December 29, 2014 5:03 pm

Eurozone’s weakest link is the voters

Gideon Rachman

The rise of anti-system parties threatens a currency that depends on consensus

Daniel Pudles illustration©Daniel Pudles
The euro crisis is back. An election in Greece next month and the probable victory of Syriza, a far-left party, will frighten politicians and investors. Once again they will be engaged in a grim discussion of a connected series of possible horrors: debt-default, bank runs, bailouts, social unrest and the possible ejection of Greece from the eurozone.
It is somehow fitting that this crisis should break out at the very end of a year in which markets were lulled into believing that the euro crisis was essentially over. The cost of borrowing of debtor nations in Europe had fallen sharply, reflecting the widespread belief that the European Central Bank’s famous pledge to do “whatever it takes” to save the single currency has removed the risk of euro collapse.
That idea was always naive, as events in Greece are now illustrating. The weak link in the theory was European politics – and, specifically, the risk that voters would revolt against economic austerity and cast their ballots for “anti-system” parties that reject the European consensus on how to keep the single currency together.
If that consensus is broken the whole delicate house of cards of debt, bailouts and austerity begins to wobble. And that is what we are seeing in Greece now.

The development of the euro crisis has always involved the interaction of three elements: politics, markets and economics. When things are improving, the three elements can create a virtuous circle: voters elect mainstream politicians, the markets relax and interest-rates fall, and so the real economy improves, strengthening the position of the political centre.

Alternatively, a vicious circle can set in. Economic distress leads to political radicalisation which frightens markets, which leads to higher interest rates, a heavier debt burden and more austerity – which in turns leads to further political radicalisation.

Those who hoped for a virtuous circle in Greece pointed out that the economy has finally returned to growth in 2014. The trouble is that the growth has been too slow and too weak to counter popular anguish at the state of the nation. The Greek economy has shrunk by more than 25 per cent since the onset of the crisis, youth unemployment is above 50 per cent and the state’s debt-to-gross domestic product ratio is considerably higher than when the crisis began.

Under the circumstances, the rise of anti-system political parties is not hard to understand.

As ever, Greece is an extreme but not an isolated case in the eurozone. Austerity has also led to the rise of radical parties in other key economies. In Spain Podemos – a leftist party with a similar ideology to Syriza – is currently top of the polls. In France, the far-right National Front won most votes in the elections to the European Parliament last May. In Italy, extremists from both the right and the left are waiting in the wings, readying themselves for the failure of the reformist government, led by Matteo Renzi.

The rise of anti-system parties threatens the survival of the euro because the single currency depends on the maintenance of a pro-euro consensus among the 18 countries that have adopted the currency.

As long as the leaders gathered around the table at yet another “emergency summit” in Brussels are all basically committed to the project, experience suggests that they will find a way to keep it together.

In theory, Syriza would not break that consensus. The Greek radicals say that they intend to keep their country inside the eurozone. The trouble is that they also want to write off about half of Greece’s foreign debt – a demand that is likely to prove unacceptable to the other eurozone members, above all, Germany.

Syriza may be right that Greece’s debts are essentially unpayable. But the policy of “extend and pretend” (extending the payback period, but pretending that all debts will eventually be paid) was essential to allow Angela Merkel, the German chancellor, to persuade her voters to agree to successive bailouts. If German voters are now told that all those loans to Greece will not, in fact, be repaid, they may also drift to the extremes. The rising force in German politics is on the right, not the left, in the form of the anti-euro Alternative for Germany (AfD) party.

There are also external reasons for Germany to be very wary of giving ground to Syriza. A debt write-off for Greece may be affordable – but it would clearly open the door for similar demands from Italy, Portugal, Ireland, Spain and even France.

It is very easy to see how a train-wreck could happen in the eurozone. But how might it be avoided? There are two main ways. First, Greek voters may take fright. Syriza’s lead over the mainstream parties has narrowed in recent days and may fall further between now and election day on January 25.

That could allow centrist parties to group together to keep out the anti-system parties – a pattern that is becoming fairly common in Europe. Second, even if Syriza takes power, it is possible that the party will moderate its demands once it looks into the abyss of debt default.

There is nothing like empty Treasury coffers to concentrate the mind. The Germans, too, may make further compromises when they consider the potential anarchy unleashed by a Greek exit from the euro.

A messy compromise seems to be the outcome that the markets are betting on. That is what recent history suggests will happen. But the story of the euro is still unfolding. And a happy ending is far from guaranteed.

