Rags to rupees

India wants its own currency symbol.

The rupee is certainly a strong, and storied, currency, but if China doesn't even have a standardized keyboard and the euro sign isn't yet really universal, what chance does the rupee have of making it as a globally recognized symbol?

The development of a common market (Pakistan, Sri Lanka, and Nepal) would certainly help; bringing together more than a billion people using the same currency in a volatile region would promote greater market integration and freer trade within South Asia. Though not very likely, if implemented, such a momentous change would help to ensure a little more political stability in the 'hood and it just might make for a lasting rupee (and symbol).

(Photo from 8en)

Mo' Rubles Mo' Problems

Amidst the spring-time clouds and snow over the Moscow sky, there appears to be one bit of good news: the ruble, for now, seems to have stabilized, defying the critics of the Kremlin’s ruble stabilization program. When I was in Russia just two months ago, every stop at the ATM was like a special delivery from Ded Moroz, as the RUB/USD rate dropped from 29 to 32 in 8 short days. In the spirit of the season, I decided to do my part for the economy by “donating” my extra 10% of purchasing power to the fine brewhouses and eating establishments of St. Petersburg.

Yet, before we start celebrating, we should keep in mind that movements in the ruble have correlated almost entirely with movements in the price of oil, which is really the only marketable Russian export (in addition to vodka, defunct ideology, and depressing literature), and thus the indicator for the overall Russian economy. As crude has now stabilized above $40/bbl, so the ruble has stabilized below the euro-dollar basket of 41. This is a good thing, but it can also create an illusion of stability and economic upturn. Meanwhile, inflation continues to soar in Russia, outpacing other Eastern European countries. While inflation has picked up, salaries, both nominal and real, have been falling, and consumption has dropped sharply – it has even hit one of the most rock-solid sectors of retail! Sadly, many of my friends have recently had to choose between leaving their jobs or taking pay cuts of up to 50% - one friend tells me that her employer has not even paid her in the past 2 months, and she has taken out a line of credit to fund her basic living costs.

This last part is particularly worrying, especially since ruble stabilization has necessitated a significant rise in the already sky-high interest rates for personal and business loans at Russian banks. Faced with double-digit interest rates, Russians have done what many in the former Communist bloc have done over the past few years – take out loans in foreign currency, particularly in Euros, at much lower rates. This was great when emerging markets were booming, but now that currency devaluation has hit, consumers and businesses are struggling to make payments, with the latter raising prices on goods. Already in Russian cities, most real estate rental prices are set in Euros. As small businesses get hit with higher real costs for rent and loan payments, prices continue to rise. Moreover, as confidence in the ruble continues to wane, the desire for holdings (and lending) in foreign currencies grows still.

What is the Kremlin to do? Lowering interest rates on loans below the current 13% inflation rate would effectively mean government subsidization of lending, and would drive further devaluation of the ruble, and price inflation for imported goods. While this could cause a further flight of capital from Russia and could plant the seeds for ‘90s era economic chaos, it could also stimulate lending and growth, if coupled with prudent policy reforms, particularly toward small businesses which are drowning in bureaucracy and corruption. It might also cost the Kremlin less, and be more effective, than continuing to subsidize banks who then speculate against the ruble in the Forex markets. Keeping interest rates high, however, may create the illusion of stability, but will surely continue to stifle growth, and will hurt ordinary Russians most. In any case, winter in Russia may not end for some time to come.

(photo from Alcoyotl's photostream)

Poland solves economic crisis by going back in time

Poland deserves some recognition: they brought us Lech Kaczyński (left) and Jarosław Kaczyński (right). In 2006, Lech, the president of Poland, appointed his twin brother Jaroslaw as Prime Minister. While dutifully manging the fragile coalition government and promoting a conservative Christian agenda, the duo became overnight YouTube sensations (as well as the butt end of a new wave of politically charged one-liners). In 2007, the Law and Justice party that was co-founded by the twins lost its majority in Parliament and Jaroslaw, became leader of the opposition. Lech will continue to serve his five-year term as President until 2010.

