Saturday, December 27, 2008

Brief Break

Dear Readers,

This blog will be on break until mid-January 2009. Thanks for reading!

Sunday, December 14, 2008

A Bad Financial Week for Russia

Sources: Bloomberg, Ruble Suffers Biggest Weekly Plunge Against Euro Since 2000; Financial Times, Rouble Exodus Hits Russia Credit Rating; Financial Times, Minister Warns Russia Faces Recession; Bloomberg, Klepach Clarifies Statement on Russian Recession

Facing the shrinking of foreign reserves that until recently were some of the largest in the world, the Russian central bank widened the band within which the ruble can be traded for the fifth time in a month on Thursday. The ruble fell 3.2% against the euro this week as investors rapidly pulled money out of the country in fear of falling oil prices. Banks are also rushing to replace rubles with dollars or hoarding their rubles, which makes the $200 billion government bailout plan largely ineffective. Forecasts range from a fifteen to twenty-five percent fall of the ruble against the euro-dollar basket by the end of 2009, and at least one large investment bank is calling for major devaluation in January. The problem is that though Prime Minister Putin promised that Russia will let the exchange rate adjust gradually, using its reserves to avoid sharp movements, the current economic situation makes gradual depreciation very difficult.

This follows Monday's ratings downgrade, when Standard & Poor's reduced Russia's foreign currency credit rating from BBB+ to BBB due to depletion of foreign exchange reserves and troubles finding external financing due to the financial crisis. Standard & Poor's warned that Russia may have to spend all the money in its Reserve Fund and National Wealth Fund, two sovereign wealth funds that were supposed to guarantee prosperity for future generations, in re-capitalizing the banks and covering fiscal deficits over the next two years. Low oil prices will pressure the trade balance, and balancing the budget over the next few years will be a much tougher challenge for Russian legislators. This is the first downgrade of a G8 country's rating in the present crisis.

On Friday, the Russian Deputy Economic Minister admitted that Russia is facing a potential recession of more than two quarters, though he quickly clarified his statement to mean slowing economic growth rather than an economic contraction as the term is used in the United States. If there is a recession, it would be the first for Russia since August 1998, but the Deputy Minister did not provide specific forecasts for the slowed growth.

Also on Friday, Russia suspended trading on the MICEX exchange. Prices fell 5.6% before the suspension in reaction to another oil price drop, bringing the index's value down a total of more than seventy percent since May.


1) Do you think Russia should adopt a more flexible exchange rate policy, rather than drying up its reserves defending the currency, or is Putin's avoidance of a sharp movement smart policy?
2) Do you think that the current slowing growth will compromise all of Russia's phenomenal growth over the past ten years, so that the cycle will have to restart again, or can smart policy decisions get it quickly back on the road to sustainable growth?

Monday, December 08, 2008

Argentina Moves to Expropriate Spanish Airlines: Investors throughout Latin American Grow Wary

“Spain’s Bets Sour in Latin America,” The Wall Street Journal, Dec. 4, 2008 at A13
“Argentine House Passes Airline Expropriation Bill,” The International Herald Tribune
“Argentina One Step Closer to Expropriating Airline,” Financial Times

In the wake of the Argentina’s seizure of private pension funds from banks, as addressed in a prior blog, new nationalistic actions of the leftist Argentinean government continue to surprise spectators and concern investors. Last week Argentina’s President Cristina Kirchner, with the approval of the lower house of Congress, pushed plans to expropriate two airlines owned by Group Marsans SA, a travel company based in Spain. The measure now heads to the Senate, where it is expected to pass easily. The confiscation of Aerolíneas Argentinas and a smaller airline, Austral, comes with a transaction of $1 peso (.30 USD) to be paid by the Argentinean government to Marsan. The governments of former President Néstor Kirchner and now of his wife Cristina Kirchner have followed a strategy of renationalizing key public services since 2003. To legally expropriate, or “nationalize,” a company or property in Argentina, the Argentinean the government needs to show only that the expropriation is “of public utility.” The two Spanish airlines operate approximately 80 percent of domestic flights in Argentina, and President Kirchner argues that those airlines are “for public use.”

