The World is changing at an accelerated pace, especially in a region called the “New Fertile Crescent”.
The world as we knew it, a world of Western domination, is fast disappearing. The West, of course, will always have an importance role to play, but the days of our domination are nearing their end.
What we are witnessing is the emergence of a multi-polar world, which will make our lives as international investors more complicated.
I had Scott come over to discuss his thesis around the formation of a New Fertile Crescent. Scott is the Chief Investment Officer of an Uzbekistan-focused fund and has been living in Central Asia for a number of years (we actually met in Tashkent).
He believes that what we are witnessing is the emergence of an increasingly cohesive trading block in the Middle East, large parts of the former Soviet Union, and China. We discussed this is detail, what some of the implications could be, some ways to play it, and also how to deal with potential Western sanctions such as the ones that left many of us stuck with Russian stocks.
We must adapt
Whether we like it or not, the world is changing and we must adapt. As investors we must always differentiate between what we would like to happen, and what is actually happening. Our money should not get stuck in convenient narratives.
I recommend you sign up to Scott’s free Telegram channel in which he shares his thoughts, articles, and some of the investments he makes.
To a World of Opportunities,
The Wandering Investor
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Transcript of “Investing in the New Fertile Crescent”
LADISLAS MAURICE: Hello, everyone. Ladislas Maurice from thewanderinginvestor.com. So today, I’m with Scott Osheroff, who is the Chief Investment Officer of an Uzbekistan Focus Fund, and who’s an active investor in the whole region. And today, we’ll be discussing a very interesting, I’ll call it a thesis, if I can call it this way, Scott, the New Fertile Crescent. So it’s a term that you developed, and that you’ve built a thesis around. And it’s quite interesting. So I’ll let you elaborate.
What is the New Fertile Crescent
SCOTT OSHEROFF: Thanks, Ladislas. Good to see you. So the concept of the New Fertile Crescent really came about when I was looking at the original fertile crescent, which, of course, stems from the Middle East, specifically, Iraq, where you have the convergence of the Euphrates and Tigris rivers, which was the breadbasket of the world a thousand plus years ago. And looking at what’s happening in Asia, specifically, you’re seeing the bifurcation of the world, which throws in or [inaudible 00:01:07] it is de-globalization and a host of other things. So it’s something I’ve been looking at for five or six years. And it’s a term that I coined, I think, in 2020, where, being based in Tashkent, Uzbekistan, and looking at who the regional players are, what political alliances and influence there is in the region, what’s happening as the world bifurcate between East and West.
And as I think we’ve talked about before, I firmly believe, and you sort of saw it during COVID, with the acceleration of it, that the West is becoming more socialist and more authoritarian, and the East is becoming more authoritarian but it’s remaining capitalist. So the question becomes, where would you prefer to do business? For me, I’d prefer to do business in Asia, or what I call the New Fertile Crescent. And when you look at a map, if you look at the Middle East, up through Central Asia, and then you look at China and Russia on either side of Central Asia, throw in Iran and Turkey, and put a line through it, it looks like a crescent.
And this part of the world has relatively low debt to GDPs, young, fast-growing populations. It’s resource rich, and, more importantly, when you look at the de-globalization of the world and the inflationary aspects associated with that, a lot of these countries, in one way, shape, or form, have gone through import substitution. So a lot of them have already suffered significant inflationary forces over the past two or three decades, for example, Iran, Turkey, to a degree, Uzbekistan, which means that you have domestic industry, the polar opposite of the West, which has seen their industry hollowed out over the past 20 or 30 years.
So looking forward, it was a loose sort of concept that I formed as to what was happening in the region, but I imagine that China is ultimately going to become the driving force behind this New Fertile Crescent, with Russia being a significant player as well, but more on the lines of, to a degree, politics, but certainly, militarily, and then from a resource standpoint. And this region has very much been fractured over the past hundred years plus. The Soviet Union, of course, provided some coherence. But nonetheless, if you look at the Middle East, Iran and Saudi Arabia have been enemies for quite some time, or there has been conflict at least due to religious issues.