On February 10th, Poland set another precedent (unless you consider Medvedev Putin's twin) by announcing a solution to the country's currency problems. The economics minister, Waldemar Pawlak, announced that the Polish government will pass a law allowing companies to renegotiate currency option contracts established last year. Back then economists believed Poland's currency, the zloty, would continue to strengthen into 2009 and threaten Poland's export industry. These companies had the option of purchasing currency in advance at prices below the predicted value. Had the currency continued to appreciate, these companies would have been able to continue to sell products overseas at more competitive prices than the predicted exchange rate would allow. This was before the economic downturn. Now these companies are holding currency options priced well above the going rate. According to the Economist, the zloty has lost nearly 37% of it's value against the Euro since 2008 and led to cumulative losses estimated at $5 billion. Many of these companies face bankruptcy and or failure.

To solve this crisis, the Polish government is going to allow businesses to retroactively renegotiate or simply back out of their currency options. In this scenario, the burden of the currency decline will weigh more heavily upon banks and save many companies from catastrophe. Aside from the legal mess that this will create, the move is flat out sketchy business; not unlike appointing your own brother to a top political office. Laugh all you want, but these backwater politics just may stave off the collapse of the country's export industry.

Lech Kaczyński Photo via the President of the Republic of Poland
Jaroslaw Kaczyński Photo via the Chancellory of the Prime Minister

Devaluing the rouble

Last month, the Bank of Russia announced a floor under the rouble. So much for that. The floor was already tested this week and the central bank is burning through reserves faster than Putin does ABBA cover bands. On the surface, we would expect Russia to have little difficulty in defending the rouble, given the substantial accumulation of foreign exchange reserves in recent years (high commodity prices + booming exports + the long shadow of the 1998 rouble crisis = big time reserves). But look a little deeper, and that cushion isn't quite a comfortable as it appears.

In fact, Russia is in big, big trouble.

The Russian government didn't anticipate the sudden, rapid decline in commodity prices (to be fair, few did), and it is now struggling to balance its obligations amidst declining revenues and FX earnings. Its 2009 budget relies on $95/barrel oil, and billions of dollars have been committed in support of the banking sector (not to mention the money provided major companies crippled with debt). Defending the rouble and supporting the banking sector/companies alone consumed approximately 40% of Russia's FX reserves since summer 2008, and were a major factor in the Fitch downgrade on Wednesday. If the government's recent actions are any indication, Russia's foreign exchange reserves will come under increasing pressure in 2009. It delayed discussions on amending the budget, and publicly stated that it won't make any cuts to this year’s spending. With social instability spreading, it is unlikely the government will make any significant cut to the budget over 2009-2010. Furthermore, its new crisis strategy directly targets the banking sector, which should be applauded, but will require a significant amount of capital.

Which brings us back to the rouble. The central bank's ability to defend the rouble will be seriously constrained by the budget and banking sector support. Its decision to gradually devalue the rouble, as opposed to allowing it to freely fall to its market equilibrium, has proven ill advised and sacrificed a greater share of foreign exchange reserves than was otherwise necessary. Little official debt, falling imports, and the complacency of the Russian elite would have made a single devaluation possible. But now the central bank is in a bind; let the rouble fall and you risk a loss of confidence in the central bank, keep defending it in the hope that the oil price recovers and you play a dangerous game of Russian roulette (no pun intended).

Russia's spending and banking sector support are necessary under the current economic and financial conditions. The market already expects a further devaluation of the rouble; artificially supporting it is a losing battle that only increases the risk of a serious run on the currency and drains its foreign exchange reserves. Russia should set the rouble free.

(photo from melted snowball's photostream)

The new administration's approach to China

Most foreign governments have rallied behind the call brought forth by President Obama to restore the spirit and the strength of the United States - even the Chinese (though with a few concerns I will outline here). While most are looking forward to a "new chapter" and anxiously awaiting an opportunity to embrace the forthcoming change, there is cause for some nations to wonder what the rejuvenation of America will bring. After just a few days under the Obama administration, it is clear that China has become one of these, cautiously optimistic, nations. No one is overlooking the longstanding issues between China and the US: especially, China's human rights record, environmental standards, public censorship, fixed currency, and increased military spending. Not listed however, may be a bigger and more subtle challenge for the Chinese: both the United States and the Chinese have developed an insurmountable political ego. A renewed global, American presence means these two countries will inevitably step on each others toes.

