The West’s Unilateral Cold War
Sergei Karaganov
MOSCOW – Rising tensions between the United Kingdom and Russia are but further proof that Russia and the West, according to no less an authority than Richard N. Haass, President of the Council on Foreign Relations, have entered a “Cold War II”. I tend to disagree.
Yes, Russia’s relations with the United States, and now also with the UK, are worse than in the 1950s, and the chance of a direct conflict is higher than at any time since the 1962 Cuban missile crisis. Given the complexity of today’s strategic nuclear weapons and the systems designed to neutralize them, one cannot rule out the possibility that some actor on either side, or a third party, could provoke escalation.
Making matters worse, communication between US and Russian leaders is all but nonexistent, owing to the lack of trust on both sides. Among Americans, feelings toward Russia verge on something close to hatred, and many in Russia now regard Americans with ill-concealed disdain.
This psychological backdrop to the bilateral relationship truly is worse than during the Cold War. But that does not mean that today’s tensions amount to a sequel. Such a confrontation would require an ideological component that is decidedly lacking on the Russian side.
Russia has no intention of waging another Cold War. Although some degree of confrontation with the US does help President Vladimir Putin unite the public while burnishing Russian elites’ nationalist credentials, Russia is not an ideologically motivated state. What ideology it does have is based in Russian culture and civilization, which it is not interested in exporting.
The Kremlin in fact prefers not to proselytize on Russia’s behalf. Russia’s approach to international affairs has long centered on respect for national interests and sovereignty, and the belief that all peoples and nations should have the freedom to make their own political, economic, and cultural choices. Russia also embraces universal human values such as trust in God, family, and country, as well as self-fulfillment through service to society and nation.
I dream of the possibility that even 2% of the accusations concerning Russian “interference” in the 2016 US election prove true. It would bolster my self-esteem as a Russian, while educating Americans – whose government has long interfered in other countries’ internal affairs – about the dangers of throwing stones from a glass house.
But the problem between Russia and the West is really a problem among Westerners themselves. The US establishment is using the scarecrow of Russian interference to regain its lost political control, particularly in the realm of social media, where a discontented population and maverick politicians have finally found a voice.
But even if American elites do manage to wrest back control, the deeper source of Western angst will remain. For at least the past decade, the world has been witnessing the endgame of the West’s 500-year hegemony. It started in the sixteenth century, when Europe developed better guns and warships and began its imperial expansion. In the following centuries, Europeans would use their economic, cultural, political, and especially military dominance to siphon off the world’s wealth.
For a few decades in the second half of the twentieth century, the West’s dominant position was challenged by the Soviet Union and China. But after the Soviet Union imploded, the US emerged as the sole hegemon, and the world seemed to return to its historic status quo. Soon enough, however, the US overextended itself by plunging into geopolitical misadventures like the invasion of Iraq. And then came the 2008 financial crisis, which exposed the weaknesses of twenty-first-century capitalism.
At the same time, the US has long pursued military superiority. In 2002, it unilaterally abrogated the 1972 Anti-Ballistic Missile Treaty. And, more recently, it has embarked on a massive build-up of conventional forces and a large-scale modernization of its nuclear arsenal.
Still, Russia, China, and the rest of the world won’t allow a return to US hegemony. Putin recently made this clear by unveiling a number of new, cutting-edge strategic weapons systems, as part of what I would call a strategy of “preemptive deterrence.” The message was that the US cannot hope to regain absolute military superiority, even if it decides to bleed itself dry in an arms race, as the Soviet Union did.
Preliminary assessments that my colleagues and I recently carried outsuggest that even if the US decides to wage a unilateral Cold War, its chances against Russia, China, and other emerging powers would not be very good. The balance of military, political, economic, and moral power has simply shifted too far away from the West to be reversed.
Nonetheless, a new Cold War, even if largely one-sided, would be extremely dangerous for humanity. The world’s major powers should concentrate on strengthening international strategic stability through dialogue; reopening channels of communications between militaries; and restoring civility to their interactions. We should also consider establishing more diplomatic, legislative, academic, and educational exchanges. Most of all, though, we must stop demonizing each other.
The world is entering a dangerous period. But if we are wise, we can build a more balanced international system, one in which the major powers will deter one another while cooperating to solve global problems. Smaller countries, meanwhile, will be freer to develop according to their own political, cultural, and economic preferences.
The previous, Western-led system has collapsed. To ensure a peaceful future, we need to start working together to build a new one.
Sergei Karaganov is Dean of the School of International Economics and Foreign Affairs at the National Research University Higher School of Economics in Moscow, and Honorary Chairman of Russia’s Council on Foreign and Defense Policy.
WARNING SIGNAL ON U.S. BORROWING COSTS IS A RED HERRING / THE FINANCIAL TIMES
Warning signal on US borrowing costs is a red herring
While a widening in a key spread does not portend doom, other indicators need watching
Bhanu Baweja
Dollar funding for banks is tightening, but not exceptionally so in the context of a rise in yields on government bills
Perhaps because it reflexively takes us back to an unhappier time, there’s a strong sense of disquiet about the rising gap between the dollar Libor rate, at which banks borrow from one another, and the overnight indexed swap (OIS) rate, a gauge of the future Fed Funds.
