Surveillance: Russian Energy with Yergin

a few years ago, The New Map. We're thrilled at Daniel Jorgan could join us today as we consider the crushing commanding heights of the United States and in New Europe and the collapse of the Russian Federation in some form. Daniel gonna thank you so much for joining us today and your commanding heights. You magi sterily talk about the shift of Russia in the nineties, you say the marriage of the hedgehog UH and onto the new Gorbachev era.

Are we seeing a shift now with Putin? Is there an outcome that you can see absolutely what we're seeing that that process that began in the nineties of Russia connecting with the world economy, being integrated with the world economy is very rapidly going in reverse now as these crushing sanctions are being imposed. Russia is being disconnected from the world economy. What does the new map for Vladimir Putin look like? Uh, he grossly miscalculated. I think he

obviously thought this would be quick. I think he also overestimated, Uh, Europe's dependence on Russian energy and that that would be his high card. Turned out that, among other things, with extraordinary growth in us l n G, which was nowhere in twenty sixteen and this year will be the largest llengy exporter in the world, as offset Russian gas in Europe.

And it may be tough depending what happens, but that that it's manageable, and so he doesn't have that high carn Let's talk about the word manageable and I'll take it to one extreme and you can maybe run me back in. Are we really thinking about a Europe without Russian energy in our future? No? I don't think that happens for a long time. And sometimes people overestimate. Russian gas was twenty of Europe's gas last year, big number,

But that means that about came from other sources. So, but I think it will uh when this crisis is over, whatever form may and takes, Russia will be a supplier, but will be changed is no longer will it be seen as Russia is a reliable supplier, which they've been saying for fifty years. And we heard it from the Germans. They're going to build ellen Gy receiving terminals so that they can have diversity and pen also in the world market and not be held so much rigidly to Russian gas.

And nord Stream two is going to that pipeline is going to lie and suspended animation beneath the Baltic Sea. Dan, you mentioned the Germans. The legacy of Chancellor Merkele. The history books don't look kind right now as we look back on her, and I just wonder what happens when nuclear from here down. And if you can take a moment, because we have the time with you, just take a moment to walk through what a monster change we've just seen from a German chancellor in just a couple of days. Well,

I think that chacelor merkel it was. It was a different circumstance. She had no illusions about Putin. I mean she could speak Russian, and I mean from the beginning when he's knowing that she had a fear of dogs, brought his big dog into the room. So and I remember being in St. Petersburg when the two of them were on the stage together. The ice was palpable to the audience, but the circumstances were different, and Putting at that point up here to be a more rational. It's

tough actor. But I think now with the new Chancellor of the statements, I think if she and power, she probably would have said the same thing. But it is a dramatic reversal. And Putin is one of his major games was to welcome, to break NATO, to weaken NATO. He's done just the opposite. He's brought it together and Germany is going to go to two percent of GDP

for defense spending. We talk about the consequences for Russia as they get locked out of the financial system, but can you game out the financial consequences for Germany, for the United States, for the rest of Europe as we do get some sort of uncertainty, not only about the carve outs for the energy sector. In all of these sanctions which is how feasible the payment for any of

this will be. Well, I think that's the payment system even you know, it's been said initially that the goal was to carve out energy so would not hit Europe. But risk officers are not going to are going to be very cautious. They're gonna overcomply. You already see that people are not doing letters of credit. Tanker owners are going to think twice before sending their tankers. So the energy trade is going to be disrupted. This is not

going to be a smooth thing. Uh. How bad it gets depends on how the war goes, what the Russians do, and so forth. But I think you're gonna see, uh, in effect, a sanction in a sanction on Russian energy, just by the behavior of market actors. And everybody today I know is calling their lawyers. Can you understand what the sanctions are. We don't want to make a mistake here, We don't want to get a six billion dollar fine

a year from now. Meanwhile, we are getting news about a possible oil release, a crude release from strategic petroleum reserves of a number of major oil consuming nations, including the U S. Somewhere of seventy million barrels. Do you think this will move the dial at all? I think it will. I think that if you add up what is it, US production is going to increase a million barrels a day. There could be more oil out of the Gulf. If their sanctions are taken off Iran, you

get a million barrels a day. And I think it was inevitable that they would use strategic stocks. After all, this is what strategic stocks were built for. And so I know the administration certainly is wants to go in that direction. Be interesting to see what the Chinese do this time. Dan, you're aging. As I mentioned, you're wonderful. The New Map was my book of the year a few years ago. Not that long ago, was only a year and a half. A year and a half ago,

