The Real Arctic Threat

Obama focuses on global warming while Putin’s neo-imperialist dreams continue to spread north.

By John McCain

Sept. 1, 2015 7:17 p.m. ET

  Russian President Vladimir Putin, aboard a cross-country vehicle, arriving at a research center in Russia’s Franz Josef archipelago in the Arctic Ocean in 2010.                    

Russian President Vladimir Putin, aboard a cross-country vehicle, arriving at a research center in Russia’s Franz Josef archipelago in the Arctic Ocean in 2010. Photo: Alexei Nikolsky/Associated Press
President Obama is on a three-day visit to Alaska that will include a stop north of the Arctic Circle. The focus of his trip is climate change. Some of my Senate colleagues and I recently returned from the Arctic, and while we saw the challenges of melting polar ice, we also saw a greater and more immediate threat. It is a menace that many assumed was relegated to the past: an aggressive, militarily capable Russian state that is ruled by an anti-American autocrat, hostile to our interests, dismissive of our values, and seeking to challenge the international order that U.S. leaders of both parties have maintained for seven decades.

Vladimir Putin’s neo-imperial ambitions are clear enough in his attempt to dominate Russia’s neighbors, Ukraine most of all. But his ambitions increasingly extend to the Arctic and Europe’s northern flank. That is where I and my colleagues met with leaders and security officials from Norway, Sweden, Latvia, Lithuania and Estonia.

Like the U.S., these nations don’t want a return to the Cold War. But Russia’s aggressive behavior has led them to conclude President Putin wants exactly that. They see Russia’s undeclared, grinding war on Ukraine as a test both for Moscow’s campaign to reassert Russian dominance of its so-called near abroad and the response of the trans-Atlantic community.

As polar ice melts, Russia is rushing to nationalize and control new waterways across the Arctic Ocean that could open not simply to commercial shipping, but also military and intelligence activities. Vast natural resources, including oil and gas, could become available for exploitation, potentially transforming the Arctic into a new theater of geopolitical competition.
Officials from each of the countries I visited expressed the same concern: Russia is threatening the security and prosperity of the Arctic and Northern Europe by assertively deploying its military power, patrolling its neighbors’ coastlines both above and below water, and building or reopening numerous military outposts across the region.

Russian provocations and territorial claims in the Arctic also threaten U.S. national-security interests. Russia’s military expansion in the Arctic and North Atlantic appears to be an attempt to establish de facto control over these vital areas, much as China is seeking to do in the South China Sea. In both cases the U.S. response has so far been feeble. That is alarming, because freedom of the seas is essential to the modern way of life. Any action by Russia that impedes movement in the Arctic may ultimately threaten the peace of the Atlantic and the intercontinental ties between the U.S. and our closest allies and trading partners in Europe.

Defending America’s national interests in the Arctic will require bringing renewed energy to our alliances and partnerships. This year the U.S. assumed the chairmanship of the Arctic Council for two years. During that time we should make recognition of Mr. Putin’s hegemonic ambitions a top priority and increase cooperation with our Arctic partners to deter Russia from instigating a new “great game” in the Arctic.

We must also provide robust support for the U.S. Navy and Coast Guard. But amid budget constraints and worsening global crises, the Arctic challenge is stark. Traveling in the region often requires heavy icebreakers. Russia currently operates 27 of these vessels. The U.S. has two, one of which is not currently operational. As U.S. Coast Guard Commandant Paul F. Zukunft told Newsweek in July: “We’re not even in the same league as Russia right now. We’re not playing in this game at all.”

On Tuesday President Obama proposed to start planning for construction of new icebreakers. That’s only modest progress. Without the proper capabilities, the U.S. gives Russia a free pass to establish facts on the ground that will be hard to rebut.

Ultimately, Mr. Putin’s ambitions—from Ukraine and the Baltics to the Arctic and North Atlantic—require the trans-Atlantic community to return to a mission that too many assumed was no longer necessary: deterrence. We must project strength to prevent conflict.

Moscow is waging a Cold War updated for the 21st century, employing modern military tactics and weapons systems, conducting sophisticated information-warfare operations and using advanced cyber and space capabilities. It is not that the U.S. and our allies are doing nothing in response to this new Russian threat, but nothing we are doing has been successful in establishing deterrence.

To be successful, the U.S. must end the arbitrary caps on defense spending imposed by the Budget Control Act and return to a strategy-driven defense budget. America’s European and NATO partners must spend more on defense—at a minimum, meeting the NATO commitment of 2% of gross domestic product. But they also have to spend strategically by investing in interoperability and high-priority and high-demand systems, including missile defense, aerial refueling and unmanned aerial vehicles.