Five Reasons for Slow Growth
Michael Spence
DEC 29, 2014

Slow economic growth
MILAN – A remarkable pattern has emerged since the 2008 global financial crisis: Governments, central banks, and international financial institutions have consistently had to revise their growth forecasts downward. With very few exceptions, this has been true of projections for the global economy and individual countries alike.
It is a pattern that has caused real damage, because overoptimistic forecasts delay measures that are needed to boost growth, and thus impede full economic recovery. Forecasters need to come to terms with what has gone wrong; fortunately, as the post-crisis experience lengthens, some of the missing pieces are coming into clear focus. I have identified five.
First, the capacity for fiscal intervention – at least among developed economies – has been underutilized. As former United States Deputy Secretary of the Treasury Frank Newman argued in a recent book, Freedom from National Debt, a country’s capacity for fiscal intervention is better assessed by examining its aggregate balance sheet than by the traditional method of comparing its debt (a liability) to its GDP (a flow).
Reliance on the traditional method has resulted in missed opportunities, particularly given that productive public-sector investment can more than pay for itself. Investments in infrastructure, education, and technology help drive long-term growth. They increase competitiveness, facilitate innovation, and boost private-sector returns, generating growth and employment. It does not take a lot of growth to offset even substantial investment – especially given current low borrowing costs.
Research by the International Monetary Fund has indicated that these fiscal multipliers – the second factor overlooked by forecasters – vary with underlying economic conditions. In economies with excess capacity (including human capital) and a high degree of structural flexibility, the multipliers are greater than once thought.
In the US, for instance, structural flexibility contributed to economic recovery and helped the country adapt to long-term technological changes and global market forces. In Europe, by contrast, structural change faces resistance. Fiscal stimulus in Europe may still be justified, but structural rigidity will lower its impact on long-term growth. Europe’s fiscal interventions would be easier to justify if they were accompanied by microeconomic reforms targeted at increasing flexibility.
A third piece of the forecast puzzle is the disparity between the behavior of financial markets and that of the real economy. Judged only by asset prices, one would have to conclude that growth is booming. Obviously, it is not.
A major contributor to this divergence has been ultra-loose monetary policy, which, by flooding financial markets with liquidity, was supposed to boost growth. But it remains unclear whether elevated asset prices are supporting aggregate demand or mainly shifting the distribution of wealth. It is equally unclear what will happen to asset prices when monetary assistance is withdrawn.
A fourth factor is the quality of government. In recent years, there has been no shortage of examples of governments abusing their powers to favor the ruling elite, their supporters, and a variety of special interests, with detrimental effects on regulation, public investment, the delivery of services, and growth. It is critically important that public services, public investment, and public policy are well managed. Countries that attract and motivate skilled public managers outperform their peers.
Finally, and most important, the magnitude and duration of the drop in aggregate demand has been greater than expected, partly because employment and median incomes have been lagging behind growth. This phenomenon preceded the crisis, and high levels of household debt have exacerbated its impact in the aftermath. The stagnation of incomes in the bottom 75% of the distribution presents an especially large challenge, because it depresses consumption, undermines social cohesion (and thus political stability and effectiveness), and decreases intergenerational mobility – especially where public education is poor.
Sometimes change occurs at a pace that outstrips the capacity of individuals and systems to respond. This appears to be one of those times. Labor markets have been knocked out of equilibrium as new technology and shifting global supply chains have caused demand in the labor market to change faster than supply can adjust.
This is not a permanent condition, but the transition will be long and complex. The same forces that are dramatically increasing the world economy’s productive potential are largely responsible for the adverse trends in income distribution. Digital technology and capital have eliminated middle-income jobs or moved them offshore, generating an excess supply of labor that has contributed to income stagnation precisely in that range.
A more muscular response will require an awareness of the nature of the challenge and a willingness to meet it by investing heavily in key areas – particularly education, health care, and infrastructure. It must be recognized that this is a difficult moment and countries must mobilize their resources to help their people with the transition.
That will mean redistributing income and ensuring access to essential basic services. If countering inequality and promoting intergenerational opportunity introduces some marginal inefficiencies and blunts some incentives, it is more than worth the price. Public provision of critical basic services like education or health care may never be as efficient as private-sector alternatives; but where efficiency entails exclusion and inequality of opportunity, public provision is not a mistake.
One hopes that a growing awareness of the significance of these and other factors will have a positive effect on policy agendas in the coming year. 


