Daily Sources 3/4

1. Philip P. Pan at the Washington Post reports that Russian federal courts have ruled that they would try Russian oil oligarch Mikhail Khodorkovsky in Moscow, having previously ruled with prosecutors who resisted the motion.

"Prosecutors are calling Khodorkovsky's alleged crime the largest theft in the history of modern Russia. His supporters describe the accusations as preposterous and say the authorities are staging a second show trial intended to keep Khodorkovsky in prison indefinitely."

Politicos associated with President Dimitry Medvedev have indicated support for the move, saying the Khodorovsky story has seriously damaged Russia's image abroad. Mr. Medvedev had made a commitment to the "rule of law" and the rejection of "legal nihilism" one of his major campaign promises for office. Stephen Bierman at Bloomberg reports that Rosneft profits fell by 64% in the fourth quarter, to $775 million from $2.18 billion a year earlier. Rosneft had $21.3 billion in net debt at the close of 2008, and is obligated to repay $7 billion this year. A great portion of Rosneft's debt obligations are to China, and specifically CNPC, in return for financing the purchase of Khodorovsky's Yukos's outstanding assets.

2. China's recent use of its financial assets to continue with its strategy of taking stakes in overseas commodities producers and resource concessions has spurred renewed chattering class concerns regarding Beijing's intentions. Platts has a special feature on the recent acquisition and politically-influenced lending spree, saying:

"While governments and companies across the developed world are in a state of financial paralysis, fixated on the unfolding economic gloom and doom, Chinese leaders and company executives have been jetting through the Middle East, Africa, Latin America and Australia, checkbooks in hand."

According to the piece, which is worth reading in its entirety, the Politburo put the kibosh on overseas acquisitions in June last year due to concerns about the US housing crisis, but that Beijing reversed that decision in December. Platts includes in the piece two useful tables, one on loans and investments so far in 2009:



And one in metals M&As successfully carried out in 2009, which has caused so much concern in Australia:



Michael Pettis, professor of finance at Peking University's Guanghua School of Management, has an opinion piece in Wall Street Journal Asia which points out that the stimulus program in China so far has not boosted consumption.

"[Instead] of reducing China's export dependence, the opposite is happening. China's trade surplus has risen, from an already-high monthly trade surplus of just under $17 billion in the first half of 2008 to nearly $33 billion in the second half, with January figures this year clocking in at just over $39 billion. The stimulus isn't working because the money isn't going where it needs to go -- to household consumers and service industries, whose rising demand could absorb a greater share of Chinese production."

Prof. Pettis argues that the transition from an export-led growth model to a consumption-led one will be difficult, and impossible to do quickly without causing more trouble than its worth:

"China can and will eventually make the transition away from export-led growth, but no one should expect it to be quick or easy. China's development model was based on expanding investment rapidly and boosting savings while constraining consumption, and for this reason it never developed a significant service industry or a financial system capable of channeling funding into consumption through developed-world-style consumer finance. These flaws are embedded deeply into the economy. As much as Beijing would like to change its model, it cannot do so quickly except by tolerating a massive collapse in manufacturing output.

Obviously China does not want to do this, and it would certainly be harmful for the world over the medium- and long term if it did."

Well-worth reading in full. Sky Canaves and Juliet Ye at the China Journal report that today's meetings of the National People’s Congress and the National Committee of the Chinese People’s Political Consultative Conference are dominated by the government’s economic stimulus package, social security and corruption. "CPPCC delegate Liu Hanyuan wants to give everyone 4,000 yuan ($585) in shopping vouchers to stimulate consumption." The rumors of additional stimulus this morning spurred price increases in commodities. Justin Fox at The Curious Capitalist reports that the International Labor Organization compiled a compendium of economic stimulus packages globally, and it turns out that Beijing and DC are by far the largest players not just in absolute terms, but as a share of GDP as well.



Meanwhile, Nouriel Roubini's RGE Monitor's newsletter today included a long analysis of rising protectionist measures being taken internationally. (You can subscribe to their newsletter for free here.) Some key excerpts:

"Countries like Indonesia, India, Vietnam, Ukraine, Russia, Argentina, Ecuador and Turkey have raised import tariffs, duties or laid restrictions on import licenses or quotas. In their fiscal stimulus packages, several countries are also offering distortionary subsidies, and credit and other incentives for exporting firms to sustain trade flows, especially countries with high export dependence and low domestic demand. But trying to promote exports amid global demand and industrial activity slump might only add to the global excess capacity and deflation pressures. One of China’s first steps was to reinstate and then increase export rebates which create disincentives to sell goods at home, a move that might only increase the domestic imbalances, as might the government’s efforts to buy grain and metals to support prices. As WTO bound rates, especially for developing countries, have fallen significantly in recent years, governments have ample room to raise tariffs closer to the bound rate levels without violating WTO rules."

[Emphasis mine.]

"[To] prevent import leakages and promote production and jobs at local firms, fiscal stimulus in countries like US, Spain and France encourage spending on domestically produced goods at the expense of foreign-owned firms and nationals working at those firms. The US fiscal stimulus package limits sourcing infrastructure spending related goods from WTO signatories like EU, NAFTA and Japan while excluding non-signatories like China, Brazil, India, Russia, Ukraine, Turkey and many other developing countries. Since close to 55% of the infrastructure spending will take place after 2009-10, the impact of this measure on jobs and growth will be limited in the short-term. But this has nevertheless led other countries implementing fiscal stimulus and infrastructure spending to retaliate with similar measures to protect their own jobs and firms."

