Financial Overview Plus

A change in strategy or uncontrollable consequences?

2008-11-26T15:15:00.000-08:00

As was previously mentioned in my earlier blog, the trend of the rouble forced the government to introduce massive injections into financial system. After that did not work out, the central bank started to get rid of its dollar reserves in order to generate extra liquidity to finance its support policy. After a mo central bank was spending $1.6 billion every week to try to alter the currency trend. #

This however also proved to be ineffective and government is now claiming that this devaluation of rouble is planned and controlled. The rouble is undergoing a very difficult stage when oil prices collapse and foreign investors try to pull out its funds from the emerging economies. While the central bank along with Prime Minister Putin claims that is a first step of a series of technical decisions it is very unclear whether the government is still able to recover the currency afterwards. Significant injections lowered the government liquidity which is risky with the currency being under pressure.

Pumping in money is not enough…

2008-11-14T15:46:00.000-08:00

Russian central bank has been injecting significant chunks of funds into the economy which by mid November added up to over $55 billion. This policy was forced by the general downturn in the economy beginning with the rouble followed by the decrease of RTS index. Devaluation of the currency meant that imports became much more expensive. Since the internal production has been suffering from the days of communism the country is very dependant on imports. Now the effects of that can be extremely felt by the SME’s.

A rapid change of plans by the central bank from the strong currency support position to its devaluation raised question marks whether it is still under control The initial injections into the economy limited further government actions to battle the crisis. Global way of fixing the situation proved to be decreasing interest rates to encourage public spending. Most of the European central banks including Britain chose this policy to help small businesses to recover from the global shock. In Russia, however things are a lot different. After the collapse of the currency and massive injections into the economy, public spending only increased. As the result the central bank was virtually the only one in the world to increase its interest rates in order to target rising inflation levels.

Tired battling the crisis? Here is a solution…

2008-11-10T16:13:00.000-08:00

As we all already know the credit crisis affected not only the global banking sector but virtually paralysed economies in many countries around the world. With the recent significant reduction in interest rates adopted by the Bank of England last week it became clear that British government is now trying to encourage spending and borrowing to promote economic stabilisation. This reduction happened as a part of a rescue plan which incorporated a privatisation of risky assets by the government to “free up” the banking sector.

In other countries such as Russia things also went not so in favour of economic stability. The central bank also attempted to pursue various rescue measures like extra financial injections in the economy. However, due to lack credibility of the government and generally negative investor environment foreign and domestic investor chose to pull out funds from the Russian market. According to the report of Russian finance minister the outflow of cash reached just over 50 billion just over the past month. Here is a way to tackle the crisis according to the Russian Prime Minister Putin. Today he called for an unusual meeting of all the key figures in the finance sector alongside with the law enforcement officials. Prime Minister Putin order off to initiate a thorough check into “possible illegal activities” which could happen in the circumstances of crisis. His called for an immediate action from the law enforcement agencies such as FSB (former KGB) in case of a “suspicious” activity. He also pointed out the fact that transferring money abroad is perfectly legal transaction however later he added that financial institutions that transfer “significant” amounts abroad will not be granted the special low rate loans from the governmental banks. So how is this for a way to tackle cash outflows?

So who is responsible?

2008-10-26T06:09:00.000-07:00

The former head of the Fed, Alan Greenspan, speaking at a hearing in the U.S. Congress, acknowledged that he is "partly" to blame for the shake of the world financial crisis. He confessed that he had underestimated the risk of rejection of strong regulation of derivatives and other risky financial instruments. In his forecast, the world after the crisis will live without them, and thus will have less risk of a giant soap bubbles to emerge. "

"We are middle of the credit tsunami, which occurs once a century" - the former head of the Federal Reserve System (FRS). Alan Greenspan began with a reminder that even in 2005, he warned that the prolonged underestimation of the risks would have "terrible consequences". "This crisis, however, was much broader than anything I could have predicted - he continued .- I do not see how we could prevent a substantial increase in unemployment." According to him, due reduced consumption, Americans are sending an increasing proportion of their income on savings. Indeed, because of falling stock market has dropped the amount of pension savings (401K plan), as well as the cost of homes - for U.S. citizens are usually the largest portion of savings.

What is happening to rouble?

2008-10-24T14:49:00.000-07:00

The first signs of the devaluation of the rouble came to light in early September. After a massive government injection of $3.4 which followed after a decrease in rouble trends. The rouble, which has been strengthening against the dollar amid high oil prices for most of the year, came under pressure as foreign investors stepped up their exodus from Russian money markets amid a flight to US Treasuries and the dollar.

After the massive injection in the system by the central bank rouble is still showing bad results. This fact is exposed to the Russian public which starts to be increasingly worried. Falling rouble forces Russians to acquire more dollars which even worsens the situation. Moreover, central bank is starting to sell its dollar reserves to provide extra funds to support its falling currency. Although the government is trying all the possible means to stabilize rouble, it does not seem to be working.

