The latest threats, and these are serious threats, are being directed at Iran. Regardless of the fact that the U.S. is still considered the world’s superpower, any aggressive war against Iran could come back to haunt even the most evil and powerful designers of U.S. foreign policy.

Iran is a country with 80 million people. Given the trouble the U.S. has had in dealing with places like Vietnam, Afghanistan and Iraq, what on earth do they think will happen if they wage war on Iran? Keep in mind that the U.S. is already involved in multiple wars of aggression, and now is attempting to take over Africa as well. This type of imperialism will, eventually, lead to the destruction of the empire, but if either Israel or the U.S. attacks Iran now, all hell could break loose!

Iran is the world’s fourth-largest oil producer, which makes it attractive to many hostile neighbors and to Big Oil companies. This is reason enough for concern, but Iran is also geographically important, at least in the eyes of American foreign policymakers. Iran is bordered by Pakistan, Afghanistan, Iraq, Turkey and Turkmenistan, and is just across the Persian Gulf from Saudi Arabia. Iran, literally, is the middle of the Middle East. Iran also borders the Caspian Sea, and the U.S. has long been after those huge stores of oil. Much of the reason for the war in Afghanistan was based on building and securing the north-south oil pipeline that would allow oil delivery from the Caspian through Turkmenistan, Afghanistan and into Pakistan. Securing Iran would take the U.S. a step closer to gaining access to the oil in the Caspian, but at what cost?

China and Russia, both nuclear powers, are very important trading partners with Iran. China now has very extensive oil and gas contracts with Iran. Iran currently supplies 12% of China’s oil, making Iran the third-largest supplier of crude to China. The Iran/China annual trade value is expected to increase to $50 billion just over the next few years. Russian and Iranian trade ties have expanded to include agriculture and telecommunications, as well as energy and other goods, and Iran exports many products to Russia. Will Russia and China sit back while aggressive attacks are taking place, or will they protect their interests in Iran?

This is only the tip of the iceberg, but it is obvious that any unleashing of force against Iran would probably come with many unintended consequences, very dangerous consequences at that. War with Iran would force the other Arab states to take sides. The entire Middle East would become a boiling pot of turmoil. The region is already a powder keg, and little agitation is necessary to turn this situation into total chaos.

In the past 100 years or so, Iran has not aggressively attacked any country, much less any Western country. During that same period, the U.S. and its complicit military have aggressively attacked, and in many cases, occupied country after country, nation after nation, and now are interfering with entire continents. The U.S. has become the leader in perpetual unholy wars of aggression against innocents, and most in this country still cling to the misguided notion that America is exceptional. It is only exceptional in its desire to gain total hegemony in its quest to conquer the world!

I fear that any attack of Iran by United States forces would bring cataclysmic results never before seen on this earth. Considering all the players involved, the entire Middle East, including Israel, China, Russia, the NATO countries and probably others, the ramifications would be deadly. This could easily turn into World War III, and with this many countries involved, it might only be a matter of time until nuclear weapons were used. If that happened, where would it stop, considering the nuclear capabilities of the U.S., China, Russia, Pakistan, India and, of course, Israel? It is evident that without the use of nuclear weapons by Israel or the U.S., Iran would be difficult, if not impossible, to defeat. This truth is not escapable.

The Pentagon is building and testing monstrous flying bombs that can travel anywhere on earth within an hour, killing all people in any given location. Killer-drone bases are being constructed everywhere. Our liberty at home has disappeared, and torture and rendition are commonplace. And while indefinite detention without trial is now accepted, and while the president — on his say-so alone — can assassinate Americans or anyone else he chooses, most are sitting in their living rooms waiting to see Dancing With the Stars or Monday Night Football. I have never seen or experienced anything more pathetic in my lifetime. This sickens me!

World War III might be just around the corner. The possibility of nuclear war is now a real threat, and that threat is too dangerous to consider. Do these loathsome politicians and war-makers know the real risks? Do they understand what consequences will befall us, should these wars continue? Do they even care? If they don’t know, then they are all fools playing a fool’s game, and that game does not have a happy ending!

