It's not 1955 anymore

Delivered on By Justin Pyvis

Good morning! There was more aid for flood victims yesterday after NSW Premier Dominic Perrottet pledged another $A551 million to “support 25,000 households in relation to housing support”, half of which will be funded by the federal government.

Perrottet said the clean-up from the flooding will take months, “with more than 4,000 tonnes of debris collected in one day alone”.

Meanwhile QLD may also get its own state of emergency declaration, with ScoMo to discuss it with the Governor-General later today. However, yesterday QLD Premier Annastacia Palaszczuk didn’t appear too thrilled by the idea:

“The time for that national emergency [declaration] was probably a week ago. So we’ve actually gone past that. The floodwaters have gone down, they’ve subsided, and… those disaster declarations will be lifted on Sunday.”

Palaszczuk has a point. As we wrote yesterday, it’s not entirely clear what a state of emergency declaration in QLD would achieve at this stage – the legislation appears to allow Ministers to bypass tasks like the witnessing of signatures and physical production of documents, which presumably has already happened by now. 🤷‍♂️


Reading the tea leaves

Daily % change

AUD/USD

73.6

+0.4%

AUD/CNY

4.65

+0.4%

AU Bond

2.39

+3.0%

US Bond

2.01

+3.2%

ASX200

7,131

+1.1%

S&P500

4,253

-0.6%

Brent (bbl)

109.8

-1.2%

Gold (oz)

2,006

+1.0%

Iron ore (t)

162.5

-0.5%

Bitcoin

39,366

-6.2%

Ethereum

2,606

-4.5%

Note: Brent oil, gold bullion and iron ore prices are the second futures contract. Bond yields are 10-year Treasuries. The S&P500 is a snapshot 30 minutes before close.

At the time of writing the US S&P500 was down -0.58% after US inflation hit a four-decade high annual growth rate of 7.9% in February. Barring yet another geopolitical, health or economic disaster, that rate of inflation all but guarantees the US Federal Reserve will begin to tighten monetary policy when it meets next week, potentially by as much as 50 basis points.

Locally, the ASX200 followed the strong lead in the US and Europe the night before to close up +1.10%, with a “risk on” move seeing every sector rise except for energy (-2.5%), materials (-1.8%) and utilities (-0.1%).

A notable mover was again Nickel Mines, which fell -13.2% as uncertainty continues to swirl around Chinese stainless steel producer Tsingshan – a partner and major shareholder of Nickel Mines – after it was forced to cover a significant short position on the London Metal Exchange (LME), breaking the exchange in the process.


Food for thought

In Russia the simplest, most lucrative industries are dominated by those closest to Putin.
In Russia the simplest, most lucrative industries are dominated by those closest to Putin. Source

Kamil Galeev of the Wilson Center published an interesting set of tweets (unrolled here for an easier read) looking into why the Russian economy is “so deeply integrated into Western technological chains that severing these ties will lead to its collapse”.

According to Galeev, in Russia those closest to power extract rents from the simplest industries such as oil and gas, which “are dominated by Putin’s friends - the most mafia-like interest group” (see the image above).

As you move away from power complexity increases, for example the metallurgy sector is run by “1990s oligarchs”, who can administer it “without ruining it immediately… it will take time”.

But once you get out to the likes of machinery you need “nerds”, people who are “very low in Russian dominance hierarchy” and whose existence is only tolerated because they’re essential.

This model was all well and good until the first wave of sanctions hit Russia following its invasion of Crimea in 2014. The sanctions caused the price of Russian-made machinery to surge, irking those closer to power in the extractive industries who were benefiting from a falling ruble (oil is priced in US dollars).

Rather than sacrificing some of their own gains by paying more to the “nerds”, increasing the perceived risk “that the balance of power might be changed in their favour”, the oligarchs started to outsource machinery production:

“Putin’s friend declared that repairing existing mining machines Урал-20Р in Russia is “too costly” and made a contract with Czech company T-machinery to repair them in Czech Republic…

[However], sending Russia-produced machines to Czech Republic just to repair them and save the costs doesn’t really sound convincing. Some speculated that the real reason was not “repairment” but outsourcing production abroad…

Allowing Czech companies to enrich is safe. Cash earned by Czechs most probably won’t be invested in redistributing power within Russia. Meanwhile, the money acquired by a wrong interest group in Russia absolutely can.”

Outsourcing the production of complex machinery quickly became the model for insiders who wanted to move up the chain. Consider Svetlana Orlova, governor of Vladimir who in 2017 unveiled a new Russian designed and produced tractor, the АНТ 4135F, after Putin started a campaign of “import-substitution” with the aim of reducing Russia’s reliance on foreign machinery and technology (and thus its vulnerability to sanctions).

