Russians Can Cut Off Natural Gas to Europe Anytime They Want

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In the broader world economy we are in the realm of the extraordinary. Never before have so many people in so many places had so much money. The Chinese are earning billions. The Arabs too. And Russians…

“This story coming out of Ossetia is very revealing,” said a fellow diner last night. “The region is much more complex than I realized. These people have been at each others’ throats for centuries. You know, they have about 50 different languages – and none of them related to any of the others. It is only when there is a strong imperial power in place that they settle down and behave themselves. The Tsar pacified the region in the 19th century. Then, the different cultures lived side by side. There were Catholic churches next to Orthodox churches next to mosques. And people mostly got along. And then, Stalin took over. He tried to erase a lot of the ethnic divisions…making them all communists…and forcing them all to learn Russian. But the Russians – either from the time of the Tsars or the time of the Soviets always had trouble along the southern periphery of the empire. They could never very easily bring the Muslims under control. That’s what the Crimean war was all about…and then, in Afghanistan, the Muslims kicked them out.

“But what I think is most interesting about this story is the way Russia is asserting itself. I don’t know what was going through the Georgian president’s head. You don’t attack Russia with just 17 tanks. He must have thought he had support from the U.S. and Europe. But what could the U.S. or Europe do? We know that the Russians can cut off natural gas to Europe anytime they want. They have the energy; we don’t. If they cut off the gas, it will be a long, cold winter for us. And the United States? Putin knows that the U.S. is bogged down in Iraq. And he knows too that the U.S. doesn’t have any money. In geopolitics, the country with the energy and the money wins. And right now, that’s Russia.”

Yes, dear reader, Russia looks like a winner. And China. And India. And all the countries that seem to be on the way up. Who knows which will succeed…or when? But it looks to us as though these countries are catching up – first in economic terms…later in military terms – to the United States.

What does this mean for investors? It probably means that, over the long run, shares in growing, developing countries are a better bet than those in the United States. And it probably means that the dollar is a bad way to store wealth – since it is tied to an economy in (relative) decline.

It probably also means that limited resources – gold, copper, land, water – will become (relatively) more expensive, because there are more and more people who want them and have the purchasing power to buy them.

Regards,

Bill Bonner
The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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Comments

  1. Oh we do get carried away. Russia has an economy smaller than Spain’s which is smaller than California’s. Both parties where stupid, unfortunately for Russia, in the long run Russia will suffer for it. Europe will pay a premium for gas from elsewhere ( or if you like a discount to Russia), the war in Iraq has cost USA, the war in Georgia will cost Russia. Military power isn’t as handy as it used to be.

    A long cold winter in Europe would result in a very long fiscal drought in Russia, as it is, the level of profit will be reduced, this will remind Russia for a long while that what they did was a little stupid.

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  2. If in fact Russia has a smaller economy that California’s (not so sure about that!!), then wouldn’t it be worth noting that Russia’s GPD is more production than consumption. Which can’t be said for California. I have the feeling that Bill is making the point that if push comes to shove Russia has the cards, a very strong point believe it or not. Russia is a country of wealth, It is important to note that the measure of wealth is how long an entity can remain functional while having no positive cash flow. The clout of the Russian army should not be under estimated, and Europe has always been weak. in recend years big brother USA has been babying them, very few leaders in Europe or USA have the ability to influence Russia. Politically Europe are in bed with USA. Which as far as Russia are concerned is like a mate who is bagging. History proves that when there is a shift of power the certainty is uncertaintly, while leading power is weakening someone is getting stronger. Power is not always abused, well we would like to hope that is true.

    Always take into account History…..It is the measure of tomorrow! what tommorrow brings is the rise of the sun, another few 10,000 new borns, another lie, another tear, another smile and another laugh. But for all that can happen will some day, in the future!

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  3. * The Economist, How to contain Russia, economist.com, August 21, 2008:

    There is no quick fix, but an over-confident Russia is weaker than it looks…

    The wider aims with which Russia is presumed to have entered Georgia have not yet been achieved, however. They include toppling its pro-American president, Mikheil Saakashvili, and using intimidation to stop Georgia and Ukraine from following the Poles, Czechs, Balts and other former dominions of the Soviet Union into the orbit of the West and thence into NATO. If it pursues sound policies, the West still stands a fair chance, despite its divisions, of thwarting these aims.

