Wanna Be A Great Trader? Size Matters… Finger Size

Take a moment and look at your hands. Specifically, compare the length of your ring finger to the one you use to point.  Is the ring finger longer or shorter than your pointer, and by how much?  It turns out that the answer to that question can tell a lot about your mental abilities and appetite for risk. As ConvergEx’s Nick Colas details, a 2009 study of mostly male traders working in London found that the ones with longer ring fingers were generally more profitable than those with shorter ones. Traders with the largest fourth finger/second (pointer) finger ratios actually made 11 times more than those with the smallest. 

Via ConvergEx’s Nick Colas,

A 2012 study of entrepreneurs in Italy showed that highly successful female entrepreneurs tended to have longer ring fingers as well.  Researchers believe that the causal link between digits on your hand and in your bank account goes all the way back to the womb.  No, finger length is not the only thing that makes you successful in this business.  But it clearly doesn’t seem to hurt.

Occasionally I happen upon a theme for one of these notes that seems to stretch well into the distant horizon of the unbelievable.  This is one of those days.  Still, at ConvergEx we follow the data wherever it leads and we also have an abiding respect for the scientific process.  So buckle up – here goes.

The length of your ring finger relative to your pointer digit is a useful proxy for a whole host of personality traits and aptitude for the world of high finance.  So take a look at your hand, and check to see which is longer.

If your ring finger is longer than your pointer, then:

You are likely a better athlete than your peers.

 

You tend to be more physically aggressive, regardless of gender.

 

You take more risks.  If you are an entrepreneur (male or female), you have a greater chance of succeeding.

 

If you are a woman, may well have knee problems.

 

If you are a man, have an increased chance of oral and prostate cancers.

 

If you are taking the SATs soon, expect to do better on the math section.  Conversely, if your pointer finger is longer, expect to rock the verbal parts of the exam.

The science behind these observations, some of which date back many years, is relatively recent.  It turns out that the way your fingers develop is closely tied to your exposure to specific hormones during pre-natal development.  In 2011, researchers at the Howard Hughes Medical Institute in Florida managed to isolate the exact process by which the exposure to estrogen and testosterone governs the growth of fingers.  Males have testosterone receptors in their digits, so the more they get the longer the fourth finger grows.  Block the receptors, and you get shorter fourth fingers.  Pump in more testosterone, and you get longer ones again.  The experiments that yielded these results were done with mice, by the way.

The upshot is that longer fourth fingers are the result of greater exposure to testosterone in utero, and this has other developmental implications beyond digit length.   Larger doses of this hormone tend to promote better spacial relations during the key learning years, but also correlate to more aggressive personality types.  When it comes time to take standardized tests like the SATs, young men with longer fourth fingers tended to excel in math.  Those with smaller fourth/second finger length ratios tended to be better at the verbal parts of the test.  Yes, I know all this feels like a lecture from Larry Summers, but (again) all the studies backing up these assertions appear at the end of this note.  It does, however, raise the question: is Larry’s fourth finger longer than his second?  Inquiring minds want to know.

Let’s move onto safer and more familiar ground: success as a day trader.  In 2008 researchers John Coates, Mark Gurnell and Aldo Rustichini parked themselves at a London based prop shop and measured the finger lengths of 49 traders.  Then they examined how successful these people were at fast-paced trading.  Here is what they found:

The larger the ring finger relative to the pointer, the more profitable the trader on average.  The R-squared was 48%, an amazing result for a one-variable analysis.

 

The traders with the largest 4th/2nd finger ratios did 11x better than those with the smallest ratios. 

 

The researchers offer two explanations, and their data supports both.  One is that those traders with longer ring fingers are able to productively process higher levels of testosterone.   The amount of the hormone varied day to day by subject, but long-fourth-fingered subjects could take advantage of it when it happened along and use it to boost their confidence. The other explanation is that individuals with longer fourth fingers have superior pattern recognition abilities under pressure, a byproduct of the presence of higher testosterone levels in utero.  Put both explanations together and you get a plausible explanation for the fourth-finger effect.