Confidence weakens in the Russian financial sector as a result of the global crisis

2008-10-23T07:56:00.001-07:00

By the end of the trading day the decline in RTS and MICEX Russian indices greatly accelerated. This happened as a result of the statement of international rating agency Standard & Poor's (S & P) on the revision of forecasts for Russia sovereign ratings from "stable" to "negative". As a result, the rating for Russia could be downgraded. According to S & P, this can be associated with the declining confidence in the financial system.

At the moment, long-term rating of Russia in the foreign currency remains at "BBB +" and short-term - at "A-2". Among the reasons which made S & P to take such a step was the uncertainty of economic policy and the impact of global financial crisis. In addition, if the active support of government banks will be further pursued, the country’s rating can be significantly decreased. In addition, analysts expect defaults in the financial and corporate sector in Russia. The situation maybe much worsened by the current trend on oil prices which is experiencing a significant decline lately.

The reaction to the statement by S & P followed immediately. By the end of the trading RTS index fell by 4.39% (636.54 points), and MICEX fell to 5.63% (592.75 points). The leaders among the declining companies were Gazprom, Rosneft, Tatneft, as well as Serbank Russia.

Who will come out “clean” from the crisis?

2008-10-15T10:23:00.000-07:00

In the recent interview to the German newspaper Die Welt the American billionaire George Soros claimed that China will be the “winner” of the global financial crisis. He described that the origins of the crisis, that "mortgage bubble" was only a trigger that caused the collapse of the economy. It also explains why, despite all the measures taken, the administration of U.S. President has not yet been able to cope with the crisis.

"The key to understanding this crisis - the most serious crisis since the 1930's - is the recognition that it was created within the financial system. What we are experiencing today is not the effects of external shocks that disturb the equilibrium, as stated in the theory. In practice, it turns out that destabilize financial markets themselves, "- Soros explained.

According to him, "from time to time markets tend not to equilibrium, and the imbalance. My theory is different from the perception on two issues: first, financial markets do not reflect the fundamental economic indicators, they distorted the market. Secondly, this distortion in the financial markets may affect key indicators - as in the case of bubble or collapse. "
"Financial markets are functioning well indeed. Their instability affects the real economy, not vice versa. Now it is not only about the mortgage bubble. He was the only trigger that led to a major bubble burst. This super bubble, inflated increasing loans and debts, as well as the belief that markets correct themselves, grew in 25 years. And now it burst ", - explained Soros.

One of the main reasons for the crisis to grow to the present extent was the incorrect approach towards the problem by the Bush administration. The finance office failed to target the growing disaster at its very origin. In this view I agree with Mr. Soros on the basis that the finance office relied on the common perception of the financial market that is able to “fix” itself. No preventative and precautionary measures were developed after the fall of Bear Sterns and therefore American economy was absolutely not prepared for the strike. Moreover, if one was to monitor the actions the US finance minister Paulson one might notice that on every stage of the development of the crisis the office failed to introduce preventative measures.

Over the plan was not working. When the consequences of Lehman’s bankruptcy were obvious, Paulson urgently had to do something to save AIG. After a day the stock market was in ciaos. But he did not want there to take money. He wanted acquire bank’s illiquid assets "- Soros said.

So what is the way out of the crisis according to George Soros?
The billionaire suggests stages which should resolve the crisis and put the world economy back on its track:

1. Firstly, the administration is ought to recapitalise the financial system by acquiring bank assets.
2. The major process of inter bank loans must commence. This can only be encouraged by various government guarantees on transactions.
3. Thirdly, it is vital reform the U.S. mortgage system making sure that mortgage is not higher then the price of a house. This will encourage to slow down the decrease in mortgage prices.
4. Europe must ensure high position of euro.
5. Finally, it important to revitalise those world economies that suffered the most from the crisis which should be the job of the IMF.

Why China?

The main objective of the global financial policy is to prevent a worldwide recession. As a result of the crisis the US and Europe banks will be nationalised in the most part and will be having huge debts. Whereas, in peoples republic of china will become a new financial empire simply because it will be able to invest the markets worldwide and therefore acquire assets.

"The Chinese over time will have much of the world assets, as they transferred their dollar reserves and deposits in the U.S. into these assets. This will change the balance of power. The shift of power towards Asia will occur as a result of America over the past 25 years of sins" -- Soros concluded.