I believe it was in 2016 that Syria and Saudi Arabia broke off diplomatic ties. And nonetheless, there’s been an incentive for perpetual instability in the region, because the US, for example, has wanted to be able to maintain superiority in the region through its influence. But some really interesting things have happened in the last month, which sort of confirmed to me that this whole region is beginning to solidify, more powerful and independent, if you will, without the West being so actively involved, and China is the driving force behind it. Just last month in March, we saw that China helped to broker a ceasefire agreement between the Houthis, what, effectively Iran and Saudi Arabia, by getting the Houthis in Yemen to stop firing rockets into Saudi. So those two countries have now announced that they’re going to reestablish diplomatic ties.
Syria and Saudi Arabia are in negotiations to reopen embassies, and as a result of some of that, you’ve seen Saudi Arabia also announced that they’re joining the Shanghai Cooperation Organization, which is huge, along with a bunch of other countries, from Venezuela to Egypt, which are sort of on the waiting list. So in a few years, you could very well have fifty-plus percent of GDP in the global population being involved in something like the Shanghai Cooperation summit, much to the dismay of the United States in the West, as well, what runs–
The significance of the Shanghai Cooperation Organization expanding
LADISLAS MAURICE: If I may? So we’re seeing all these countries joining the SCO, right? So you’re saying, so Saudi Arabia is joining, there are other countries on the waiting list like Egypt, like Venezuela. Great. But don’t you risk, at some point, of seeing an SCO that’s actually meaningless, because all these people from all these countries from different parts of the world are just together as a talking shop, and then it ends up being like ASEAN, in Southeast Asia, where nothing really happens, it’s just a talking shop? Like how significant is it actually?
SCOTT OSHEROFF: Well, I think, to a large degree, that’s sort of what the SCO is. But if you’ve got a talking shop that is sort of, to a degree, anti-West, and it brings countries that are some type of influence into the orbit of China and Russia, that becomes increasingly powerful.
Which countries are in the New Fertile Crescent
LADISLAS MAURICE: When you talk about the New Fertile Crescent, which countries exactly do you include in this?
SCOTT OSHEROFF: Let’s say this includes more or less the entire Middle East, up through Central Asia, so Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan, Russia and China, of course. I would throw Turkey into it, Iran into it, most certainly. And then if you look at, it’s a bit of a stretch geographically, but I would throw in Pakistan and India. India, specifically, they’ve been a longtime ally of Russia. I don’t really think that they are very anti-Chinese, because they do a lot of business with the Chinese. I think it’s, there’s a degree of propaganda in the media that makes it seem like India and China on the verge of kinetic war all the time, even with the things that you’ve seen in the north, of course.
But nonetheless, I think India is going to play ball with these countries because they need to, from a resource standpoint, from the military arms standpoint, etc. So these would be the countries I would include the New Fertile Crescent.
How to invest in the New Fertile Crescent
LADISLAS MAURICE: Clear. So how do you play this as a Western investor? Because I completely understand. I mean, the West is becoming increasingly un-investable. Taxes are going up, regulations are going up, more and more restrictions. It’s increasingly complicated to make money in the West and to keep the money that you make because of all these capital gains taxes. And especially in Europe, with the whole energy situation, we find ourselves in a situation where we used to get Russian gas because it was cheap. Now that Russian gas is gone, we’re buying American and Qatari LNG instead, which is a lot more expensive. And then the Russian gas, which was ours, is now going to the New Fertile Crescent, and they’re paying a discount for it because of the Western sanctions. So Europeans have really shot themselves in the foot. So not only is gas more expensive in Europe now, but it also resulted in an extra discount for our direct competitors.
I can see why you would prefer to invest there from a macro point of view. But concretely, how do you do this as a Westerner because I mean, last time I tried something like that in February 2022, I’m still stuck with a bunch of Russian ADRs. And I’m staying– So I don’t know if I’m a little too traumatized from the experience, but I’m also staying away from Chinese assets. I had a brokerage account in Hong Kong for a while, I had quite a bit of money there. I used it as diversification. But in the past year, I have reduced it by 99%. I just have some unlisted company on the brokerage account that I somehow can’t transfer anywhere. So that’s like my only exposure to Hong Kong at this point. Because I feel that, sure, you have really attractive valuations, but at some point, the European Union or the US are going to come in there and just ensure I lose everything. So how do you play it?
SCOTT OSHEROFF: So I think there are a lot of ways to play this region because it’s so vast and it’s so dynamic. Specifically, I think that, over the next few years, you’re going to realize that resource nationalism is going to become a regional nationalism from a resource standpoint is going to become huge. You look at Europe, and they don’t really want Russian oil and gas and coal. Nonetheless, some of it’s still ending up there with ship-to-ship transfers off the coast of Spain and whatnot. But you’re seeing, if you look at Russian Urals crude prices, they’re trading at a fat discount to Brent, which means that countries like India and China can buy discounted crude, which does wonders for their economy. Look at grains as well.