I can't remember. The brain freezes. Farrell keeps me up to speed. Is the only reason I keep going, Dan, you're again. I'm reading Putin's World by Angelus Stent, and i've in February. I've made it my book of the year because of this war and what is so important, Dan, and this folds right into Commanding Heights is two thousand and eight, when NATO and buch Arest said we're gonna push east, and Robert Gates and Condo Liza Rice said no, no, no,

and they were overruled. Yank this forward to now with what you perceive NATO will do, given the oil economy, given our new capitalism, and given America's true commanding heights, what do you expect NATO to do in two thousand twenty three. Well, first, let me say I'm very pleased to see that that's your your book of the year. Since I'm related to Angela, so uh, that's I'll pass that on. But I think that in terms of what

NATO does, I think it's a strengthening of it. I think it's particularly the change in Germany is the one that's going to be most notable. It's going to be a much more coordinated and it isn't you know, it was kind of frame at the edges. It it isn't anymore. And you may see Sweden being interested, you may see Finland being interested in joining NATO. So it's completely achieved,

just the opposite of what Vladimir Putin wanted. Danie again, fantastic to catch up with you, sir, as a white on geopolitics, on this crude market of market right now and foreign exchange Jane follow joins us how to foreign exchange strategy at Rubble Bank with all of Rabble banks commercial relationships across Europe. Jane Folly, from your strategy standpoint, what is the state of liquidity within the European financial system? Well, I think liquidity quite clearly there is none really inert

that the Russian ruble are very very little. But I think if we move into the agricultural space, I think that's where perhaps the spotlight is beginning to shine. Certainly it can be a little bit more difficult. We're not we're not used to having crisis at effects at agricultural prices or commodity prices in this area. So we are seeing signs of a little bit stress and really unfamiliar conditions and those sorts of markets that really threw out.

We've been talking, Jane about how Ruble will open for trading beginning last evening six seven pm whatever time that was. Is Ruble fully open for trading? From where you sit, I don't think it's going to be fully open really

for a long time. You've got to bear in mind that because of the sanctions, so many banks are just unable to trade with Russian counterpassing, and therefore automatically you get a real crushing of of liquidity, so that the prices that we see on the screen, you know, just to seem what we've seen an enormous spread traded in the course of today compared with where we would normally

see the Russian ruble. But again that's just a reflection of the fact that very few people are are able to trade it right now, so that really is is not a proper market and it's probably going to be like that for some time. Jane, taking a step back.

Over the weekend, the backdrop changed materially in a lot of people calling the US's actions and Europe's actions a weaponization of the hegemony of the dollar, basically saying that they are using the dollars predominance here to push Russia out of the financial system, that it would have ramifications longer term for the dollar and it would weaken it. We're not seeing that in the market. It's quite the opposite. But do you think that there is validity to this argument?

That is an argument that is not new, you know, that is an argument which has been going on really at least eight or so years or you know, we can take it back to the Crimea for instance, or eight years ago, where and Russia really then tried to protect itself against some Western sanctions, really ramping up those from exchange reserves, increasing itself sufficiency in food also and also trying to have more invoices that were not US dollar denominated. Now the dollar is of course that that

the primary currency in the global payment system. That is why sanctions have been used by the US government, you know, to such an extent, think Iran, and certainly it is a weapon if you like to try and force another country to really back down on what they want to do.

And it's been used very powerful in this instance. And and really you know, with the blessing of all of the US is Western allies, Jane, there is a concern that there will be a friction and so will be huge liquidity issues within the major markets, money markets, dollar financing. And there has been some speculation, including by the likes of Credit Swee Result and Posar, that the Federal Reserve will have to extend f X swap lines and do other types of intervention. Do you see any signs that

will be required? I think sometimes that the fact that the Central Bank is is willing to do it might be enough, because often what creates that these liquidity shortages it's just sheer panic um and and people trying to get their hands on on dollar liquidity just in case, not that they need it now or or even in a few days time. So the fact often that the Fed may promise that it's there that these liquidity lines are possible if if needed, could be enough to see

the tension. So this is really about stopping market panic. And we've got to remember that, yes and Friday we did see some ports being shut down in the Black Sea, but right now we don't have a huge amount of disruption yet to you know, food certainly or energy, and this is where the panic could come from. And this is perhaps why some of the sanctions that have been announced with respect to that the swift system haven't yet

been universal. I think Europe would like to know that it can still get its hands on some Russian supplies of energy. That's really necessary for a country like Germany, which of course has a huge amount of industry which will be using that Russian energy. So this is this is it's really important how it's managed to stop that panic. That may then require some of those extra liquidity lines to change. Just to build on something you mentioned earlier.