Orlova received great praise for the innovation, until it was discovered that she simply purchased tractor kits in the Czech Republic and assembled them in Russia:

“In 2017 she bough 100 kits from Zetor Tractor company, in 2018 - 450. That’s how she’s import-substituting. Putin must be proud.”

When she was eventually caught out it was the “dishonest CEO” of the Russian factory who was arrested, not Orlova, who despite being photographed in Brno, Czech Republic purchasing the tractor kits was promoted to:

“Auditor of the Accounts Chamber of the Russian Federation. She’ll be checking the transparency of other branches of government and make sure they use government funds efficiently…

Just pretend to work on import substitution, share stolen cash with influential people, and go up. Now you check financial transparency and prevent corruption. Your henchmen go to jail but who cares.”

The hollowing out of Russia’s economy has left it more vulnerable to sanctions, and Putin will be suffering significantly greater economic losses than he would have expected before deciding to invade Ukraine.

Even iconic car manufacturer Lada – famous for operating during the Cold War despite harsh sanctions – was forced to halt production yesterday because “it could not source the necessary parts and supplies” (see image below).

It’s not 1955 anymore and this time Putin may have bitten off more than he can chew. Given the unsustainability of this war – and assuming Ukraine continues to hold out – Putin probably faces two choices: double down by escalating the situation, for example by cutting exports to the west or increasing the violence in Ukraine, or make some concessions and sign a peace treaty.

We just hope he chooses the latter. 🤞


Chewing the fat


Bits and bytes

⚔️ ScoMo announced plans to expand Australia’s Defence Force personnel by some 30% by 2040, “the largest military build-up in peace time… at a cost of some A$38 billion”.

🌳 RBA deputy governor Guy Debelle resigned after 25 years at the central bank to take up a job at Fortescue Future Industries, the green hydrogen offshoot of iron ore giant Fortescue Metals Group.

🌊 According to the Insurance Council of Australia, over 100,000 individual insurance claims have already been lodged in QLD (65%) and NSW (35%), totalling over $A1.62 billion.

⚰️ Australian Labor Senator Kimberley Kitching, 52, died suddenly of a suspected heart attack yesterday afternoon.

🧊 Ernest Shackleton’s long-lost ‘Endurance’ ship, crushed by pack ice in 1915, was discovered intact “at a depth of three kilometres beneath the ocean surface”.

💸 After Russian state media was banned from purchasing adverts on Facebook, China’s propaganda machine has stepped up, using “state channels to buy ads pushing a pro-Russian line”.

🤥 China’s Global Times yesterday reported that “large convoys from Russia are delivering humanitarian aid to the Donbas region”.

🤪 Asked whether Russia would attack other countries, Russia’s Minister for Foreign Affairs Sergeĭ Lavrov said “We are not planning to attack other countries. We didn’t attack Ukraine in the first place.”

⛏️ Mining giant Rio Tinto is in the process of “terminating all commercial relationships it has with any Russian business”.

🎾 “Novax” Djokovic withdrew from Indian Wells, a prestigious non-Grand Slam tournament, and the Miami Open, “due to CDC regulations restricting unvaccinated people from entering the US”.

💰 The International Monetary Fund approved $US1.4 billion in emergency funding for Ukraine to “help meet urgent spending needs”.

🚶‍♀️ A new meta-analysis found that “Taking more steps per day was associated with a progressively lower risk of all-cause mortality, up to a level that varied by age [6,000–8,000 for those aged over 60, 8,000–10,000 for those aged under 60].”

☮️ UN Secretary-General António Guterres said: “Civilians are paying the highest price for a war that has nothing to do with them. This senseless violence must stop. End the bloodshed now.”

🕵️‍♀️ UK intelligence reported that: “Russia has deployed conscript troops to Ukraine… As casualties mount, President Putin will be forced to draw from across the Russian Armed Forces and other sources to replace his losses.”

📑 Russia’s government “approved the first step towards nationalising assets of foreign firms that leave the country”, and to seize control of “firms more than 25% owned by foreigners from ‘unfriendly states’”.

💉 Between 1 February 1 and 4 March, “Half of all West Australians hospitalised with Omicron were unvaccinated — despite comprising less than two per cent of the State’s adult population.”

⚽ Chelsea owner Roman Abramovich had his assets frozen by the UK government, preventing him from selling the club, selling tickets or signing new players without special approval from the government.

🐭 Disney, Burger King, KFC and Pizza Hut became the latest brands to pull out of Russia due to its invasion of Ukraine.

🚢 Lloyd’s Register, the world’s oldest maritime classification society, “will disengage from the provision of all services to Russian owned, controlled or managed assets or companies”, further impacting Russia’s ability to trade internationally.