World economy sold short

If it’s true that there’s an opportunity in every crisis, then there exists today the greatest opportunity in a decade. But not necessarily for you and me.

As stock markets register the biggest fall since 2008, pensioners, savers and small investors are getting hammered. That’s hardly surprising, considering that some of the world’s major markets, including China, are more or less in a lockdown.

As a result, the FTSE 100 has lost the better part of half a trillion pounds, £144 billion just yesterday, and none of the equivalent indices is doing better. The immediate reason for such plummeting is the global coronavirus hysteria, with people encouraged to run scared.

Markets respond by giving a new twist to the old Nietzschean adage. In this case, it could be paraphrased as “what doesn’t kill you will make you poorer”. And the virus has a much greater potential of causing the second calamity than the first.

After all, markets are more sensitive to the perception of reality than to reality itself. Thanks to today’s masses’ steady diet of mass media, the distinction between the two is blurred. Yet actual reality does exist, and it warrants caution rather than panic.

Coronavirus isn’t the Black Death that wiped out between a third and 60 per cent of Europe’s population in the 14^th century. Nor is it Spanish flu that killed between 17 and 100 million in 1918-1920.

By contrast, so far Covid-19 has claimed 3,584 victims worldwide. Comparing this with seasonal flu that kills between 291,000 and 646,000 every year ought to put things in perspective.

Unlike reality, perception can be manipulated, and some groups have a vested interest in doing so. The media are usually singled out as a culprit, and with good reason: panic sells papers and products advertised on TV.

Yet other, possibly more significant, culprits hardly get a mention. It’s market speculators who stand to earn trillions by short-selling and asset-stripping. In case you have more important things to worry about, short-selling benefits from shares falling.

A trader borrows a large number of declining shares at rock-bottom prices. Then, when the prices rise, he sells his position at the new high level and remits the cost of the borrowed cheap shares to the original owner. The profits can be staggering, and the greater the original fall, the greater the returns.

Asset-strippers are another genus of vultures circling around moribund companies. The moment a company’s market value plunges below its assets (in 2008, some firms were even worth less than their cash reserves), the asset-strippers pounce, buy the company, tear it up, sell off its assets and get richer.

Since I’ve seen no reports to that effect, this is purely conjecture on my part. But I’m certain that such vultures have a large role to play in the scale of the crisis.

Some of those creatures live in Russia, nesting in and close to the Kremlin. Prime among them is Igor Sechin, Putin’s former KGB colleague, seen as Russia’s sinister eminence grise.

As chairman of Rosneft, the world’s largest publicly traded company, he keeps his hand on what the Russians sardonically call their “oil needle”, hydrocarbons being the sustenance to which the country’s economy is addicted.

On 6 March, Sechin (with Putin’s blessing) instigated a move that looks incomprehensible outside the avian context I outlined above. Russia abruptly severed her agreement with OPEC about keeping crude production low.

Predictably Saudi Arabia responded by slashing prices and dramatically increasing production. As a result, Brent prices, already dropping due to the coronavirus crisis, went down 30 per cent, dealing a huge blow to the Russian economy.

Or so one would think, off the top. Yet Russian realities can’t be skimmed off the top; they reside at a greater depth.

Sechin’s official explanation for this seemingly crazy move evokes the cliché of cutting off one’s nose to spite one’s face. The purpose, he explained, is to put US shale producers out of business: at prices below $40 a barrel, shale oil is produced at a loss.

Taking those greedy Yanks down a peg seems like a sufficient justification for impoverishing the already indigent Russians even further. Overnight the rouble lost 10 per cent of its value against the dollar.

Since everything worth buying in Russia is imported, and the cost of imports will grow, the people will bear the brunt of Sechin’s initiative. Yet this reminds me of an old Soviet story about a collective farmer attending the Party Congress in Moscow, presided over by the Politburo.

When he returns home, his friends ask him how things were in the Kremlin. “Lads,” says the farmer, “you wouldn’t believe it. Government of the people, by the people and for the people. And I saw those people!”

Mutatis mutandis, the same joke would work just as well nowadays. The Russian government runs solely for the benefit of those in and around it, Putin’s personal cronies, mainly from the KGB.

And what’s poison to the Russian people may well be meat to those people. Hence I don’t believe that Sechin’s attack on those shale Yanks has only an aesthetic value to him and his boss. One suspects a pecuniary motive at play as well.

Russian gangsters, otherwise known as oligarchs, have trillions in purloined cash sloshing in global offshore funds. This can be easily shown by comparing the oil revenues of Norway and Russia.

Russia’s oil production is about four times that of Norway. Yet the latter’s reserves of oil cash stand at $1.1 trillion – to Russia’s $100 billion, roughly one tenth of Norway’s. True, Russia pumps more of her oil revenues into the internal economy. Yet most of them go into those offshore accounts, and the populace be damned.

Having that much ready cash enables Russian traders-raiders to move in with ease on any flagging company and buy it at a deflated price. At this point they can either asset-strip it or simply wait for the share prices to go up. Some short-selling may come in handy as well, ultimately serving the same purpose.

It’s not just the Russians of course. Vultures breed in the West too, and they are just as ravenous.

But seldom do they act in the same blatant manner – our civilisational veneer still encourages some semblance of tact. Yet when it comes to Messrs Putin, Sechin et al., no such constraints exist.