The good news is that some European countries are responding to the new strategic realities in Europe. Norway continues to be a leading military power in Europe. Sweden, which has suffered brazen Russian incursions into its territorial waters and airspace, is planning a defense-spending increase to improve training and acquire vital military capabilities, including submarines, fighters jets and air defenses.

The Baltic States are stepping up as well. Estonia has developed some of the world’s most advanced cyber capabilities. Latvia plans to spend 2% of GDP on defense by 2018. Lithuanian President Dalia Grybauskaitė tells me that her country is boosting its defense spending by a third next year.

With each of these nations, and other European and NATO allies, the U.S. must encourage greater security cooperation, robust military exchanges and exercises, and improved intelligence capabilities to deter Vladimir Putin’s quest for a new form of Russian empire.

Mr. McCain, a Republican, is a U.S. senator from Arizona.

Morgan Stanley issues 'full house' buy alert for stocks

All five of the bank's key timing indicators are flashing a green light for the first time since early 2009, suggesting the worst may be over for global equities

By Ambrose Evans-Pritchard

8:02PM BST 01 Sep 2015

Morgan Stanley: "On the balance of probabilities, the risk-reward ratio looks pretty good right now" Photo: © incamerastock / Alamy
Morgan Stanley has issued a "full house" buy alert on international stock markets for the first time since early 2009, effectively calling the bottom of this summer’s equity slump.

The US investment bank said that all five of its market-timing signals are now flashing a buy signal as selling-fever reaches capitulation levels.
This is a rare occurrence, typically leading to a V-shaped recovery that delivers a 23pc gain in stock prices over the following 12 months.
Graham Secker, the bank’s chief European equity strategist, said the sell-off over recent weeks is largely driven by emotion and has little to do with the underlying outlook for the world economy.
“Equities remain very cheap relative to government bonds and there remains a lot of liquidity around that is looking for a home,” he said.

The trailing dividend yield on stocks – measured by the MSCI Europe index – is currently 240 basis points above the yield on a mix of European government bonds, near its all time-highs over the past century. Such levels usually precede powerful equity rallies.

Morgan Stanley’s bold call has raised eyebrows since the bank caught the exact top of the European equity market in June 2007 using the same timing indicators, on that occasion issuing a "full house" sell alert.

It comes at a treacherous time for global investors as they try to fathom what is really happening in China and brace for the first rate rise in nine years by the US Federal Reserve, a move akin to a margin call for debtors in emerging markets with $4.5 trillion of US dollar liabilities.

“Our indicator is not the Holy Grail of investing. We think that on the balance of probabilities, the risk-reward ratio looks pretty good right now, but it is not a very good week-to-week timing signal,” said Mr Secker.

He said the current mood has echoes of 1998 during the East Asia crisis and the Russian default, when there was a nasty squall in the markets but it proved to be a false alarm for the global economy, thanks to three back-to-back rate cuts by the Fed.

It is the only time the "full house" buying signal has been triggered without a recession happening first in the developed countries, but that time it was six weeks premature.

The five timing tools are: valuation, fundamentals, risk, capitulation, and a combined market indicator. Between them they capture mutual fund flows, market breadth and technical momentum measures such as the rate of change, as well as price-to-earnings (P/E) ratios, dividend yields and their relationship to bonds.

Mr Secker said P/E ratios in Europe are likely to be flat this year, but this is distorted by a collapse in mining, energy and commodity revenues. Median earnings are growing at almost 10pc. “Europe is now discounting no growth over the next 12 months, which looks too bearish,” he said.

Morgan Stanley said the best way to invest for the rebound is through eurozone bank stocks, beneficiaries of quantitative easing and ultra-loose money. The star country over the next two years may be Italy – surprisingly – as it begins to reap the rewards of deep reform.

The FTSE 100 in Britain is likely to lag badly yet again next year, thanks to an over-valued pound and the heavy weighting of UK equities towards oil, gas and mining companies.

However, there is plenty of scope for well-aimed rifle shots. Mr Secker likes Burberry, Next, Pearson, Hays, Vodafone, Michael Page, Schroders, Imperial Tobacco and utilities such as Centrica and National Grid, as well as TUI, with a high exposure to Europe.

He recommended “mega-cap” stocks that on average generate 42pc of their earnings from emerging markets (EM), compared with 23pc for small companies. These have been punished over the past year. “We think it's still a little early to buy EM exposure, although that moment is getting closer,” he said.

The great worry is that China may be in deeper trouble than the authorities have let on after their failed attempts to prop up the Shanghai stock market and their ill-explained decision to ditch the country’s dollar-peg.

The heavy-handed arrest of 200 journalists, brokers and regulators for allegedly spreading false rumours and undermining public trust has further entrenched the view that Beijing is losing control.

