Tag Archives: Russia

Ukraine needs Money, not Guns

Foreign officials met Saturday at the Munich Security Conference to discuss possible diplomatic solutions to the re-emerging crisis in Ukraine, where fighting has erupted on the eastern Ukrainian border, leading to nine dead in the past 24 hours.  Per the Wall Street Journal, German Chancellor Angela Merkel has been in staunch opposition of U.S. lawmakers, who wish to bolster the Ukrainian armory with weapons with which to defend the country’s borders from Russian-backed separatists.  Merkel was quoted as saying “This cannot be won militarily.  That is the bitter truth.  The international community must think of something else.”  While I disagree with the sentiment that it is unfortunate that the situation necessitates diplomatic responses beyond wielding the biggest club, the international discussions about the situation are completely missing a crucial issue.  The Ukrainian currency has tanked all of the sudden, dropping 50% against the dollar in just the past two days, as reported by the Washington Post.  The drop is the product of the nation’s conflict with Russia, its biggest trade partner, which is facing its own economic issues that ripple down to Ukraine.

UkraineCurrency

The lack of discussion between international officials about the state of Ukraine’s economy is somewhat troubling – policymakers are too preoccupied with the clashes on Ukraine’s border, which may not have an immediate diplomatic solution, while Ukraine’s economy is desperate for some form of stimulus.  The country’s reserves are dwindling in correlation with the currency’s decline, leading to a dire situation where Ukraine may have to resort to defaulting on its debt if some sort of economic relief does not occur.  The Ukrainian government was in discussions with the IMF two and a half weeks ago about a $15 billion bailout package, per Reuters, which would help the country meet its public funding and debt obligations in the short term, so as to avoid any debt restructuring.  This is a more pressing issue than shoring up the Ukrainian military, where a few extra tanks or UAVs may not have any real impact, and yet the conversations about a stimulus package seem to have died down for the time being.  One of the worst case scenarios here (excluding all out warfare between Ukraine and Russia, which seems very unlikely) is one where Ukraine is thrown into a deep depression yet is dependent on Russia in its recovery.  Ukraine’s economy is overly reliant on Russia, namely for meeting its energy consumption needs, and if a depression is sparked (especially one that includes a debt default) while diplomatic agreements with Russia collapse, it could be years before the nation is able to restore economic stability.  The international community should focus on providing Ukraine with the funds it needs to meet its obligations to avoid crisis in the short run, while establishing foreign exchange programs that help compensate the country for any loss of trade channels with Russia.  There is no reason that work cannot begin on such economic-focused measures while foreign heads of state try to reach an agreement on political-based approaches.

 

ukrainecurrencyukrainecurrency

Disappointing Crimea

crimea_russia_mgn(http://www.ketknbc.com/news/pro-russians-tighten-security-as-crimea-heads-for)

It might be a particularly freezing winter for Crimea’s people. Their city has not been totally recovered from the war, and they are suffered from the essential decrease of money. Moreover, the turbulent circumstance of the government with terrible management also made people depressed.

AP_ukraine_crimea_russia_sk_140307_16x9_608(http://abcnews.go.com/blogs/headlines/2014/03/international-monitors-again-barred-from-crimea-by-pro-russia-forces/)

