[reality101] Putin & Petro-Dollar Revolt

Several months ago I posted my beliefs that the falling Dollar could become a liability to this country. It is a liability in this sense, if the world views America as a Debtor Nation they will no longer use the US dollar as a standard. The article I have posted also reflects this.

This is now seeming to become a reality. Any where in the world the dollar is used as the transaction currency, the seller is seeing their profits drop with the dollar. No business man likes to lose money, especially when you are talking Millions and Billions of dollars.

The dollar has been on a 7 week slide, hitting lows not seen in decades. The Dow bounced after the elections, but only because it was a rally based on pent up money waiting on the sidelines because of the uncertainty of the Presidential Election. That momentum is just about played out. The Bush administration is showing yet again, no concern about fiscal responsibility by allowing a bloated bill to allow the Government to simply continue to functioning to be stuffed with special interest spending. The Bush administration is also talking additional tax cuts putting even more pressure on the Nations ability to get the Record Deficit and Record Debt under control. The World sees that the current outstanding US Debt is fast approaching 80% of GDP and is already 7 times the National Annual Receipts.

Think of it this way, you owe money that MUST be paid back, that total amount equals EVERY DIME YOU MAKE FOR THE NEXT 7 YEARS!!!!. With that knowledge who will continue to loan you money?

Soon individuals will start looking for ways to not have to deal with you unless absolutely necessary.

The World is starting to think about changing Bankers. Europe with it's rising Euro, though not an economic engine, is not showing double digit depreciation, which translates to double digit loses even if sales and margins are constant.

Putin & Petro-Dollar Revolt

Jim Willie CB is the editor of the "HAT TRICK LETTER"

For specific detailed analysis of the Gold, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and Fed monetary policy, see instructions for subscription to my newsletter research reports, which include stock recommendations positioned to rise in the commodity bull market.

Subtle changes are in the wind on the energy front. As much as some people want to regard Russia as a strong American ally, their behavior on several fronts testifies to the contrary. Some truly staggering developments are underway, not adequately reported. Behind the scenes, covered little by the intrepid US press & media, a meeting was convened two weeks ago in the Urals of Russia. European leaders, and OPEC representatives, and Putin quietly are plotting to establish stronger ties between Europe and Russia in their basis for financial transactions. Putin is adroitly offering to install euro pricing of crude oil, which would surely favor Germany and other large EU nations. He strives to obtain geopolitical concessions from EU leaders, namely a more powerful voice for Russia in world politics.

OPEC appears to be willing and eager to join in new alliances to undermine the US domination from owning the world reserve currency. Enormous consequences follow, which lie completely in US blind spots. A strange contrasting parallel might exist between the United States and Russia, regarding relationships with large energy companies. The USA has evolved into a cooperative collusion with big companies like Halliburton. Russia has broken down into a confrontational situation steeped in confiscation with big companies like Yukos. The USA seems to work constructively with large firms, with governmental support. This is seen in sponsored foreign grain sales, in development of petro-chemical plants, in defense contracts for the military complex, in permissiveness toward software monopolies, in protection of the steel industry, and elsewhere. Russia seems to work in adversarial roles to steal back and forth with their big firms.

RUSSIAN ASSAULT ON FREE ENTERPRISE
Russian legal treachery embodies a big insult to free enterprise and rights to property. One might say Yukos Oil began as a company with stolen property, or cozy deals to gather in several purchases from state-owned regions, or tax scoffs at Russian authorities enabled growth. Fine, whatever. My attention is trained on current methods, which can be aptly labeled as legal warfare, and trends which betray private property. The Yukos tax & fine bill submitted was revealed to be $18.5 billion, which exceeds the company's annual revenue, and goes far beyond the level where embarrassment is profoundly clear. The Russian government has established a modus operandi, i.e. method of operation. A company is targeted for seizure. It is charged with tax evasion. Their assets are then frozen, pending investigations and legal outcomes. Cash flow is interrupted, only to put debt service repayments in jeopardy. The courts declare debt default, a fresh new problem for the targeted company, whose stock declines in value, and possibly sharply. Under financial duress, a deal is cut, as taxes are paid as a fraction of the original demand in return for a sale of large tracts of the company's properties to the Russian govt. Charges are reduced or negotiated along with the distress sale of their property. Such a pattern has shown itself clearly with the Yukos case.