The decision to force a respected journalist from Caijing Magazine to issue a grovelling confession on state television smacks of Maoist practices in the Cultural Revolution and amounts to crude repression of news reporting.

However, the economic picture may not be as bad as it looks, at least over coming months. While the latest data confirm that China is struggling to shake off what amounted to a recession earlier this year, it fails to clarify whether or not growth is picking up again.

The Caixin PMI index for manufacturing fell to a six-year low of 47.3 in August, but this was badly distorted by the fallout from the Tianjin chemical explosion and the closure of 12,000 factories to clear the air in Beijing before this week’s Victory Parade.

Capital Economics said the PMI index issued a false reading after the air purification campaign before the APEC summit in Beijing last year.

The Chinese property market is picking up after a deep slump, with house prices up for four months in a row. The fiscal crunch earlier this year is fading as a new bond market for local governments gets off the ground, issuing $100bn a month.

Morgan Stanley said it remains wary of China in the “short-run” but is waiting to jump back in if there is a fresh blast of fiscal stimulus.
That may be exactly what is now happening. Lou Jiwei, the finance minister, said last week that Beijing will pull forward a raft of infrastructure projects planned for next year, launching them later this year instead.

Both credit growth and the money supply are accelerating. Draconian curbs have been imposed on foreign exchange transactions to stop capital flight, easing the way for the central bank to cut lending rates further and inject liquidity by lowering the reserve requirement ratio.

A combined shot of fiscal and monetary stimulus is already in the Chinese pipeline. Yet China has lost so much credibility over the past year that the world may not believe the promise of largesse until the evidence is irrefutable.

Who Will Suffer Most from Climate Change?

Bill Gates

rural road

SEATTLE – A few years ago, Melinda and I visited with a group of rice farmers in Bihar, India, one of the most flood-prone regions of the country. All of them were extremely poor and depended on the rice they grew to feed and support their families. When the monsoon rains arrived each year, the rivers would swell, threatening to flood their farms and ruin their crops.
Still, they were willing to bet everything on the chance that their farm would be spared. It was a gamble they often lost. Their crops ruined, they would flee to the cities in search of odd jobs to feed their families. By the next year, however, they would return – often poorer than when they left – ready to plant again.
Our visit was a powerful reminder that for the world’s poorest farmers, life is a high-wire act – without safety nets. They don’t have access to improved seeds, fertilizer, irrigation systems, and other beneficial technologies, as farmers in rich countries do – and no crop insurance, either, to protect themselves against losses. Just one stroke of bad fortune – a drought, a flood, or an illness – is enough for them to tumble deeper into poverty and hunger.
Now, climate change is set to add a fresh layer of risk to their lives. Rising temperatures in the decades ahead will lead to major disruptions in agriculture, particularly in tropical zones.

Crops won’t grow because of too little rain or too much rain. Pests will thrive in the warmer climate and destroy crops.
Farmers in wealthier countries will experience changes, too. But they have the tools and supports to manage these risks. The world’s poorest farmers show up for work each day for the most part empty-handed. That’s why of all the people who will suffer from climate change, they are likely to suffer the most.
Poor farmers will feel the sting of these changes at the same time the world needs their help to feed a growing population. By 2050, global food demand is expected to increase by 60%.
Declining harvests would strain the global food system, increasing hunger and eroding the tremendous progress the world has made against poverty over the last half-century.
I’m optimistic that we can avoid the worst impacts of climate change and feed the world – if we act now. There’s an urgent need for governments to invest in new clean-energy innovations that will dramatically reduce greenhouse-gas emissions and halt rising temperatures. At the same time, we need to recognize that it’s already too late to stop all of the impacts of hotter temperatures. Even if the world discovered a cheap, clean energy source next week, it would take time for it to kick its fossil fuel-powered habits and shift to a carbon-free future. That’s why it’s critical for the world to invest in efforts to help the poorest adapt.
Many of the tools they’ll need are quite basic – things that they need anyway to grow more food and earn more income: access to financing, better seeds, fertilizer, training, and markets where they can sell what they grow.
Other tools are new and tailored to the demands of a changing climate. The Gates Foundation and its partners have worked together to develop new varieties of seeds that grow even during times of drought or flooding. The rice farmers I met in Bihar, for instance, are now growing a new variety of flood-tolerant rice – nicknamed “scuba” rice – that can survive two weeks underwater. They are already prepared if shifts in the weather pattern bring more flooding to their region. Other rice varieties are being developed that can withstand drought, heat, cold, and soil problems like high salt contamination.
All of these efforts have the power to transform lives. It’s quite common to see these farmers double or triple their harvests and their incomes when they have access to the advances farmers in the rich world take for granted. This new prosperity allows them to improve their diets, invest in their farms, and send their children to school. It also pulls their lives back from the razor’s edge, giving them a sense of security even if they have a bad harvest.
There will also be threats from climate change that we can’t foresee. To be prepared, the world needs to accelerate research into seeds and supports for smallholder farmers. One of the most exciting innovations to help farmers is satellite technology. In Africa, researchers are using satellite images to create detailed soil maps, which can inform farmers about what varieties will thrive on their land.
Still, a better seed or a new technology can’t transform the lives of farming families until it’s in their hands. A number of organizations, including a non-profit group called One Acre Fund, are finding ways to ensure that farmers take advantage of these solutions. One Acre Fund works closely with more than 200,000 African farmers, providing access to financing, tools, and training. By 2020, they aim to reach one million farmers.
In this year’s Annual Letter, Melinda and I made a bet that Africa will be able to feed itself in the next 15 years. Even with the risks of climate change, that’s a bet I stand by.
Yes, poor farmers have it tough. Their lives are puzzles with so many pieces to get right – from planting the right seeds and using the correct fertilizer to getting training and having a place to sell their harvest. If just one piece falls out of place, their lives can fall apart.
I know the world has what it takes to help put those pieces in place for both the challenges they face today and the ones they’ll face tomorrow. Most importantly, I know the farmers do, too.