A Trade Opportunity for Obama and the New Congress

The benefits from deals now in the works could mean an added $3,000 a year for the average U.S. family of four.

By Charles Boustany And Robert B. Zoellick

Dec. 28, 2014 7:01 p.m. ET

After the midterm elections, political commentators identified trade policy as one area for cooperation between President Obama and the Republican Congress. We agree. Under the U.S. Constitution, Congress has authority over trade. But the active direction and use of that authority depends on an energetic executive, in partnership with Congress.
According to a recent Pew Research survey, 66% of Americans believe greater U.S. involvement in the global economy is a “good thing,” with only 25% thinking it is bad. The Trans-Pacific Partnership (TPP) trade agreement is a “good thing” in the eyes of 55% of Americans, versus 25% who consider it bad; the Transatlantic Trade and Investment Partnership (TTIP) scores 53% good and 20% bad. These inclinations offer opportunity.  
Prof. Richard Neustadt explained to President John F. Kennedy that the presidency relied on the “power to persuade.” It’s time for Mr. Obama to persuade on trade. He must make use of the convening power of the executive to bolster his advocacy. His administration must work closely with Congress—to listen, explain, address problems and cut deals.
So why does trade matter? First, Americans are feeling squeezed. On the eve of the election, Pew Research reported that 79% of Americans considered the economy to be poor or at best fair. A boost in U.S. trade can increase wages and lower living expenses for families—offering higher earnings and cutting taxes on trade. Manufacturing workers who produce exports earn, on average, about 18% more, according to the Commerce Department. Their pay raise can be traced to the higher productivity of competitive exporting businesses.
Since World War II, U.S. trade policy has focused on lowering barriers to manufacturing and agricultural products. But U.S. trade negotiators also use free-trade agreements (FTAs) to pry open service sectors and expand e-commerce. In recent years, such business services as software, finance, architecture and engineering employed 25% of American workers, more than twice as many as worked in manufacturing. Business service employees earned over 20% more than the average manufacturing job, and the U.S. consistently runs a trade surplus in business services.
Over the past five years, the World Bank reports, about 75% of the world’s growth has been in emerging markets, which generally have higher barriers to trade. As America’s highly productive farmers and ranchers have seen, growing world markets are the drivers of higher sales. With the boom in U.S. energy innovation and production, fuel exports could spur more investment and jobs in that sector, too.
American families, and businesses, benefit from higher incomes and lower-priced imports. The World Trade Organization reports that the North American Free Trade Agreement and the Uruguay Round, the last big global trade agreement, have increased the purchasing power of an average American family of four by $1,300 to $2,000 every year. The Peterson Institute for International Economics estimates that the new trade deals in the works could offer that family another $3,000 or more a year.
Second, the U.S. and world economies desperately need a shift from extraordinary governmental spending and zero-interest-rate monetary policies to growth led by the private sector. Sustained growth can only be generated by private investment, innovation and purchases. American companies need greater confidence in free-enterprise policies before investing their big cash reserves. Trade policy offers an international partnership to overcome structural impediments to growth.
The negotiations for the TPP, for example, aim to create an open trade and investment network among the U.S., six current FTA partners, and five new ones. The biggest additional market is Japan, a pivotal Pacific ally. Japanese Prime Minister Shinzo Abe wants to use the TPP to press his own economy toward more competition, without which his goal of reviving Japan will falter.

Vietnam and Malaysia would also take part; they believe they can use the rules and disciplines of the TPP to boost growth, improve industries and services, expand global linkages, and avoid the so-called “middle income” trap, where countries’ lack of productivity growth slows the rise to higher incomes.
The TTIP under negotiation with the 28 countries of the European Union could overcome regulatory barriers that now choke off Europe’s economic recovery and weigh down U.S. growth. The industries that already operate across the Atlantic—such as autos, chemicals, pharmaceuticals and advanced manufacturing—could offer examples of ways to promote more competition with high standards.
The U.S. is well-positioned to benefit from new, expanded and enforceable rules for fair competition. With an advanced economy at the technological frontier, American companies have demonstrated a rare capacity to innovate—as we have seen in software, use of Big Data, energy, robotics and bioengineering. The demands of consumers and business for better services—in retail, communications, entertainment, education, health care, infrastructure, transport and logistics—in both developed and developing economies, offer private-sector opportunities for growth.
Third, U.S. foreign policy has been drifting. President Obama’s disengagements, have eroded confidence in America’s staying power. Trade policy can help re-establish America’s international economic commitment; U.S. economic interests underpin political and security ties. New economic links with key security partners on the Pacific and Atlantic rims of the Eurasian continents advance our primary geopolitical interests. And trade policy enlists America’s greatest asset—its dynamic private sector—in support of U.S. foreign policy.
Just as American commerce in the 19th and 20th centuries sailed with missionaries, engineers and educators, so 21st-century trade, investment and business networks will promote the causes of civil society, human rights, the environment and gender equality.
Mr. Boustany (R., La.) is a senior member of the House Ways and Means Committee, where he serves on the Subcommittee on Trade. Mr. Zoellick served as U.S. trade representative, deputy secretary of state, and president of the World Bank.

