The Crimean crisis is a risk factor

26 APRIL 2014

The Western world is using their hold over the global financial system to punish Russia for taking over Crimea, after holding a referendum there. After imposing sanctions on Russian oligarchs, it has now got a rating agency to downgrade Russia to junk status, thus making it very difficult, and expensive, for Russia to raise international money.

Russia is retaliating by threatening to shut down supplies of gas to Europe, whose dependence on it is significant. Russia is set to sign a long term deal with China, when their leaders meet in May. Some people feel that the US, with its increasing shale oil/gas production, can make up for the cut in Russian supply, but it simply cannot.

What is more worrying is the build up of troops by both Russia and by Nato and the fear that even a small incident (such as the shooting of an Archduke that triggered off WWI) can spiral out of control.

But there would be other far reaching implications of such a situation. Russia and China would price the gas in a currency other than gold. At the same time, Saudi Arabia, miffed at its ally, the US, getting closer to Iran, may also select an alternative currency. This would put the status of the US $ as a global currency at great risk, and that would mean that the ability of the US to get other countries to pay for their high standard of living would be impaired. The US has continually been living beyond its means, and has depended on the fact that the US is the only globally accepted currency to keep its inflation low and also to finance the deficit through borrowings.

At the same time, the US has bloated its welfare system, and now has 60 million more of its people taking money out of the system, through welfare, than putting into the system, through work. Under the Presidentship of Obama, the number of people under food stamps has gone up from 15 m to 47m.

After the 2008 global financial crisis, the US Federal Reserve has tried printing its way out of trouble, and has bloated its Balance Sheet by some $4 trillion. It is now leveraged an unsustainable 80 times! It has no ability to print more $ if there was another crisis.

With such demographics (60 m. more people drawing money out of the system than putting in) the US, as also most nations, are trying to find ways to grab private assets.

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Can one ever imagine a situation where, as happened to Mary Price, the US tax authorities withheld a tax refund due to her, because it felt that her dead grandmother owed it taxes?

India, too, is in a resource crunch, caused, for the larger part, by leaky schemes of subsidies and welfare, whose beneficiaries are corrupt middlemen. Also for the system of sharing of spoils in a coalition Government, headed by a Prime Minister who lacked the ability, the will and the desire to control. It is only now, when the next elections are being held, that the Enforcement Directorate has filed a chargesheet against A Raja and Kanimozhi, for fear of upsetting its coalition partner. But good governance is not about turning a blind eye to your partners. Good governance is about prosecuting criminals and protecting citizens.

If political leaders did the job they were elected to do, viz. govern with honesty, it would not be necessary for courts to intervene. As did the Calcutta High Court, in ordering the Government of West Bengal to pay all investors cheated in the Saradha chit fund scam. The article mentions that the wife of the Saradha CEO had bought two paintings from Chief Minister Mamata Banerjee, for Rs 3 crores! Were this discovered to be the reason for her inaction it is, indeed, depressing and abhorrent!

One hopes that similar action is taken in the case of Sahara and NSEL scams, which have dragged on for too long, perhaps with political blessings. In the case of the latter, though, the Bombay High Court has set up a 3 member committee to pass a decree, sell off seized assets and repay investors. One hopes that the Court, and the Committee act expeditiously, and do not allow the wheels of justice to grind slowly.

The UPA Government has been negligent, not only in permitting scams such as telecom spectrum scam, CWG, Sahara, NSEL, etc, but in also neglecting to take swift remedial action. The Supreme Court had banned illegal iron ore mining, as it destroyed the environment. Fair enough. But it was then incumbent upon the Government to sit down with all stake holders and work out a solution through which normalcy could be resumed. It did not. Exports fell, which affected our trade deficit, increased our CAD, depressed our currency, and led to a host of actions. It is only now, after several years and a roughly 70% fall in exports, that the Supreme Court has lifted the ban on exports.

Or take banks. Among other writings, these columns have been advocating the need to look at reducing the number of public sector banks by either merging smaller ones, or by permitting Government holding in the smaller banks to fall below 51%. It takes eons for a common sensical idea to enter the mindspace of our political leaders. It is only now that the Finance Ministry is talking about merging smaller PSU banks. It is still unable to conclude that allowing private sector banks to take over some of them may be a thought worth mulling over.

The RBI recently cleared the applications of two private sector companies to set up commercial banks. L&T Finance is now in talks with Yes Bank to acquire a stake in it and it would be interesting to see the stance RBI would take in this case. Yes Bank is going through its own controversy with Rana Kapoor fighting with the wife of his former co-promoter (and his sister-in-law), over the latter's wish to induct her qualified daughter to become a director, as per their shareholder agreement. Instead, Yes Bank has inducted two others as independent directors.

The parent of L&T Finance, viz.L&T, has a strong balance sheet. It recently won a Rs 4,500 crore order from Qatar Railways.

Policies and laws once made are difficult to overturn. The Land Acquisition Act is a big thorn in the expansion plans of companies. It is not the price of acquisition that is of concern, but the delay in obtaining clearances, the delay in the impact studies mandated under the Act and the extreme difficulty of getting vast tracts of contiguous land, were even one land owner, or a group of them, to dispute it. The new DIPP Secretary is to be complimented for his stance that the Act needs to be relooked at, because the jobs which are absolutely necessary for a young population, would not be otherwise created.

In corporate news, DoCoMo is exercising its put option to exit its partnership with Tata Teleservices with a loss of 50% of the amount it had invested. The Tata group have not succeeded in their telecom ventures and needs to exit this line of business.

Interestingly, at the same time, group company TCS has strengthened its partnership with Japanese Mitsubishi which would help the venture to get more IT business from Japan.

In other corporate news of interest, RIL has borrowed $ 550 m. from Japanese banks to part finance its petrochemical expansion plans. The proposed doubling of natural gas price to $ 8.4 per unit has been postponed to the end of June, for a new Government to handle.

Last week the BSE-Sensex hit a new all time high of 22,939, before closing at 22,688, for a weekly gain of 59. The NSE-Nifty hit an all time high of 6,869, and ended at 6,782, up 3.

Investors are hopeful for a strong showing by the NDA alliance and some are even hoping for a majority, thus obviating the need to rely on enfeebling coalition partners. (Amongst the hopefuls is the step brother of PM Manmohan Singh, who has joined the BJP). So the market would rally if the NDA gets near, or clear, majority, but would fall sharply if it does poorly and needs to find coalition partners from amongst a motley bunch with grubby fingers waiting to be dipped into the national economic pie.

The IMD has forecast 'below normal monsoons' although a closer reading shows that below normal is 95% of long term average, whilst a 96% would count as normal. It is doubtful that investors would put as much significance into the 1% as a statistician would. They have heard about the weather forecaster who took early retirement, because the weather didn't agree with him.

All eyes are now on the election results, and on the unfolding of events in Crimea.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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1 Responses to "The Crimean crisis is a risk factor"


Apr 29, 2014

Dear Mulraj, once again u have batted well in focusing on essential glabal developments. The ego of politiaans is beating the inflation index !! read this: A Catholic woman went for Sunday confession and revealed she had killed a politicina. She wanted forgiveness. The Father responded: "My daughter, I am here to help with your moral sins. Not with your social service activities ..." THINK IT OVER, DEAR FELLOW CITIZENS ,,,,

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