The Russian contingency plans convey a clear message to Riyadh and to Opec’s high command that the country can withstand very low oil prices indefinitely, thanks to a floating rouble that protects the internal budget.Russia is not entirely in the clear economically however:
Saudi Arabia is trapped by a fixed exchange peg, forcing it to bleed foreign reserves to cover a budget deficit running at 20pc of GDP.
Russia claims to have the strategic depth to sit out a long siege. It is pursuing an import-substitution policy to revive its industrial and engineering core. It can ultimately feed itself. The Gulf Opec states are one-trick ponies by comparison.…
Saudi Arabia’s leaders are fully aware of the Kremlin’s painful predicament. They appear certain that they can outlast Russia in a long duel. By the time we find out which of these two petro-giants is stronger, both may be on their knees.The Saudis are probably figuring that the US will support them if things yet rough, but after they wiped out the profitability of nascent US shale industry, that may be wishful thinking.
The Telegraph
Russia plans $40 a barrel oil for next seven years as Saudi showdown intensifies
Ambrose Evans-Pritchard
10 comments:
Amazingly the Russians are predicted to run out of rubles. Can't believe they still push this nonsense
"…there is nothing either good or bad, but thinking makes it so"
Wm. Shakespeare, Hamlet, Act 2, Scene 2.
As long as a government thinks it can run out of money, it will act as if it can.
Reading things that Putin has said, I don't think he is under this illusion. But he is aware that others are and has determined that he needs to run a reasonably tight ship financially for international credibility. There is also an issue of domestic credibility, as in the US, where the ordinary people think that government finances are like their own.
But I also think that when push come to shove, the Russians will do what it takes and they know what to do. They are smarting from the 1998 default and won't make that mistake again.
Why are the Saudis pegging their currency?
As long as a government thinks it can run out of money, it will act as if it can.
That's a perfect description of the Brazilian experience.
The country is undergoing an extreme recession (likely, a 4% drop in GPD this year with maybe a repeat performance in 2016) and from right to left of the political spectrum everybody agrees that the right approach to get the economy moving again is - you guessed it - to cut expenditures and raise taxes in order to achieve a primary surplus (tax receipts higher than non interest expenditures).
In practice the ratings agencies can dictate economic policy by threatening to downgrade the country's public debt (one of them has already done so - the government is now terrified that the other agencies may follow suit).
And - alas - it's quite true that every time markets believe this nonsense about Brazil not being able to pay debts issued in its own currency the Real has more sellers than buyers and the exchange rate may go into a free fall, jeopardizing inflation control and faith in the currency's external value.
So there you have it - a monetary sovereign with a population of 200 million completely under the spell of ratings agencies and their archaic belief that a currency issuer is not different from a currency user.
"the exchange rate may go into a free fall,"
It can only go into free fall if you have banks creating money to clear currency exchange contracts. Stop that and you'll find that you can bear squeeze the currency speculators.
The problem is the belief that the currency market has to be 'liquid'. It doesn't and it shouldn't be. Lack of liquidity should be the fear of anybody selling the currency. If people need foreign currency to buy something important they can go to the central bank and make a case as to why their purchase is really, really important to the nation - which would then exclude speculators.
The whole policy structure in this area is designed to stop elected governments asserting control over their economy - just the same as the independent central bank.
Jose the currency fall may have more to do with the disinvestment and ownership class selling under performing assets, the fall of commodities (and lowering of price) and buying dollars from the dollar-zone to change their portfolios.
The problem is that much of the developing world is plagued with Dutch disease, corruption, poor capital controls (which make hot investments too common) and export dependency. So when a recession hits all is rewound and the price collapses.
This also happens internally in the dollar and euro monetary regions (specially here), the difference then is that the 'rewinding' is done via deflation instead of inflation.
The problem is that "trade" in foreign exchange now dwarfs trade in real goods and services - the annual volume of foreign exchange transactions is 60 or 70 times larger than the value of world trade and some 15 times larger than world GDP.
This wasn't so under Bretton Woods - but since the collapse of that system and the adoption of floating exchange rates in 1971-73 transactions in foreign exchange recorded under the financial account of the balance of payments have reached this point that they simply overwhelm the amount of currency used (bought and sold) to pay for trade in real goofs and services that are recorded in the current account of the BoP.
That's the reason why irrational downgrades of an emerging country's debt can easily have a devastating impact in that country's currency exchange rate. Expectations and perceptions change, traders go on a selling spree and presto presto the currency is in free fall.
Of course there are limits to such processes. The government can choose not to intervene in the beginning, announce its indifference to the foreign price of its currency and then suddenly and unexpectedly start applying strategies such as massively using its dollar reserves to prop up the currency, raise domestic interest rates etc. If the currency then recovers short sellers will be caught with their pants down and may hesitate in the future before speculating again against said currency.
But this presupposes a level of competence, self confidence and practical ability that is often lacking in governments and central banks. In most cases they just try to appease the ratings agencies by duly applying the "sound finance" policies most likely to set their countries on course for devastating recessions.
The whole policy structure in this area is designed to stop elected governments asserting control over their economy - just the same as the independent central bank.
This is what "free" means in the neoliberal slogan, "free markets, free trade, and free capital flows." It really means free to ripped off by extracting rents, and crime is an extreme form of rent-seeking. Rent-seeking is free-riding.
Money & banking, and finance are powerful tools economically but they have deep and far-reaching social and political consequences. They are like using explosives in construction. Dynamite greatly increased productivity when used with proper caution but it's devastating if used recklessly. And, of course, weaponized.…
Freedom is like that. When it is not used responsibly then it creates havoc and is taken away. And when "freedom" is weaponized, go figure.
This is a reason that Russia and China are stockpiling gold and intend to adopt an international monetary standard with gold in the basket, or the institution of a Bancorr-like international unit of account and international monetary system.
"and then suddenly and unexpectedly start applying strategies such as massively using its dollar reserves to prop up the currency, raise domestic interest rates etc"
You just leave it. Eventually sellers run out of buyers and then they have to cover - which is difficult.
Speculators can only get anywhere if there is a patsy in the system. So they shake the tree trying to scare holders using the currency for something useful. If there is no patsy then it just becomes a drawn game of tug of war.
It's always important to remember in foreign exchange that there are no required market makers and for every seller there has to be a buyer *and* that at 10pm GMT *they have to settle their contracts*.
Run that on a simulation without bank loans or a stupid central bank worrying about 'liquidity' and you'll find it is self limiting
Post a Comment