So, is you have this bifurcation of the world, I think that this New Fertile Crescent bloc, you’re going to see more countries become resource nationalists. And if they’re able to withhold resources from the international market, or at the very least, cause friction in the market, which means it’s more expensive to do business and buy these commodities, and they do business more with other neighbors in this bloc, then, technically, that just results in larger shortages globally, which means commodity prices go up. So one way to play it would be just to invest into commodity producers wherever they might be listed in the stock market, because you’re getting broad exposure to this bifurcation of the world. When I look at it, from a more micro standpoint, Uzbekistan, Uzbekistan has a stock market. It’s very cheap. You can go and open a brokerage account. I think you’ve done a video on that, talking about a group there. So there are ways to get direct exposure to these countries. I mean, Iran is really the golden goose but, unfortunately, it’s still sanctioned.
And like you mentioned or hinted out with Russian equities, sure, you can’t actively trade Russian equities if you’re from what’s termed an unfriendly country but, nonetheless, if you bought, for example, Sberbank, one of the largest banks in Russia, I think one or two days before trading of the [EDRs 00:12:02] in London was frozen, well, if you look at the price in Russia now on the Moscow Exchange, I think you’re up 20 times, and they’re paying dividends as well. So not an ideal situation, but if you look out, over the next few years, I don’t think sanctions are going to last forever, they could last certainly for longer than anyone would expect, just look at Iran. But there’s still value to be had there.
Equally, being that you’re a big real estate investor, you look at real estate in a lot of these markets, and real estate’s cheap, yields are good, there’s huge potential for capital appreciation. Because, again, if you look at a lot of these countries, from Iran, to Turkey, to Central Asia, exclude China, to a degree, because, in the next few years, they’re going to have a population crisis, but you’ve got large growing middle classes where the average age is between 25 and, say, 33. The cost of capital is coming down significantly but, nonetheless, it’s still high. The central bank policy rate in Uzbekistan, for example, last month got lowered from 15% down to 14%. But if you want to get a mortgage for a home, you’re still paying 25% plus and you need to provide 125% collateral. So is the cost of capital comes down in these markets, you’re going to have a huge boom in real estate.
And again, it’s populations are growing. It’s very similar to the baby boom generation in the West in the 1970s and 80s. It’s that same play. So there’s a lot of ways to get exposure. It just depends what type of exposure one wants. And sorry for being vague.
The South Caucasus
LADISLAS MAURICE: No, I hear you. We actually met in Tashkent in Uzbekistan, and I bought some shares there. I’ve been very happy, they’ve done great. Some of them have just stagnated, but a few of them just went through the roof. And so my average has been very good. But yeah, it’s not that easy, because a lot of these countries, also from a real estate point of view, have restrictions in terms of foreigners buying. They’re often quite nationalistic when it comes to real estate. So not easy to get exposure to these countries. And obviously, not all of them, but some of them. And then the stock markets are often rather undeveloped. So it’s not the easiest of places to get exposure. But if you can, and there are ways, I agree, it’s a good one. But what about the Caucasus? So, for example, so Georgia, Armenia, Azerbaijan, do you include them in the New Fertile Crescent?
SCOTT OSHEROFF: Certainly. They’ve got very large strategic relationships with Russia and China. Of course, there’s also influence from the US there. But nonetheless, it was canceled if I’m not mistaken, but there was supposed to be a very large deep-water port built in Georgia by the Chinese. Now I believe DP World is looking to get evolved. So this New Fertile Crescent concept also, of course, ties in a bit, just from a logistical standpoint, with China’s Belt and Road Initiative. This whole region really is the connecting aspect between East and West. So if you look at the movement of commodities, manufactured goods, and you don’t want to go by sea, then this New Fertile Crescent becomes exceptionally important, but also the fact that they’ve got their own industry, and you’re probably going to see regional trade blocs become more and more important. For example, the Eurasian Economic EAEU.