    Sound policy starts with a sense of proportion. Contrary to some excitable first reactions, Russia’s ability to crush the minuscule Georgian army does not make it a superpower, and its aggression in the Caucasus need not mark the start of a new cold war. To put things in perspective, America’s GDP is ten times bigger than Russia’s and it spends at least seven times more on defence. Russia’s economy would fall off a cliff if energy prices slumped and its population, racked by ill-health and inequality, is shrinking by up to 800,000 a year. Russia can make mischief, but it cannot project military and ideological power all around the world, as the Soviet Union did during the cold war. Although it scares some neighbours (but not the Chinese), its threats make them all the more determined to stay on guard. It is surely no coincidence that after months of prevarication the Poles agreed immediately after Russia invaded Georgia to let America base missile defences (ostensibly against a future threat from Iran) on Polish territory.

    To say that Russia’s strength is exaggerated is not to say that it should be allowed to escape its Georgian adventure unpunished. A weak power can be more reckless than a strong one. Russia needs to learn that in spite of their own enervating foreign wars and economic worries the members of the Western alliance can still unite in front of a challenge. But because Russia is fundamentally less strong than it likes to pretend, the West’s response can afford to be patient as well as principled.

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  4. I believe that key to Russia’s strength is it’s resources. Prices are set to increase over the next 5+yrs, giving Russia a more powerful stance over Europe and USA which it sells oil/gas to. USA GPD is much larger than that of Russia, this is obvious! But take into account the USA falling into recession, real inflation is not under control, which can only be solved by increasing the FRB rate to levels not seen in 30yrs. I know this a powerful and scary statement – the USA has no way to avoid a major financial crash. In fact if rates are left low at below around 4% and money & credit are dispersed into the institutions and public. Inflation could well go far higher, which would require much higher interest rates to cool. Simply the 7 times spend rate cannot be maintained; Obama could make some serious cuts to military binge spending!?

    My point is this: higher commodities
    = Stronger Russia
    = Weaker Europe zone
    = Much weaker USA including military (a net consumer)
    = Stronger Australia
    = Stronger Canada
    = Stronger Middle Eastern area

    Also the added fact that Russia has a lot of US dollars in reserve, enough to influence the market (manipulate would be more correct but most major governments are doing this to their own currency for over the last 100yrs). In effect dumping the currency into the open market could hamstrung the world’s largest economy (the bigger they are the faster they fall). If in this theory this happens a domino effect could result with other much larger holdings of USD being dumped on the market, causing panic in the market place.

    I personally believe that Russia know USA is becoming weaker; the communists are capitalising on this and will try to rebuild an empire for trade purposes. USA has done this over the last 90yrs and has become it own worst enemy.

    A pivotal fact is the USA are threaten the great bear with trade sanctions! USA placed tariffs on Japan in the 30’s; simply USA removed the supply of oil to Japan. The making of world warII, at that time USA was a producer! Using it as leverage to build its empire. Is it communist Russia’s or communist China’s turn for world trade? China has been very quiet over this conflict! What do they think?? The power is shifting.

    USA has very little that is sustainable to negotiate with. What does Russia have? How about China?

    Please keep in mind that this will not mean the end of the world! Day will still follow night, we will still wake up and work, there will still be conflict and there will still be peace.

    COULD HISTORY REPEAT ITSELF??

    History will reveal all.

    MW

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  5. Russia may be weak, but if I am going to get into a fight with someone much bigger than myself. I want them drugged and hog tied – just in case.

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  6. Don’t discount Russian power. They have massive power in relation to energy and military capability. They still control thousands of ICBM warheads capable of levelling anyone on Earth. They control massive amounts of gas through pipelines to Europe. Europe can not simply “buy” gas from an alternative source as the pipeline infrastructure is not in place. As chairman Mao once said “All power comes out of the barrel of a gun”.

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  7. Hey Charles, if Russia dumps the USD and turns off the oil tap then the USD buys not a zack. All of a sudden your USD GDP meaures go out the window. And an isolated Russia can survive better than just about any other sovereign state on this planet. After the US accounts its global warrior sized deficit, its household liabilities, its healthcare and its retirement benefits; then without the SWF’s and central banks continuing to suck up those US treasuries you have one very poor backwater indeed.

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