Archive for the ‘Finance’ Category

Balance of power shifting from U.S. To Russia and China

Tuesday, June 10th, 2014

611x395_G7_4fcdb15a7f78eThe G7 group’s foreign ministers decision to boycott a planned G8 meeting in Moscow was a grave mistake. First of all, the U.S., Germany, and the United Kingdom are responsible for that. If only the G8 summit were held this summer amid the current geopolitical crisis, it would be as welcome as summer rain on hot skin. However, instead of several days of a constructive dialogue and search for ways out of both political and economic issues, the global community preferred to dive headfirst into harsh consequences of economic sanctions imposed on Russia.
Let us consider some potential implications of economic sanctions against Russia. Lithuania and Latvia are the first nations whose economies would collapse losing almost 50% of their exports. Furthermore, they risk ending with zero GDP growth, negative trade balance, and overall budget deficit. The fact that Lithuania is set to adopt the euro in January 2015 could add fuel to the fire. get_img
Going forward, almost all European countries would suffer from surging gas prices if fortunate enough. In the worst-case scenario, the EU states would face insufficient/ in gas supplies.  About 25-30% of German industrial production directly depends on the Russian gas and 60% of industries are partly dependent. In case of disruptions in natural gas deliveries, the declining German economy could have a domino effect across the entire euro area. When that happens, the EU could wave goodbye to Greece, Portugal, Spain, and perhaps Italy that have been kept afloat by Germany so far.  Moreover, the Russian Federation is the fourth largest exports market for the German machinery and equipment industry. If Russia exits some contracts and projects, this would seriously affect German exports. So sanctions against Russia are a double-edged sword hitting the economy of Germany and the whole Europe. This is the way the U.S. pushes the European Union to take decisions that would be advantageous solely to it, not the EU. The U.S. dares to put pressure on Europe and use Cold War rhetoric because it is not as dependent on Russia as the EU. The EU is going through a paradoxical situation with its businesses being either fence sitters or favorers of Russia when the EU’s government is toeing the U.S. line on sanctions. For example, Germany’s entrepreneurs send very clear signals that quarrelling with Russia would deal a fatal blow to some European businesses and even entire economic sectors.
3e58de2c5f0dHowever, those who think that this political and economic conflict would no way affect the U.S. simply do not understand how it works. The risk does exist. And it is called “the China factor”. It was China that voted against imposing sanctions on Russia at the UN Security Council, thus making it clear it would not play the U.S. political games. Moreover, China is the world’s largest energy consumer firmly tied to Russia. So pressure from the West, whatever strong it may be, would not make the People’s Republic of China dance to U.S. tune.
The U.S. has opened a real can of worms with its attempts to isolate Russia. Thus, at live broadcast nationwide phone-in, Russian President Vladimir Putin highlighted the growing strategic partnership between Moscow and Beijing. The U.S must have struck a note of warning about that. China, the biggest foreign creditor to the U.S. holding the lion’s share of its foreign debt in dollar reserves, has every right to demand the United States to pay it off in full. It is theoretically possible that China would bring down the American empire, say to the level of Uganda or Bangladesh. But the Chinese would not do that since it would rather look like an economic war. 2469_1
Yet, China is willing and will be friends with Russia. In its turn, Russia is ready to organize an unofficial bloc with China and ease conditions of energy provision for its Eastern neighbor.  In such a situation, Europe would better either take a neutral position so that not to worsen its economic situation or take a risk and back the East, on which the global economy would depend in the next 20 years. Russia in no event would lose the U.S. as its partner since it has never been like that. As for the relations with Europe, the nations’ economies are so interdependent that cool heads should prevail in solving the issue. Contrariwise, Russia’s partnership with China could dramatically change global balance of power. Who stands to gain from it? Obviously, China and Russia. And who would lose out? The U.S. and all the rest. As they say, whoever digs a pit will fall into it.

QE3 trim consequences for world economy

Wednesday, October 2nd, 2013

Fed’s QE3 tapering has been a headline-grabbing event for the last several months. It is hundred to one that many followers of this blog know what the QE3 means. But I would like to jog your memory anyway. The QE or Quantitative Easing is a monetary policy program, which is used by central banks and aimed to stimulate the economy. The QE is coming to the fore, when the ordinary monetary policies are inefficient or not enough efficient. The U.S. government has been using it for the third time, so the program was assigned the number 3. It is worthy of note that last time the Americans almost succeeded in using it. However, we are interested not in the QE theory, but in the QE3 consequences and effects to the world economy and international markets.

As you know, in the middle of September, Fed’s CEO Ben Bernanke postponed the QE trim for an indefinite period. Nevertheless, most of the experts and analysts expect the scaling back in late autumn or early winter 2013. There are enough supporters and opponents of the QE3 winding down not only in the United States, but also in the rest of the world. Anyway, the final decision will be the one that is upheld by the Fed’s chairman. Nobody prohibited to put Bernanke under pressure though, so this subject has been already discussed million times. 1361895951_0949.250x200

According to the International Monetary Fund, the tapering of the bond buying program may trigger an extreme volatility of the benchmark interest rates all over the world. To start with, it will concern the emerging markets such as China, Brazil, India, etc. The interest rate volatility may cause rather profound consequences for the world economy. At least, the opponents of the QE trim have such a point of view.