So, you’ve got, I think, Iran is supposed to actually join the EAEU, which is a duty-free economic union, but who are in some post-Soviet countries. Iran is supposed to join it by September, which will be huge, because they have the biggest manufacturing capacity of any of the EAEU countries, maybe besides Russia, which means they’ll be able to flood the market. And you’re already seeing a lot of Iranian products in the Caucasus, in Central Asia. So yeah, the Caucasus is very much a part of what I call this New Fertile Crescent region.
LADISLAS MAURICE: And I think what you’re highlighting is very important in terms of the bifurcation of the world, because it’s not just a new regional bloc that’s being formed. Bifurcation is the right terminology, because it’s essentially a bloc that will be against the West. So whether the bloc actively seeks to be against the West or not is a different topic, but the West will view this as an enemy. I mean, we’re talking of a bloc with Iran, under sanctions, Russia, under sanctions, China, increasingly under sanctions, effectively, you know, all the export restrictions, etc., towards China, Saudi Arabia and Turkey that are under threat of sanctions by many politicians in the West. So what will be the implications if this bloc actually kind of does move forward, increasingly, and start becoming a bit more politically connected and economically connected? What would be the impact on the US dollar?
Impact on the US dollar of the world’s bifurcation
SCOTT OSHEROFF: People have called for the demise of the US dollar for longer than I’ve been alive. So certainly, you’re seeing more international trade done in, in particular, Chinese RMB. When Xi Jinping was in Russia, in the past week or two, if I’m not mistaken, they announced that they would be doing more trade, especially in the commodity sphere, in RMB, and that Russia would be doing business with African countries in RMB. You saw Ghana, which is on the verge of a debt crisis, and has been for a while, selling gold in order to buy oil. So I think it’s a mix of you’re going to see more business done in commodities and the diversification of currencies that business is done in. The country escapes me but, last week, it was announced that, it was– I don’t remember. Saudi Arabia is going to start doing business with it, it was Kenya, in shillings for oil.
So and again, the fact that Saudi announced a significant investment in petrochemical plants and refineries in China means that, sure, you’re moving away from the dollar, but we still have this– perhaps, we see the formation of a second quasi-financial system, which is not dollar-denominated, if you will. But we’ll have to see what happens. I think what makes sense, from what I’m seeing in the world, especially living in this New Fertile Crescent, is I’m looking to have capital both in the West and in the East for diversification. I don’t think that this New Fertile Crescent region and the East in general is going to– I look at this as sort of moving puzzle pieces. It’s not like there’s going to be a new Berlin wall made. So you’ll still be able to move capital around.
The question is, perhaps, will certain countries in East or West, I think there’s probably a greater risk of this over the next 10 or 20 years in the West of them implementing some form of capital controls, along with Central Bank digital currencies, which perhaps will make it more challenging to move capital out of Country X, Y, or Z into perhaps some of these Eastern countries. So it’s worth considering all of that but, sure, will it have some impact on the dollar? No doubt. But in the short term, medium term, the dollar is not going anywhere.
LADISLAS MAURICE: Yeah, I agree. Too many people calling, like you say, the end of the dollar, the dollar is going to crash, the dollar is going to crash. Before it crashes, other currencies will collapse. The euro will crash before the dollar, and when the euro crashes, you can be sure that the dollar will be doing very well at that point in time. If I have cash, I’m very comfortable keeping dollars as opposed to other currencies, even though I understand that, long term, just as with every other main currency throughout history, it’ll go down in flames at some point. But we’re not at that stage yet, for sure, no matter how insane the politicians are, etc. It’s just building up, building up, building up, it’ll happen eventually, but not now.
SCOTT OSHEROFF: As we’ve talked about before, I’m very, very bullish on commodities this decade due to structural deficits really across the periodic table. And then if you look at specific industries, and commodities, oil service companies, etc., etc., there’s a huge opportunity there, I think. But with what you were mentioning around the dollar, I think the world is going to become much more fixated on having stockpiles of natural resources, but if you look at gold, in particular, versus the dollar, it hasn’t done a whole lot, even though it looks like it might be on the verge of breaking out north of $2,000 per ounce. But if you look at the dollar in a slew of other currencies, the Aussie dollar, the yen, and a bunch of others, it’s at all-time highs, which is saying something, that, within the system, there is certainly stress.