Op-Ed Columnist

The Obama Recovery

Paul Krugman

DEC. 28, 2014

Suppose that for some reason you decided to start hitting yourself in the head, repeatedly, with a baseball bat. You’d feel pretty bad. Correspondingly, you’d probably feel a lot better if and when you finally stopped. What would that improvement in your condition tell you?
It certainly wouldn’t imply that hitting yourself in the head was a good idea. It would, however, be an indication that the pain you were experiencing wasn’t a reflection of anything fundamentally wrong with your health. Your head wasn’t hurting because you were sick; it was hurting because you kept hitting it with that baseball bat.
And now you understand the basics of what has been happening to several major economies, including the United States, over the past few years. In fact, you understand these basics better than many politicians and commentators. 

Let’s start with a tale from overseas: austerity policy in Britain. As you may know, back in 2010 Britain’s newly installed Conservative government declared that a sharp reduction in budget deficits was needed to keep Britain from turning into Greece. Over the next two years growth in the British economy, which had been recovering fairly well from the financial crisis, more or less stalled. In 2013, however, growth picked up again — and the British government claimed vindication for its policies. Was this claim justified?
No, not at all. What actually happened was that the Tories stopped tightening the screws — they didn’t reverse the austerity that had already occurred, but they effectively put a hold on further cuts. So they stopped hitting Britain in the head with that baseball bat. And sure enough, the nation started feeling better.

To claim that this bounceback vindicated austerity is silly. As Simon Wren-Lewis of Oxford University likes to point out, if rapid growth after a gratuitous slump counts as success, the government should just close down half the economy for a year; the next year’s growth would be fantastic. Or as I’d put it, you shouldn’t conclude that hitting yourself in the head is smart because it feels so good when you stop. Unfortunately, the silliness of the claim hasn’t prevented its widespread acceptance by what Mr. Wren-Lewis calls “mediamacro.”
Meanwhile, back in America we haven’t had an official, declared policy of fiscal austerity — but we’ve nonetheless had plenty of austerity in practice, thanks to the federal sequester and sharp cuts by state and local governments. The good news is that we, too, seem to have stopped tightening the screws: Public spending isn’t surging, but at least it has stopped falling. And the economy is doing much better as a result. We are finally starting to see the kind of growth, in employment and G.D.P., that we should have been seeing all along — and the public’s mood is rapidly improving.

What’s the important lesson from this late Obama bounce? Mainly, I’d suggest, that everything you’ve heard about President Obama’s economic policies is wrong.
You know the spiel: that the U.S. economy is ailing because Obamacare is a job-killer and the president is a redistributionist, that Mr. Obama’s anti-business speeches (he hasn’t actually made any, but never mind) have hurt entrepreneurs’ feelings, inducing them to take their marbles and go home.
This story line never made much sense. The truth is that the private sector has done surprisingly well under Mr. Obama, adding 6.7 million jobs since he took office, compared with just 3.1 million at this point under President George W. Bush. Corporate profits have soared, as have stock prices. What held us back was unprecedented public-sector austerity: At this point in the Bush years, government employment was up by 1.2 million, but under Mr. Obama it’s down by 600,000. Sure enough, now that this de facto austerity is easing, the economy is perking up.
And what this bounce tells you is that the alleged faults of Obamanomics had nothing to do with the pain we were feeling. We weren’t hurting because we were sick; we were hurting because we kept hitting ourselves with that baseball bat, and we’re feeling a lot better now that we’ve stopped.
Will this improvement in our condition continue? Britain’s government has declared its intention to pick up the baseball bat again — to engage in further austerity, which does not bode well. But here the picture looks brighter. Households are in much better financial shape than they were a few years ago; there’s probably still a lot of pent-up demand, especially for housing. And falling oil prices will be good for most of the country, although some regions — especially Texas — may take a hit.
So I’m fairly optimistic about 2015, and probably beyond, as long as we avoid any more self-inflicted damage. Let’s just leave that baseball bat lying on the ground, O.K.?