Moreover on the front tied to cooperative agreements, Russia's treachery is wholly evident in its dealings with western firms. Pan Am Silver was severely victimized, via dissolution of a partner firm and reconstitution of a new corporate entity Polimetall with those mining rights, leaving the US firm out in the cold Siberian winter. PanAm Silver appears not to be in line to share profits where silver production is forthcoming. The original company was dissolved, and along with it, all contracts with PanAm. Czarist gamesmanship with western energy companies is now in focus. British Petroleum is at risk with older contracts, while others like Conoco Philips are at risk with newer contracts. British Petroleum could be in the midst of a bold double-cross, for the craziest of sounding reasons. They exceeded licensed production amounts!

To the casual non-discerning observer, Putin appears to offer much needed support to President Bush, as seen in bilateral meetings in Texas that included a horseback ride photo opp. A closer examination reveals more ominous overtones in recent geopolitical events and high-level discussions. The summertime tragedy at the children schoolhouse in Chechnya triggered an international outcry of criticism. The US State Dept issued public statements to the effect that the Russian govt might have acted with too much force, a vivid reminder of their action taken in the Moscow theatre taken hostage a year ago. Each incident, the theater and the school, resulted in over 200 fatal victims. Putin was rankled by the criticism. Last month, after a visit by a leading US legal team to Russia, and upon urgent pleas made to the US State Dept once again, our prestigious ministry issued more criticism of Putin for their harsh legal approach to Yukos and denial of property rights, not to mention due process travesties. Several US firms have longstanding contracts with Yukos, which are now in confusion or jeopardy. Once more Putin has been angered.

RUSSIA-EUROPEAN AXIS EVOLVES
Putin is in the midst of taking steps very harmful to the petro-dollar foundation of international commerce. In late October, the Moscow Times reported that President Vladimir Putin might order Russia to switch its trade in oil from denomination in USDollars to the currency flowing in the European Union, the euro. Such a move could have far-reaching repercussions for the global monetary system and its balance of power. Few US-based analysts even discuss the stability of the petro-dollar, which is assumed a fixture never to be tampered with. Not here. Few again discuss the impact of changes in basis to link the USDollar to crude oil. Implications would add fresh momentum and force to the three-year bear market in the USDollar. What harms the USA would enhance the European Union and its economy.

Putin's words and actions are telling, a key revelation of his awareness of how important the stakes are, and how Russia holds a strong poker hand with respect to the United States. At a joint news conference with German Chancellor Schroeder in Yekaterinburg, Putin strongly suggested that Russia could switch its trade in oil from dollars to euros. He said "We do not rule out that it is possible. That would be interesting for our European partners. But this does not depend solely on us. We do not want to hurt prices on the market." The importance of the event was not lost on strategic energy agencies, but hardly made a sound bite within the US financial circles.

The European Union has long objected to the financial hegemony of the United States in its dominance of global commerce and money supply. Nowhere is the battle more bitter than in reaction to the chronic abuse of the USGovt in irresponsible spending disconnected from accountability. Europe has complained for many years about the realized exploitation by the USA in expanding federal spending, domestic tax rate cuts, advocated consumer spending, mortgage finance support, and wartime expeditions. Behind these trends and excesses is the petro-dollar system, whose US$ status as world reserve currency basically means "anything goes." We have taken advantage of the situation, much like an undisciplined teenager who with impunity wrecks cars, collects traffic violation fines, goes on drunken benders, destroys property, assaults people, and expects the world's savings account to pay for all the bills and cleanup costs. The analogy might seem off the mark, but not really. Most foreign trade surpluses find their way quickly into the US Treasury market, the Fanny Mae & Freddy Mac mortgage market, and US corporate bonds which finance their retail credit operations. Resentment has grown perhaps to a critical level, where reaction is to be soon expected.

The Putin statements in the Urals Summit highlight the drawn out campaign by European Union leaders to encourage increased commerce and banking operations in the euro currency. This is a natural response to the USDollar decline. European exports have been forced to endure price hikes from currency exchange impact alone, only to stress their economies. European bank reserves have suffered a decline in value from that same currency exchange impact, only to stress their banking systems. EU leaders obviously seek two changes: more commerce priced in euros, more reserves held in eurobonds. Many regard Russia to be in the enviable position to extract concessions, to demand more prominent geopolitical stature, in return for agreements to broaden ties to Europe. In doing so, they would break links or weaken links to the USA.