Not suprisingly, this happened within minutes of President Obama's Inauguration. During the live broadcast of the Inaugural address, Chinese officials moved quickly to censor remarks on communism and fascism, in addition to a call for an end to the "silencing of dissent." For most of us watching in the United States these comments elicited historical nostalgia, but word of the Chinese censorship highlights how drastically the American worldview differs from the Chinese. In a country where a large portion of the population sees their brand of communism as a centerpiece of national pride and lives a separate struggle for prosperity, it is unlikely that such references would have been well received. More importantly, an educated audience would know that President Obama's words had less to do with the communism we see in China and more to do with American history and its historical rival. What is intriguing, is that the omission of these comments may have been a favor to the United States, in addition to a precaution meant to quell a growing sense of nationalism in China that could easily turn on either government. For the Chinese, it is possible that letting a stab at communism pass without notice would just be plain bad form. China would like to display President Obama as the charismatic leader that he has become and avoid the possibility that the public might falsely interpret his comments as opposition to the Chinese political system.

Post-inaugural remarks were decidely more focused, both in tone and detail. Timothy Geithner's statement to the Senate during his confirmation hearing directly accused China of manipulating its currency. Some sources are claiming the statement marks the beginning of a new era - one of hard line approaches to China's economic policy. China's adjustable currency rate has long been an issue among economists, but why did Geithner bother to bring it up now, except to please Senator Charles Schumer? Especially as the response was no small matter - when the Deputy Governor of the People's Bank of China politely reminds you that the widespread consequences of the current financial crisis and the trade imbalance in the United States will not be leveled by a mere currency revaluation, China means business. That friendly reminder definitely cost a few treasury bonds. Of course Tim Geithner wants our "major trading partners to operate with a flexible exchange rate system" and for "market forces [to] determine the value of the exchange rate." But I am certain that in the future, the Chinese will be quick to remind Mr.Geithner that he can't have everything he wants.

There are plenty of other issues for the United States and China to butt heads over, but I believe that the ball is in China's court. Tibet has been off the radar since negotions between the Dalai Lama and the Chinese came to a standstill and the world is already well aware of the floating smog cloud over the entire continent of Asia. (Also, our environmental woes are now officially mutual: note the literal "Collapse of the Clean Coal Myth" just days ago). However, there is one issue that China has made progress on faster than the Obama Administration likley expected. This is affordable health care. On Wednesday, China announced that it will bring Universal Health Care to 90% of the population by 2011 and spend as little as seventeen dollars per person. This is tough to believe, but if China can pull this one off, then touché. We have our work cut out for ourselves.

(Photo of Chinese currency from toesoxluver's photostream)

Ouch

A surging dollar is great if you’re a consumer. But if you’ve recently moved back to the United States from the UK and still hold most of your assets/get paid in Sterling, it’s… not so great. I just realized that in the last six weeks, the tumbling GBP (against the USD) has wiped out about 8% of my savings. Ouch.

Ironically, after studying the Politics of Money in the World Economy for an entire year, I’ve broken one of the major rules of international finance: wherever possible, match the currency of your assets with that of your liabilities. Now who said grad school was a waste of time?

(Photo by Tracy Olson)

Inflation woes

The Central Bank of Zimbabwe is set to lop some more zeroes off the Zimbabwe dollar. They knocked off three back in 2006, and this round is set to see another 3-6 zeroes get the chop. Excuse this humble commentator for his cynicism, but when the annual rate of inflation is above 2.2 million per cent, this isn't going to help much. It will likely improve transaction efficiency for a short period of time, but unless Zimbabwe takes some concrete steps to rein in inflation, sooner than later the currency will be just as worthless as it is today.

Venezuela tried this trick last year, when it introduced the Strong Bolivar, which President Hugo Chavez promised would help curb inflation. A 'Strong' Bolivar is essentially just a normal Bolivar, Venezuela's unit of currency, with three zeroes lopped off. Unfortunately, Venezuelan inflation has actually gotten worse since then, reaching 32% in Caracas in the month of June.

I wrote last month about how inflation is fast becoming a major financial worry. This is especially true in developing countries and emerging markets . As painful as the medicine may be, now is the time when such countries should be prioritizing inflation control over economic growth. The short term losses are undesirable, but the long term dangers are too real to ignore. Keynes said it best:

As inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundations of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

It's troubling when there exists such chronic financial mismanagement in economies like Venezuela and Zimbabwe, which could both be in much better shape than they are. But they're not, and unfortunately it is the citizens of those countries who pay the highest price for that.