Ambrose Evans-Pritchard
Russia is in much the same position today as Britain in the early stages of the Second World War, liquidating its gold reserves and foreign currency to stay in the fight.
The difference is that the explosive rally in gold has raised the value of Russia’s usable reserves by over $US200 billion ($285.3 billion) since the invasion of Ukraine, making up for the collapse in export revenues from oil and gas.
The barbarous relic has allowed Vladimir Putin to continue fighting without imposing drastic economic hardship on the Russian people.
The twin fates of Putin and Ukraine now hang on whether the 18 per cent crash in gold prices last week – an echo of 1980 – was just a breather on the way up to further heights, or the bursting of a speculative mega-bubble based on fevered theories about the unravelling of the dollar-based global system.
Britain was burning through reserves at a pace of almost $US50 million a day in today’s money under the “cash and carry” scheme with the US. The UK’s Treasury feared the country would run out of money by April 1941, forcing it to seek terms from the Nazis.
Franklin Roosevelt saved the day by rushing through the Lend-Lease Act. Congress named the bill HR 1776 to drive home the point that it was a measure taken in US self-defence rather than a bailout for imperial Britain. Winston Churchill bit his tongue and gamely called it “the most unsordid act in history”.
China’s Xi Jinping is currently keeping Putin’s war economy afloat with his version of “cash and carry”, increasingly in the form of direct gold bullion deliveries from the vaults of the Russian central bank.
Yet the chances that China will extend Putin a latter day Lend-Lease to help him secure his maximalist war aims in Ukraine must be close to zero.
The loveless collusion between the two autocratic regimes is opportunistic. Xi has larger interests as he seeks rapprochement with the major economic powers of Europe – on Chinese terms, of course.
Russia’s oil export revenues dropped by 24 per cent last year and have gone into free fall over the last three months as sanctions hit Rosneft and Lukoil. China’s state-owned energy companies have mostly suspended purchases of Russian oil, afraid of secondary sanctions.
India’s refineries are retreating too. Donald Trump said on Monday that India had agreed to stop buying Russian oil altogether as part of a deal on lower tariffs, although Narendra Modi’s government has yet to confirm it.
“Russian Urals crude from ports in the Baltic and the Black Sea is selling at a $US24 discount below Brent. Buyers know it’s a distressed cargo,” said David Fyfe, the chief economist at energy specialists Argus. Russia is barely earning $US35 a barrel.
“The stuff just isn’t moving and Russia is running out of storage. There’s a lot of oil floating offshore as people decide whether or not they want to take it. That’s pushing up freight rates, so Russia has to peddle even harder,” he said.
Russia now faces the wider risk of a global slump in oil prices. Fyfe, who used to head the oil division at the International Energy Agency, said there is so much excess supply this year that prices could fall through the floor.
“There is a potential surplus of 3.5 million barrels a day. Unless Opec steps back from the brink and curbs production again, $US30 here we come,” he said. That would make Russian oil close to unsellable.
Putin is losing on price, and he is now losing on volume, too. Edward Wrong, from the Royal United Services Institute, says seven tankers transporting Russian crude have suffered critical damage over the last two months, almost certainly hit by Ukrainian sea drones.
Insurance rates for the Black Sea route rose 300 per cent in December, and doubled again in January. Shipments have fallen by 30 per cent.
Besiktas Shipping, a major Turkish operator, has pulled out of the business after one of its tankers was hit off West Africa, evidence of how far Ukraine is able to strike with its Sea Baby drones.
“We have decided to cease all shipping operations involving Russian interests. Effective immediately,” said Besiktas.
Gold has until now been Putin’s get-out-of-jail-free card.
Russia’s finance ministry is officially selling $US165 million a day of gold and yuan from its national welfare fund. The liquid assets have dropped from 7.3 per cent to 1.9 per cent of GDP since 2022. The fund has sold 71 per cent of its gold.
This overstates the rate of gold loss. Most of Russia’s gold is held separately by the central bank. It has only recently begun physical sales on a large scale to China, although we do not know how much more has been sold forward. No data out of Russia can be trusted.
Gold has until now been Putin’s get-out-of-jail-free card.
Putin has a large enough buffer to prosecute the war at today’s gold price of $US4925, up from $US1900 three years ago. The open question is whether gold is on its way down to much lower structural levels.
Ross Norman, head of Metals Daily, said the latest wild moves have been driven entirely by speculation in China. “When the Chinese play on the commodity markets, they all move together as a pack and really bet the bank,” he said.
Gold held on its trend support line at $US4520 and has since bounced back to its 50 per cent retracement line. Deutsche Bank has kept the faith and is sticking to its $US6000 target. JP Morgan has pencilled in $US6300 by the end of the year.
They may be right, but there is no necessary reason why the parabolic super-rally should continue. Inflation has come back down across the West. Artificial intelligence is ultimately deflationary. It is already lifting productivity growth rates and may soon start to bend down the rising debt trajectories of the G7 economies.
For all the talk of fiscal overstretch, credit default swaps measuring bankruptcy risk have been falling over recent months for the US, UK, France, Italy, Germany and Japan.
Putin’s woes are mounting. He has lost most of his European gas market forever. Now he faces a second squeeze in Asia: China’s shale fracking in the Sichuan Basin is finally taking off, at a cost of production as low as $0.23 a cubic metre at the best sites.
“It’s becoming cheaper than Russian pipeline gas,” said Professor Alan Riley, a gas expert at the Atlantic Council.
“Putin’s last great hope was to sell his gas in China but it is no longer clear whether the Power of Siberia 2 pipeline will ever be built,” he said.
There is another twist to the Sichuan shale boom. China may never again need to buy a single cargo of liquefied natural gas from America. “The US will have nowhere to send its LNG other than Europe,” said Riley.
This reduces America’s strategic leverage.
The energy price gap between the two sides of the Atlantic is likely to drop to a modest premium. Britain’s Ed Miliband may win his bet on lower household energy bills after all, thanks to Sichuan frackers.
Putin can claim a half victory now or keep going and continue to suffer economic and strategic attrition.
“It is reaching the point where Russia needs to get out of Ukraine in good order while it can. Putin still has enough cognitive control over the Russian people to get away with it,” said Riley.
It may take another leg down in precious metals to clear the way for an end to the great Ukraine war of 2022-2026. So let us pray for an almighty crash in gold prices.
Telegraph, London
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