Oil prices fall, China is slowing down, Russia still hopeful. Norway, collateral victim

The Chinese economy has slowed down engines for some time, and investors don’t have patience. Let us not be misunderstood, in July the economy grew by 6.6% as compared to the same period last year, but it seems that expectations were higher – the official forecasts targeted 7% in 2015. The ‘Black Monday’ of August 24 increased the pulse of lots of global players on the stock market and not only theirs. August 25 was not much better than the previous rate of decline. In just two days the Shanghai Composite index lost 15 percent of its value.

As a result, on August 25, China’s central bank lowered the monetary interest rate to 4.6%, for the fifth time since November last year, as well as the banks’ minimum obligatory reserves, in an effort to support the capital market and to stop the economic slowdown. Investors are retained in anticipating the developments in China. But China’s problems are felt worldwide. Globally, China is the largest consumer of raw materials and the second largest consumer of oil. Demand for raw materials has declined heavily on the Chinese market, amid signs of slowing down of the economic growth. After the ‘Black Monday’ the prices of metals and other commodity prices have fallen dramatically, putting at risk the manufacturers and exporters of such products. Meanwhile the world markets recorded lows of the last six and a half years for oil - below USD 40/barrel for WTI and about USD 43/barrel for Brent. Some analysts question to what minimums the oil is heading on the world market, in a volatile context in which some players aim retaining their market share, while others are struggling to meet domestic budgetary challenges.

In this unfortunate context, Russian President Vladimir Putin is to pay an official visit to Beijing in early September. As at the end of 2014 Russia and China concluded a long-term contract for the supply of gas, after about ten years of negotiations - at the time the contract was approximated to USD 400 billion - Moscow was hoping for another such contract. But China’s crisis and the falling oil and natural gas prices change everything, analysts say. The chances for a new agreement are minimal. It was reported that by mid-August the Gazprom representatives were hoping to get a second contract for gas supply to the Chinese market. But Beijing has shattered these hopes. Ling Ji, director of the Eurasian area of the Ministry of Commerce of China said the issue will not be addressed in talks with the Kremlin leader. “The new officials are not willing to sign risky agreements, a deal with Russia in this moment is extremely risky. This as a result of sanctions imposed by the West, of the depreciation of the ruble and of the constant changes in the tax regime,” also says Alexander Gabuev, an analyst at the Carnegie Centre in Moscow.

As if there were not enough bad news for Moscow, the Russian Ministry of Economy worsened the estimates of Russia’s economic contraction this year from 2.8% to 3.3%, but says return to growth is expected at the earliest in 2016. IMF sees this growth at about 0.2%...

Worldwide, the drop of oil and gas prices, as well as of the raw materials, affects the emerging economies, especially the ones which export resources, but not only them. With global stock market volatility, no one seems to be safe from surprises. Pending a decision on raising interest rates in the US, many emerging countries are experiencing capital outflows and are confused about short-term prospects.

The persistence of low oil prices makes many victims. Even among the wealthy, even if their approaches are different and calculated in detail. A collateral victim is Norway, affected by rising unemployment to 4.3% and being deeply worried about the collapse of the oil market. Local economists predict the central bank will adjust in September by 0.25 points the interest for bank deposits to the lowest level of 0.75%. The movement would aim to stop the rapid rise of unemployment.

Norway is the largest oil and gas producer in Western Europe and this has helped the state gather one of the largest sovereign wealth funds, now at USD 875 billion. But the collapse in oil prices has had a double effect: on one hand it reduced investment in the oil industry, on the other hand the budget revenues decreased and now the need (for the first time) to use money from the sovereign fund lies ahead.

Norway faces the biggest slowdown in investment in oil and gas since 2000. Oil companies have renounced 20,000 jobs. Although lower than anywhere in Europe, unemployment in Norway has reached, as said above, the highest level in 11 years.

On the other hand, Norway’s public pension fund (the official name, although not directly related to pensions) announced the first negative development of minus 0.9% in the second quarter of 2015, following a first quarter increase by 5.3%. On June 30, fund manager Yngve Slyngstad said that the fund’s value has reached USD 830.6 billion (EUR 753 billion).

The fund holds 1.3% of listed shares globally and about 2.4% of shares listed on the European stock exchange markets.

Norway’s sovereign fund, the largest in the world, has lost 73 billion krone (USD 8.8 billion) in Q2, recording the first decline in three years, due to negative developments of the global bond and shares markets.

The fund, based in Oslo - which gets revenues from oil sales from the Norwegian State to avoid overheating the economy - began to decline amid the fall in oil prices. The fund’s largest holdings of shares are with Nestle, Apple and Novartis, and the largest bond holdings are in the United States, Japan and Germany.

As the oil price fell, as did the Norwegian krone, raising the price of imported goods. It is obvious Norway will not face problems that endanger its long-term development. When you are backed by a reserve fund of over USD 850 billion, there is no question of panic coming from the stock exchanges or otherwise. And yet, the recent effects felt by Oslo confirm the universality of the problems posed by the oil crisis of overproduction and by the falling prices worldwide. In a country where everything is calculated and carefully managed, such developments are likely to bring at least a shadow of uneasiness.

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