RGE also takes on financial protectionism like France's decision to establish a fund to prevent to foreign acquisition of strategic firms at distressed prices. I am more skeptical about the advantages of the unrestricted and unregulated flow of capital, but it remains worth reading in full.

3. Elizabeth Fry at the Financial Times reports that Australian GDP officially contracted by 0.5% in the fourth quarter from the third. Year over year, the economy grew by 0.3%.

4. Maria Danilova at the Associated Press reports that armed Ukrainian national security agents raided the offices of Naftogaz in masks today. "The national security service is controlled by President Viktor Yushchenko." The agents were reportedly seeking copies of the contract signed with Gazprom on January 19, effectively ending the gas supply shut off by Moscow. Naftogaz is apparently required to pay for February Ukrainian gas consumption by Saturday, March 7. The company has indicated that it has collected the necessary funds for payment, though it had earlier indicated on its website that it may well have trouble doing so (see Daily Sources 2/26 #3 and Daily Sources 2/19 #6.) President Yushchenko has characterized the January contract agreement as "capitulation" (see Daily Sources 1/23 #4) and talks with Moscow initiated by Prime Minister Yulia Tymoshenko to secure a loan to help plug the budget deficit as "a threat to Ukraine's national interests" (see Daily Sources 2/10 #8.)

"In an interview with the French newspaper Le Monde published Wednesday, Tymoshenko called for early presidential elections and indicated she would run and win. She said that her struggle with Yushchenko will end 'not in my destruction but in his political suicide.'"

Dmitry Zhdannikov at Reuters reports that Gazprom earlier this week agreed not to fine Naftogaz for taking less natural gas than it had contracted for and indicated today that it was concerned that Naftogaz was not going to be able to pay for supplies going forward. "'It seems that someone doesn't want Naftogaz to pay in time in order that we don't have problems,' Gazprom spokesman Sergei Kupriyanov told Reuters."

5. Eurointelligence reports that Icelandic popular support for joining the EU--which stood at 80% at one point in their crisis--now stands at about 40%.

6. Pamela Constable at the Washington Post reports that the Afghan Elections Commission today rejected President Karzai's choice of dates for the presidential election which Karzai had originally postponed.

"Karzai, who has led Afghanistan for seven years and hopes to win reelection, issued a decree last week that effectively ordered the polls held in April or May. The commission, which had previously ruled the election should not be held until August, defied his decree Wednesday and reaffirmed its earlier position."

The UN and NATO have both backed the August date.

7. Colum Lynch and Stephanie McCrummen at the Washington Post report that the International Criminal Court yesterday issued a warrant for the arrest of the president of Sudan, Omar Hassan al-Bashi.

"A three-judge panel upheld a request by the ICC's chief prosecutor, Luis Moreno-Ocampo of Argentina, to charge Bashir on seven counts of war crimes and crimes against humanity. But it ruled that prosecutors had not provided enough proof to charge Bashir with orchestrating a campaign of genocide. Moreno-Ocampo, the panel said, was free to pursue the genocide charge later if he obtained additional evidence."

The court stated that Bashir's status as a sitting head of state would not shield him from being called to task for criminal responsibility, though it remains rather unclear who will be able to bring the man to trial--especially now that he is very unlikely to travel anywhere which would carry out the arrest warrant. In an interview today, Sudan's ambassador to the UN Abdalmahmood Adalhaleem Mohamad said, predictably enough:

"For us, the ICC doesn't exist. We are not going to be bound by any decision they make against our leadership. We are in no way going to cooperate with it."

The Southern Sudanese leadership has had a mixed response to the move by the ICC. Salva Kiir, Vice President under the 2005 peace deal, said,

"The ICC issue has to be dealt with in many ways--legally, diplomatically, politically--and we should engage these fronts. We want to work with our partners in peace ... That does not mean support [for the ICC decision] and that does not mean condemnation. We want a solution to the conflict that brought about the ICC decision in the first place."

Alex De Waal, a Sudan expert and program director at the Social Science Research Council, said, "the indictment would likely complicate the internal politics of Bashir's ruling National Congress Party, saying that the Sudanese political process 'will get paralyzed or slow down, and that does not bode well for peace.'"

8. Bob Willis at Bloomberg reports that ADP Employer Services released data showing that companies cut 697,000 jobs in February, much more than most analysts had anticipated.

9. The EIA reports that crude stocks fell by 700,000 barrels to 350.6 million barrels in the week ended February 27. The stocks levels are well above the five year historical average range for this time of year, but are smaller than the most recent peak in 2007. According to a Bloomberg survey, analysts had expected a 1 million barrel build. Gasoline stocks built by 200,000 barrels versus Wall Street expectations of a 800,000 barrel decline, and are in the middle of the historical range. Distillate stocks built by 1.7 million barrels versus expectations of a million barrel draw, and are well above the five year historical average range for this time of year. Taken in isolation, the news is mixed, but high crude stocks levels should put downward pressure on crude prices. That said, gasoline cracks, as expressed by Apr delivery of RBOB over CL Apr 09, were awfully healthy at close yesterday at $13.76/b.