Regards,

Gary D. Barnett

Targeting Iran Is a Fool’s Game was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Twenty-five years ago the Russians found themselves in a hole.

They had an official price for petrol (gasoline) of 1 ruble. But the cost of providing it, for example by buying it on world markets, was 8 rubles. Insofar as the state could supply any petrol to anyone at all, it was definitely going to be at a big loss. Yet they obstinately refused to accept that their price was wrong.

How we laughed at this dogmatic denial of the discipline of the market! We put it down to some sort of political imperative, but in fact it was much simpler than that.

Rather than lose money at a world-record rate, the Russian state responded by distributing official petrol in limited quantities, and only to favored clients, which in their society meant party members. The members used to fill up their Zil limousines with this cheap petrol, and effect a supply chain to retail via the simple device of draining their tanks into the jerry cans of local teenaged entrepreneurs – at 6 rubles per liter. That left the last 2 rubles to the entrepreneur, who sold it on the side of the street at 8, with hardly a murmur from official sources.

Party members were getting rich, after all, and the taxpayer was footing the bill.

Now substitute USA for Russia, and credit for petrol, and you have the essence of what is going on today. Can you get a mortgage in America or the UK at 2%, even if you pay a 50% deposit on your house? Certainly not. In America, only government mortgage agencies (Fannie and Freddie) and megabanks which are too big to fail have access to the 0.25% credit provided by the Fed. And once again, those megabanks are making very large sums, much of which gets distributed via bonus pools to those with an unremarkable talent for re-selling this cheap credit at market rates of 5.0% or more.

Political leaders regularly rail against greedy bankers, but the problem – all that cheap money – has for the last five years come directly from the false market in credit extended by ultra-low rate policies sourced in the Treasuries of the West.

Who’s at fault is academic. The issue now is that this artificially low interest rate environment can set off a hyperinflation chain reaction, just as it did in Russia once market forces prevailed. Not much is different from previous hyperinflation episodes, save that the melting of a glacially frozen stockpile of $50 trillion in government bonds performs the role traditionally played by the printing press.

In the end, those who have saved for their futures could form our own Babushka generation of pensioners. Paid out monthly, and in full, their pension will buy them a sandwich or two. The nominal value of sovereign debt will not decline, but the value of it will inflate away, taking with it the value of all those bonds.

We could end up needing to remove a couple of zeros from banknotes, because otherwise the coinage will be melted back into nickel and copper ingots as soon as it is issued, and then sold to the Chinese…

Regards,
Paul Tustain
BullionVault

October 12, 2009

Hyperinflation and Our Bankrupt Babushka Future was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

I am in Long Beach, California this week, attending the annual convention of the American Association of Petroleum Geologists (AAPG). Why not? I have been a dues-paying member of AAPG for 30 years (even during my Navy days) and have learned quite a bit about the world of oil and gas by participating in the organization and reading its many excellent publications.

As for the annual convention, a lot of the premier oil finders in the world are here in Long Beach, as well as people from many of the critical vendors who sell articles and services to the oil industry. Everyone is gathered together to talk shop and compare notes about what is going on in the energy industry, from remote sensing to seismic, from exploration prospects to drilling decks, from total depth to the pipelines.

So this convention is exactly where I ought to be, considering that my beat is oil and other natural resources. And yes, it means that I must travel to sunny Southern California. It’s a tough job and somebody has to do it. But I do it all for you, dear readers. As the week wears on, I will be writing about the AAPG convention, and you can be certain that the best of the information that I pick up here will find its way into future articles in Whiskey & Gunpowder, as well as into the other Agora Financial publication for which I write, Outstanding Investments.