The rubles not a proper market, it's certainly not this morning, and to build it out just a little bit more when foreigners can actually sell their Russian assets when the market reopens again, what kind of pressure would you expect on this currency. A huge amount of pressure. We've seen for instance that that the that the news from BP, that's just one that you've mentioned a little bit earlier

on you know, selling it's it's Russian stake. I think also that the WE Sovereign Wealth Fund at the biggest often wealth fund in the world, and and it wants to sell it's it's Russian assets. It ends um bonds as well as a lot of stocks in Russia. Those will be going now, even if it's delayed, not just today or another few days. At some point in that setting will come and and and therefore we we can expect a lot of dawnside pressure on the ruble. Jane,

thank you as always wonderful work at Atlanta. Jane Foley there rather bank on the markets. Ross Casters joins us now with a Global Allocation Fund at black Rock Ross, good morning to you. What did you do over the weekend? What does the money guy? What does black Rock do an institutional investment over a weekend? As we've seen, we'll

tell good morning. Look, I think we're all trying to figure out what's going on now, and it's very hard, if not impossible, to predict what Vladimir Prudence going to do. But I think we do know when something's have changed. And you've got a position the poor portfolio, so we for months now we've been bringing down risk. We've been

controlling our equity data. We've been looking at some of the early growth names that are really exposed given the rate volatility, and thinking about the long term implications for Europe, for energy, infrastructure, for macro volatility. Again, it's not a bold statement to say that the world has changed fairly dramatically over the last couple of weeks. Have you changed your allocations yet, russ Are you still just thinking about

the ramifications? You know, thankfully we had been bringing down risk for several months aheaded this, and again I won't pretend that we had the foresight to see what's gonna happen in Russia, but certainly as that became more evident, UH, as you deal with a very tough balancing act for

the FED even before the invasion of Ukraine. UH, it was prudent given tighter financial conditions, giving the uncertainty about rates to bring down risk in the portfolio, and obviously the events the last week or two when we support that for us, there's an idea that the FED will be forced to come in and actually support market liquidity, be market makers in the next couple of days and possibly even weeks, as some of these sanctions ripple through

the financial markets. What's your view on the FED moving away from tightening financial conditions, moving away from the balance sheet reduction, moving away from even rate hikes in response to this conflict. You know, it's a great question, and I certainly think the FIT has to take this into consideration. Where are now in a world where there is very significant two sided risk, the impact on confidence, the effect

of higher oil prices. Having said that, UH, it's not obvious that the FED has to completely or or can completely rip up their game plan because you still have a world in which domestic inflation is at a forty year high. It's broad, it's sticky, which means the FED is probably still going to have to hike. Where I think this has an impact is how much do they go in March? How quickly did they start to change the balance sheet? But the direction of travel still has

to be towards the removal of some accommodation. RUSS, where and what you focused on in this market at the moment through today? What will you be laser focused on? So I think there are a couple of things. You know, Jonathan, you were talking about the European banks. Obviously that is a big deal, as well as the impact on the overall European economy. You know, just given the geographic proximity, given the spike not just an oil but gas prices,

you know, what is the economic effect in Europe? I think the seconds we're just talking about is the FED the third? Are we seeing any change in the behavior of US consumers so far? The answer that is no. We look at higher frequency data, there's still an underlying strength to U as economy. But does that change given higher oil prices and these just very very significant events going on in Europe? RUSS, where would you look for stress and do you see any signs of that now? Well?

I think the stress obviously is going to come in a couple of places. One the names that are most exposed to Russia. Uh. You know again, fortunately outside of energy, outside of particular commodity. You know, this is not an economy with tremendous links to the rest of the world. But the transmission mechanisms really are about banking, about the

financial system, and of course energy. We keep coming back to energy, and the reason for that is, you know again, if this would have happened five or six years ago, when oil was a lot lower, it would have created less stress economically than obviously it's created a new moment when you already had very high inflation in the US, in Europe and already elevated oil prices US. Thanks for inflexible this morning to catch how the buddy as Ohites

Russ constrict that of black Crow. When I woke up this morning early and I did not know what I would see, I really underestimated John Farrell, what you and Lisa have lead on this morning, which is I guess I'm gonna call them non sanctions sanctions That would be a good thing, John, to start with Oliver Wyman's Daniel Tannem I think we can kill them SOLF sanctions down town a while like that they had of America's anti financial crime Oliver Wie and not my term, Dan, But

let's work through it. We've had the sanctions and down what we're all trying to work out is how it works in practice. How many companies, even if they don't have to abide by these sanctions, choose to pull back anyway? Thanks John. And obviously if you see oil companies walk out of the market, I think that's a pretty good indication that you're going to see other businesses and I do like that self sanctions point can begin to walk out.

