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Russia, the Ruble and Gold: A commodity crisis?

The Europeans are screaming breach of contract when the Russians refuse to accept US$/€. Who is going to bully whom?
April 8, 2022

Alexander Mihailov has a slightly different spin on matters, which is interesting to read.

I comment on the article as follows:

The major issue for me, is the knock on effect. Yes the West is trying it’s damnedest NOT to buy ANYTHING from Russia. Russia has to sell it’s excesses. There are however other buyers. Russia can afford to drop it’s prices well below market for long enough to bleed out all the West’s reserves/ability to generate so much debt money that there will be hyper inflation.

The weak link in this whole economic war is China. The whole world is totally entangled economically. It reminds me of two hands clasping each other the fingers are totally locked together. But there are also some differences. Europe has contracts for commodities from Russia, most of which specify payment in either US$ or €. The Europeans are screaming breach of contract when the Russians refuse to accept US$/€. Who is going to bully whom? There are many investments in China from the West. In the panic at the beginning of this Ukraine issue, many Western investments were pulled out of China, which together with the three other structural/circumstantial problems has the Chinese economy balanced on a knife edge:

Issue 1. The ideologically based city building spree in China is a disaster, because the dwellings are empty, because they are too expensive to live in. They were built on debt, which is now overdue, and is going to continue to get worse and worse

Issue 2. Short term disaster caused by Covid, which has disrupted supply chains and the economic downturn has weakened everyone’s economies

Issue 3. China’s ageing population and diminishing birthrate is causing a negative structural imbalance in the work force.

If China can overcome the short term logistical issues of buying cheaper Russian oil, then it has a better chance of getting through this cash flow crunch.

India, South Africa/Africa and Brazil/South America are all potential customers for Russia commodities (gas and electricity are the exceptions). Logistics and payment mechanisms need to be restructured. Price reduction is the greatest incentive of all in our world.

Now we need to look at the currency issue. The start point, is that the Role has just about recovered to pre “war” levels.

Then there is the oil price. A year or two ago, when oil prices were over US$100, China decided that she could not afford to pay more than US$80 a barrel. In 2014 as a result of oil Fracking in the USA America became and exporter of oil, and the initial Fracking was mined at about US$30 a barrel, and the price of oil fell to a low of below US$40 for a short time.

Then as the cheap Fracking reserves were quickly exhausted the minimum oil price rose to about US$80. So as the oil price continued well below US$80 , the American fracking industry failed.

Then Covid really messed up the oil producers. Fracking requires about a two year start-up process, and the existing frackers all failed, and its will take a great deal of time and cost for them to re-establish their operations, which we have all learned really causes the worst of all ecological damage. With fracking USA was oil independent, without fracking it was oil dependant on foreign supplies.

China had also been in a bind, because it had insufficient oil reserves.

China used the Covid disaster as an opportunity to build up her oil reserves at VERY low prices, which I would imagine are about a years worth of oil!!

Gradually as we came out of Covid the prices again arrived at US$80, and I watched with interest as oil increase to about US$83. I have now looked at the exchange rates between the US$ and Remnimbi (CNY).

At that time tumultuous events were taking place in the world’s money markets, and the US$ dropped against the CNY so US$ weakened against the CNY. US$86.67 now buys the same barrel as US$80 did in 2017!!

Then the Ukraine war changed a lot of things.

In the background, for a few years China set up a deal with Iran (which had difficulty selling oil to the West) to buy it’s oil at undisclosed lower prices, which most probably is still in operation today.

Deutsche Bank & potential Commodity crises looming?

Apparently there are 1 500 IT specialists working in the commodities marketplace for Deutsche Bank whose operation is in the Ukraine!!! This operation has had to shut down because of the war in Ukraine.

Deutsche bank is in huge trouble now, as are world commodities markets. Major food shortages may follow?!