From the last year, Crimea’s people were immersed in the center of a big vortex. Russia’s tough attitude towards attaining Crimea, which was a peninsula with almost 60 percent of Russians, caused tremendous accusations from the rest of the world. Significant conflicts were boomed between Russophile party and Pro-Europe party. The conflicts spread from the political fields to military fields quickly and brought huge damages not only for Crimea but even the whole Ukraine, from sky, land, and sea. “Saturday’s attack, the deadliest in terms of civilian losses in the region in months, signaled a possible escalation in the conflict in eastern Ukraine, where a September cease-fire deal has never really taken hold. Mariupol, a deep-water seaport on the Sea of Azov coast about 70 miles south of the city of Donetsk, was little touched by the bitter fighting in the region over the summer. Capturing the city would give the economically struggling regions controlled by separatists access to the sea.”(http://www.wsj.com/articles/ukraine-city-of-mariupol-hit-by-deadly-rocket-fire-1422100691?KEYWORDS=russia+ukraine) Crimea’s people have endured the negative influence of fights for months. However, Russia still could not concede stepping back a little. Why Crimea is so important? For Russia, it can be a bay for the Russian navy, which was an army with chronic blockage by the barrier of the landlocked disadvantage. More vital thing is Russia can broaden its navy power to the world based on Crimea. “The Black Sea Fleet has seen a flurry of activity since 2008: during the war with Georgia that year, the fleet staged blockades in the Black Sea. The Russian navy was actively engaged with Vietnam, Syria and Venezuela (and up until March 2011, Libya) ‘for logistics and repair services in their principal ports’. It has also been alleged that Sevastopol has served as the main source in supplying the Assad regime during Syria’s civil war and proved useful with Russia’s role in dismantling Syria’s chemical weapons last year.”(http://gulfnews.com/news/world/usa/why-crimea-is-so-important-to-russia-1.1305604) Furthermore, Crimea’s about 60 percent Russian people who share the same kind of consanguineous relationship with the citizens of Russia, provided a powerful legitimacy. This was an absolute superiority for Russia.

dailyrouble_repo1(http://econbrowser.com/archives/2014/11/rouble-floats-and-sinks)

Unfortunately, the unpleasant situation will probably continue to be exacerbated. Rouble’s deject performance and the disappointing economic environment in Russia seems will keep for a while. After the big division of the former Soviet Union, Russia’s economy was unsteady for dozens of years. This phenomena should partly attribute to the unsuccessful diplomacy. Russia’s relationships with other European countries, USA, Japan could not make bilateral governments satisfied. As Russia’s tough attitude towards Crimea, it also received severe retaliation. “BRUSSELS—The European Union could extend targeted sanctions on Russian officials and separatist leaders when foreign ministers meet Thursday but there is little momentum behind a push for broader measures at this stage, EU diplomats said.”(http://www.wsj.com/articles/eu-may-extend-russian-sanctions-by-nine-months-1422471148) Such terrible circumstance’s victims are those Crimea’s people who have voted for coming back to Russia. Hoping their patriotic hearts will not be broken.

Russia hopes to stimulate its economy by lowering interest rates

Since last year, Russia has had territorial disputes with Ukraine in the Crimean Peninsula. Russian aggression in this region are highly disapproved by the West, has been met with numerous Western sanctions against Russia. Such sanctions include restriction to Western finance, oil technology and services, Mark Thompson writes on CNN.

And if that’s not all, plummeting oil prices, in part caused by OPEC’s refusal to cut production despite lower global demand. Has further hit the Russian economy, one that is heavily dependent on oil.

As a result, the Russian ruble has plummeted along with the price of oil.

New Bitmap Image
Picture taken from xe.com, Ruble to USD exchange rate.

 

In the early stages of the crisis, the governor of the Central Bank of Russia (CBR), Elvira Nabiullina, aiming to prevent loss of reserves, and expecting OPEC to cut oil production, allowed the ruble to fall freely, Frances Coppola writes on Forbes. But it turned out that OPEC decided to maintain its market share and maintained their oil production.

The fall of the ruble, combined with the fall of oil price, served to cripple Russia’s banking sector and oil companies. The CBR began to hand out billions in bailouts to Russian banks, however the cash fails to reach firms.

Anatoly Aksakov, president of Russia’s regional banking association and deputy chairman of parliament’s financial markets committee, said the central bank must cut rates this month to 15% from 17%, then gradually to 10.5%, the level they were at before the current financial crisis. A central bank rate of 17% meant some companies were having to pay as much as 30% to borrow.

The state media has also reported an inflation rate of 11.4% in 2014, cause in part by the collapse of the ruble as well as oil prices.

The Fisher Equation stipulates that real interest rate is nominal interest rate minus expected inflation rate. This means that a 10.5% nominal interest rate, which the CBR can achieve if it chose to, would mean a -0.9% real interest rate. A negative interest rate, which would drastically increase the velocity of money, would serve to stimulate investment activity, which would save many of Russia’s firms.

Currently, however, the CBR’s reserves are being heavily drained. Falling oil prices and sanctions are taking a heavy toll on the Russian economy and at this rate the SBR will not be able to withstand them much longer. But the question remains, how long before Russia withdraw from the Crimean Peninsula to save its economy?