Did The Saudis And The US Collude In Dropping Oil Prices?

Monday, December 29, 2014

The oil price drop that has dominated the headlines in recent weeks has been framed almost exclusively in terms of oil market economics, with most media outlets blaming Saudi Arabia, through its OPEC Trojan horse, for driving down the price, thus causing serious damage to the world's major oil exporters - most notably Russia.

While the market explanation is partially true, it is simplistic, and fails to address key geopolitical pressure points in the Middle East. looked beyond the headlines for the reason behind the oil price drop, and found that the explanation, while difficult to prove, may revolve around control of oil and gas in the Middle East and the weakening of Russia, Iran and Syria by flooding the market with cheap oil.

The oil weapon

We don't have to look too far back in history to see Saudi Arabia, the world's largest oil exporter and producer, using the oil price to achieve its foreign policy objectives. In 1973, Egyptian President Anwar Sadat convinced Saudi King Faisal to cut production and raise prices, then to go as far as embargoing oil exports, all with the goal of punishing the United States for supporting Israel against the Arab states. It worked. The "oil price shock" quadrupled prices.

It happened again in 1986, when Saudi Arabia-led OPEC allowed prices to drop precipitously, and then in 1990, when the Saudis sent prices plummeting as a way of taking out Russia, which was seen as a threat to their oil supremacy. In 1998, they succeeded. When the oil price was halved from $25 to $12, Russia defaulted on its debt.

The Saudis and other OPEC members have, of course, used the oil price for the obverse effect, that is, suppressing production to keep prices artificially high and member states swimming in "petrodollars". In 2008, oil peaked at $147 a barrel.

Turning to the current price drop, the Saudis and OPEC have a vested interest in taking out higher-cost competitors, such as US shale oil producers, who will certainly be hurt by the lower price. Even before the price drop, the Saudis were selling their oil to China at a discount.

OPEC's refusal on Nov. 27 to cut production seemed like the baldest evidence yet that the oil price drop was really an oil price war between Saudi Arabia and the US.

However, analysis shows the reasoning is complex, and may go beyond simply taking down the price to gain back lost marketshare.

"What is the reason for the United States and some U.S. allies wanting to drive down the price of oil?" Venezuelan President Nicolas Maduro asked rhetorically in October. "To harm Russia."

Many believe the oil price plunge is the result of deliberate and well-planned collusion on the part of the United States and Saudi Arabia to punish Russia and Iran for supporting the murderous Assad regime in Syria.

Punishing Assad and friends

Proponents of this theory point to a Sept. 11 meeting between US Secretary of State John Kerry and Saudi King Abdullah at his palace on the Red Sea. According to an article in the Wall Street Journal, it was during that meeting that a deal was hammered out between Kerry and Abdullah. In it, the Saudis would support Syrian airstrikes against Islamic State (ISIS), in exchange for Washington backing the Saudis in toppling Assad.

If in fact a deal was struck, it would make sense, considering the long-simmering rivalry between Saudi Arabia and its chief rival in the region: Iran. By opposing Syria, Abdullah grabs the opportunity to strike a blow against Iran, which he sees as a powerful regional rival due to its nuclear ambitions, its support for militant groups Hamas and Hezbollah, and its alliance with Syria, which it provides with weapons and funding. The two nations are also divided by religion, with the majority of Saudis following the Sunni version of Islam, and most Iranians considering themselves Shi'ites.

"The conflict is now a full-blown proxy war between Iran and Saudi Arabia, which is playing out across the region," Reuters reported on Dec. 15. "Both sides increasingly see their rivalry as a winner-take-all conflict: if the Shi'ite Hezbollah gains an upper hand in Lebanon, then the Sunnis of Lebanon -- and by extension, their Saudi patrons -- lose a round to Iran. If a Shi'ite-led government solidifies its control of Iraq, then Iran will have won another round."

The Saudis know the Iranians are vulnerable on the oil price. Experts say the country needs $140 a barrel oil to balance its budget; at sub-$60 prices, the Saudis succeed in pressuring Iran's supreme leader, Ayatollah Ali Khamanei, possibly containing its nuclear ambitions and making the country more pliable to the West, which has the power to reduce or lift sanctions if Iran cooperates.

