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Tuesday, September 9, 2014

Here Is Why Europe Just Launched The "Nuclear Option" Against Russia

Europe's leaders, we assume under pressure from Washington, appear to be making a big weather-related bet with their taxpayers' lives this winter.  As they unleash funding sanctions on Russia's big energy producers, Europe has pumped a record volume of natural gas into underground inventories in an effort to 'outlast' Russia and mitigate any Napoleonic "Winter War" scenario. The plan appears to be to starve Russian energy firms of cashflow - as flows to Europe are already plunging - and remove their funding ability, potentially forcing severe hardship on Russia's key economic drivers. There appears to be 3 potential problems with this plan...

As Bloomberg reports,
Europe’s reliance on Russian natural gas shipments via Ukraine is declining after the region pumped a record volume of the fuel into underground inventories, minimizing the risk of shortages during the coming winter.

The blue line above shows average daily flows at Velke Kapusany on the Slovakian-Ukrainian border, the biggest single entry point for Russian gas into the European Union, last month fell to a record, according to data from Slovak grid operator Eustream AS going back to 2011. The red histogram shows the 28-nation bloc has pumped a record volume of gas into storage, according to Gas Infrastructure Europe, a lobby group in Brussels.

Natural gas flows from Russia to the EU haven’t been affected in the current crisis. Storage sites in Slovakia, which had to seek emergency imports after its supplies were cut in 2009, were 92 percent full on Sept. 4, according to Gas Infrastructure Europe.
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So Europe is stocking-up - which makes perfect sense - just in case Russia pulls the plug... but has now taken the situation to "11" on the Spinal Tap amplifier of escalating tensions by planning sanctions on Russia's energy providers.
The plan appears clear:
stock-up now (to survive the winter)...

starve Russian firms of cashflow (thanks to stockpiles)...

cut off their funding source (sanctions)...

force Putin's economy into a tailspin...

Putin folds and it all ends happily ever after
*  *  *
There appears to be 3 problems with this plan...
1) What if the weather is considerably colder than normal this winter? (i.e. they need more supply)

Central based El Nino's seem to be associated with much colder European winters than eastern based El Nino's. Temperature anomalies come out on average 2-3c colder than a "normal" European winter.

With a central based El Nino forecast for winter 2014/2015 this would suggest a chance of some brutal cold moving much of central and northern Europe at times this winter.

For the United Kingdom and Ireland a central based El Nino does suggest a colder than average winter as well - Because of our proximity to the Atlantic Ocean the negative anomaly is much less extreme for Great Britain than it is for central Europe and Russia. Nevertheless, with the temperature anomaly coming out at 1c colder than average, the UK would still have a greater chance of a colder than average winter than an eastern based El Nino.
2) Russia has already committed to supporting the sanctioned firms (and we would hardly be shocked if China chipped in)
The Russian government, according to Bloomberg, is ready to provide 1.5 Trillion rubles financing to Rosneft to support production at current level, Prime Minister Dmitry Medvedev says in Vedomosti interview.

Details, ways of support are under review

Support wouldn’t be in one yr; needed to sustain output because Rosneft is budget’s main taxpayer
and furthermore, Gazprom appears to be quickly funding before the sanctions are actually put in place...
As Bloomberg reports, European banks may organize new borrowing for Gazprom, Interfax reports, citing people familiar it doesn’t identify.

The company's board to consider some loans Sept. 23, no details yet, news service reports

Gazprom spokesman Sergei Kupriyanov declined to comment when reached by Bloomberg
3) What happens in Spring? German industrials need energy?

It appears that Putin is a patient man... why not wait till the stockpiles have dwindled, winter is over, and then press...?
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It appears Europe's short-term plan to mitigate the "Winter War" may have bigger boomerag consequences than they seem to believe (and bear in mind the consequences of cold, pissed off Europeans in the past).
*  *  *
We point out that planned sanctions are on Gazprom Neft will be sanctioned (not the gazprom nat gas entity) as Europe appears to be focused on the crude oil side of things for now.
New European Union sanctions on Russia will expand the number of Russian companies unable to raise money in the bloc's capital markets to include three state-owned oil companies, according to documents seen by The Wall Street Journal.

The documents show the EU seeking to hit Russian oil companies, but leaving unscathed those involved in gas production and export, which are critical to many European countries' energy supplies.


Under a modest expansion of sanctions introduced in late July, the three oil companies - Gazpromneft, the oil-production and refining subsidiary of OAO Gazprom, oil transportation company Transneft, and oil giant Rosneft - will be forbidden from raising funds of longer than 30 days' maturity.
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So jab at oil companies, and mitigate natural gas restriction blowback?
Credit to Zero Hedge

Russia Sanctions Aimed At Collapsing Western Economies?

Russia's Response To European Capital Sanctions In One Word

While the West continues to press the "Russia is increasingly isolated" meme, it appears - as we noted ironically previously, that Vladimir Putin is finding plenty of friends... most notably China. While threats of 'asymmetric' retaliation over European sanctions may have been enough to worry Europe's leaders, the slew of news overnight regarding increased cooperation between China and Russia is likely more damaging to Western strategy (and egos).

Not so isolated...
h/t @PersonOfAwesome

As overnight news shows... China and Russia are ramping up their cooperation...
First, as Reuters reportsRussia and China pledged on Tuesday to settle more bilateral trade in rouble and yuan and to enhance cooperation between banks, Russia's First Deputy Prime Minister Igor Shuvalov said, as Moscow seeks to cushion the effects of Western economic sanctions...
Russia's First Deputy Prime Minister Igor Shuvalov said told reporters in Beijing that he had agreed an economic cooperation pact with China's Vice Premier Zhang Gaoli that included boosting use of the rouble and yuan for trade transactions.

The pact also lets Russian banks set up accounts with Chinese banks, and makes provisions for Russian companies to seek loans from Chinese firms.

"We are not going to break old contracts, most of which were denominated in dollars," Shuvalov said through an interpreter.

"But, we're going to encourage companies from the two countries to settle more in local currencies, to avoid using a currency from a third country."
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So that blows the oil/gas funding sanctions plan out of the water as Russian firms will merely fund via China.
*  *  *
Second, as RBTH reports, The Chinese company CNPC is to get up to 10 percent in Russia’s Vankor oilfields, Rosneft’s biggest production asset...
Russian President Vladimir Putin announced the plan at the construction launch of the Power of Siberia gas pipeline on 1 September, business newspaper Kommersant reported.

“The plan will secure state support, and we will encourage your participation,” said Putin to the members of the Chinese delegation.

“There are no restrictions for our Chinese friends,” he said. According to Kommersant, the Chinese state company CNPC could get up to 10 percent in Vankorneft for approximately $1 billion.
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So that knocks another leg out of the sanctions stool as investment in energy infrastructure and technology is covered.
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And finally, as ITAR-TASS reportsRussian Railways are set to get RUB400 Billion investment from Chinese investors...
Chinese investors have expressed their willingness to invest 400 billion rubles. in the construction of high-speed highway Moscow - Kazan. Itar-Tass said the first vice-president of Russian Railways Alexander Misharin.

"Even today, the Chinese banks, China Development Bank in the first place, ready to raise the funding needed for this project, we are talking about the order of 400 billion rubles." - Said Misharin, noting that the final decision on the construction of high-speed rail is in Russian government.

Misharin emphasized that the stated funds are sufficient to "provide funding for the project in terms of funds raised."
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But apart from that, yeah Russia is isolated...
Credit to Zero Hedge

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