The Weekly Wrap -- Aug. 3, 2012 (Part I)

China's moment of coal truth: A question that has vexed us for some time is when we will witness an inflection point in ordinary Chinese tolerance for the coal-borne pollution in their air. At that time, we have argued, we will likely also see a sharp turn away from coal consumption, and more use of cleaner natural gas -- Communist Party leaders will see to it for reasons of political survival. With this shift will come important knock-on events, including a materially smaller increase in projected global CO2 emissions. According to Bernstein Research, that tipping point may now be past. In a note to clients yesterday, Michael W. Parker and Alex Leung argue that the moment of truth became apparent to them in two pollution protests over the last month in the cities of Shifang and Qidong. In the former, violent July protests resulted in the scrapping of a planned metals plant; in the latter last week, the ax fell on a waste pipeline connected to a paper mill, again because of an agitated local citizenry. Their paper's title -- Who Are You Going to Believe: Me or Your Smog-Irritated, Burning, Weeping, Lying Eyes? -- is a reference to what the authors regard as a general outside blindness to a conspicuous new political day. One reason no one is noticing, they say, is the curse of history itself. The record of surging economies -- comparing China with, say Japan -- suggests that a burning aspiration for cleaner surroundings over economic betterment should reach critical mass in China only in about a decade. Yet, "the clear signal from Shifang and Qidong is that China has reached the point today, where the population is ready to take to the streets in protest of worsening environmental conditions," the two researchers write. They go on:

Since we all agree that the Chinese government is focused on social harmony, the practical implication is that the government will do whatever is required to ensure that people aren't in the streets protesting not just food prices or lack of jobs, but also the environment. Few observers seem to classify the environment as the kind of issue that could excite the Chinese population into the street or the kind of issue that could result in changing political decision making and economic outcomes. And yet that is exactly what we are seeing.

The Bernstein writers seem under no illusion that their scenario will be widely embraced. In fact, they are not summoning anyone to the ramparts. Rather, their paper is a pragmatic nudge for equity analysts and customers to incorporate a very different scenario into their buy-and-sell decisions. That sounds like a reasonable call.

 

The mysterious Mr. Putin: Feuds, grudges, vendettas -- a general unwillingness to move on -- are among the least-constructive of humankind's nature. It is in that spirit that we put aside the nine-year-old, politically motivated imprisonment of oilman Mikhail Khodorkovsky, the 2006 London murder of KGB defector Alexander Litvinenko with radioactive polonium-210, and the still-unsolved early-to-mid 2000s killings of journalists Anna Politkovskaya, Paul Klebnikov and  Yuri Shchekochikhin.  Instead, we stay current, and ponder -- why oh why does Russian President Vladimir Putin wish to be globally associated with protecting senior officials who, implicated in the theft of $230 million from the Russian treasury, imprisoned their accuser -- lawyer Sergei Magnitsky -- until he died of beatings and medical neglect? With the current jailing of three women members of punk ensemble Pussy Riot, who face seven years' imprisonment for singing and kicking against Putin in church? And with the indictment of opposition leader and blogger Alexei Navalny, who could be imprisoned for 10 years for alleged embezzlement?

The conventional answers are variously that Putin cultivates a tough-guy image, that he is intolerant of critics, and that this is all about Russian power-politics. As for me, I have leaned toward a less-satisfying yet possibly more chilling explanation -- that Russia's culture of impunity for murder is larger than Putin. That is, there are no "to-be-murdered" lists in the Kremlin, and Putin has never uttered the phrase so often attributed to him, channeling Henry II, "Won't someone rid me of this nettlesome (fill in the occupation)."  Rather, Putin lords over a pre-existing culture comprising lines not to be crossed, and we have either a case in which challenging that deep-seated system is too politically risky, or simply one that doesn't trouble him much. As for Putin's apparent eagerness to be linked with events widely seen abroad as stigmata, that is purely domestic politics -- it plays well to a not necessarily obvious local constituency whose acceptance he cherishes above any other.

 

When Russia joined the Kurdistan oil-rush: After four unanswered triumphs by autonomy-minded Kurdistan, the ball is firmly in Baghdad's court -- it must craft a response to growing defiance by the world's biggest oil companies, which have been signing exploration deals with the northern region. Baghdad claims the right to vet and approve all energy deals in Iraq, while Kurdistan argues that it is autonomous, and can make its own such decisions. The latest miscreant as far as Baghdad is concerned is Gazprom, whose oil affiliate Wednesday bought large percentages in two blocks of land that the Russian company estimates could contain 3.6 billion barrels of oil. The move follows on the heels of an announcement just the day before by France's Total, which said it had bought a 35 percent stake in two Kurdistan fields. Last week, Chevron entered into a deal for a Kurdistan oilfield, and in October, ExxonMobil was the first Big Oil company to sign a contract in the region. As punishment, Baghdad excluded Exxon from a May auction, and wholly blacklisted Chevron from any future oil deals. But since the oil companies and Kurdistan itself have already said -- loudly -- that they don't care about exclusion, "the next chess move needs to come from Baghdad," a Western oilman based in the country told me. Baghdad's choices, according to this oilman: Do nothing; punish all the companies in a way that hurt them materially; punish Kurdistan - or punish both. "I don't know which way they'll go, no idea at all," the oilman said.

The issue is more than bragging rights or cash. We are talking nationhood and geopolitics -- as this blog pointed out a couple of days ago, with their actions, the oil companies have effectively recognized Kurdistan as a stand-alone state. Ironically, Baghdad itself has set this course of events into motion with miserly oil-contract terms that make it ultra-profitable for the companies to pull up stakes and go north.

"The terms offered by Iraq are so thin, that the draw of Kurdistan seems irresistible," Steven Kopits, an energy analyst at Douglas-Westwood, told me. "So Iraq, in choosing to maximize its own oil revenues, may also be choosing to let Kurdistan go." Kopits said:

Could the matter end in open conflict sometime in the future?  Possibly. But given that Iraq can hardly manage its own restive minorities, and given that arbitrarily crafted countries like Iraq tend to fall apart into ethnic or religious groups when they become democracies, it would seem more likely that over time the de facto status will become the de jure status.  With oil revenues, acceptable governance, and the support of the oil industry, Kurdistan has the opportunity to survive as an independent entity.  In a Solomon's choice of money or country, Baghdad has elected to take the money.

That may be the case, but Baghdad will still move to hold the country together.

Go to Part II of the Wrap.

Philippe Lopez AFP/GettyImages