Taken across its full spectrum, this whole analysis is a bit uncomfortable – full of gender stereotypes and nature/nurture debates.  Well, I never wanted to be Harvard’s president anyway.  Still, it is hard to turn away from the numerous studies on the topic and ignore them.  The authors of the traders study do point out that there is far more to success than just finger measurements, and that is fair enough.  But that this one simple metric can explain half a trader’s success is pretty dramatic.

And consider this – my own fourth finger is meaningfully longer than my second.  I should be home by now – markets closed hours ago.  But here I am, writing this note rather than planning tomorrow’s trades.  The only thing my own fourth finger is good for is typing the letters on the outer fringes of the keyboard.  Guess it really doesn’t work all the time.

 

Sources:

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5 Things To Ponder: Demographics

Submitted by Lance Roberts of STA Wealth Management,

"Blessed are the young, for they shall inherit the National Debt."  –  Herbert Hoover

I turned 49 this past Monday.  I don't feel like I am half a century old and my wife regularly tells me that she has five children to take of – our four plus me. But yet, here I am, about to be the proud owner of regular prostrate exams.  Oh…the joy.

I am not technically a "baby boomer" as I am one year outside the designated range of individuals born between 1946-1964.  However, the roll off of this massive slice of the population in the years ahead will have a significant and profound impact on the economy and the markets. In my opinion, there is simply not enough attention paid this issue and it is an important one.  However, since demographic impacts take a very long time to mature, they are ignored by the mainstream media which are focused on the 24-hour news and market cycles.  

The impact on the economy and the markets is real.  As I wrote earlier this week:

:With 24% of 'baby boomers' postponing retirement, due to an inability to retire, it is not surprising that the employment level of individuals OVER the age of 65, as a percent of the working age population 16 and over, has risen sharply in recent years."

Employment-65-Over-051414

In this regard, this week's "Things To Ponder" is a collection of articles about the "aging of America" and the potential impacts to the financial markets and the economy.

1) Median Household Income By State by Doug Short via Advisor Perspectives

"Back to the big picture: The median household incomes in 17 states plus DC have fared better than the US median as measured by the real percent declines from peak years. A total of 33 states have suffered greater declines, with four states dropping more than 20%. Delaware is the biggest loser, down a whopping 27.1% since its real median income peak in 2000."

Dshort-median-incomes-051614

2) 22 Facts About The Coming Demographic Shockwave by Michael Synder via Zero Hedge

"Today, more than 10,000 Baby Boomers will retire.  This is going to happen day after day, month after month, year after year until 2030.  It is the greatest demographic tsunami in the history of the United States, and we are woefully unprepared for it.  We have made financial promises to the Baby Boomers worth tens of trillions of dollars that we simply are not going to be able to keep.

The Baby Boomer generation is so massive that it has fundamentally changed America with each stage that it has gone through.  When the Baby Boomers were young, sales of diapers and toys absolutely skyrocketed.  When they became young adults, they pioneered social changes that permanently altered our society."

3) Aging America Heading For Disaster? by Kyle Smith via New York Post

"People tend, for instance, to buy houses at about the same age — age 31 or so. Around age 53 is when people tend to buy their luxury cars — after the kids have finished college, before old age sets in. Demographics can even tell us when your household spending on potato chips is likely to peak — when the head of it is about 42.

Ultimately the size of the US economy is simply the total of what we’re all spending. Overall household spending hits a high when we’re about 46. So the peak of the Baby Boom (1961) plus 46 suggests that a high point in the US economy should be about 2007, with a long, slow decline to follow for years to come."

PCE-GDP-Debt-051614

4) Baby Boomers Reluctant To Retire by Gallup

"Concerns about money likely play a significant role in explaining why so many baby boomers see themselves working longer. Even before the 2008-2009 recession, financial advisers were warning that some baby boomers were carrying too much debt, saving too little, and relying too heavily on Social Security to retire comfortably. And then came the economic collapse — a perfect storm of layoffs, pension and stock losses, and plummeting home values — which was particularly ill-timed for boomers who might otherwise have been in financial shape to retire on schedule with the start of their Social Security benefits.

