Russia’s Gold Binge
This week marks the start of a new series as part of The Spark. We have recruited five new members who will write articles on everything from mergers and acquisitions to equity research! Patrick Bateson is one new writer, who will provide a news roundup each week, informing readers of all the major events affecting financial markets!
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UK Inflation Spiking
The Consumer Price Index (CPI) has risen to a 30 year high in February of 6.2%. This is up from 5.5% in January, marking the highest annual inflation rate in the UK since 1992. This rising inflation will continue to hurt the consumer and put further pressure on Bank of England Governor, Andrew Bailey, to continue raising rates to counter the effects. Rishi Sunak, the chancellor of the exchequer, has also come under pressure recently and he has now back-peddled on his National Insurance contribution raise during 2021, stating this will be reduced come 2024.
In the Chancellor’s spring statement today, he announced that fuel duty would be cut by 5p, the threshold at which people pay National insurance would be raised, and a cut of the basic rate of income tax before the next general election (May 2024). Many have criticised that this is not enough as inflation will lower the real value of these tax allowances. This steep rise is inflation is due to several problems, mainly the rising cost of energy. The office for Budget Responsibility has warned that there may be a 40 year high of 8.7% inflation by the final 3 months of 2022. Zero COVID policies in China continue to affect supply chains, but wheat and fertiliser shortages due to the Russia-Ukraine war are a major concern, as these could fuel inflation further.
Caspian Pipeline Shutdown
The operation of a major oil pipeline in the black sea has been fully halted. The Caspian pipeline, which links Kazakh oil fields to the Novorossiysk port in Russia has been shut down because of supposed ‘storm damages’, which has caused a continued rise in crude oil prices. This adds further woe to the already uncertain effects that the heavy sanctions on Russia will have on their oil exportation.
The Caspian pipeline accounts for roughly 1% of global demand. Russia’s deputy prime minister has stated that the Caspian pipeline could be out of action for up to 2 months. Many EU countries are uncertain on whether to join in on the sanctions imposed by the US on Russian oil exportation, as this could accelerate the already alarming inflation across Europe’s economies.
Putin will Only Accept Rouble
Vladimir Putin has demanded that ‘unfriendly’ western countries pay for Russian gas deliveries in Russian Ruble. This is a play to counter the continuous sanctions being placed against Russia in recent weeks because of their invasion of Ukraine. Putin’s goal is to prop up the Rubles price as it has fallen almost 42% since mid-February. Its value gained against the US Dollar and the Euro following Putin's announcement.
Russia currently supplies roughly 45% of Europe’s gas needs. If European countries were to abide by Putin’s demands, it would significantly strengthen the Ruble exchange rate, as these countries would be forced to use the currency, increasing its demand. This group of “unfriendly countries” that Russia refers to includes the US, UK, and the EU.
G7 Crackdown on Russian gold
Leaders of G7 countries have agreed to inhibit Russia’s ability to sell its gold reserves. This sanction aims to restrict Vladimir Putin’s capacity to sell assets to fund its war against Ukraine and prop up the Russian economy. Russian gold reserves are estimated to have a value between €100bn-€140bn. The US is hoping to encourage other countries outside of the G7 to implement this sanction on Russia.
Meanwhile, the Biden administration announced more sanctions targeting 48 state-owned defense companies, 328 members of the Duma, Russia's lower parliament, and dozens of Russian elites
Russia’s gold reserves, Source: Bloomberg
US EU Gas Partnership
The US is currently making plans to provide the EU with 15 billion additional cubic metres of natural gas per year by the end of 2022, in an attempt to shift the demand away from Russia’s gas supply. The US already supplies the EU with 22 billion cubic metres, so the extra 15 billion would take the total to 37 billion cubic metres per year.
European countries are currently under pressure to cut their supply of Russian fossil fuels, but this in turn is causing rising energy prices. The German economy minister, Robert Habeck, has today announced that the country plans to end “all but a small portion” of its consumption of Russian gas by the summer of 2024. Habeck also stated that they are preparing for the possibility of Russia cutting supplies in retaliation.
Disclaimer
This communication is for informational and educational purposes only and should not be taken nor used as investment advice, as a personal recommendation, or solicitation to buy or sell any financial instrument. This material has been prepared without considering any particular recipient’s investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or structured product are not, and should not be taken as, a reliable indicator of future performance. I assume no liability as to the accuracy or completeness of the content of this publication.