Has no one told Russia the cold war ended?

If you have been paying attention to the news lately, or even if you haven’t, you have probably heard about plummeting oil prices worldwide. Crude oil, which reached $100 a barrel less than a year ago, has now dropped as low as roughly $45 a barrel (The Wall Street Journal, Market Data Center). Everyday Americans view this as a great thing. I mean who doesn’t like cheap gasoline at the pump. For countries whose economy largely depends on exporting oil, however, this is a very bad thing.

One nation that has been hit extremely hard by falling oil prices is Russia.

“Heavily dependent on oil exports that are priced in U.S. dollars, Russia faces mounting pressure from U.S. and European officials over the unrest in eastern Ukraine. On Saturday, U.S. and European leaders threatened new sanctions against Moscow” (Albanese, Armental, 2015).

Russia is learning that their economy may have one huge fatal flaw, if they already didn’t know. Depending too heavily on one single commodity, crude oil, opens up their economy to extreme volatility. If the value of crude oil falls significantly, which is happening currently primarily due to increased global supply, the value of their entire economy also falls significantly. This openness to extreme volatility is exactly what is crippling the Russian economy currently. This is reflected by the falling price of the Ruble, Russia’s currency. However, this is just one of the issues that Russia is facing.

“The ruble, which has been in a free fall amid slumping oil prices and geopolitical unrest in the region, was trading at about 68 rubles to the dollar Monday, compared with about 35 rubles a year ago” (Albanese, Armental, 2015).

This “geopolitical unrest” that the above quotation is referring to is the conflict in Ukraine that has been going on for some time now.

“A surge in fighting in eastern Ukraine, which killed about 30 civilians in the Kiev-controlled town of Mariupol over the weekend, prompted U.S. and European leaders to threaten new sanctions against Moscow” (Albanese, Ostroukh, Armental, 2015).

“The sanctions, which cut off Russian banks and companies from global capital markets, are widely expected to push the commodity-dependent economy into contraction for the first time since 2009” (Albanese, Ostroukh, Armental, 2015).

If the falling global price of crude oil is not enough to sink the oil dependent Russian economy, facing sanctions and being cut off from global markets should just about do it. Changes need to be made, if Russia wants to remain a global player long term. Now don’t get me wrong, Russia is still one of the world’s most powerful nations that cannot be ignored. However, it seems that all of Russia would benefit, if Putin and Medvedev took a step back and reevaluated their cold-war-esque foreign policy, and drastically restructured their economy to keep up with the changing times. No more, it seems, that a nation can rely on natural resources alone to create a prosperous economy. No more are the days that a nation can invade another nation, and not expect serious backlash from the global community.

Sources

http://online.wsj.com/mdc/public/page/mdc_commodities.html?refresh=on

http://www.wsj.com/articles/s-p-downgrades-russia-foreign-currency-rating-to-junk-1422297409?mod=WSJ_hp_LEFTWhatsNewsCollection

http://www.wsj.com/articles/fears-of-fresh-sanctions-hit-russian-ruble-1422268436

Bask the Low Price of Oil

3(http://www.businessinsider.com/oil-prices-brutal-summer-2014-8)

The oil price may be one of the hottest topics recently. The price kept decreasing from the midpoint of 2014 with an unbelievable speed. I remembered many of my friends even took the pictures of the price tags in oil stations on their facebooks. I was shocked by the amazing low price of oil, which has been compared with the value of gold in these years. Yet, what factors in the background are the causes of this price dropping? Will this trend continues for a long period? It is not realistic to grab the whole picture of the issue so I just learn this price changes from some main perspectives.

The rigid relationship between Russia and other western countries, especially with other European countries, was definitely a major contribution for the dramatically dropped oil price. Russia is constantly one of the biggest country which export energy, including oil, to the world. The income of the oil accounts for a huge part of its GDP. This time, the dropped price could be perceived as a retaliation from other countries who were not content with Russia’s attitude towards Ukraine. Crimea is a sensitive place and the possession of it is related to politics, army, and trade for many countries. It is almost impossible to reach a surefire decision to make two sides both absolutely satisfied. Moreover, the tough attitude of Russian government always made other countries unpleasant. This price decreasing is a little punch by other countries to this big country.

