sous le contrôle du ministère du Pétrole et des Ressources minières, est majoritairement réintroduit dans le circuit domestique et utilisé pour alimenter les champs pétroliers et les centrales électriques.

En 2010, dernière année de fonctionnement normal de l’industrie, la Syrie produisait 316 milliards de pieds cubes de gaz. Un chiffre tombé à 278 un an plus tard. Sa forte consommation interne l’oblige à importer du gaz depuis l’Égypte. Le pays n’exporte en revanche pas de gaz liquéfié.



• Un réseau de pipelines

L’un des atouts de la Syrie est son réseau domestique de pipelines très développé, notamment pour apporter le pétrole et le gaz des gisements de l’est à la population concentrée dans l’ouest du pays. Plusieurs d’entre eux ont fait l’objet d’attaque depuis le début du conflit. «Ces opérations ont surtout eu lieu dans l’est. Les rebelles se sont battus pour prendre le contrôle des puits et des infrastructures. Vendre le pétrole est un moyen de survie pour eux», explique la spécialiste.

Mais c’est surtout le potentiel de développement de ces réseaux à l’international qui suscite les convoitises. L’ouverture méditerranéenne de la Syrie fait de Damas un point de transit incontournable pour l’énergie dans la région. Dans cette optique, deux nouveaux projets de pipelines visant à envoyer le pétrole irakien vers la Méditerranée via la Syrie, sont à l’étude (le pipeline Kirkuk- Baniyas, ville située sur la côte méditerranéenne, a été endommagé lors de l’invasion américaine en Irak en 2003 et ne fonctionne toujours pas). Côté gaz, Damas a signé en mai 2011 un accord trilatéral avec l’Iran et l’Irak pour la construction d’un gazoduc qui, selon les observateurs, pourrait permettre à l’Iran d’exporter un jour son gaz naturel vers l’Europe. Plusieurs autres projets, suspendus par le conflit, sont prévus comme celui prévoyant de faire passer en Syrie un nouveau gazoduc partant du sud de l’Irak, un autre de l’Azerbaïdjan ou encore une prolongation de l’Arab Gas Pipeline qui, de l’Egypte, traverserait la Syrie de part en part pour rejoindre la Turquie et les marchés européens.

«Beaucoup de ces projets dépendent de la situation politique entre la Syrie et l’Irak, deux pays qui se méfient l’un de l’autre. Les relations ont souvent été mauvaises, même si elles se sont améliorées aujourd’hui», fait savoir Agnès Levallois. «Toutefois, il est clair que la Syrie est dans une position très stratégique, que le régime a toujours su monnayer de façon très intelligente».

Par Hayat Gazzane

Source Le Figaro 5/9/2013

http://www.lefigaro.fr/conjoncture/2013/09/05/20002-20130905ARTFIG00325-la-syrie-pays-de-transit-energetique.php