Authors: Dr. Matthew Crosston , Andy Deahn
Russian President Vladimir Putin has loudly projected that his nation and the other Caspian nations will leave the dollar behind. Mr. Putin has exclaimed that the United States runs a “Dollar dictatorship” when it comes to global market oil prices and affirms that his nation’s currency will not become a victim subjected to its rule.
In order to combat this “dictatorship” attempts have been made to enhance relations with China in order to integrate both the ruble and the yuan into the global market more dominantly. His belief is that in doing so he will weaken the dollar while strengthening both national currencies. However, Mr. Putin is potentially committing a mistake, as he is generally associating a strong currency with national strength and views the decline in the ruble’s value as an offense against Russia’s prowess. These are clearly political statements used to project an aura of strength that disregard the economic realities facing the Kremlin. Rather than take meaningful counter-actions so as to create positive momentum and strong economic stimuli, Putin sometimes seems more focused on capitalizing on his celebrity status to ‘tweak the American eagle’ as it were. Putin’s “projection” as stated above can thus be observed as an attempt to manufacture a sense of Russian exceptionalism that will counter the ‘insult’ that he considers as a constant American exceptionalism on the global stage. However, these geopolitical playground battles do not outweigh the realities of the world economy and how Russia needs to create serious policies to deal with sanctions and weak oil prices.
While China is Russia’s largest trading partner and has become the world’s largest consumer of fossil fuels — a vital aspect to Russian economic health — the Chinese financial crisis that occurred in August 2015 has weakened the Yuan, consequently placing increased pressure on the Russian economy as well. The Chinese economic meltdown and the resultant devaluation of the Yuan held global implications. From Wall Street to Venezuela to Saudi Arabia, economic downturns were observed. On Wall Street the drop in the stock market created panic among brokers/investors and in Saudi Arabia and Venezuela a drop in oil prices impacted their economies rather severely, given both have bet some of their financial futures on China’s continual thirst for commodity imports. Russia, however, which exports approximately 14 percent of its annual oil production to China, has a lot more to lose from the Chinese economic decline. This is because oil and natural gas are at the heart of the Russian economy. These commodities account for over 75 percent of export revenues and over 50 percent of government budgetary resources. The Russian ruble, which is directly linked to global oil prices, has been steadily decreasing in value throughout the last 12 months. This direct link is identified through the correlating data of the market price for oil and the value of the ruble to the U.S. dollar. For example, the market price for oil dropped from $104 USD per barrel to around $50 USD per barrel from September 2014 to September 2015. At the same time the value of the ruble, which in the beginning of September 2014 was 36 RUB to 1 USD, had slipped by September 2015 to 68 RUB to 1 USD—a steep devaluation rate not seen since the 1997 global financial recession.
In addition to having the value of its currency decline, for every dollar that global oil prices drop Russia loses an estimated $2 billion a year in revenues. When combined with other harmful realities like Western sanctions, Russia’s relative dependence upon a singular commodity market, and lavish spending rather than modernizing its energy sector during high oil prices, it is clear that Russia pontificating about a ‘dollar dictatorship’ should not be its focus. Indeed, there is something of a flawed logic in the premise: why does President Putin believe he can leave the dollar behind by tying the punished ruble with the declining Chinese yuan? In the near-term at least this strategy is destined to fail.
One regional influence Russia is also somewhat disregarding (or making too many positive assumptions) in this endeavor and that will potentially become of greater geopolitical importance is the Islamic Republic of Iran, now that the new nuclear accord has been struck and many sanctions lifted. By hedging their bets too heavily on China and disregarding up-to-the-minute regional economic shifts, Russia is possibly inflicting its own monetary wounds while uselessly blame-shifting on America for its economic woes. The lifting of Iranian sanctions would mean that Russia could face a newly invigorated, oil-producing, heavyweight regional competitor, one that could reshape the power balance in the Caspian Sea Region and may not necessarily be willing to be as close an ally to Russia as Russia assumes it will be.
A more economically and politically independent Iran, and its ability to influence regional power shifts, would allow for the other Caspian states to modernize and diversify their economies. This would mean that Turkmenistan and Azerbaijan may finally be able to break free of the Russian influence that has basically engulfed them since the Soviet era by building the Trans-Caspian pipeline. Likewise Kazakhstan, a nation whose economy is also built upon the same commodity market as Russia, may finally be able to lessen the havoc that the Russian currency decline is playing within its own borders. Right now there are few analysts seriously considering these potentialities, both here in the West and within Russia. This is an error. Russia clearly thinks the new nuclear accord will lead only to improved ties and deeper economic prosperity for both itself and Iran. But there is ample historical evidence to consider that an emboldened and newly stabilized Iran simply might not need Russia as much as Russia needs it. This future reality could signal a dramatic change in the Russian-Iranian relationship, and not to Russia’s favor. The longer Moscow assumes this is a geostrategic impossibility and that its only concern is battling the ‘dollar dictatorship,’ then the Kremlin only creates more danger for itself.