It is my analysis that the USA-Russian relationship will degrade into open hostility, but in stages of deterioration. Yesterday a story was reported on a new advanced weapon system to be deployed by Russia. Its targets are uncertain, while the risks are clear. As the world's #1 oil producer, ahead of Saudi Arabia, Russia holds much new clout. An agreement by them to embrace European currency aspirations could provoke a chain reaction among other oil producers, thus stabilizing the crude oil price IN THEIR WORLD. My analytic forecast in May 2003 for crude oil to become priced in euro denomination is slowly taking root, with broad implications. As the eurobonds grow in held reserves, the euro will gradually unseat the USDollar and claim exalted status as the world reserve currency, first in de-facto action then in actual deed. US financial markets seem asleep on the issue and its frightening risk to the US Economy.

SOME THOUGHTS INSIDE RUSSIA
In the grand chess game of global clout, Russia wants to become a stronger player on the European continent and in the Middle East. These guys know chess and craft. USA knows force and muscle. At a Helsinki meeting in 1999, Putin showed his original intention to switch oil pricing to euros as part of a grand package which included security issues. According to Alexander Rahr, an expert on Russia at the German Council on Foreign Relations, "Putin is very much interested in changing the structure of OPEC and he cannot do that without the United Statesâ€¦ And, he wants to get contracts for the Russian oil industry in Iraq â€” for this, too, he needs the United States." We Americans tend to forget the growing commercial ties between Russia and the 300 million people who occupy the European Union plus Eastern Europe. That entire region is slowly being embraced by the EU. Yevgeny Gavrilenkov, chief economic advisor to Putin, said debate is growing on a move to the euro as Russia mulls siding with the EU. "Such an idea is really possible. Why not? More than half of Russia's oil trade is with Europe. But there will be great opposition to this from the United States." The impact to Russia would be much less than to Europe, which now feels the sting of a rising euro. Putin is playing a huge bargaining chip, or else he is bluffing in order to gain inroads into Iraqi oil production contracts. A sure benefit to Europe from a wider acceptance of the new petro-euro would be lower EU interest rates, like what the USA enjoys now (temporarily).

How about a word from Russian big oil? The opinion of Lukoil vice president Leonid Fedun is worthy of note. Three or four giant energy companies dominate in Russia, including Gazprom and Lukoil, rivals of Yukos. Fedun acknowledges that any switch to euro payments would mean only a minor difference in actual transactions and cost changes. For observers it is important to focus not on the small value differences in the commerce, but on the large tectonic shift in the system which links that commerce to the monetary system itself. The political price tag and shift of financial power matter much more. Fedun is quoted by Interfax as saying "We are ready to move to the euro if the country will be included in a visa-free regime with Europe. It's a bargaining chip." By "visa" he means passports, not credit cards. Talk is rampant that Putin is playing his chess pieces in the tradition of smart Russian masters, vying for EU concessions and World Trade Org inclusion.

ASIA GETS A WORD IN
Bank of Japan Governor Fukui said if a strong rival to the USDollar as a key global currency were to emerge, a stabilizing effect on the global financial system would result. Fukui referred to the dangers associated with allowing any single currency to dominate global commerce, mentioned its disruptive influence, and indirectly criticized the US financial management. Fukui told a recent conference "In such a situation, the economy of the key currency is easily tempted to focus its economic policy on domestic considerationsâ€¦ In today's globalized economy, this could lead to undesirable ripple effects on the rest of the world, through the fluctuations of the external value of the key currency." The message is clear. We have been warned, but our bond market seems in total indifference.

Asians, with their collective $1900 billion in foreign exchange reserves, stand to lose significant capital in their banking systems, since the majority of these reserves are in US$-based securities. Asians, most notably Japan and China, find themselves in an awkward position. If they extend deeper support to the US$, their risk rises. If they diversify or withdraw with more conviction, their capital losses could be staggering. For certain, rhetoric both in Asia and Europe is bubbling over. A severe backlash is coming for the USDollar for its profligate abuse and irresponsible management. We have used the world currency US$ as an agent for bubble generation and Ponzi Economics. This topic receives sparse coverage in the US press & media, with little or no appreciation of importance.

OPEC HAS SOMETHING TO SAY
Youssef Ibrahim is the managing director of the Strategic Energy Investment Group in Dubai and a member of the US Council on Foreign Relations. His words included the word "catastrophe" in recent quotes. His voice carries great influence, perhaps as much in the European-Arab petro world as Alan Greenspan in our world. Ibrahim speaks from the world of the petro system and its root in tangible world of trade, while Greenspan speaks from the world of the monetary system and its roots in inflationary financial engineering.