Whether by choice or necessity, baby boomers will remain a sizeable proportion of the workforce in the years ahead, with many expecting to work past the average U.S. retirement age of 61 and even the traditional retirement age of 65."

Also Read: 12 Ways Baby Boomers Will Affect The Nation

5) Baby Boomer's Retirement On The Economy by Ben Casselman via 538

"The U.S. dependency ratio has been improving in recent decades, falling from 65 in 1980 to 61 in 2000 to 59 in 2010. But now the trend is set to reverse. By 2020, the Census Bureau estimates, the U.S. dependency ratio will be back to 65; in 2030, it will be 75, the worst since the 1960s and 1970s, when the baby boomers were children.

By 2050, more than 4 percent of the population will be at least 85 years old, more than double today’s figure."

casselman-feature-boomers-3

The demographic shift will have an increasing importance over the next decade or so on the economy and the financial markets.  Ignoring the issue won't make it go away and, somewhat unfortunately, fiscal policy has yet to address any of the issues concerning entitlement reform.

The aging population will provide both headwinds and opportunities for investors and the economy over the years ahead.  However, I suspect that the investment opportunities won't be found in a simple "indexing strategy" but through rather specific targeting of investments relating to the aging of America.

Of course, I'm old, so maybe I am just biased.




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“Mysterious” VIX-Seller Ramps S&P To Unchanged On The Week

For the 4th day in a row, selling pressure in US equities climaxed as Europe closed. The big buying-panic today though was sparked with about an hour to go as VIX was pummeled lower and stocks levitated to save all kinds of key technical levels – (S&P unch, Nasdaq green on the week, S&P back above its 50DMA, Russell off its 7-month lows). Trouble with all that exuberance… bonds, the USD, commodities, JPY carry, and credit weren't buying it. The USD rose 0.2% for the 2nd week in a row (led by 0.5% weakness in the EUR) and JPY strengthened. Commodities all closed higher on the week, led by oil and copper (+2%) with WTI over $102. Treasuries sold off modestly into the late-day buying scramble in stocks but ended the week 10bps lower in yield (biggest weekly drop in 2mo, lowest in 6mo). VIX plunged back to almost 12 with its biggest daily drop in a month. T-Bonds and Bullion are both +7.2% YTD, S&P +1.6% YTD, Russell 2000 -5%YTD.

 

 

Behold… The VIXnado…

 

Which dragged stocks up to critical levels and off other critical levels…

 

S&P Sectors on the week…Financials worst, Tech best

 

But bonds didnt buy it today…

 

Nor did credit…

 

Nor did JPY carry

 

But leaves them lagging on the year still.. notice that the price appreciation of the US Treasury Long Bond and Gold are now equal for the year…

 

On the week, bonds rallied notably…

 

Commodities gained…

 

and the USD rose modestly led by EUR…

 

As a gentle reminder, credit markets are at best flashing orange if not red…

 

Charts: Bloomberg

Bonus Chart: Those "costs" are mounting up…




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Meet Denmark’s VoteMan: Using Sex & Violence To Get Out The Vote For EU Elections

Most people have no idea what government is about. As Bill Bonner notes, they think it is a benign institution, designed to make life better for everyone. “The government is all of us,” said Hillary Clinton, talking her book. This myth helps keep the voters and the taxpayers in line.

Some governments, desperate to get more “buy in” from the public, even insist eligible voters go to the polls – or face penalties.

Other countries, such as the US, merely excite the voters with dreams of avarice and threats of sanctions. One group votes because it hopes to score more of another group’s money. The other group votes to protect itself.

Among “get out the vote” campaigns, Denmark’s recent cartoon for the European parliamentary elections (by all accounts a snooze-fest) must set a new milestone in the history of democratic fraud and absurdity.