Citizenship diversification for international investing
LADISLAS MAURICE: And your point about diversification, I think, is very important, being diversified, being in both east and west. But also, as you were saying, it’ll probably be increasingly hard to shift money around, especially seeing that sanctions get implemented by the financial sector in a bit of a retroactive way. So, let’s say, before the whole Russia situation, if you had been making regular transfers to Russia, and you had business activities in Russia, in 80% of cases, your current bank would just kick you out, and then you’d have to find a new bank. So there’s also that risk of when you make all these investments in these countries that, at some point, suddenly, sanctions against whatever country show up, you’re invested there, and then most of your banking relationships get shut down.
Increasingly, building conduits to be able to make these investments is really important. And it’s not just from a banking point of view, but it’s taking the whole game to a new level, in the sense that, probably, I mean, let’s put it this way, if you’re a Westerner, and you’re serious about diversification, and you want exposure to the other side without getting burned, like actually, both of us got with Russian stocks, people should be actively acquiring second citizenships of neutral countries. As Westerners, we have passports of extremely aggressive countries that go around and boss people around. That was fine when we were really the bosses. We’re not quite entirely the bosses anymore. So now we’re just, in many cases, middling powers, especially in Europe, with aggressive foreign policies and not that much to back it up. So these passports are increasingly becoming a liability when it comes to making international investments.
Like recently, I was at a conversation with a fund manager in Venezuela for Venezuelan real estate. The numbers were absolutely amazing, dirt cheap, high yields, in dollars, but he was using a US structure. And I just don’t feel comfortable investing in Venezuela using a US structure, because as soon as suddenly sanctions start showing up again, good luck with your investments. So what people need to do is to start getting these other citizenships. You can, for example, get a Turkish citizenship by making a $400,000 investment, either a bank deposit in a bank there, or $400,000 of real estate in Turkey, that gets you, your spouse, and all your underage children, and future underage children Turkish citizenship. Is that a good thing for investments in other parts of the world? Probably, at some point, it’ll be useful. It could also be a liability if, suddenly, Turks are the next Russians, and then you find yourself with this passport, and you were too loud about it and told everyone about it, then suddenly, you might find yourself under sanctions everywhere you go.
Or, people could consider, especially people that work online or that have time on their hands, people should just move to Latin America for a few years, get themselves a Latin American passport the normal way through immigration, and then start investing as a Mexican around the world. And nobody hates Mexicans, apart from some people in the US. But generally, when you invest, especially in that New Fertile Crescent, there could be sanctions, whatever, but you, as a Mexican citizen, if you invest using that citizenship, and you’re not necessarily too loud about the other ones, again, this is not financial or tax advice, or legal advice, but it could make your life a lot easier down the line. But this is essentially the world that we’re entering into. If you have a lot of capital to invest, and you want to diversify on the other side of the world, you’re going to have to really start seriously considering such moves.
SCOTT OSHEROFF: To add to that a little bit, because one of the frameworks that I use for looking at the world is one of de-globalization, which has resulted in balkanization and, again, this bifurcation between East and West, is that probably sometime in the middle of the last decade is when we reached peak globalization. And then it began to slowly go into reverse. And now you’re seeing nearshoring of factories in Mexico, and also on-shoring back in the US due to cheap energy. But we had reached peak economies of scale, which means that when we go in reverse, that’s inherently inflationary, because you go from having a factory in China that has the ability to produce 20 million widgets a year to saying, well, we want to diversify and have one factory in the United States but we don’t need that factory producing 20 million widgets for Europe, we only need one-and-a-half, which means that your cost per unit has gone up.
For what you’re talking about with citizenships and second order thinking in terms of what’s going to happen and how to position not only your capital, but how to position yourself to be able to protect your capital, and I guess yourself in due course, unfortunately, with the way the world is heading, sure, acquiring second citizenships through one way, shape, or form is certainly an added cost, but with the world that we live in, and that we’re acceleratingly moving into, it’s perhaps a necessary evil, because, again, it’s expensive and time-consuming and burdensome to do so, but if you look at where we’re heading, it’s probably a really wonderful hedge. So I agree with you.
LADISLAS MAURICE: All right, fantastic. Thank you very much, Scott. So everyone, I really recommend that you follow Scott on his Telegram channel, it’s called Yurta. There’s a link below. And then he often posts his own analysis in terms of what’s happening in that part of the world. Also, sometimes, he shares some of the stocks that he’s invested in and shares a lot of very interesting articles, so it’s a channel that I really like to follow. Great. So Scott, thank you, and I’ll talk to you soon.
SCOTT OSHEROFF: Thanks, Ladislas. Take care.
Bullshit and rashists propaganda 😉