McCain, Obama and Diamond Market

In the beginning of October 2008, at the Moscow Capital Markets Conference Russian key financiers and experts formulated a rather pessimistic forecast for the development of the world and Russian economies. Among the volunteered evaluations and outlooks the following appear to be the most important:
- The financial crisis in the United States was provoked by subprime mortgage lending as a consequence of the government’s attempt to saturate the country’s economy with cheap money to overcome the recession conceived in the early 2000s.
- In the nearest six months the Dow Jones index will drop below 7700 points thus coming back to the 2002 level.
- Oil prices will steadily go down and possibly reach $70 per barrel.
- The Russian rouble will not be strengthened.
- The world economy will start its recovery not earlier than 2010.

The presidential elections in the United States were virtually ignored by the conference speakers. Evidently by default, it should be assumed that the formulated forecasts are universal and the probability of their implementation does not in any way depend on who will become the 44th U.S. President – Democrat Barack Obama or Republican John McCain.

Meanwhile the two presidential terms of Democrat Bill Clinton (1993 – 2001) were fundamentally different from the two terms of Republican George Bush (2001 – 2008) preeminently by their economic programs. Putting aside the motley ideological peeling waste, the gist of these programs boiled down to simple paradigms: “Strong dollar – cheap oil” (Democrats) and “weak dollar – expensive oil” (Republicans). In the period of Clinton’s administration the price for oil was sufficiently steady and fluctuated around the point of $20 per barrel while the position of the U.S. dollar in relation to the mark, pound, yen, etc. appeared just made of reinforced concrete. Under Republican administration the price for a barrel of oil soared above $140 and the dollar looked so dismal that it prompted some authoritative experts to predict its quick demise as a world reserve currency.

Was the fantastic price hike for hydrocarbons in 2001 – 2008 exclusively due to a rise in global demand for energy products? Can the real demand for oil products in any, even a most advanced economy go up 100 percent? 200? 400? Of course, it cannot. The eight years of vigorous Republican rule have once again demonstrated high efficiency of the control mechanism actuating the “oil weapon,” a mechanism designed as far back as 1945 by way of the “Quincy Pact,” which gave exclusive rights for exploration and development of oil fields and for purchasing Saudi oil to U.S. oil companies under the guarantees of protecting the Saudis from any outside threat.

This mechanism (in its essence, it is a controlling stake in the world oil market) was at least twice used to attain global geopolitical goals and both times by the Republicans. In 1985, under Ronald Reagan oil prices were collapsed to a level excluding profit-making crude production in the USSR and the budget in the “country of full-fledged socialism” busted like a soap bubble. In 1999, shortly before the introduction of euro currency Lisbon hosted a conference of the heads of state and government of the European Union, which set a super target of “turning the European Union into the most competitive and dynamically developing region in the world by 2010.” Such a bright outlook was worthily appreciated on the other coast of the Atlantics, and what seemed to be so close at $20 per barrel in less than no time turned into a pipe dream at $90 per barrel.

In the first case, the “dealing for a fall” was undertaken against an evident enemy – the communist regime. In the second case, it was preferred not to mention the true competitor in vain, dragging instead the scarecrow of “international Islamic terrorism” to the foreground. Spectacular terrorist acts, picturesque militants (preferably in the oil exporting countries) and finally the pearl of the operation – long-suffering Iraq. Today it is absolutely clear that the aim of this campaign was not at all the annihilation of some mythic weapons of mass destruction of Saddam Hussein and far less so the introduction of yet another portion of democracy in the Middle East. The aim was much more work-a-day and it was reached - $90 per barrel. Just the right price brackets to turn the European Union’s aspiration to become “the most competitive and dynamically developing region in the world” into dust.

Why was it the Republicans, who managed to implement such decisions? Because the Republican Party means first all Еххоn Mobil, Halliburton, Carlyle Group, etc. This is the nucleus of the U.S. energy complex wielding virtually absolute influence on OPEC via Saudi Arabia.

The Democrats have no access to this mechanism. The bombing of Baghdad in 2003 jolted up oil futures by tens of percent. The attacks on Belgrade in 1999 left oil traders virtually indifferent. The Democrats have other solutions and they are monetary. Such solutions require a strong dollar, which is impossible without cheap oil. How to make oil cheap? All you have to do is just to muffle “international terrorism” a few decibels down, take away troops from Iraq, commence loyal talks with Iran, have a change of heart for Russia in the Georgian and Ukrainian affairs. This will make $50 per barrel. Taking into account inflation, this would be the price of 2001. And then you will have an opportunity to operate IMF credits with zeroed-out Russia. Evidently, this is exactly the option, which is best matching the forecast of Russian experts particularly taking into consideration the refusal to strengthen the rouble any further.