The whole sluggish global economic environment is also a significant role for the dropping price of the oil. Though America has commenced its resurgence after the financial crisis in 2008, economy in US is still not a totally optimistic circumstance. Most areas of Europe have not been recovered from the recession. Some European countries are still suffered from the magnificent pressure of debt. That means two main economic entity are in a “dormitory period”. Furthermore, as the most quickly developed country, China also lowered its pace. The whole languid economy cause less demand of oil, which pulled down the price.

Interestingly, many issues related to the oil price came into people’s view subsequently. Many corporations discovered this price decreasing of oil as a fortune opportunity to make tremendous profit. “According to shipbrokers and analysts, major traders including Vitol SA, Gunvor SA, Trafigura Beheer BV and Koch Supply & Trading Co. Ltd have chartered supertankers capable of storing a combined total of more than 30 million barrels of oil—many of them in the past few weeks. Vitol, Gunvor and Trafigura declined to comment. Koch didn’t respond to requests for comment.”(http://www.wsj.com/articles/worlds-largest-traders-use-offshore-supertankers-to-store-oil-1421689744?mod=trending_now_1)When I saw this new I unconsciously said “Oh my god!” It seems like a very simple trick here to earn billions of money. Buying the oil when the price is low and sell it when the price become higher again. It is even a little stupid to use that kind of strategy as the presents of such tycoons like Vitol. It seems everyone can be a millionaire if we are in the position. But wait! How could we know the oil price will come back higher but continues slumping?

Above all, the whole economy of the world is still on the way be recovered. Recessions are often followed by flourish. Thus, there may be a surge of development in the next few years. What’s more, both Russia and other countries do not want to keep a rigid relationship with each other for so long. Without doubt, retaliation will hurt both sides from the long term view. Hence, let’s drive cars more often now and enjoy the low price of oil price for these days.

The Winners and Losers of Oil’s Decline

It’s no well kept secret that the sharp decline in oil prices is having sweeping effects across the global economy, but the ramifications of this dip have varied dramatically country to country.  The dramatic price shock (oil hit a five-and-a-half-year low Friday after falling below $50 a barrel, per Bloomberg) poses a major threat to petroleum-dependent countries like Venezuela and Russia, and to the titans that are the world’s energy companies.  For now though, things are looking pretty good for the U.S.  Although the Wall Street Journal projects energy companies to report a 19.1% fall in fourth quarter earnings for 2014, the Dow and the S&P have recently set record highs and December’s job report has lent confidence to the U.S. economy.  The hit to the energy industry is partially offset by businesses that have benefitted from lower prices: those dependent on transportation, and those dependent on consumer spending, which should rise as households save more on gas.

The impact of oil’s plunge isn’t merely economic though – petroleum has the power to reshape the world’s political landscape, as we’ve seen so many times in the past.  In this case, things seem to be shifting in the favor of the U.S., with weak oil prices providing, as David Goldwyn puts it in the Washington Post, “great serendipitous leverage” for the U.S. over countries it has been at odds with on political issues.  The U.S. has been applying economic pressure to both Russia and Iran in the form of sanctions in an effort to impose policy resolutions regarding the former’s involvement in Ukrainian separatist movements and the latter’s nuclear program.  Falling oil prices work in favor of the U.S. by putting further pressure on these two nations, which rely heavily on petroleum exports.  Another U.S. foe that supports itself on oil sales is the Islamic State, which will see a constriction on its revenue stream that will hopefully hit the organization hard.

The current market for oil could be quite beneficial for the U.S. in the long term as well, as investors may begin to see more merit in renewable energy sources, helping the country catch up to  nations leading the way in green energy.  Recently, one of the biggest backers of renewables has been Google, which just invested $188 million to build Utah’s biggest solar plant, and has invested $1.5 billion total in renewable energy, according to the Wall Street Journal.  It’s not just solar energy that’s been seeing recent investing activity though; the Journal also reported a $150 million acquisition by uranium producer Energy Fuels Inc.  If current oil prices are here to stay, we may be seeing the beginning of a long-term flow of capital away from petroleum investments and towards renewable energies that look more and more appealing every day.