This expropriation is yet another step for Kirchner in her vow to reverse free-market policies, largely at the expense of foreign investors. Spain-based companies have been hit particularly hard populist economic policies throughout Latin America. The Wall Street Journal lists Repsol YPF, SA, Banco Bilbao Vizcaya Argentaria SA and Banco Santander SA as a few of the Spanish companies whose assets have been nationalized or contracts torn up in Argentina, Venezuela, Bolivia and Equador. Critics of these populist policies warn that such actions revive tensions regarding the “Conquistador” sentiment towards Spain – leaders like Venezuela’s President Chavez use the centuries old “Conquest” of Latin America by Spain to blame Spanish and other foreign investors today for economic ills. Such “Conquest” rhetoric is strategically used by Latin American populist leaders and is triggering greater nationalism throughout the region. Companies from the United States have also fallen prey to Latin American “Conquest” rhetoric. For example, Venezuela forced U.S.-based Verizon Communications, Inc. to sell its stake in a Venezuelan telecommunications company to the government.

Said nationalization actions propel a divergence between Latin American countries when it comes to reception of foreign direct investment (FDI). Companies from Spain and other countries continue to invest heavily in the region. However, investors have grown wiser and warier through their experiences with countries that advocate state intervention in industries. In 2007 FDI in Latin America reached a record USD $106 billion, and nearly 80 percent went to pro-business countries nations such as Mexico, Brazil, Chile, and Colombia.

1) How might the populist policies of countries like Argentina and Venezuela affect other, more pro-business countries in Latin America?
2) How do you perceive nationalization of private companies? Might it be the best move for a country's citizens at the time, or is nationalization an unacceptable interference with private property?

Sunday, December 07, 2008

Spain Takes Flack for Guantánamo Involvement

Sources: Financial Times- Notes Implicate Spain in Guantánamo Flights; El País- Accomplices of Shame

Early this week, letters surfaced showing that officers of the Spanish officials aided the C.I.A. in transporting prisoners from Afghanistan to Guantánamo following the U.S. attacks on the Taliban and al-Qaeda regimes in 2001. In the letters, officers from the Ministry of Defense affirmed support for the U.S. and urged that Spain be discreet about its role in extra-territorial rendition. The letters have spurred a renewed court investigation regarding the extent and consequences of Spain’s involvement.

According to Spain’s leftist newspaper, El País, the prisoners were detained without charge and trial on U.S. military aircrafts that utilized Spanish airbases and airspace. The article further asserts that the former populist government, headed by José María Aznar, destroyed evidence of the collaboration between Spain and the U.S.

Internal party politics have undoubtedly played a role in the timing of the leak. Aznar prided himself on strong ties to George W. Bush, thereby alienating the majority of Spanish voters. Spain’s current government, led by socialist prime minister José Luis Rodríguez Zapatero, disassociated himself from Bush in 2004 by withdrawing Spanish troops immediately following his election. The Populist Party is accusing current foreign minister Miguel Moratinos of jeopardizing national security and diplomacy by leaking the letters. They also claim that 9 of the 11 U.S. military flights that actually landed in Spain since 2001 were during the first term of Zapatero’s administration. Zapatero has repeatedly denied any knowledge of U.S. military flights stopping in Spain on the way to Guantánamo.

What consequences should Spain face for its involvement? What role should the UN play?