As The Financial Times reports:

The 90-second video features “Voteman,“ a muscleman first seen in bed with five naked women who then proceeds to beat up young people to force them to vote. He then decapitates one man, interrupts a couple having sex to throw them out of a window, and uses a dolphin to help chuck people into voting booths.”

The Danish parliament withdrew the video on Tuesday.

Politicians want you to vote so they can claim to represent you. Then they do what they want. Like any other organization, government promotes the goals of those who control it. In that sense, it is no different from the Kiwanis International club or the electric power company. Every business, club or charitable institution is meant to do something – and always and everywhere it does what the people running it want done.

 

Source: Bill Bonner via Acting Man blog




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Epic VIX Slams Sparks Buying Panic In Stocks

Nasdaq and S&P back into the green for the week… Dow back into the green for the year…

 

mission accomplished (but a little premature). And all it took was an options-expiration debacle-driven collapsed in VIX…

 

 

Who could have seen that coming?

Can’t help but feel this is a little premature to last




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At Least 6 Chinese Cities Have Bailed Out There Real Estate Markets In The Last Month

Submitted by Simon Black of Sovereign Man blog,

According to the Chinese financial publication Securities Daily, emergency real estate rescue packages have been launched in large cities such as Wuxi, Nanning, Hangzhou, Tianjin, Tongling and Zhengzhou in the last month alone.

“Zhengzhou created a mortgage guarantee policy to win back banks’ confidence” according to the story.

Further, “if a borrower does not fulfill the loan repayment obligations as agreed in the contract, the guarantee institutions will have to repay the housing loans…”

What a surprise– a government guarantee.

The market is imploding and defaults are going through the roof. Property vacancy rates in Zhengzhou are an astounding 23%. So the government is putting taxpayers on the hook.

The article goes on: “A legislative affairs official of Zhengzhou revealed to the media that this was the first time for Zhengzhou to carry out such individual housing loans guarantee policy.”

In other words, the government is panicking.

Home sales in China fell last month by 18%, in no small part due to tightening credit conditions.

Developers have tried to pick up the slack and liquidate inventory by offering no money down deals… their own desperation tactic.

But it’s not working.

Over the May 1-3 holiday weekend, new home sales across China’s 54 largest cities were 47% lower than last year.

The national government in China has all but capitulated, and they’ve turned the reins over to local governments to ‘fix’ the problem.

This has been a long time in the making.

According to data from the US Geological Survey and China’s National Bureau of Statistics that was compiled by the Financial Times, in just two years (2011 and 2012), China produced more cement than the United States produced in the entire 20th century.

Much of this development came from centrally planned monster infrastructure projects– bridges to nowhere, zombie train stations, and infamous ghost cities.

So much excess inventory has built up, a major slowdown was inevitable.

This is a huge issue for China given that housing sales comprised nearly 12% of GDP last year.

Even President Xi Jinping recently stated that his nation must adapt to a ‘new normal’ of slower economic growth.

And like the butterfly that flaps its wings, a slowdown in China has substantial effects on the rest of the world.

I’m seeing this first hand here in Chile; Chile is a huge copper producer, and under high growth conditions, China is a top consumer.

As China has slowed, its copper consumption has fallen. Copper prices have tanked.

Over the past few months, the Chilean peso has lost as much as 20% over its average in recent years. And I can see on the ground, all of this has adversely affected the Chilean economy.

But as I’m fond of writing, in every situation, there are winners and losers.

In this case, my team and I are seeing a lot of attractive deals for agricultural property.

What was once a seller’s market just a few months ago is rapidly turning into a buyer’s market as many indebted owners are dumping their properties. Many are in distress.

Yet due to the slowdown, there are fewer buyers in the market with cash in hand, and I’ve even seen several properties go to auction recently.

For foreign investors, this is a great situation to be in. And I expect that as China’s slowdown continues to unfold, we’ll see a lot more of these types of opportunities all around the world.




