Be Careful What You Wish For
This week's issue will be a bit different than usual. We're sharing with you an excerpt from our latest Insider Weekly that looks under the hood (bonnet, for our British readers) of the economic measures against Russia.
The pundits are rushing to tell us that the way to stop Russia's aggression is by hitting the Russkies where it hurts (i.e. their oil and gas).
Our view is that any sort of blockade of Russia’s exports will only lead to an inflationary super storm.
Now, before you accuse us of peddling “pro-Russia” talking points: Nothing of the sort. What we are trying to do is point out how Russia is way more critical to the world economy than it was some 20 years ago.
Some 20 years ago Europe (and the “West”) had the North Sea, which produced as much as Russia and the US. Today, the North Sea is a shadow of its former self. And if US shale continues to disappoint, it won't be long before Russia becomes the world's biggest oil producer "beyond reasonable doubt".
Do you think that Rosneft, Lukoil, or Gazprom are in trouble of being sanctioned when they supply some 36% of Europe's oil needs?
And natural gas (not that this is unappreciated).
Furthermore, there are probably a couple of commodities that few have given any thought to, coal in particular.
Russia exports almost as much thermal coal as Australia (granted the chart below is a few years old but volumes wouldn’t have changed materially in that time). Russia also exports about as much coking coal as the US and about 40% of Australia.
Hmmm... switch off Russian natural gas (for a theoretical exercise), and the world will need a stink load more of coal of which Russia is one of the top 5 global suppliers. Guess you could always turn to uranium?
Granted Kazakhstan isn't Russia, but they are rather friendly. Of course, uranium produced (yellow cake) isn't the stuff that goes into nuclear reactors. That is enriched uranium, which Russia (Rosatom) accounts for 50% of world enriched uranium production. That is absolutely extraordinary. Roughly 20% of the US electricity supply comes from nuclear. You know who's really screwed?
Our French mates run the place on nuclear, and guess what? Over half of this enriched uranium comes from the Russkies.
And who accounts for a fair whack of grain exports?
And without fertilizer crops don't grow. Here are the world's top fertilizer exporters (as of 2020 and the value of exports in US dollars).
Should the rest of the world be sanctioning Russia's commodity exports, we'd likely see Weimar Republic style inflation in those countries, particularly Europe.
You might say, "Surely, there must be other countries Western governments can turn to."
Here is a neat little picture to make this easy from a geopolitical perspective. The options available to the West from "friendly" states.
One word: yikes!
Can you see now why the calls for sanctions of Russian exports are not only naive, but also self-destructive?
Disclaimer: This is not intended to render investment advice. None of the principles of Capex Administrative Ltd or Chris MacIntosh are licensed as financial professionals, brokers, bankers or even ...
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