Monday, December 01, 2008

Crisis or No Crisis, Development Must Go On

Sources: IMF Survey, IMF Presses Donors to Maintain Aid Flows Amid Crisis; United Nations, International Conference on Financing for Development

In March 2002, 250 leaders from around the globe met in Monterrey, Mexico, to discuss international development. The meeting was sponsored by the United Nations (UN) and was the first time that a large number of international leaders met with representatives from the UN, the International Monetary Fund (IMF) and the World Bank (WB) to discuss development. The meeting produced the Monterrey Consensus, a document which is now referred to as the most comprehensive and authoritative statement of principles of international development that leaders from both the developing and the developed world have subscribed to. After the summit meeting, developing countries experienced an economic surge that some attribute to the unprecedented cooperation that took place in Monterrey.

The UN scheduled a Follow-Up Conference from November 19th to December 1st in Doha, Qatar, to review the Monterrey Consensus. In light of the ongoing global credit crisis, much of the meeting has focused on the financial aspect of international development. The meeting's program indicates that participants will discuss topics such as foreign direct investment, trade, mobilization of domestic resources, and other ways in which countries may work together to finance development.

Some fear, however, that the developed countries attending this meeting will feel that their hands are tied with the problems that their respective economies are facing as a result of the crisis. IMF Director Dominique Strauss-Kahn has voiced his concerns that fears resulting from the credit crisis will derail the progress that developing countries have made since the Monterrey summit. On December 1st, he issued a statement urging developed countries not to forget that there are other kinds of crises, like the food and fuel crises, that have for long threatened the health and safety of those who live in developing countries.

The key to the Doha conference, from the IMF's point of view, is that developed countries should resist the temptation to scale back on external assistance because of the strains that the credit crisis has caused on their budgets. Crisis or no crisis, the goal of this meeting is to reaffirm the international community's commitment to development. According to IMF leaders, the fact that the credit crisis has spread so quickly demonstrates just how inter-connected international economies are. Contributing to international development, they argue, is thus beneficial for all involved, because it will make the global economy stronger and better able to respond to other crises that may arise in the future.

Discussion Questions:

1- The Monterrey summit meeting took place six years ago. Do you think that this is the proper time to review the Monterrey Consensus? Do you think the UN should have set an earlier date for the Doha conference?

2- It's hard to tell, at this point, just what the long-term effects of the current financial crisis will be. If you were one of the leaders attending the conference, how would you weigh your uncertainty about the current crisis against the possible benefits of international development to the global economy?

OPEC Postpones Further Cuts Until Next Meeting

Sources: OPEC Paves Way for Production Cut This Month, Financial Times; OPEC to Hold Yet Another Meeting—In Cairo, BusinessWeek; OPEC Confirms Consultative Ministerial Meeting in Cairo November 29, Tehran Times

OPEC, the supplier of forty percent of the world’s oil, held a meeting on November 29th in Cairo, coinciding with a gathering of Arab oil ministers already scheduled for that day. Although oil prices continue to plummet, OPEC agreed to defer further output reductions until its members comply more fully with cuts agreed on over the past three months.

The members that have failed to fully comply are nations that need higher oil prices to balance their economies, such as Venezuela, Iran, and Nigeria. Other OPEC members, such as Saudi Arabia and the Gulf states are better-able to handle lower prices, although Saudi Arabia has indicated that it would like to see prices rise back to $75 a barrel.

Though further cuts were avoided this time, there was a general consensus for action at OPEC’s next meeting on December 17th in Algeria. Some analysts have indicated that the decision to postpone another production cut until December will result in a significant fall in prices in the upcoming days.

However, although prices have continued to fall, markets don’t seem to believe that the low prices are here to stay. The forward price for oil five years out remains in the $80 a barrel range. But until then, OPEC will likely hold a plethora of meetings and make additional production cuts in an attempt to keep prices from heading into the dreaded $30-$40 a barrel range.

Discussion: Is it fair for OPEC to require less wealthy members, such as Nigeria and Venezuela, to comply with cuts before it will make further output reductions? Will the current global credit crisis put a strain on the organization? Was the seemingly pointless meeting in Cairo primarily an attempt to promote and showcase the organization’s continued cohesion?