Having risen 35 basis points over the past six months, this spread, now at 50bp, is about to break through the highest levels recorded during the European peripheral scare of 2011. It has historically been viewed by investors and policymakers alike as a reliable indicator of the health of financial plumbing. But its widening today should not portend the dark spell of the past.
To understand why, it is useful to decompose the Libor-OIS spread into three parts: the Treasury bill (T-bill)-OIS spread, the commercial paper (CP) to T-bill spread, and Libor to CP spread.
At least two-thirds of the move in Libor-OIS has been driven by a widening in the T-bill-OIS spread. Dollar funding for banks is tightening, but not exceptionally so in the context of a rise in yields on government bills, widely considered the risk free rate of the world. T-bill yields have risen particularly sharply since early February, when the US Congress agreed on further fiscal spending. Supply is at play here, not rising credit risk.
The remaining widening in Libor-OIS is explained by the widening in the CP-T-bill spread.
Large corporations fund themselves in this CP market, and their funding became dearer to T-bill rates after US money market reform of 2016. This required the pricing of institutional money market funds investing in CP to move to floating Net Asset Value, shrinking the set of investors who held these instruments. As secured T-bill rates have risen since, unsecured CP rates have climbed with a modestly higher beta. This is a new reality of the market microstructure; again, not a credit issue.
Finally, the spread between Libor rates and CP rates is, if anything, tighter than where it has been in previous Fed hiking cycles. In all, Libor is rising in tandem with T-bill and CP rates, not because financial institutions are becoming more wary of one another.
Signs across different asset classes echo this message. Subordinated debt issued by subinvestment grade financial institutions trades close to its strongest level. US equities are up on the year, with financials outperforming. The premium for funding in dollars, as tracked by the cross-currency basis swaps, barely shows a tremor. US financial conditions remain in the loosest quartile of their distribution of the past 10 years.
So, access to funding isn’t changing, the price of funding is. It isn’t the same thing. The price of funding is changing by design; the Fed is raising rates to keep the US economy from overheating. But, reduced access to funding, especially for able borrowers, would constitute tightening by accident, and must induce the Fed to stop dead in their tracks, and potentially to reverse course. We are very likely to find out at the Fed meeting on Wednesday that isn’t the case.
Does the price of funding not matter at all, then? It most certainly does. It can fundamentally alter market trends. But instead of Libor-OIS widening, which is likely a red herring, we need to focus on the right channels to detect signals of a change in the investment opportunity set.
First, watch the hit from yields to floating rate high yield credit and leveraged loans. We estimate floating rate loans to US borrowers at $2.2tn, nearly half of which have been extended to issuers rated below BB-. Our analysis shows that leveraged loan issuers will remain resilient to the next 75-100bp increase in Fed Funds rates, but could see their interest coverage ratios reaching dangerously low levels beyond that.
Second, watch US growth surprises relative to those in the rest of the world. Widening front end rate interest rate differentials will become more meaningful for currency trends if mirrored in growth differentials. It’s worth paying particular attention to the relative economic cycles of US and China. The EM complex, particularly EM currencies, thus far in a Zen-like calm, may begin to show signs of fatigue if China growth softens against a backdrop of higher US rates. Risks become more elevated as we approach US Trade Representative Office’s report on intellectual property rights.
Third, and perhaps most importantly, watch term premium in the US bond markets. Investors have been worried about the impact of higher rates, but US rates volatility itself hasn’t risen yet, and isn’t likely to unless term premium rises. A change here could mean a sell-off in the US bond hits other assets classes harder and quicker.
Much as one must now prepare for the music stopping, it is important not to overreact when history rhymes for unrelated causes. It’s often said in jest that policy is fully equipped to fight the last crisis. Somehow that’s a reassuring thought today.
Bhanu Baweja is the deputy head of macro strategy at UBS Investment Bank
CHINA USES ECONOMIC MUSCLE TO BRING N KOREA TO NEGOTIATING TABLE / THE FINANCIAL TIMES
China uses economic muscle to bring N Korea to negotiating table
Data reveal how Beijing has drastically cut exports of key materials to Pyongyang
James Kynge in London
Kim Jong Un with China's Xi Jinping during the North Korean leader's visit to Beijing this week © AP
China virtually halted exports of petroleum products, coal and other key materials to North Korea in the months leading to this week’s unprecedented summit between Kim Jong Un, the North Korean leader, and his Chinese counterpart Xi Jinping.
The export freeze — revealed in official Chinese data and going much further than the limits stipulated under UN sanctions — shows the extent of Chinese pressure following the ramping up of Pyongyang’s nuclear testing programme. It also suggests that behind Mr Xi’s talk this week of a “profound revolutionary friendship” between the two nations, his government has been playing hard ball with its neighbour.