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Three Market Factors Which Citi Says Are Worse Now Than In 2007

When it comes to the current state of the market, everyone knows – whether they admit it or not – that it is broken. And we aren’t talking HFT which while rigging price discovery, generally does so on a microburst momentum basis which at most lasts for the duration of the trading day. The real culprit of the broken market is the Fed, a Fed which as we have explained over the years, is simply seeking to compensate for the collapse in stock (and flow) from the unwind of shadow banking which was nearly crushed in the days after Lehman.

Citigroup’s Stephen Antczak admits as much: “QE has obviously created a huge distortion in the marketplace, pushing risk-free rates and risk premiums well through many “fair value” metrics. But that said, doesn’t every credit cycle seem to have distorting factors of some sort? For example, one can easily argue that back in the pre-Lehman era the shadow banking system was every bit as much of a distorting influence as QE is now. (Shadow banking is defined as forms of intermediation that create credit without being subject to regulatory oversight, i.e., unlisted derivatives, hedge funds, etc.)”

However, the silver lining at least to Citi, is that while massive Shadow Banking, peaking at over $20 trillion in 2008, was inherently unstable and subject to liquidity runs (which did in fact happen in September 2008 when first money markets, and then other shadow conduits, froze up), the Fed is far more stable. Antczak’s amusingly quips that “we are not going to see a BWIC from the Fed anytime soon.” Which to be sure is yet another “certainty” among the economist community – just like every economist saw the US economy picking up in 2014, and 67 out of 67 economists polled in April expected higher bond yields in 6 months. If there is one thing we know about a unanimous opinion share by economists is that it is always wrong. All we have to say here is: “subprime is contained“, and, “housing prices can not possibly ever go down.” Nuf said.

But let’s ignore the “improbable” end game unwind for the time being.

A more practical concern, and one which Citi’s credit guru Stephen Antczak focuses his attention on, are the factors that in 2014 are as bad as or worse than during the heyday of the last credit bubble in 2007.

Here they are:

1. Valuations

With regard to valuations, spreads are still north of the levels seen in ’07 in an absolute sense, but to a large extent the extra spread represents compensation for factors that have evolved since ’07. These factors include higher dollar prices (typical HG non-fin trades at $109 now vs. $103 in early ’07) and lower liquidity, among others. After adjusting for such factors, spreads in many parts of the market are more or less equivalent to ’07 levels.

In fact, it is not all that difficult to find names that now trade through ’07 levels. IBM on-the-run 10-years are trading at 76 bp, or 7 bp through ’07 levels (in OAS terms). And KO 10-year benchmarks are now at 65 bp, or 13 bp through ’07 levels (Figure 2).

But for those of you who worry that these examples may be the exception rather than the rule, we looked at the distribution of the spread change of name matched on-the-run 10-year bonds since Jan ’07 (Figure 3). It’s almost shocking that the proportion of credits that are tighter now than they were in ’07 is only a hair shy of the proportion of those that are wider. What this tells us is that it wasn’t really all that hard to find names like IBM and KO – pick out of a hat and 1 in every 2 are trading through ’07 spreads.

2. Liquidity

Liquidity, defined as the bid / ask for a given trade size, is far less ample now than it was in the pre-Lehman era. This is in part due to how dramatically dealer balance sheets have shrunk — back then dealer B/S totaled almost 4% of corporate bonds outstanding, relative to only 1% now (Figure 4).

But that said, it’s very easy to overlook how problematic liquidity was back then. The reason is because everyone seemed to take abundant liquidity as a given back then, and trading strategies were based on this expectation — negative basis trades, CPDOs, SIVs, leveraged loans in TRS form, etc. all fit this profile. But this is certainly not the case anymore. In fact, if investors assume anything about liquidity at this stage, it’s that it won’t be there when it’s needed, in our view. And investment strategies have been adjusted accordingly.

To illustrate in real world terms, consider the triple-A CLO market then vs. now. In early ’07 triple-A CLOs traded in a 1 to 2 cent market for sizes in the 10 mm to 20 mm range. Now the bid / ask is about 25 cents for the same size. So in this context the advantage obviously goes to ’07. But as we know, the ability to actually transfer risk in ’07 at these levels was fleeting.