The Man of Steel

I mentioned above that last week the LA Times published an article about a television series currently being broadcast on Russian television concerning Joseph Stalin. This prompts some thoughts about the late comrade and generalissimo, and what the revival, if not the rehabilitation, of Stalin’s legacy may tell us about what is happening in Russia.

The man’s real name was Iosif Vissarionovich Dzhugashvili, born 1878 in Georgia, and died 1953 in Moscow. Early in his adult life, Dzhugashvili studied for the Russian Orthodox seminary. But not long into his godly pursuits, he gave up notions of sacrificing material things on Earth for the prospect of gaining them in heaven. Instead, young Dzhugashvili pursued material things on Earth, adopting and embodying a hard line of Marxism and communism in the process. Through his own brand of that ideology, the man pursued these material things with a vengeance. “The death of one person is a tragedy,” he once commented. “The death of a million is a statistic.” You have to be a hard, cold person to think like that. And the Georgian adopted a name that suited his character. He called himself Stalin, which in Russian means “man of steel.”

One would truly have to be a child who was, as the modern expression goes, “left behind” in school not to have heard about and to know at least something of Stalin. Stalin was one of the key players in the Bolshevik Revolution of Russia in 1917. He worked with Vladimir Lenin to found the USSR out of the remains of the Russian monarchical government. After Lenin’s death in 1924, a death in which some scholars believe that Stalin played a role, Stalin rose rapidly to power in the USSR and ruled that nation with a grip of…well, with a grip of steel, until his own demise due to complications from a stroke. Yes, a stroke. At least that is what the Soviets said about how Stalin died, back in 1953. Not long afterward, they blamed a conspiracy of Jewish doctors.

Stamp out Religion in Russia

After seizing power in the 1920s, Stalin, the former seminarian, moved to stamp out religion in Russia, a place where Orthodox Christianity had traditionally been thought of as part of the very soil. Thousands of churches were destroyed, and the clergy sent away, which in Russia is very far away (to Siberia). As the 1920s and 1930s wore on, Stalin presided over the collectivization of property in Russia, to include establishing state ownership of essentially all resources both natural and man-made. Stalin collectivized Russian agriculture and drove off or killed any who opposed him, and many who did not. Similarly, Stalin forced a pattern of massive heavy industrialization on Russia, at something approaching a breakneck speed. And he broke many necks in the process. Stalin’s secret police arrested and imprisoned anyone who was considered an enemy of the state, and of those there were many. Stalin was responsible for the deaths of well over 20 million of his fellow Soviet citizens, “a statistic” in his words, but a statistic that staggers the mind.

Brethren

In the late 1930s, Stalin purged his army of tens of thousands of its most senior and experienced officers. And then, in 1939 through his foreign minister Molotov, Stalin signed a nonaggression pact with Germany and its leader, Adolph Hitler. When Hitler’s German armies attacked Russia in June 1941, they sliced through the ineptly led Russian formations and battered their way to the gates of Moscow. When, in July 1941, Stalin initially addressed his Soviet people to urge resistance to the Germans, the first word out of his mouth called his millions of listeners “brethren,” a devout reference back to his seminarian days, and to the ancient Orthodox religion that he had done so much to destroy. When all else was failing, Stalin attempted to enlist God into the Red Army.

A Common Soviet Soldier

During the war with the Germans, Stalin’s son Yakov was captured by the invading troops. At one point, the Germans sent a message offering to bargain with the Soviets over the return of Yakov. Stalin replied with words along the lines that the leader of the Soviet Union does not concern himself with the fate of a single “common Soviet soldier.” Yakov eventually died in German captivity. The Man of Steel had settled the issue.

The fate of this “common Soviet soldier” concerns us in this article because a rather idealized and sentimental, even maudlin, version of Stalin’s relationship with his son forms part of the background to a 40-part series currently running on Russian television, called “Stalin Live.” The theme of the show is a rather flattering portrayal of an elderly Stalin, a few weeks before his death, recalling and flashing back to events from the past. The show is presented as a history of the Stalinist period in the USSR, as recalled by the “Best Friend of Soldiers” himself.

