Russia Just Told The World, “No.”
The comments below are an edited and abridged synopsis of an article by Tom Luongo
In the midst of the worst market meltdown in years, Russia found itself in the position to say “no.”
The current crisis is because market prices around the world are vastly overvalued. The power of the US dollar has pushed the world to this state. Meanwhile, oil prices have been on a one-way trade: down.
The problems have been present for months, pushed aside by Fed intervention in the dollar-funding markets. The repo crisis of last year never ended; it reappeared as people sold dollars and bought Treasuries, pushing yields down. Credit and stock markets are spiralling downward.
Add to this OPEC’s request for a historic production cut. It needs the cut to remain relevant, the cartel is dying. But Russia said no. Russia is prepared for lower oil prices. And this was the perfect moment for Russia to do that.
Russia is one of the lowest-cost producers in the world. Even after paying taxes to the government their costs are far lower, close to a $20-per-barrel break-even point, than anyone else’s in the world when external costs are factored in. That’s where the Russians’ power comes from.
When you don’t owe anyone anything, you are free to tell them “no.” Russia is holding the whip hand over the global market for oil, and they will have it for years to come as US production implodes, because Russia can and does produce the marginal barrel of oil, and that is why oil prices are plunging on the news that production will not be cut.
Trouble lurks beneath the market. There is a lot of bank and pension fund exposure in the US to what is soon to be non-performing fracking debt. Liquidations will begin later this year, but the market is handicapping now.
America’s problem is debt. The dollar has been its greatest weapon, and it is still king. It is a weapon with a great deal of power, but wielded only against the US’s allies, not Russia.
Markets will adjust and calm down. The panic will subside. But it will come back soon enough in a more virulent form. Today is a replay of 2007-2008, but this time, Russia is far better prepared to fight back.
And when that happens, it won’t be the Saudis or the Turks asking Russia to save them, but the US and Europe.