Figure 5 shows that the typical triple-A fell over 30 pts when the banks prop books that owned the vast majority of this “liquid” paper had to unwind their positions and a new buyer had to be discovered. Conversely, the biggest downturn in recent years was approximately -$2.2 pts.

 

3. Rates

Treasury yields are low and the consensus expectation is that they will rise at some point. The problem is that mutual fund holdings of corporate bonds are higher now than they have ever been — 15% of the market (Figure 6) — and if outflows occur in response they could overwhelm dealer balance sheets.

We did not have this problem in ’07 for three reasons. First, rates were higher than they are now (they averaged 4.6% then vs. 2.7% now), so it wasn’t a given that yields would move higher. Second, mutual funds only accounted for 8% of the corporate market, about half as much as now. Third, as noted above, dealer balance sheets were much larger, providing more cushion for risk transfer activity.

But that said, how much pressure could we see as a result of a rates-induced selloff? We built a framework to estimate mutual fund flows given various Treasury yields, and we find that a yield of 3.5% by year-end would cause an  outflow of about $15 bn. Certainly not good, but potentially manageable, in our view.

* * *

Among the factors that Citi doesn’t think are as bad as they were in 2007 are corporate leverage (which is ironic because as we won’t tire of showing, corporate leverage has never been higher), Investor Leverage (before one agrees, take a quick look at this chart of Prime Broker-enabled hedge fund leverage), and Treasury Curves (considering the Fed is sitting on the front end, if only until the time of the “dots” arrives, we wouldn’t assign much value to yet another manipulated metric). 

But all of the above is completely meaningless in its own factual vacuum: at the end of the day all that matters is what traders and investors think and believe. And a perfect indicator of what said belief is, we paraphrase a statement a Portfolio Manager made to Citi:

“You’re picking up pennies on a train track. You are not getting paid much but you are sure that there will be a very negative surprise at some point. The risk / reward profile is as bad as ’07.”

Judging by recent comments by such hedge fund luminaries as David Tepper this is increasingly the norm. Which is why anyone expecting the same 30% return in 2014 as in 2013, will certainly be very disappointed on December 31 of this year.




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The FCC Issues its Proposal on Net Neutrality as Protesters Are Tossed from Hearing

As spring unfolds here in the Northern Hemisphere, the future of the free and open Internet hangs in the balance. As such, I strongly believe everyone should have at least some understanding of what is at stake. When most people hear or read the words “net neutrality” their eyes glaze over with a feeling of confusion and despair: “I can’t remember, am I supposed to be for or against this?” This is exactly how the lawyers and lobbyists in D.C. want it, but unless the citizenry is informed we could lose the most important weapon of free speech in the history of mankind.

Recognizing the convoluted nature of the subject, I did my best to lay out what “net neutrality” is and what is at stake with the current FCC rule-making process in my recent post: Say Goodbye to “Net Neutrality” – New FCC Proposal Will Permit Discrimination of Web Content.

Well the FCC voted on its proposal yesterday and it passed with a 3-2 vote. More on that later, first I want to share an article I recently read on The Verge, which is extremely important to understand before you form an opinion on what should be done.

The first buzzword you need to familiarize yourself with is “Title II regulation.” Title II refers to a key section of the Communications Act, which has to do with the classification of telephone providers as “common carriers,” and subjects them to increased regulation and oversight. When the Communications Act was updated in 1996, it appears that broadband providers would not be deemed “common carriers,” which would allow them to be largely unregulated. Yet, Verizon decided it wanted to be regulated under Title II when building out its broadband network. Why would it do this?

It turns out that building a huge broadband network isn’t cheap, and being more “regulated” actually gave Verizon a tremendous cost advantage. Verge notes that: “Title II designation gives carriers broad power to compel other utilities — power, water, and so on — to give them access to existing infrastructure for a federally controlled price, which makes it simpler and more cost-effective for cables to be run.