Experts say that the U.S. GDP 2013 will post 1.7%, while in 2014 the economy is supposed to show the growth of 2.7%. This data confirms the fact that the U.S. government can make up its mind to taper the purchases of bonds that belong to large banks, investment funds, and governments of developing countries. For example, China owns a huge package of the U.S. government bonds. So, the QE3 allows the People’s Republic of China to increase the liquidity of its economy.

If the Fed finds that the American economy is quite healthy, so, there will be no need of the QE3 anymore, and it will be scaled back. That may cause that the developing countries will review their financial plans, the benchmark rates’ volatility will be up, the world economies will start to shrink, and the renewed growth of the global economy will slow. The U.S. will not stay away from that as well in 2014-2015, thus, the government can revive the QE3 or even create the QE4. In this case, the gradual and slow tapering of the stimulus program will be the best option. But there are also positive aspects. For these 2-3 years, the United States’ GDP growth rate will boost. As for the emerging markets, they will have enough time to make a good use of the proceeds.

It is certain that Ben Bernanke realizes that. Furthermore, he is taking advantages of opinions and terms. The sharp stimulus trim is a sort of economic rugby. And the Americans, as real rugby players, are well-equipped and ready to all the difficulties. So, the rolling back of the QE3 is supposed to pass painless.

Reserves pool of BRICS countries

Thursday, September 26th, 2013

There were several important political and economic decisions made at the G20 summit in St Petersburg. One of the highlights was the agreement of BRICS countries on joint foreign currency reserve pool. The countries’ leaders were unanimous in establishing the reserve pool of $100 billion to guard against financial shocks.  China will contribute $41 billion to the BRICS forex reserve pool, while Russia, Brazil and India will each add $18 billion, and South Africa will provide $5 billion. The countries’ contributions to the fund’s capital were distributed according to the state of their economies and the size of their international reserves. A similar scheme works at the International Monetary Fund and has already proven its efficiency. It is the best way to allocate quota and is fully consistent with the real possibilities of each of the BRICS nations. First of all, the development bank is founded in order to immediately response to sharp fluctuations in global exchange markets. The collapse of national currencies of emerging countries is the biggest possible risk.

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The loan facilities  are aimed at hedging countries in case of their currencies’ depreciation, economic slowdown or crisis, also in the event of internal turmoil or external financial shocks. Eventually, it becomes clear that the leaders of emerging countries want to somehow  increase their importance and influence in the global financial market. However, $100 billion is not enough to compete with the IMF; these reserves will not be also enough for any drastic measures to save the economy in case of major crisis in the BRICS nations. “BRICS is not much more than an economic fiction, artificial union of countries with different interests. Of course, they can veil it with the staff like the development bank, but nothing will come of it. The only thing that unites the BRICS countries is the discontent with the rules set by the IMF but for the simple reason that the U.S. benefits from them. When it comes to changing the rules, Russia, India, Brazil, and China cannot reach a consensus. Thus, for China it is much more beneficial to dictate its rules through the IMF. What’s more, China wants today’s markets,  not tomorrow’s ones – that’s why the IMF is of much more concern for it,” Mikhail Khazin, the  president of consulting firm Neocon said.

Extent of euro influence

Wednesday, October 10th, 2012

Since the euro is one of the main Forex instruments, it is crucial to know to what extent this estimable currency is influential.

At present, the euro is an official currency for the majority of EU nations. 7 countries out of 27 are even planning to replace their national currency with the euro in 2014-2015. Denmark, Sweden and Great Britain do not seem to be willing to join the euro area so far. There can be various reasons for it, but they are mostly psychological rather than economic.

The euro reaches out far beyond the Eurozone borders. Vatican, Monaco and San Marino concluded formal agreements with the EU to adopt the euro as an official currency. The euro also serves as an official currency in Andorra, Montenegro, the Republic of Kosovo and two British-administered areas on Cyprus, even though they adopted the single European currency unilaterally.

What is more, the euro is used in some countries of Africa and Pacific Island countries.

Impact of interest rates on exchange rates

Wednesday, September 19th, 2012

Change of interest rates may lead to ambiguous reaction of traders and have some consequences for a national currency. On the one hand, interest rates change should be in direct proportion to the change of exchange rates; on the other hand, every rule has an exception.

Let’s examine the information in details.

It is beneficial for investors to put money in a country at high rates of return, making demand for national currency grow and currency rates rise. However, such system does not always work.

Firstly, it is expensive for entrepreneurs to take out a loan, so they are forced to set higher prices for their goods. Undoubtedly, national currency devalues.

Secondly, during the financial crisis most investors are afraid of investing as unjustified risk may lead to considerable loss. So investors prefer either to wait till it is over or to buy currencies with the lowest interest rates. It inevitably leads to drop in price of the national currencies with high interest rates.

Thus, any changes on the foreign exchange market as well as the change of interest rates have direct and indirect influence on the exchange rate. In order to interpret the economic events correctly, it is necessary to be well-informed about major events, read articles, look through the specialized forums, and analyze the situation on the foreign exchange market.