The U.S. targeted seven new Russian officials and 17 companies either owned or controlled by Russian politicians – including Russian oil giant Rosneft. The U.S. also imposed sanctions on gas-pipeline-construction firm SMG Group.
S&A Global Contrarian editor Kim Iskyan – who recently returned from a trip to Ukraine – sent us an update on the Russia situation…
"The news out of Russia just keeps getting worse. Last week, ratings agency Standard & Poor's cut Russia's sovereign rating to BBB-… a notch above junk bonds on negative outlook and sanctions concerns," he wrote.
"The country's central bank hiked interest rates by half a percentage point… that's after a 1.5 percentage point hike several weeks ago. Its currency, the ruble, is down 8.6% this year (a huge move) and shows no signs of slowing its fall."
As Kim explained, the U.S. and Europe are preparing for another round of sanctions designed to punish Russia for not doing its part to implement the new four-way deal signed in Geneva a few weeks ago to de-escalate the crisis…
New sanctions might add to the list of people in Russia whose assets will be frozen. I've also heard that Russia's third-largest bank, Gazprombank, might be put on the sanctions list… this bank (controlled by the country's gas monopoly) is 10 times larger than Bank Rossiya, the only Russian bank that was hit with sanctions last time around.
Kim says this could lead to more fund managers dumping Russian stocks…
As we suggested a few weeks ago, this will further spook fund managers and investors in the West. If I'm a hedge-fund manager or mutual-fund manager in Europe or the U.S., I'm cautious about holding anything that can be linked back to Russia.
Gazprombank has tentacles throughout the Russian economy… and the last thing I want is the distraction of my compliance department poking around my portfolio. If I'm them, I'm selling now and asking questions later. A broker friend in Moscow said he's seen U.S. investors sharply cutting their fixed-income exposure to Russia.
But, Kim says, the bigger problem could come when Russia has to roll over its debt…
International investors have loaned Russia a lot of money by buying bonds and debt that Russian companies and the government have issued. But if sanctions continue, these investors might not be interested in rolling over the debt… and over the next year, around $115 billion in debt in Russia is falling due. That's a lot of money… It's equivalent to around 5% of the country's total economic output.
In theory, Russia could turn to domestic sources (like the big state banks) for money. This is feasible… Russia is a net creditor to the world. One of the ironies of the S&P's downgrade is that Russia has a tiny amount of sovereign debt. But this level of borrowing would stress the banking system and create distortions in the domestic capital markets. Russia could turn to China and the Middle East for financing… but investors there have reason to be wary of Russia. The net effect will be that Russian companies will grow more slowly and be forced to defer investment.
Still, Russian stocks are somehow up on the news… The Market Vectors Russia Fund (RSX) was up as much as 2% today. Russian oil giant Gazprom was up nearly 3%. It seems the bad news was already priced into one of the world's cheapest stock markets.
Meanwhile, things still aren't looking good in Ukraine. And in this month's S&A Global Contrarian, which hits e-mail inboxes tonight, Kim discusses his recent trip there… and what's next for the country.
Kim is currently traveling in search of investments in another contrarian market: Mongolia. We'll be sure to update you on Kim's travels. And if you have any connections in Mongolia that Kim should meet while he's there, let us know at firstname.lastname@example.org.
In the October 18 Digest, Porter wrote about China buying trophy assets in the U.S. At the time, a Chinese company had just purchased One Chase Plaza, a landmark New York City building…
A building – One Chase Plaza – was sold yesterday in New York for $750 million.
Not surprisingly, the building was bought by a Chinese asset-management firm, Fosun.
Today's Friday Digest is about this deal… and the massive economic forces that lie behind it. The story of One Chase Plaza is the story of how America was sold to its bankers. It's the story of how inflation plundered our wages. It's the story of how credit, rather than savings, came to dominate our economy and transform our way of life. It's the story of how America was packaged and sold to our foreign creditors – mostly the Chinese.
But buying real estate is only part of China's plan. As Porter wrote…
Since 1996, the Chinese have made 51 major acquisitions in America, including deals to own or control iconic U.S. assets like computer giant IBM, carmaker GM, meat producer Smithfield Foods, U.S. power company AES Corp., major airplane lessor International Lease Finance Corp., investment bank Morgan Stanley, and private-equity firm Blackstone Group. They've also bought trophy real estate around the U.S., like the GM Tower.
These deals didn't happen by accident. They happened because the U.S. continues to consume far more than it produces. We finance this consumption with debt that's owned in large measure by foreign creditors. Take the U.S. Treasury debt, for example. At nearly $17 trillion, this is the world's largest pile of obligations. If you exclude Treasury obligations held by the U.S. government and the Federal Reserve, 54% of the remaining obligations are held by foreign creditors. And these foreign debts continue to grow rapidly – at about $500 billion annually.
Debt service on these obligations allows our foreign creditors to continually buy America's best assets. Today, foreign creditors directly own and control U.S. assets worth more than $25 trillion. That's roughly a third of all the wealth in America. And that's far more than what Americans own overseas: Americans only own about $20 trillion of foreign assets.
Now, it seems, the Chinese are turning their eyes to New York City residential real estate…
According to a Reuters poll of five leading real estate brokerages, Chinese buyers overtook Russians for the first time in both volume and value of sales in New York City.
The brokers Reuters consulted said it's a "valuation play"… Luxury apartments in Hong Kong cost between $4,100 and $5,000 per square foot. The same apartment in New York City costs around $2,500 per square foot.
We don't blame the brokers for not understanding the Chinese economy and larger macroeconomic issues, but the reason for spiking Chinese purchases in New York (and other major markets around the world, like London and Sydney) is because buyers want to get their money out of China.
Chinese buyers don't trust their government's ability to engineer the economy to endless 5%-plus annual growth. They're afraid of a big blowup. So they're moving their capital outside of China and into stable countries with deep capital markets and lots of experience with rule of law and property rights.
They are also parking some cash in the Bahamas…
Last week, we held our annual Spring Editors Conference at the Ocean Club on Paradise Island. On the way to the resort, my driver pointed toward two huge towers under construction. "This is the Chinese project," he told me. "They're building a giant, Vegas-style casino."