Here’s the really despicable thing. Now that Verizon has used Title II to build out much of its network, it now wants to turn around and play unregulated entity when it comes to pricing services that it built out under the guise of it being a heavily regulated business. You can’t make this stuff up. More from The Verge:

At issue is how (or if) the FCC will protect the internet’s openness, free of special treatment and data “fast lanes” offered to the highest bidders. And while Verizon, Comcast, AT&T, and others have been clamoring to prevent heavy regulation from being considered this week, it turns out that communications providers have actually been working the system for years, using exactly this kind of regulation to their advantage. In fact, strict FCC rules have helped Verizon build a largely unregulated network — a network that’s valued in the tens of billions of dollars.

Today New York’s Public Utility Law Project (PULP) published a report, authored by New Networks, which contains previously unseen documents. It demonstrates how Verizon deliberately moves back and forth between regulatory regimes, classifying its infrastructure either like a heavily regulated telephone network or a deregulated information service depending on its needs. The chicanery has allowed Verizon to raise telephone rates, all the while missing commitments for high-speed internet deployment.

continue reading

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Mapping The “Scalpel, Not A Meat Axe” Approach To US Sectoral Sanctions Against Russia

The threat of “sectoral” sanctions is the latest arrow in America’s quiver against Russia’s unwillingness to back off and, as the FT reports, the US is seeking support from Europe for these efforts. The problem, as we have discussed, is that energy binds Russia to the rest of the world in a codependent relationship. Consumers – especially in Europe – need Russian oil and gas as much as Russia needs the revenue they bring in. The US believes it can circumvent that obstacle as “the situation calls for a scalpel, not a meat axe… we need targeted asymmetric sanctions that hurt them more than they hurt us.”

As The FT explains, the plan is to block exports of oil and gas technology only for new projects run by state-controlled companies, with the objective of casting the long-term future of Russia’s energy industry into doubt, while safeguarding its short-term contribution to global fuel supplies. In other words, do you believe in miracles?

 

 

As the US looks for levers to exert influence over Russia, energy is an obvious choice. Oil and gas generate more than 50 per cent of Russian federal government revenues, and Rosneft and Gazprom, the country’s two largest energy companies, are both state controlled.

 

The problem is that energy binds Russia to the rest of the world in a codependent relationship. Consumers – especially in Europe – need Russian oil and gas as much as Russia needs the revenue they bring in.

 

The energy sanctions being proposed by the US are intended to circumvent that obstacle.

The plan is to block exports of oil and gas technology only for new projects run by state-controlled companies, with the objective of casting the long-term future of Russia’s energy industry into doubt, while safeguarding its short-term contribution to global fuel supplies.

 

“This situation calls for a scalpel, not a meat axe,” says Robin West of the Center for Strategic and International Studies. “We need targeted asymmetric sanctions that hurt them more than they hurt us.”

 

By allowing continued exports of oil and gas equipment and services to Russia’s existing oil and gasfields, the proposed sanctions should make very little difference to the country’s energy exports.

 

 

However, blocking exports of equipment and services for new projects could have a “very meaningful impact on Moscow”, according to Jason Bordoff of Columbia University’s Center on Global Energy Policy.

 

 

The sanctions would not send Russia’s oil and gas production into an immediate slump, but over time the natural decline of existing fields would depress the country’s output.

 

 

The uncertainty over Russia’s long-term prospects in oil and gas would probably also depress the share prices of Rosneft and Gazprom.

Which all sounds great in practice. But do they really think Putin will stand for this? And will the Europeans agree?

The US is seeking support from European countries for its plan, but that may not be necessary.

 

The tricky question will be what to do if the Ukraine crisis drags on. As time passes and the effect on Russia’s output grows, the strains on world energy markets will become more noticeable, potentially driving up prices for oil and gas.

As Mr Bordoff warns/concludes:

“In a global economy, each of these actions may also come at a cost to the countries imposing the sanctions that needs to be considered.”

Sure – what could go wrong?




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