For Those Who barter the World's Resources, the War Is an Opportunity

The point when Russia has maximum energy leverage against Europe is early winter, when during the coldest snap Vladimir Putin decides to turn off the gas. I think the people really realize how ugly it could get. And it will get ugly – says Javier Blas, co-author of “The World for Sale”, in conversation with Jakub Dymek

Jakub Dymek: Are the commodity traders the closest thing we have to a secretive cabal running the world in shadows? 

Javier Blas: I wouldn’t use such a wording for it having possibly xenophobic conotations. And commodity traders have been active in the global economy and remain today, because they perform an important business and economic function. If it weren’t so, capitalism would have thrown them out long ago, because nobody wants to pay for a service that is not needed.

So commodity traders are needed and perform a function that is needed, and therefore valuable, to society. 

It is true, however, that they operate in the shadows, almost anonymously, with barely any regulations and governments know very little about them. And, not only historically, but even recently, there have been a lot of cases of bad behavior in the industry. Corruption, bribery and manipulation of markets was seen as an extension of regular business activity. And therefore you can make an argument that this is an industry that misbehaves and operates in ways that are not up to the standard that society would expect.

But even putting misbehavior and corruption aside, trading the world’s resources comes with enormous power and influence in itself, doesn’t it? At least that’s what “The World for Sale”, a book you and Jack Farchy wrote, argues. 

The most amazing thing for me is that beyond business and trade, commodities play an enormous political role. Commodities are money, money is power. And in many countries, the commodities they produce are the main source of income for them. And they can break a country’s economy, too. It’s amazing how things we’re seeing today in Sri Lanka, for example, resemble historical episodes from our book so closely. When there’s the Prime Minister of Sri Lanka, who says “we have enough gasoline for two days”, but there’s a vessel with oil just over our coast, but we don’t have enough money to pay for it. I thought to myself, “my God! we’ve already written about this story, only the country was Jamaica back then.” It’s so similar as if somebody had literally made it for us. 

What’s extraordinary is that commodity traders are mostly unknown in business and in the world of politics, the way both are typically covered.

At the same time, they’re extremely active in the most unusual and dramatic of examples, like financing a war or an uprising! In doing that they’re literally shaping the course of history, because they support or finance certain outcomes. And it’s either the traders are extremely smart and are betting on the side that is winning a particular war or it’s that their participation that tips the balance and helps one side in winning the conflict. And usually the side getting their help is winning.

Like where for example?

I’ll give you three examples. In the 1980s, we had Marc Rich and company financing the Communist side of the civil war in Angola. Which is interesting also, because here you see how the commodity traders are willing to do business with whomever. Marc Rich who is an epitome of capitalism, and here he is, supporting the left or even outright Communist government of Angola, which was also backed by the Soviet Union. In the 1990s, you have the example of Glencore financing aluminum exchange with the government of Tajikistan during one of the bloodiest post-soviet collapse conflicts. And more recently, in 2011, Vitol, the world’s largest oil trader, financed a rebel movement against Gaddafi, to the tune of providing a billion dollar’s worth of gasoline, diesel and fuel oil on credit! This is extraordinary. The last example is particularly unusual. Because in the 1980s and 1990s, both in Angola and Tajikistan, we had traders supporting governments fighting against guerillas. But in the case of Vitol in 2011, it was the other way round. They supported the rebel movement which at the moment was perhaps backed by some members of the international community – they were ‘our guys’ if I may. They were supported by the French government, the British, the Americans, sure. But at the time, Vitol started supporting the rebels, they didn’t have a reliable power structure. I was in Benghazi, a major rebel outpost at the time, and almost nothing was working there. So that was an almost unprecedented bet.

And the traders engage with whom they like, regardless of cold and hot wars, as well as economic sanctions?

These three examples showcase the span of at least 40 years of commodity trader’s interventions in war, where they put the balance in favor of the winning side. But there are other examples. I like to point to the way the commodity trades helped Fidel Castro in the early 1990s. Cuba needed the help of the Soviet Union, but the USSR collapsed and the money and resources flowing to the island disappeared. It was the commodity traders who replaced the Soviets and saved Fidel Castro. In 1992, when Cuba was going through an economic crisis – at the time called “a special situation in times of peace” as the euphemism coined by the authorities at the time called it – it would not have survived, in my view, if it wasn’t for the commodity traders. Cuba would have run out of gasoline and oil, without which it is simply impossible to run a country.

Would you go as far and say the commodity trade is the most important vehicle for outrunning sanctions in the modern world?

Not so much today… In the twentieth century, yes, definitely! Nowadays, European banks would be much more considerate in their lending so as to avoid sanctions imposed by the capitals. There’s much more scrutiny – journalistic, civic and other – and oversight over what the traders are doing. In the previous century however, it is not that the traders themselves who were the biggest breachers of sanctions.

And we have to remember that many sanctions – for South Africa under the apartheid regime for example – were voluntary.

