Is the Red Bear Rising again? We promised a few extra thoughts on what’s going on in the Caucasus yesterday. Here they are. Investors should take note that Russia’s Grand Geopolitical Strategy is resource based (energy and metals). This leads us to at least three insights, which could, of course, be wrong. But here they are anyway.
The balance of power in the world has shifted to resource producers (because of relative scarcity) and not consumers. You see a mini version of this in China (an iron ore and coal consumer) and its steadfast objection to a Rio Tinto (ASX: RIO) – BHP Billiton (ASX: BHP) merger (Aussie resource producers). The merger, from China’s perspective, would create the so-called OPEC of Iron ore. If pricing power shifts to the producers, so does a greater share of the profits. Profit margins on Chinese steel would go down and the cost of steel-essential to China’s great industrialisation-would go up.
Second, we see that in the execution of this strategy a resurgent Russia asserting itself against former Soviet territories and controlling all the energy corridors to Europe from Siberia and the Caucasus-you have a potential floor in energy prices. This will scare the heat and daylight out of natural gas consumers in Europe. But it also puts a premium on non-Russian energy projects, which investors might want to consider owning. Hello North West Shelf.
Finally, symbolically (along with the hosting of the Olympics by an authoritarian capitalist State) this indicates the end of benign globalisation and the beginning of a bull market in State on State warfare over resources. It will be a much darker, competitive period of economic history. Not quite a New Dark Ages. But that would be the worst-case scenario.
The good news in all of this? You can do something about it! The resource sector has been pounded so much recently that world-class projects are selling at pretty significant discounts.
Markets and Money