The Legend of Stalin

To admirers of Stalin, of whom there are many in Russia today, the show is an educational and informative vehicle by which to bring the legend of Stalin to a younger generation of Russians. To many critics, however, the show is a long campaign of historical distortion and outright propaganda that glosses over and whitewashes the inexpiable crimes of a horrific dictator.

Georgian actor David Giorgobiani, who plays Stalin in the series, states that “Many more years have to pass before we can make an unbiased judgment on that great man [sic]…One hundred years from now, no one will pay attention to the fact that so many people perished and the costs were so terribly high.” In reference to the war against the Germans, Giorgobiani states that “Everyone will remember that such a great country was saved” by Stalin.

However, Danill Dondurey, editor of a film-themed Russian newspaper, states that “In the show, Stalin is portrayed as the savior of the people, the country, and all of civilization, the leader who destroyed fascism…Not for a split second do we see Stalin soaked in blood up to his elbows, as he really was.” And because the TV series is focused on Stalin just before his death, there is no plot device through which to offer the perspectives of Stalin’s contemporary critics. There were, of course, those who knew Stalin well, such as Nikita Khrushchev who as Soviet premier later gave the famous “anti-Stalin” speech that denounced much of Stalin’s legacy and sowed the seeds of the illegitimacy of the founding myths of the USSR.

“The message is clear,” states Dondurey. “Russia needs a wise leader…The main goal of this show is to preserve and nurture in the people the desire to obey a supreme leader, to take pride in having a supreme leader, to see no alternative to this model in the development of society.”

Apparently, this message is getting through, if not touching nerves. The LA Times article quotes one satisfied Russian who has a fond recollection of the good old days. States one fan of the series, a viewer named Viktor Kurenkov, “Under Stalin, we had the best weapons, the best planes, the best tanks. He built the country that was first to send a man into space. As for the repressions attributed to him, their scale was always exaggerated.”

Mr. Kurenkov’s sentiments are not exactly a minority view in Russia. In fact, no less an authority and scholar of the USSR than Russian President Vladimir Putin has called the demise of the USSR “the greatest geopolitical disaster of the 20th century.”

A Word From the Sponsor

Interestingly, the Russian network NTV, which broadcasts the Stalin series, is owned by the state-controlled entity Gazprom, the massive energy company that has effective monopoly control over the vast natural gas resources of Russia. According to editor and critic Dondurey, by sponsoring and broadcasting such a program that glorifies the Stalinist past, the Russian state is essentially promoting and encouraging the trend toward authoritarianism in contemporary Russian political life. So the broadcast of the “Stalin Live” show is not exactly the equivalent of, say, Texaco sponsoring the New York Metropolitan Opera over the past many decades.

The show’s producer, Grigory Lyubormirov, states that his goal is to portray both the historical Stalin and the myth of Stalin. “Our Stalin is not only Joseph Dzhugashvili. It is Comrade Stalin, (whose) myth is still alive in the minds of Russian citizens.” No doubt it is.

Lyubormirov goes on, “I categorically refuse to show Stalin as a paranoid, bloodthirsty wolf, because everything Stalin did had ironclad logic to it…Stalin was doing all that for logical reasons. Stalin was responsible for everything that happened in the Soviet Union after 1924, everything good and everything bad.”

The Medium and the Message

So we see in Russia a popular television program, sponsored by energy giant Gazprom, which tends to glorify Stalin and the days of his dictatorial reign over the USSR. The show depicts Stalin in the context of using communism and political repression to build a strong nation, defend Russia against foreign invasion, and save the Soviet state, if not the world, from German fascism. The series glosses over the almost bottomless, decades-long brutality of the Stalinist period. The series also elevates Soviet Communist cultural myth over historical reality, and recalls how a supreme leader was able to offer some semblance of what the producer depicts as domestic stability and security from external threat to the Russian people.