Countries could join them or not. So it is fair to say that some commodity traders saw sanctions as a business opportunity rather than moral impediment in doing business. In the twentieth century, both sanctions and wars were seen as an opportunity.

Is today’s situation similar in that regard?

Ever so often a commodity trader or an executive tells me: “oh no, we don’t do that, Javier, the industry has moved on, your concerns are of the yesteryear, blah, blah, blah.” And then, literally just weeks ago, Glencore pleads guilty and agrees to pay billions in fines, after admitting to the Department of Justice to paying bribes in multiple countries in Africa and Latin America as recently as 2018. Vitol, about a year to a year-and-a-half ago, admitted to paying bribes in Mexico, Ecuador and Brazil up to as recently as 2020, which is in business terms like yesterday. So you have two of the largest commodity traders engaging in illegal behavior and paying bribes very, very recently. So when people tell me how the industry has changed, I remain deeply skeptical. Because we have proof that if circumstances permit, they will engage in bribery and corruption. Is this as outlandish as in the 1970s and 1980s? Probably not. But we also have this new crop of commodity traders in the Middle East and Asia, who are buying a lot of Russian oil – which is practically legal – and looking forward to making a huge profit. Believe it or not, one of these trading companies is named after a baddie from a Harry Potter book!

You’ve said the community traders used to – or still do – treat wars like a business opportunity. Asking more broadly about Russia’s war with Ukraine and energy markets: who stands to benefit from the conflict? If it is an opportunity, for whom?

Every oil and gas producer today is making – and this might not be the most appropriate word – a killing these days. Even Norway is making enormous amounts of money, even without taking advantage of the conflict. It’s just that the price of oil is 120$ a barrel, the price of gas is 100 euros per megawatt/hour. And if you have oil and gas to sell, you make a lot of money. Simple as that. The same goes with Saudi Arabia, which is making about one billion dollars a day gross income selling its oil. 

Commodity traders are set to make more money in 2022 than any other year in history and a lot of it thanks to the war.

In some cases, they are helping countries secure alternative sources of oil, which means a lot of extra work, with a difficult market and charging extra for their services. In other cases it’s countries that are trying to resign from importing Russian oil. But generally this is a very good environment to be a commodity trader, one that you can make a lot of money in. And some commodity traders are buying discounted Russian oil…

to sell it later?

No! To sell it immediately, just in a place that will accept it. Look, you’re buying Russian oil today with a 35$ discount and selling it with 10 or 15$ of discount. The difference is 20$ a barrel that you can pocket. And typically a commodity trader would be very happy to make a profit of 20 cents per barrel. Now dealing in Russian oil, which is perfectly legal by the way, could make you a hundredfold the premium you were getting previously. The only thing is, you and your customer have to – let’s put it this way – have a taste for this particular product. And again: you’re getting a profit that is orders of magnitude higher than normally, without doing anything that is today yet illegal. 

If you ask me personally: would I like to do business with Rosneft, with the Russian government at that time, with these types of characters? No, I would not like to be involved with them. But commodity traders usually see themselves as “beyond politics”. They’re happy to deal with them.

How far does the Western rhetoric of “not buying from murderers and despots” really go? Not buying from Russia equals buying even more from Saudi Arabia, which is not a paragon of democracy either. 

When people ask me “do the sanctions achieve anything?” I tend to be skeptical of the idea that by sanctioning Vladimir Putin’s government we can achieve something. Are we going to stop the war in Ukraine? I don’t think Vladimir Putin cares much about what happens with the Russian economy in the short term. We can put even more sanctions and that wouldn’t stop him from killing the people of Ukraine. Is there a moral case to be made? That Europe is stopping its business with Russia and is unwilling to send even a dollar there? Sure, I understand there’s a moral case for that.

But when at the same time you take that dollar and transfer it to another country that is – or was up until very recently – conducting another bloody war, the moral argument becomes more complicated. 

And not only that, Saudi Arabia was involved in the civil war in Yemen for many years, it is an ally of Russia within the OPEC+ agreement. So by shifting the oil demand towards Saudi Arabia you’re helping Russia’s allies too. 

My Dad asks me sometimes, why do I have to travel to so many dangerous countries, sometimes shady places in very remote areas. I won’t name the continent, but let’s say these are difficult places if not outright war zones. And what I say to my father is “I don’t know why, but the Dear God put the Earth’s resources in the wrong places I suppose”. The main problem is that many commodities we buy are located and extracted in countries that are very much unlike Europe. Period. We have been lucky in so many ways, to be born in a time and place to enjoy the freedoms and liberties of European democracy. Many people aren’t. I’m fully aware of the hypocrisy of criticizing the same governments that we later buy oil and gasoline from – be that Venezuela or Russia. But this is what we do. Should we? Perhaps not.

In a moral universe, we shouldn’t. In the real world however, where globalization is the king, we simply have to? Speaking of hard choices: what’s your assessment of the most recent Russian oil embargo by the EU?