“China has effectively turned off the petroleum taps flowing into North Korea,” said Alex Wolf, economist at Aberdeen Standard Investments and a former US diplomat in China. “From the data available . . . it appears that the North Korean economy is under a great deal of pressure and this has undoubtedly contributed to North Korea’s change in policy.
“It is Chinese ‘maximum pressure’ that may be bringing a change in North Korean policy.”
Since its September test of a nuclear weapon, North Korea has launched a highly unusual series of diplomatic forays. Mr Kim’s sister, Kim Yo Jung, was dispatched to the Winter Olympics held in South Korea in February. Mr Kim then shocked many by inviting Donald Trump to a summit — an offer that the US president accepted. Following the visit to Beijing this week, North and South Korea announced a historic summit scheduled for later this month.
Debate has swirled over the motivations behind North Korea’s shift in strategy. Some analysts believe that Pyongyang has achieved its nuclear and ballistic missile goals and now wants to negotiate recognition as a nuclear power. Others say that it is seeking detente with South Korea to weaken the US alliance structure. In the US, some attribute Mr Kim’s new approach to pressure from Mr Trump’s White House.
But evidence of a partial Chinese export freeze adds a further perspective. Official Chinese statistics show that the monthly average of refined petroleum exports to North Korea in January and February was 175.2 tons, just 1.3 per cent of the monthly average of 13,552.6 tons shipped in the first half of 2017.
The level of reduction went far beyond the 89 per cent cut in petroleum product exports stipulated by the UN sanctions.
Chinese coal exports to North Korea were also cut to zero in the three months to the end of February, after running at a monthly average of 8,627 tons in the first half of 2017. Exports of steel ran at a monthly average of 257 tons in the first two months of this year, down from a monthly average of 15,110 tons in the first half of 2017.
Shipments of motor vehicles also dried up, with just one unit being exported in the month of February, official Chinese statistics show. Concerns over the accuracy of China’s statistics are common, but analysts said that such consistent and bold drops in export volumes are unlikely to have been the result of official massaging.
It is more likely, analysts said, that Beijing is seeking to remind Pyongyang of the economic leverage it wields over North Korea as Mr Kim prepares his diplomatic forays. A senior Chinese official, speaking anonymously before Mr Kim’s diplomatic flurry, said that Beijing wanted to bring Pyongyang to the negotiating table.
It is important that the US and other countries realise that Pyongyang’s objective is not aggression but to win security guarantees for North Korea, the Chinese official said, adding that North Korea had in the past shown a willingness to negotiate but US inflexibility had precluded progress.
The evidence of China’s strong sanctioning of North Korea stands in contrast to Beijing’s longstanding policy of resisting US pressure for stiffer restrictions on economic engagement with North Korea. In one example, Mr Xi told former US president Barack Obama in 2016 that North Korea had little to lose from sanctions, such was the poverty already in the country.Mr Wolf said: “China wants to play a central role in resolving this crisis, but it wants to do it on its own terms.”
PRICE REFLEXIVITY - WHAT´S IT GOING TO TAKE FOR PEOPLE TO WAKE UP TO THE POTENTIAL OF HIGHER OIL PRICES FOR LONGER? / SEEKING ALPHA
Price Reflexivity - What's It Going To Take For People To Wake Up To The Potential Of Higher Oil Prices For Longer?
by: HFIR
Summary
- We explain why oil prices have to move to a level where the bull thesis can no longer be ignored.
- Our view is that this will happen when WTI reaches $80/bbl, or our upside target for 2018.
- The thinking is that Saudi, knowing full well the depressed sentiment, will shock the market in the second half of 2018 via lower exports.
- This will put upward pressure on Brent, which would widen Brent-WTI spread and result in higher US crude exports.

How high do oil prices have to go to shock the market out of its complacency?
IN GENEVA, EXTREME LUXURY TAKES THE FLOOR / THE NEW YORK TIMES
In Geneva, Extreme Luxury Takes the Floor
By TOM VOELK



The Continental GT will be on the floor of the Geneva motor show.
Matching the paint to a husband’s wedding cummerbund or wife’s signature lipstick is possible. In the Britain, Bentley said that a buyer cut off the salesman’s tie for use as a color swatch, saying it was his perfect exterior color. Interior stitching can be specified to color, length and width. If a buyer’s favorite tree is felled by lightning, its veneer can be installed to keep its memory alive.
Bienvenida
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Friedrich Nietzsche
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
Lao Tse
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
Warren Buffett
No soy alguien que sabe, sino alguien que busca.
FOZ
Only Gold is money. Everything else is debt.
J.P. Morgan
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Proverbio Chino
Quien no lo ha dado todo no ha dado nada.
Helenio Herrera
History repeats itself, first as tragedy, second as farce.
Karl Marx
If you know the other and know yourself, you need not fear the result of a hundred battles.
Sun Tzu
Paulo Coelho

Archivo del blog
-
►
2020
(2008)
- ► septiembre (145)
-
►
2019
(2103)
- ► septiembre (187)
-
▼
2018
(1928)
- ► septiembre (173)
-
►
2017
(1947)
- ► septiembre (160)