China may play a vital role in solving the world credit crisis

2008-10-09T11:07:00.000-07:00

China which holds the world largest reserves may play in important role in reserving the crisis. According to the premier of the state council of People’s Republic of China, the biggest contribution for the salvation of the crisis could be preservation of China’s economy which is the fourth biggest in the world.
Bearing this in mind Chinese authorities already adopted a new policy to decrease interest rates. Furthermore there are rumours that soon the Chinese authorities take on a promise to hold its dollar assets with the country and even try to increase them. This is to be done in order to help the US finance its $700 billion bail out plan which was adopted by the congress. This policy is of a benefit to China due to the fact that over two thirds of its reserves (the total volume is $1.8 trillion) consist of American bonds.
In return for this policy Beijing demands an easier access for the Chinese companies onto the US market and moreover it also wants to increase its influence in international organisation such as the IMF.
According to the market experts the peculiarity of the Chinese economy is that it is less influenced by capital flows. Besides, its financial system possesses quite a lot of liquidity and its poorly developed banks have internal focus.

What are the benefits of the credit crisis for the U.S?

2008-10-08T11:22:00.000-07:00

Earlier this year there were talks about a significant decrease in the U.S oil consumption. Some speculate that this trend was provoked by historically high oil prices and that consumers tend to save on its expenses on gasoline which reached $3.5 per gallon. Today the world consumes 85 million barrels of oil daily which is supplied by state controlled oil giants in countries like Saudi Arabia, Iran, Russia, Venezuela and Nigeria. The biggest oil consumers such as India and China ensure that the current pace of their economic will only force the price to increase in the coming years ultimately forcing the United States to engage in more expensive oil contracts.
The current global credit crunch which originated from the U.S now influenced almost every economy on the planet. In such conditions most of the banks suspended their inter bank activity fearing negative return on investment. With global banking system paralyzed it is now hard for businesses to continue their development resulting into a global economic slow down or in some cases even risks of recession. Consequently, the “world factory” China has been showing alarming slowdowns in the economy. But how is all that of a benefit to the U.S?

A slowdown in production or more to say a huge decrease in the demand for oil triggered worries in oil producing countries. In Russia for instance, several emergency meetings were held by the ministerial cabinet to resolve the situation. A decrease in consumption of oil had an impact on its price and here it is important to mention the so called “oil break even price”. For most of the oil producing countries a huge chunk of their budgetary profits come from the oil dollars. Depending on the level of development and other technical aspects most of oil exporters work out their oil break even prices to balance out their balance of payments. For the world leading exporter Saudi Arabia such price is around $30 per barrel and for Kuwait for instance the figure is even lower and comes down to $17 per barrel. However, in the instance of Russia such break even level is currently at $70 and if the oil should decrease its price below this point the economy of the country will be in recession.

Today there are expectations that the implications of the global crisis will lower oil price down to $60 per barrel which will be a killer for Russian economy. Now, there are two aspects in this for the U.S. Firstly lets speak about the political aspect. Over the past years Russia has created a massive network for supplying energy to Europe and Asia. With high self confidence Russian authorities stepped onto a confrontational and at times aggressive foreign policy which was provoked by the U.S plans to establish military bases equipped with missiles in the neighbouring Russia countries. The second is economic factor. This decrease in oil price will not keep the Russians occupied but even might put the country at the doorstep to economic collapse altogether. As a result, the current crisis will allow for the oil price to decrease and create a perfect opportunity for the U.S to engage in new cheap oil contracts.

S&P downgrades Russia

2008-09-27T16:03:00.000-07:00

Following the central bank’s announcement that it will review the licenses of more than 129 banks around the country the Russian banking sector entered panic mode. Throughout the country mutual trust among the banks has deteriorated and banking activity slowed down significantly. However that was the least of their worries. After lowering Russia’s credit rating S&P has downgraded the rating for 5 leading banks in the country. “It will be harder now for banks to show the same level of profit and ensure the same level of business growth.”

This announcement only worsened the situation in the sector raising significant concerns over the Russian economy and the banking sector. These worries triggered international investors to pull even more funds out of the country (the first step was the 5 day war in August). While investors are pulling out funds and inter- bank activities slowing down Russia is facing a difficult situation. Constantly decreasing liquidity levels may force injections in the sector which may lead to high inflation.

Global financial crisis decreases Russia’s oil incomes

2008-09-27T13:29:00.000-07:00

Russian authorities are becoming more and more concerned about current situation in the country’s oil industry. Leading Russian analysts are predicting a serious decrease in oil profits in the coming months due to the global financial crisis. Nezavisimaya Gazeta mentions that due to current financial difficulties investors are not able to provide funds for the development of new oil fields which forces the producers to shut down investment projects. Russia being highly dependent on its oil exports could have serious budgetary problems in the future if the oil price falls under the pre calculated price of $70 per barrel.

Russia’s deputy minister of energy Sergei Shmatko claims that newly adopted government measures such as a huge decrease in export taxes should stabilize the situation in the sector and encourage the main oil producers not to change their investment policies. However, one of the leading Russia’s oil producers LUCOIL announced on 21 September its plans with regards to its plans to modify its investment policy. “We are forced to alter our investment policy because it was initially calculated with the oil price being $105 but not $90 per barrel ” says Vagit Alikperov, CEO LUCOIL.