All of this may well be emblematic of the current political evolution within Russia. There is no question that Stalin was a critical player on the history of the 20th century, and understanding Stalin is helpful to understanding how our world came to be in its present state. But the message of the Russian series “Stalin Live” is ominous, particularly because it fits with so much else of what we are currently seeing in Russia, particularly in the area of Russian resource nationalism.

That is, the Russians are going out of their way to rewrite and reform, if not simply to renege and abrogate, agreements from the 1990s. Their goal is to recover Russian state sovereignty and control over natural resources from any semblance of foreign control, particularly foreign control over energy resources. The recent well-publicized troubles that Exxon and Shell have had with their projects on the Russian island of Sakhalin, or BP and the Sakhalin gas project in northern Russia, fit neatly into this new political paradigm. To the extent that any foreign business interests are permitted to operate in Russia, especially energy interests, it is only so long as they play the game, suffer along with whatever indignities are hurled their way, and look the other way when the Russian state displays its iron fist.

As more than one nation has learned to its eventual sorrow, the Russians will go their own way in this world. And it is not as if we in the West could (let alone, should) ever muster, let alone apply, sufficient resources to change the fundamental trajectories of Russian history. But we should at least understand the risks inherent in where the world’s largest country is headed. And wherever that trajectory is headed, it is not reassuring to learn that a show distorting history and glorifying Joseph Stalin is among the most popular items on Russian television.

Until we meet again…
Byron W. King

April 2, 2007

Stalin Lives! was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Perhaps there is no better quote to illustrate the unique place of Russia in the investment world than this simple comment from the Financial Times: “Gazprom [the giant Russian oil and gas company] does not comprehend why its thinly veiled threats and bullying are not, as at home, seen as a normal negotiating tactic.”

What do we make of Russia? Assassinations, broken promises, corruption, frequent roughhouse tactics…these things loom large in the investor’s mind, reinforcing the idea of Russia as some sort of recurring nightmare. Then there are those flashbacks to 2004 and the whole Yukos fiasco. The government basically seized the company for back taxes in a move widely considered politically motivated (i.e., Putin didn’t like its ambitious billionaire CEO, Khodorkovsky, who was arrested and sent to rot in Siberia).

Investors lost everything — billions of dollars.

Russia seems to realize it has an image problem. I thought it was funny that various Russian news organizations/agencies published a lengthy advertising supplement recently in The Washington Post, called “Trendline Russia.” The six-page pullout section was like a mini-paper within the paper. The main point of which appears to be massaging the bruised reputation of Russia.

One headline grabbed my eye: “An Image of Future Russia: 80 Ireland-Like Regions.” And the cutaway quote: “Every Russian region, depending on its specific characteristics, can copy the breakthrough experience of Ireland or Dubai.” Heady stuff. These guys should be writing my marketing copy.

Russia’s bad reputation hasn’t yet soured investors. Even though they’ve gotten pie thrown in their faces before, investors keep coming. Foreign direct investment in Russia hit a record $27 billion through the first nine months of 2006. That’s a 43% increase from a year ago.

An Insider’s View From Moscow

Recently, I’ve been reading the comments and analysis of Eric Kraus, head of the Moscow-based Nikitsky Fund. On his fund’s site is an excellent free monthly newsletter, called Truth and Beauty (…and Russian Finance). I feel it is an insider’s on-the-ground account of what’s happening in Russia. As I love to get as close to the source as possible, Truth and Beauty has become a regular part of my reading. In his latest letter, Kraus takes to task what he calls “deeply biased Western pundits”:

“In 1997, you would have been warned of the impending collapse in oil prices, in 1998 of the catastrophic breakup of the Russian Federation — while every subsequent issue of The Economist has warned of a veritable potpourri of impending catastrophes…In the meantime, of course, oil prices quintupled, the Russian equity market has soared 30-fold, while Russian GDP has exploded to almost $1 trillion.”

Kraus points out that Russia’s growth rates over the last eight consecutive years make it the fastest growing economy in the Western Hemisphere.

