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Will Commodity Prices Collapse When the BRIC’s Crumble?

Common wisdom assumes that commodity prices, including oil prices, will continue to rise on exponential demand from emerging nations, such as China, India, Brazil, Turkey, Russia, etc. But under the sheen of those rosy projections, exists a growing excremental stench of corruption and decay. If the magical trajectory of the BRICs should falter, how far would commodities prices fall? And what would be the repercussions for already stressed world financial markets, desperate for safe havens and hedged to the hilt?

China's property bubble is set to implode, and when it does, the Chinese economy will cool far more than anyone thinks, taking commodities along for the ride. Commodity producers like Australia and Canada are at extreme risk as well. _Mish

Not just Australia and Canada are at extreme risk. Two BRICs -- notably Russia and Brasil -- are gambling on continued high commodity prices into the indefinite future. Corruption in all of the BRICs is hampering genuine market-based growth, but economic dependence on raw commodities prices is particularly bad in Russia.

When commodity prices dive, Russia may well grow desperate.

Prime Minister Vladimir Putin, the country's uncrowned czar, has linked his legitimacy to the economy's performance by offering the Russian people a grand bargain: submit to his increasingly autocratic rule and the state will compensate with economic goodies like higher incomes and hefty social-welfare spending. Now that the economy is faltering, Putin is under intensifying pressure from a discontented public to restore Russian democracy, potentially destabilizing Russian politics. He has already faced protests in Moscow against his rule amid the economic downturn. There's also a risk that leaders in Moscow will resort to nationalistic appeals to distract the public from problems at home, escalating tension with Russia's neighbors, the rest of Europe and the U.S. _Time

Russia's ongoing demographic collapse, and the threat of losing much of Eastern Siberia to Chinese influence, is not helping the mood in Moscow. But without the clout that comes from high energy prices, Russia becomes an angry dancing toy bear with nuclear weapons.

Venezuela, Iran, the Arab states of MENA, Mexico, and many countries in tribal Africa and Asia, are also pathologically dependent on high commodity prices, due to internal corruption having squeezed natural markets to death. How will their people deal with the many difficulties and hardships they will face when their governments cannot feed, clothe, house, or water them?

Even the US is vulnerable to a fall in commodities prices. The US is the world's third largest oil producer. The recent boom in US shale oil & gas production is one of the few bright lights in an otherwise dim Obama economy. And although the jobs, housing, manufacturing, and other sectors in the US economy continue to sag, Obama has not had enough time to entirely destroy the US private sector.

Few readers of this blog understand the precarious state of China's economic house of cards. That is because almost all of the economic information coming out of China is closely controlled, and coated with a shiny facade. But it is time for readers to begin asking themselves about the global repercussions of a more sustained commodities price slump than they have seen.

By. Al Fin

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  • Anonymous on September 20 2011 said:
    the good news is that a collapse of the BRICS and commodity prices would probably quickly lead to war in the middle east, probably nuclear, that would drive them right back up.so we got that goin' for us.yeah, you gotta stretch pretty far to come up with something to call "good news" these days.
  • Dominus et Deus on January 18 2012 said:
    For 20 long years and moore you alarmists are spreading a psihotic hysteria and claming that Russia will colapse. But Russia still stands. It stands even stronger and moore powerfull than 20 years ago. We remember quite well, how nevrotic you were about Russia when global financial crysis occured in 2008 (oil prices fell drasticaly, global recession hits hard...). That was 4 years ago, and still nothing hapened to Russia. In year 2011, Russian economy experianced 4,5 % GDP growght and is now 6th largest economy on this planet.

    Gloomy predictions about Russia and its collapsing economy have the same weight as predictions of Joseph Smith Biblle of Mormons, claming that Jesus Christ will come down to earth in year 2020.

    Russian central bank has now the third world's largest gold and foreighn curreny reserves and Russia has extremely low budget deficit and public dept. Russian industrial growght is now 4th largest after China, India and Germany. Russia is indeed in a more advantageous position than other countries, with a low sovereign debt level and, unlike in 2008, a russian financial sector in good condition. Since then russian banks have significantly improved their foreign currency positions and the quality of their assets. Russia has also secured substantial international reserves as well as a large surplus in its current account. And unlike in 2008-2009, its stock market is not overheated.

    A different kind of crisis an NO meltdown is expected !

    The global economic problems of 2011 were caused by the unsound monetary and fiscal policies pursued by a number of countries. Crises of 2008 and 2011 are very different. This year's problems are not the result of the economy overheating, as was the case in 2008, when a critical amount of risk had accumulated in the system; rather, they are the result of poor assessments of the situation and bad management, which led to excessive lending, a dramatic decline in market liquidity, and other shocks to the market. This amounts to a cooling of the economy, with both households and businesses saving significantly.

    Circumstances are more favorable for Russia than they were in 2008. The global economy is not overheating, so a repeat of the 2008 meltdown is highly unlikely. Russian businesses are in better shape than 4 years ago. The russian government's efforts to mitigate the ill effects of the 2008 crisis have helped them cut their debt and reduce currency risks.
    The country's rainy-day funds are also quite encouraging. In 2008, the Central Bank's reserves totaled $597 billion, and this year they stand at $520 billion. The difference is not too big.

    Today we are living in completely different world. Days of low crude oil pricess and cheap gasoline are ancient history. Global oil reservs are depleting and world population is growing drasticaly. Crude oil prices are not going to change, and prices between 90 and 100 $ peer barell reflects the harsh reality.

    Today billions $ of government spending are invested in population growght and social modernization of Russia. In 2009 birth rate has eqaled the death rate in Russia. Moore russian families have children today, simply becouse they can afford it. Russia today has only 6 % of unemployment. By 2020 Russian government has strategic plan to completely eridicate poverty in Russia. Today Russia is the only BRIC country that has the highest income per capita among developing economies of BRIC. Further moore, Russia is investing large amouts of federal budget into medicine research and modernization of health program.

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