Russia is one of the world’s largest producers and exporters of rough diamonds. This is why the presumable stake placed by Russian financiers on Barack Obama’s victory is of double interest, since the United States is the major consumer of diamond jewelry – this country accounts for a 70-percent share of the world market. It is evident that any sweeping and moreover negative changes in purchasing power of the American population may have a very serious impact along the whole “diamond pipeline.” A 10-15-percent fall in demand for diamonds in the United States would mean thousands of lost jobs in Israel, Russia, Africa and Canada.

What will happen to purchasing power of the Americans in case of Obama’s or, on the contrary, McCain’s victory? Although the economic paradigms of the Republicans and Democrats look diametrically opposed, they differ only at the methodic level and have one integral goal – to provide a consumption level adequate to the position of a single global leader. The United States is first of all a gigantic consumer and in this quality indispensable for the world. (Of course, China, for instance, has currently such a dollar stock which, if thrown in the market all at once, may make the U.S. financial system crumble like a house of cards. But where will then China go to with all its low- and hi-tech export?)

It appears that for the diamond market there is indeed a perceptible difference between Obama and McCain. Under the Democrats, with a strong dollar and cheap oil there should be a dramatic increase in the number of jobs for the middle class and accordingly the purchasing power exactly of this part of the U.S. population should be substantially improved. In any case, this is how it was under Clinton. It means increased demand for diamond jewelry in the mid-price segment, which “makes the weather” on the market. Under the Republicans, with expensive oil and a weak dollar the trend for demand growth in the premium segment of the diamond market will be preserved, that is demand for diamonds meant for rich and very rich Americans, which can actually be witnessed today as one of the spin-offs of the eight-year “Texas oil rally.” Although there are quite a few such clients, for the diamond market as a whole the aggregate “Democratic” demand would differ from the “Republican” one to the best. Besides, a steadily strong dollar (in addition to a rouble left without state support) is significantly improving the positions of key rough exporters and first of all those of ALROSA (diamond export – in expensive U.S. dollars; taxes and other domestic costs – in cheap roubles).

Today we see that key European countries and Russia, as if impelled by the tamer’s baton, repeat the “body movements” of the FRS and Treasury Department of the United States, aimed at rehabilitating the banking system and improving liquidity. Bankrupt banks are bought out, budget money is injected into stock markets and discount rates are lowered at one or two day intervals. Everyone is saving their bacon, but eventually everyone is saving the United States since all the markets are in the long run tied to the dollar as to the world’s virtually single reserve currency. The Unites States is to be saved as the most generous buyer, otherwise there will be no one to sell to – and this is quite clearly seen if we take the rough and polished diamond market as an example.

Whose model will turn more efficient to solve the task of maintaining (and boosting - in case of luck) the consumption level – this is the main intrigue of the U.S. elections. In 2000, the transition to the “weak dollar – expensive oil” pattern was not easy and took five weeks of counting and re-counting votes resulting in a one-vote victory of George Bush over Albert Gore ruled by the Supreme Court. In 2004, the Republican candidate scored a far more easy victory over John Kerry despite the 9/11 terrorist nightmare, casualties in Iraq and Afghanistan. During the four years, the Republican model proved its efficiency – the consumption was growing. When Hillary Clinton and Barack Obama reached the primaries’ final, while Albert Gore, who was easily overbetting aged veteran McCain across the board, decided against another attempt, it dawned upon many minds there had been reached some preliminary agreement. A woman and an Afro-American – this was outside the traditions of the U.S. presidential elections; the most promising Democrat stepped aside; so McClain gained a significant head start. The elections of Vice-President Candidates and the Georgian – Abkhazian conflict orchestrated and played in keeping with the best Republican traditions seemed to give undeniable advantage to McCain. However, the financial crisis, which turned to be unexpectedly serious, upset the applecart altogether. Indeed, it had been triggered by subprime mortgage and this was nothing else but an attempt to pull the U.S. consumption level to a new and above-normal height. But this attempt was dangerous and apparently ill-judged and of so far unclear authorship.

Currently, the candidates are going all out to pin the blame for crisis upon each other. This is normal. This is just the surface of it, a pre-election show during which they usually do not reach beyond the well known limits. However, the depth of this crisis points to a real and no-nonsense threat, an error once committed in the U.S. post-war history. In the current situation, one may detect recession features of the early 2000th and in case of Russia even analogies with 1998. Nevertheless, every passing day reminds of the remote 1961 more and more, when in a crisis environment the victory was won by a Democrat, who knew the game rules well, but did not want to comply due to personal reasons.

Rough&Polished