I'm hearing from clients of other businesses beginning to draw up which they had actually started looking at in December, those exit plans. If do we really want to remain in this market? Is it viable for our business? Especially you have to remember Russia hasn't really responded with their version of whatever sanctions. Maybe so if you're a non Russian business operating the market, depending on the positions you take,

this might be an untenable position. Look to see more companies announce their exits from Russia in the coming days. That's for certain. Down what that's what they're choosing to do. What are you suggesting they should do. What's the advice you've given them? I think, you know, look the advice I'm giving right now, there's still a lot that's on the table. You know, this is a squeeze on the Russian economy, that's for certain. And I said it on this show on Friday, and sadly it keeps coming true.

Russia is well on its way to being treated like Iran, like Cuba in terms of being a truly isolated economy from humanity. So I think as I look to what businesses need to do, it's actually getting simpler the more significant the sanctions get, because there's less of a needle to threat and more just an exit that the business

is too untenable to take on the risk. More broadly, so, going a little further dan is the risk for a lot of these companies that the US will remove the carve out for oil companies that the EU will do the same. Or is it just that it will be too complicated financially in order to execute some of these transactions with all of the numbers of sanctioned players, And it doesn't even make financial sense at this point to keep going. So I think that is a question to watch.

And as you look at some of the sanctions, and the Treasury Department just put out the US Central Bank sanctions, I think as I was walking on here about ten minutes ago, we've still not seen what banks are being de swifted. And it was very clearly stated over the weekend that only some banks are going to be taken off swift. That's largely to facilitate that continued legal transactions. I think energy, you know, there was talk that the

Central Bank is the nuclear option. Energy restrictions are the nuclear option with respect to Russia, and I would be surprised if you didn't see programs start leaking out that begin to shrink the amount of Russian energy that's allowed

to be traded. You can't ban it. You have certain countries that are on reliant on Russian oil, Russian l n G. There's there's a whole sort of statistics that say this is a frontier economy in e M economy, and yet every statistic says it's the eleventh largest economy in the world. What is the power of Saudi Arabia right now to make Russia fifte largest economy in the world. I mean, Russia may fall out of the G twenty by the numbers this week at the rate things are going.

I think Russia's position and how its allies or what few allies remain holding their line um is a really important point to see. I mean, this economy is in crisis. I mean you're seeing it's essentially being cut off from most of the West through these sanctions that have been imposed, which does create a broader opportunity for some other nations to increase their standing potentially. Well, that's exactly where I

wanted to go. Who who can be I don't see how someone's advantaged by this war and by the economics and capitalism of this war. Your suggesting someone could be advantaged, I think possibly. I mean, frankly, this is the global response to this situation. With a few exceptions, we didn't see this much of a rallying around the flag globally with respect to COVID that we've seen with how Ukraine

is being handled. So I don't think anyone's looking for this necessarily as an opportunity to leap frog other countries. From an economic stan point, I think right now there seems to be a pretty uniform focus on how to diffuse the situation and get Russia to pull back its troops and just getting some headlines from Boris Johnson in the UK pushing for Russia to be excluded fully from Swift, Dan, do you get the feeling this is an over so that the Swift comment, and this has been constantly used

as some sort of silver bullet. If you take everyone off of Swift, any Western business is still performing, any legal trade, including energy trade, would have a very difficult time facilitating getting paid. So I really do think the complete Swift band is an overblown comment that's been made by a lot of politicians around the world. It's definitely not over. There's more companies that can be restricted, there's more sanctions that can be levied. You can drip out

oligarch sanctions. And even over the weekend it was announced the US will begin potentially seizing physical assets. And who doesn't love to see a yacht seizure coming up? That could be what we say, d'antana bam if Oliver Wyman, thank you. This is the Bloomberg Surveillance podcast. Asked thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the

best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom keene In. This is Bloomberg.