Slumping Commodities Force Glencore to Make a Tough Trade

Swiss mining and trading giant could risk denting its earnings power in an effort to cut debt

By Helen Thomas

Sept. 2, 2015 9:03 a.m. ET
Glencore CEO Ivan Glasenberg. The embattled commodities giant could free up cash in its trading business, but that raises the risk of denting its earnings power. Glencore CEO Ivan Glasenberg. The embattled commodities giant could free up cash in its trading business, but that raises the risk of denting its earnings power. Photo: Reuters

There is a paradox at the heart of Glencore GLNCY -9.09 % ’s business: The commodities powerhouse has ways to stabilize its balance sheet, but doing so could undermine the might of its trading machine.

Glencore said last month that it had reduced working capital in its trading business by about $4.7 billion. Of that, $1.5 billion came from squeezing very short-term debt used to fund the business, while $3.2 billion was found elsewhere, such as inventories.

This releases cash for the trader-cum-miner, helping to cover spending and reduce Glencore’s relatively high net debt. That is vital at the moment: those debt levels have made Glencore a target as commodities prices have slumped: its stock has collapsed, down 40% over the past month, in part on fears of a need for it to raise additional equity.

With commodities in a severe funk and many fearful it could get even worse should China’s economic situation deteriorate further, the ability to pull capital from trading is an important lever for Glencore. It is a tool the company’s pure mining peers can’t deploy and may help Glencore forestall the need to raise additional equity.

But, as Glencore does so, it will become tougher to generate profits. Commodities trading is a low-margin business that requires churning large volumes.


Glencore already faces an earnings challenge. Its earnings guidance for trading targets operating profit of $2.7 billion to $3.7 billion a year. Yet first-half operating profit in trading, at $1.1 billion, fell short of that level. The company thinks it can make up most of the shortfall, hitting a reduced full-year target of $2.5 billion to $2.6 billion.

But the need to reduce working capital may make that more difficult, even if the direct link between that and profits isn’t exactly clear. The trading unit has, on average, made about a 13% return on capital employed, according to Morgan Stanley. MS -3.86 % It made about 14% last year. On that basis, cutting working capital by $4.7 billion theoretically could wipe some $600 million from annual operating profit.

But that outlook is too severe. About two-thirds of Glencore’s reduction in working capital was due to falling commodities prices: the company needs less capital to finance a given shipment when prices are lower.

So profits wouldn’t be as adversely affected. Prices aside, the reduction in working capital was perhaps closer to $1.6 billion, theoretically cutting about $200 million from operating profit.

In dire straits, however, Glencore argues there is marginally profitable business it can cut.
Effectively, there are diminishing returns to its trading capital: the final billion invested earns a much lower return than the first.

Glencore seems likely to cut working capital more to protect its credit rating. Finance chief Steven Kalmin said it could reduce the company’s first-half net working capital of about $15 billion further, if needed. Some of that would come from operating its mines more efficiently, though the bulk would likely be found in trading.

This could mean foregoing opportunistic trades, such as taking advantage of the shape of the futures curve. The problem with that: Glencore’s vast trading operation is also meant to give it market intelligence and access that rivals lack. Doing some low-margin business may also be needed to maintain key relationships.

One option would be to do more brokerage-style business, taking a handling fee for marketing commodities, rather than taking risk on its own balance sheet. Another possibility is to team up with banks or other financiers to share the costs of potentially lucrative trades.

All of this involves trade-offs that come at a cost. But Glencore at least has a trade to make.