Much of Russia’s success is tied to commodities, of which it is a veritable storehouse. Russia is the largest producer, or among the largest producers, of palladium, platinum, diamonds, nickel, and gold. Russia is also rich in oil and gas.

Russian oil giant Gazprom has a market capitalization of $250 billion, putting it in the weight class of international heavyweights such as Exxon and General Electric. The Russian stable also boasts other heavies such as Rosneft at $100 billion and Lukoil at $80 billion. These are just a few examples.

Russian multinationals are large and ambitious. They’ve raised billions on the London Stock Exchange. They’ve also spent billions buying up assets in emerging markets around the world — in Belarus, Ukraine, Kazakhstan, Uzbekistan, and Africa. But they are also active in more developed markets. In the U.S., for example, it was a Russian company that bought and turned around Rouge Industries, the fifth largest American steel producer and Ford supplier. It was a Russian company that paid $2.3 billion for Oregon
Steel Mills this past November.

So we see how the Russian bear is awake and has become quite the global competitor.

Russia and China — Getting Chummy

Russia’s economic wagon is lashed more and more to China and Asia. “Russia and China appear to be cozying up as never before,” The Wall Street Journal reports. In 2004, they resolved a long-standing border dispute, with Russia ceding some territory. In 2005, they carried out joint military exercises for the first time. China buys more than $1 billion worth of Russian weapons every year, making it Russia’s biggest customer. Trade between the two grew 37% in 2005.

And as China continues to scour the globe for resources, Russia figures prominently in those plans. Rosneft pledges to double its exports of oil to China and it will partner with CNOOC, the big Chinese oil company, to build an oil refinery and run gas stations in China.

Sparsely populated Russian territories bordering China are taking on waves of Chinese immigrants. By some estimates, there are over 250,000 Chinese living in Russia. This has also become something of a source of tension between the two, as small Russian towns fear becoming more and more Chinese and less and less Russian.

It’s fascinating to see all of this happen. An economically vibrant Russia certainly becomes something an investor must consider. I believe it is part of my role to analyze and report on events extraordinary and important, even though these insights may not lead to an immediate investment recommendation. I feel this is the case with Russia.

The Real Gems in Russia Are Hard to Get

As well as Russia has done, I don’t regret missing the explosive rally in Russian stocks. Surely, it is a tired and easy cliche, but investing in Russia still has the feel of playing Russian roulette. How do you account for the possibility of complete nationalization, as with Yukos? How do you account for the possibility of assets and contracts disappearing overnight?

I recently heard Bruce Berkowitz, the manager of the top-notch Fairholme Fund, speak at an investment conference. Though he may have been quoting someone else (I can’t remember), I scribbled on my notepad a quote that sticks in my mind when I think of Russia: “Anyone who accepts a small risk of losing everything will lose everything eventually.”

And then there is Douglas Adams, the great humorist. He had a great quote apropos of Vladimir Putin, Russia’s head of state: “When he heard the words ‘integrity’ and ‘moral rectitude,’ he reached for the dictionary, and when he heard the chink of ready money in large quantities, he reached for the rule book and threw it away.”

Kraus, though, is bullish on Russia. To his credit, he’s been right. But he invests in things that are hard for us to get at. “At Nikitsky,” Kraus writes, “we believe that the greatest value is to be found in privatized post-Soviet industrial assets — generally unpronounceable (e.g., Sevzapelektrosetskroy), hugely undervalued, and unknown outside a small circle of small-cap specialists.”

Short of investing in Kraus’ fund, there is no way for us to play in that sandbox. There are, however, a few backdoor plays. These are ideas that do not require an investment in a Russian company, but that benefit from some trend in Russia.

So in a world in which there seems to be many other possibilities, I see no reason to buy the popular big caps of Russia. I’ll keep watching.

Sincerely,
Chris Mayer

January 31, 2007

The Russian Bear Is Back was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.