Adding credence to this theory, Iranian President Hassan Rouhani told a Cabinet meeting earlier this month that the fall in oil prices was "politically motivated" and a "conspiracy against the interests of the region, the Muslim people and the Muslim world."

Pipeline conspiracy

Some commentators have offered a more conspiratorial theory for the Saudis wanting to get rid of Assad. They point to a 2011 agreement between Syria, Iran and Iraq that would see a pipeline running from the Iranian Port Assalouyeh to Damascus via Iraq. The $10-billion project would take three years to complete and would be fed gas from the South Pars gas field, which Iran shares with Qatar. Iranian officials have said they plan to extend the pipeline to the Mediterranean to supply gas to Europe - in competition with Qatar, the world's largest LNG exporter.

"The Iran-Iraq-Syria pipeline - if it's ever built - would solidify a predominantly Shi'ite axis through an economic, steel umbilical cord," wrote Asia Times correspondent Pepe Escobar.

Global Research, a Canada-based think tank, goes further to suggest that Assad's refusal in 2009 to allow Qatar to construct a gas pipeline from its North Field through Syria and on to Turkey and the EU, combined with the 2011 pipeline deal, "ignited the full-scale Saudi and Qatari assault on Assad's power."

"Today the US-backed wars in Ukraine and in Syria are but two fronts in the same strategic war to cripple Russia and China and to rupture any Eurasian counter-pole to a US-controlled New World Order. In each, control of energy pipelines, this time primarily of natural gas pipelines -- from Russia to the EU via Ukraine and from Iran and Syria to the EU via Syria -- is the strategic goal," Global Research wrote in an Oct. 26 post.

Poking the Russian bear

How does Russia play into the oil price drop? As a key ally of Syria, supplying Assad with billions in weaponry, President Vladimir Putin has, along with Iran, found himself targeted by the House of Saud. Putin's territorial ambitions in the Ukraine have also put him at odds with US President Barack Obama and leaders of the EU, which in May of this year imposed a set of sanctions on Russia.

As has been noted, Saudi Arabia's manipulation of the oil price has twice targeted Russia. This time, the effects of a low price have hit Moscow especially hard due to sanctions already in place combined with the low ruble. Last week, in an effort to defend its currency, the Bank of Russia raised interest rates to 17 percent. The measure failed, with the ruble dropping another 20 percent, leading to speculation the country could impose capital controls. Meanwhile, Putin took the opportunity in his annual televised address to announce that while the economy is likely to suffer for the next two years and that Russians should brace for a recession, "Our economy will get diversified and oil prices will go back up."

He may be right, but what will the effect be on Russia of a sustained period of low oil prices? Eric Reguly, writing in The Globe and Mail last Saturday, points out that with foreign exchange reserves at around $400 billion, the Russian state is "in no danger of collapse" even in the event of a deep recession. Reguly predicts the greater threat is to the Russian private sector, which has a debt overhang of some $700 billion.

"This month alone, $30-billion of that amount must be repaid, with another $100-billion coming due next year. The problem is made worse by the economic sanctions, which have made it all but impossible for Russian companies to finance themselves in Western markets," he writes.

Will it work?

Whether one is a conspiracy theorist or a market theorist, in explaining the oil price drop, it really matters little, for the effect is surely more important than the cause. Putin has already shown himself to be a master player in the chess game of energy politics, so the suggestion that sub-$60 oil will crush the Russian leader has to be met with a healthy degree of skepticism.

Moscow's decision on Dec. 1 to drop the $45-billion South Stream natural gas pipeline project in favor of a new pipeline deal with Turkey shows Putin's willingness to circumvent European partners to continue deliveries of natural gas to European countries that depend heavily on Russia for its energy requirements. The deal also puts Turkey squarely in the Russian energy camp at a time when Russia has been alienated by the West.

Of course, the Russian dalliance with China is a key part of Putin's great Eastern pivot that will keep stoking demand for Russian gas even as the Saudis and OPEC, perhaps with US collusion, keep pumping to hold down the price. The November agreement, that would see Gazprom supply Chinese state oil company CNPC with 30 billion cubic meters of gas per year, builds on an earlier deal to sell China 38 bcm annually in an agreement valued at $400 billion.

As commented on Sunday, "ongoing projects are soldiering on and Russian oil output is projected to remain unchanged into 2015."

"Russia will go down with the ship before ceding market share - especially in Asia, where Putin reaffirmed the pivot is real. Saudi Arabia and North America will have to keep pumping as Putin plans to uphold his end in this game of brinksmanship."