Between 60% and 70% of world currency reserves, from trade surplus and oil export, are kept in the form of USDollars and US$-denominated securities such as USTBonds. Since surpluses are stored in the US$ system, the US Economy enjoys a risk-free benefit, and sidesteps all market mechanisms in response to imbalances. The USA should have interest rates prevail to 3% to 5% above the rest of the world, from a current account deficit basis alone. Instead, Asia and the Persian Gulf emirates keep our rates artificially low. The USA should have a currency exchange rate 20% to 35% lower than current rates, from a current account deficit basis alone.

A world euro foundation would enable development of its poorer eastern provinces such as Hungary, Czech Republic, Poland, Romania, perhaps even the Ukraine and western Russia. In the last several years, the US$ standard has encouraged mindless US consumer spending, oversized home construction, housing speculation, stock & bond speculation, and more. Those days will see a sunset. They represent the legacy of US indulgence, greed, and corruption of the system. Ibrahim warns that "There are already a number of countries within OPEC that would prefer to trade in euros." He speaks of a growing fallout from the Iraqi War, that traditional ally Saudi Arabia might switch also, though its government has not come down firmly on one side. First come the hint from rumblings, then comes the denial. After backroom preparation for change, finally we see the reality of change in action.

What follows must be heard closely, as it carries extreme significance regardless of your political position. Iraq has changed the geopolitical stage and its alignment. "There is a revision going on of its Saudi strategic relationship with the United States. Already, they are buying more French-made Airbuses," Ibrahim said. "The Saudi Crown Prince Abdullah Bin Abdul Aziz Al-Saud visit to Russia was of great significance and the regime is talking about closer cooperation with Lukoil and other Russian companies." One must consider a secondary motive in why the US attacked Iraq, related to preservation of the petro-dollar. Such a view is totally out of the field of vision by American observers and analysts. He went on with"There is a great political dimension to this. Slowly more power and muscle is moving from the United States to the EU, and that is mainly because of what happened in Iraq."

CONCLUSION
The implications are vast, worthy of discussion. In the last 15 years, the USA has learned through positive reinforcement a bad lesson in economics. The current administration, it appears, operates under the notion that twin deficits are stimulative and positive. SO IS CARDIAC ELECTRICAL SHOCK WITH PADDLE BOARDS STIMULATIVE TO A HEART ATTACK VICTIM FLAT ON HIS BACK. It is not positive. A catastrophe is in the making, as the erosion of the petro-dollar foundation continues inexorably. Such a development will undermined the USDollar in a lost world reserve status. Many inexperienced watchers proclaim SO WHAT ??? False bravado can be the accusation to defiance. To act in isolation with attitude strikes at the heart of the world currency responsibility. To act in isolation with attitude is foolhardy when we are so dependent upon world savings. Well, the answer is that soon, the US Economy will witness the consequences of fiscal and financial irresponsibility in the form of higher interest rates, as well as higher production costs and energy costs !!! No more carte blanche, blank check, free ride, endless freedom, unleashed behavior.

To some degree, a petro-dollar system shields the US Economy from higher prices for crude oil, diesel, heating oil, and gasoline. Foreign nations like Japan, and trading blocks like the European Union must collect large tranches of USDollars in order to conduct transactions for energy supplies. In doing so, they accumulate US$-based reserves. This phenomenon has softened the decline in the USDollar. Removal of the petro-dollar foundation will both push the US$ lower and lift the crude oil priced in US$ higher.

Observers and analysts alike are focused upon terrorist risk. They should pay greater notice to financial retaliation and grand shifts in its foundational structure. The United States owns tremendous superiority on the military battlefield. Our greatest vulnerability is financial, from the foreign dependence on credit supply, from supply chain import of energy and other commodities, and most of all from the continued acceptance of the petro-dollar system which serves as the foundation of the world monetary system. The petro-dollar is showing cracks, decay, and moss. Rivots are loose on the USDollar manhole cover, with chips and rust showing. One can clearly see Russian and Islamic feet attempted to tilt the manhole cover off its rim. Prepare for change.

These topics are fully discussed and analyzed in my private newsletter, and especially in special reports. Two (perhaps three) energy stocks in the portfolio are poised to rise 10-fold. The November issue cites three silver miner stocks which are also set to rise dramatically. In the coming year, look for silver to gain in price far more than gold as investment demand for the white precious metal kicks in. Meanwhile, don't look now but the Canadian Dollar is the strongest currency on earth. The ongoing and future development of its western provinces, the ongoing and future acquisition of their properties by China, these will only serve to gather even more momentum for both the looney currency and commodities.