We saw how the sausage is made, and it’s never pretty. Especially when Viktor Orban was at the time the cook-in-chief. But at the end of the day, the embargo the EU enacted will cover 90% of oil and 95% of refined products that Europe was buying pre-invasion. It also covers the insurance of shipping, which is very very important. So I think it will be quite an effective embargo. It’s going to take several months, but I’m sure European companies will start acting earlier instead of waiting until 31st of December to curb their Russian imports. 

Yes, there’s a chance that Russia will be able to reroute that oil to different places, but it’s going to be very difficult for them to reroute four million barrels a day someplace else. So eventually Russian production is going to come down and this is going to be incredibly significant for the Russian economy. But it’s going to be extremely expensive for Europe and the rest of the world too. What it means is higher energy prices for longer, that’s for sure.

Is there the possibility of a recession coming sooner and higher prices of not only energy, but everyday consumer items as well? 

This guarantees higher inflation and raises chances for a recession quite significantly. What we are seeing is a very painful measure. I want to raise another very important point here. We’re entering the fourth month of the war [the interview taking place in the first week of June – JD], Ukraine had been under attack for much longer if you include the Crimea annexation and the ongoing conflict. The EU has approved, by unanimity, six packages of sanctions already, among them targeting both the central bank and biggest commercial banks in Russia, now an oil embargo coming in six months on top of that. Apart from that, a range of other measures targeting influential business people, officials and so on. If somebody had told me that the EU was going to do all this in 100 days and break the taboo of going after Russian oil – I would have a hard time believing that even a couple of months ago. There are people who would simply claim back then that it was impossible.

So I know some steps took longer and a lot of people are frustrated with the pace of European response, but as for European standards it’s really meaningful what happened. And these are extremely painful measures to take. And some of the leaders decided to go forward with this, regardless of them facing an election – like for example Emmanuel Macron did. You know, normally I’m a pessimist, a “glass half-empty” type of guy. But in this particular case I’m inclined to say the glass is half full, being impressed by how much Europe was actually able to approve, eventually bringing Viktor Orban onboard with the sixth package of sanctions. Up to some point I wouldn’t bet any money on that happening.

But in several states, Poland and the Baltics foremost, there’s still a certain dissatisfaction and a sentiment that the EU isn’t acting with urgency. You’re saying the reality is quite different and we’re observing some kind of breakthrough?

I fully understand where these voices from Eastern Europe and the Baltics are coming from. The enemy looks all the more scarier the closer you are. And Poland as well as many other countries in the region are really facing it, and have a historical experience with that sort of challenge. So the rest of Europe should listen very attentively to what they have to say. But I also understand that other European countries are walking a fine line too. Europe is using energy as a weapon against Russia. At the same time Russia is using energy as a weapon against Europe. We’re arming the country that is fighting Russia on the battlefield as we speak. So what we’re having is really a borderline hot war with Russia. If this was the Cold War, the original one, we would be in a very hot phase of it, wouldn’t we?

When we will put everything we can into economic war with Russia and at some point the Kremlin says it will treat any next step as a casus belli, that their national security came under threat and is considering our moves as de facto war, I don’t know what Europe will do then. And I fear we’re approaching that point.

So are we to expect a harsh winter ahead of us?

It is Ukrainians who are in for a very, very hard winter. Regardless as to whether this phase of war ends within two weeks or continues for a long time, sadly the situation is going to be horrible.

The country is devastated, their economy in tatters, the state is on its knees even though they’re fighting very valiantly and fiercely to say the least. But economically they’re just devastated. 

If the war continues, it is going to be hard for the democratic governments in Europe as well. The voters will face high inflation rates, and even when the inflation cools down, it doesn’t necessarily mean the prices will go down. What it means is that the prices will still be rising, just not as fast. It’s very different when the prices are going up just as the winter – a relatively mild one – ends and you don’t have to spend as much on heating. And we might face the exact opposite: entering the winter with extremely high prices already and with a heating season ahead of us, where there is expensive heating oil, gas, coal, electricity and so on. It’s going to be tough on Europe. 

On the other hand, it’s going to be hard in Russia too. But Putin has an advantage: there’s no real democracy and public opinion that he has to answer to. So Putin has an iron grip on the population. The point when Russia has maximum energy leverage against Europe is early winter, when during the coldest snap Vladimir Putin decides to turn off the gas. I think the people really realize how ugly it could get. And it will get ugly. To think, for example, Europe is going to be facing blackouts. And this is a scenario that is much more likely today than it was just six months ago.

Javier Blas

is energy and commodities columnist at “Bloomberg”. He is co-author (with Jack Farchy) of “The World for Sale. Money, Power and the Traders Who Barter the Earth’s Resources”.

Jakub Dymek

is a columnist and author. His book about the rise of the revolutionary political right in USA, Poland and Russia entitled “Nowi Barbarzyncy” (“The New Barbarians”) was published in 2018 by Arbitror Publishing.

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