Putin is back to his old tricks. By “old,” I mean what he did last month when he arranged Crimea’s smooth transfer from Ukrainian to Russian hands. Portions of eastern Ukraine will be the next Russian acquisitions.
The still-Ukrainian part of Ukraine is begging the West for help — and not getting much. The U.S., U.K. and Germany are certainly not going to war with Russia. The most Kiev can expect is a little money, some limited military supplies and possibly intelligence on Russian troop movements.
One more thing: Obama is also sending Joe Biden to visit Kiev on April 22. That should help.
Actually, the Biden play could be more important than you think. He’s going to a city that was in flames barely a month ago, and could become a war zone any day. From a security standpoint, it seems like an odd place to send our government’s second-in-command. Something else must be happening.
I suppose having Biden in the area might force a delay in any Russian invasion plans. It will be a symbolic show of support.
Whatever Putin’s plans are, I don’t believe Biden will succeed in deterring them. So what is Putin up to, anyway?
If Putin’s plan is to stimulate his economy, it isn’t working yet. The ruble currency is falling like a rock compared to other emerging market currencies. Russian stocks are crumbling, too.
Meanwhile, energy prices are still holding substantial risk premiums. That may be Putin’s immediate goal. He needs to sell Russia’s oil and gas at the highest price he can get.
Remember, the “risk premium” is all on our side. Western buyers are willing to pay more for oil and gas because they don’t know if Putin will interrupt supplies. Putin doesn’t need to wonder. By sending Russian troops to the border and otherwise generating tension, he’s padding his own profit margin.
He’s also making a long-term plan: sell oil to China.
Last week Bloomberg reported that Putin could sign a 30-year deal to sell Russian gas to China as soon as next month. A Beijing visit is already on his agenda.
A new $22 billion pipeline from eastern Russia into China will give Russia another outlet for energy exports. The two sides are still haggling over the price. From Bloomberg:
The gas-supply deal allowing the construction of the Power of Siberia pipeline across eastern Russia into China has foundered on price. To finance the $22 billion pipeline, Russia sought to match the rates it got for its gas in Europe, a level China hasn’t been willing to pay.
[Gazprom CEO Alexey] Miller said yesterday he hopes a contract will be in force by the end of the year, according to the statement. “We advanced in our talks on the gas price,” he said.
Starting not earlier than end of 2018, Gazprom plans to supply as much as 38 billion cubic meters of gas to China, about 24 percent of the company’s deliveries to Europe last year, which produced about $63 billion in export revenue, according to the company.
This is very interesting. Why would Russia spend $22 billion to build a pipeline to China, and then accept a lower price than it gets from Europe?
I don’t know the answer — but I do know that having a Chinese export option will give Putin more leverage when he negotiates with buyers in Europe.
It’s also a smart move if Putin thinks Europe will buy less Russian energy in the future — which could happen sooner than you think.
Earlier this month Reuters reported that Canadian energy producer Enbridge (ENB) had received permission to “re-export” Canadian oil to Europe through U.S. ports. The amount they can export is limited, but could be as much as 200,000 barrels a day.
The U.S. government appears to have issued confidential permits to other companies, too. The “export ban” we hear about is springing leaks. Analysts think the Enbridge oil will go to Spain and Italy — and it could start flowing as soon as this month.
Other things being equal, adding supplies to the global markets should put downward pressure on crude oil prices. OPEC and particularly Saudi Arabia could cut production to maintain prices at the desired level, but they won’t like it.
For Europe, being less dependent on Russia for energy would be a huge relief. The slow trickle out of North America could grow if Congress eases statutory export restrictions — and they might, if the alternative is to let Canadian companies make all the money.
Clean energy is another wild card. Solar and other technologies aren’t ready to replace fossil fuels yet, but they’re developing fast.
Also on the horizon: new carbon-capture technologies that allow the burning of coal and oil without releasing potentially harmful substances into the atmosphere. Wired magazine has a fascinating story on “clean coal.” Here is a link.
A similar project is underway in Tuscaloosa, Alabama. I don’t know if this technology is really feasible — but it will be ironic if coal turns out be both cleaner and less expensive than solar energy.
North American drilling and clean coal may be our best chance to send Putin back into his cage. Maybe that’s what scares him.
Has anyone else heard about clean coal? Is the idea laughable, or real? Let me know what you think. Click here to send me an e-mail.
As I said last week, the energy markets are always changing — but we’ll always need energy from somewhere.
Here are the Monday financial headlines…
- U.S. stocks looked bullish at the open this morning. Then the strength faded in the afternoon before reviving in the last half-hour.
- The Nasdaq Composite regained the 4,000-point level after closing below it on Friday.
- U.S. retail sales posted the biggest jump since 2012 in March, according to Commerce Department data released today. February was better than expected, too.
- Some of the retail bounce may be pent-up demand from the harsh winter. If so, it should fade quickly.
- Citigroup (C) beat analyst estimates with a $3.94 billion first-quarter profit.
- Like Wells Fargo (WFC) last week, Citi’s borrowers are repaying their loans more reliably than the bank projected. This is consistent with other signs of recovery like retail sales and employment.
- Facebook (FB) applied with the Irish central bank to be a non-bank payment processor throughout Europe.
- The social network has its sights on millions of immigrant workers in Europe who regularly send cash home to developing countries.
- Earnings season continues. Tomorrow we’ll get quarterly reports from Charles Schwab (SCHW), Coca-Cola (KO), Johnson & Johnson (JNJ), Intel (INTC) and Yahoo (YHOO).
- Coming up later this week: Google (GOOG), General Electric (GE), Goldman Sachs (GS), Morgan Stanley (MS) and Schlumberger (SLB).