I've been checking up on this before class, and sometimes on off days. I've also reported to class from my notes, but I haven't posted them here. So this is just a record of what I found this past week.
On 3/11
It's come out that some of the big investors who may have to pay up if Russia is declared in default are Pimco and Credit Suisse, both on the hook for around $2B.
CDS, oil, and ruble prices are holding steady.
Surgut (the short name for a Russian oil company that sells ESPO in the Pacific) is apparently willing to deliver oil to interested takers who promise to pay ... sometime in the future. Unwritten in discussions about that is that it probably means all their storage is full, and if they don't move something they will have to start capping wells. Most wells are ruined by capping and have to be redrilled.
It has come out that about a third of Big Shot's investment was funded by J.P. Morgan, which did pay its $1B margin call on Monday before presumably getting him on the phone to cover that.
It has also come out that Big Shot is being indirectly bailed out by the government in Beijing, which has ordered (you can do that in China) smaller regional banks to make new loans to him to pay off his margin calls, which came from earlier loans. So China is paying off one credit card with another. Sometimes that works. But it is a bit desperate.
The far higher nickel prices are expected to translate into price increase of about $2,000 for EV's. Tesla has already increased prices on the cars they sell in China to cover that.
Fitch downgraded a bunch or Russian utilities to CC. Presumably, they also borrowed in the west and have upcoming interest payments.
On 3/10
Russians have offered Urals crude for a $28 discount off of Brent, up from $11. They got no takers.
Meanwhile, there are still 11 tankers scheduled to make pickups in the Baltic of Urals crude that's already been paid for.
Eurobond traders are becoming more confident that the CDDC will rule Russia in default if it pays interest in rubles, and that their CDS counterparties will have to make their promised payments. Estimates are that this will be about $40B (yes, billion). That committee met on Wednesday, and Thursday, and is meeting again on Friday, and has not issued a ruling yet, so this is all based on rumors.
The problems in the nickel market are becoming clearer. A big investor had shorted the metal (borrowed it now to return in the future when it is cheaper to replace with new purchases) as a bet that it is overpriced. Wrong! The thing is that shorting is basically done on margin (borrowed money). So this investor put up a little (their equity) and borrowed the rest. The value of that equity has gone to zero as the price rose, so the people who run the market demanded he come up with the money. They first went to his bankers and made a margin call on them, who passed it back to him. Here's the problem: the big investor is a Chinese billionaire who owns the biggest steel company in the world, one of his banks if one of the "big four" in China, and his total margin call is in the range of $8B. With a margin call you're basically supposed to come up with the money ... now. Having said all that, if someone in a market is wiped out by a margin call, someone else won that bet, right? The way these things are settled is that the loser is shut out of the market for good (or a long while), while the winners give back some of their winnings to keep the banking intermediaries in good shape. BTW: the nickname for the steely tycoon is "Big Shot". Insiders say he was aware of the risks, and understood the problem, but was not paying enough attention to the news from Ukraine (interestingly, experts in China were just as surprised as Americans and Europeans that Putin went this far).
On 3/8
Russia had put investors on notice that there is a clause in many of their Eurobonds allowing for payment of interest in rubles (rather than Euros). But this may trigger a declaration of default if the suits decide this is not what those contract clauses were intended for.
CDS's on Russian 5 year Eurobonds (the standard one used to evaluate this market) are up to 5,800 to insure 10,000. That price was in the 100-200 range last week, and this high price indicates a near certainty of default.
Not all Russian Eurobonds have that ruble clause. Turns out it is just 6 series of them. But they are big series. Took notes on those, but I have to sit down for an hour and crunch some numbers to figure out what it all means. Check back in a few days.
There is a committee that decides questions about bond clauses called the Credit Derivatives Determination Committee (CDDC). It is set to meet on the 9th to discuss those Russian bonds.
The exchange rate is holding fairly steady at a rate of around 120 rubles to the dollar. Holding steady indicates that people who wanted to get their wealth out have already done so. It doesn't hurt that Putin is preventing others from getting any more wealth out in the future.
There are no takers on offers of Russian oil (branded as Urals, ESPO and SOKOL). Urals is sold mostly through the Baltic and Black Seas. ESPO and SOKOL are sold from the Pacific coast of Siberia.
Trading on the main international nickel markets has been shut down, after prices doubled rapidly, and then doubled again on Monday morning. This is a new story. More later as it evolves. Russia is a large producer of nickel, maybe the largest. Will have to check that. Nickel is mostly used to make stainless steel, but is also used in some varieties of EV battery.
China gets a lot of bad press in the U.S., but my opinion from the news as I read it is that at the top levels they are generally steering towards the anti-Russian position. They're just less anti-Russian than most countries. So big Chinese refineries are cutting back on their purchases of ESPO and SOKOL. A worry though is that small, privately owned, refineries ... known as 'teapots' ... are snapping up cheap Russian oil.
The price for WTI (the benchmark for this hemisphere) is at $131/barrel. For Brent (the benchmark) for the other hemisphere the price is 127. These are record highs, in nominal terms.
D.C. is planning on banning purchases of Russian crude oil. But apparently, our purchases are down about 70% from last summer anyway. Not sure why ... probably just getting better deals elsewhere. Also, U.S. west coast refineries are already starting to buy more Iraqi and Ecuadorean crude as a substitute. Proportionally, the biggest American buyers of Russian oil are in Hawaii (whch makes sense: Alaska and Hawaii are closest to Russia, and Alaska has their own oil).
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