We already know that a devalued yuan is further assisting oil prices to drop on a global scale, placing great strain on the Russian economy as well as on some bordering Caspian states. Historically, when the Kremlin feels threatened, it shifts blame to other scapegoats rather than seriously tackling its problems. The current sharp slowdown of Chinese economic growth has already impacted multiple Russian economic sectors, including energy, metallurgy, timber, and agriculture. The future alliance with Iran is not an automatic guarantee. Western sanctions still grind along. The Caspian littorals may see opportunities to loosen Russia’s economic grip over their local economic standings. Clearly, plenty of ‘real’ problems exist. So it would behoove Russia to stop spending time on economic fantasies of ‘dethroning the dollar dictatorship.’ That seems to be the least of its real problems.
Afreximbank Meets Ahead of Russia-Africa Summit
The African Export-Import Bank (Afreximbank) plans to hold its 26th annual meeting in Moscow on 18-22 June. A series of closed sessions will be held as part of the event including the meeting of Board of Directors of Afreximbank and a meeting of Shareholders of Afreximbank, as well as the open Russia-Africa Economic Conference.
The African Export-Import Bank, the Roscongress Foundation, the Ministry of Finance of the Russian Federation, and the Russian Export Centre are the key organizers of this event. The Afreximbank Annual Meetings is a high-level event, bringing together political and business leaders from across Africa to discuss the issues of trade, industrialization, export, and financial stability and efficacy.
Key themes planned for the economic conference are: State of Russia-Africa Relations: An Overview; Mining Industry: An Integrated Approach to the Fields Development; Prospects for Multilateralism in an Era of Protectionism; Railways Infrastructure as the Key Element for Development in Africa; South-South Trade: Path for Africa Integration into the Global Economy.
The other topics are Emerging Trends in Sovereign Reserves Management; Reflections on the Transformative Power of South-South Trade; Launch Afreximbank ETC Strategy; Cyber Solutions and Cyber Security for Solving Governmental and Municipals Tasks; Financing South-South Trade in Difficult Global Financing Conditions; The Future of South-South Trade and Infrastructure Financing.
Over 1,500 delegates are expected to attend the economic conference, including shareholders and bank partners, government representatives, members of the business community and media representatives. The conference will be a crucial stage in preparation for the full-scale Russia-Africa political summit and the accompanying economic forum, scheduled for October 2019 in Sochi.
“Russian and African countries are basically on the track of bilateral strategic partnership and alliance based on openness and trust. The fact that the Afreximbank Annual Meeting is to be held in our country gives a positive momentum for the mutually beneficial cooperation of the parties ahead of the full-scale Russia-Africa Political Summit that will take place in Sochi in October, and will add to the inclusive nature of the events,” emphasized Anton Kobyakov, Advisor to the President of Russian Federation.
Following the setup of the Organizing Committee for the Russia – Africa summit and other Russia–Africa events in Russia in 2019, Russian officials have described that this year truly as a year of Africa for Russia.
“We witness the clear growing interests from the both sides to establish the new level of relationships, which means a perfect timing to boost the economic agenda. All economic events planned for this year will become a platform to vocalize these ideas and draw a strong roadmap for the future,” Russian Export Center’s CEO, Andrei Slepnev, argued in an emailed interview with Buziness Africa.
In December 2017, Russian Export Center became a shareholder of Afreximbank. Russian Export Center is a specialized state development institution, created to provide any assistance, both financial and non-financial, for Russian exporters looking for widening their business abroad.
On March 19, the Organizing Committee on Russia-Africa held its first meeting in Moscow. President Vladimir Putin put forward the Russia-Africa initiative at the BRICS summit (Russia, Brazil, India, China, and South Africa) in Johannesburg in July 2018.
The silent revolution
Jamaica is well known for its beautiful beaches, Bob Marley, and reggae music. But what is less known is that the Caribbean island started a silent revolution after being one of the most indebted developing countries in the world. Jamaica has shown a macroeconomic turnaround that is quite extraordinary.
As Bob Marley said, “It takes a revolution to make a solution”. After decades of high debt and low growth Jamaica has changed its growth trajectory, with positive economic growth for 16 consecutive quarters and growth getting closer to two per cent.
During that period, the Jamaica Stock Exchange went up more than 380 per cent.The credit agency Fitch upgraded the island’s debt to B+ rating with a stable fiscal outlook, and unemployment hit eight per cent in January, the lowest in decades.
The Government had a wake-up call when its debt overhang peaked at almost 150 per cent of GDP in 2013. With the support of the International Monetary Fund, the World Bank and the Inter-American Development Bank, the country embarked on an ambitious reform programme. These efforts have paid off. Jamaica is now one of the few countries that has successfully cut public debt by the equivalent of half its gross domestic product in a short time frame.
The fiscal turnaround and economic transformation were possible because of the strong commitment across political parties over two competing administrations and electoral cycles. The country also critically benefited from a sustained social consensus for change and the strong backing of the private sector.
The country has generated primary fiscal surpluses of at least seven per cent of GDP for the last six years, and remains steadfast in its commitment to fiscal discipline. These fiscal results make Jamaica a top performer internationally.
For this silent revolution to continue and bring greater prosperity to all its people, Jamaica will need to further boost the investment climate, strengthen economic and climate resilience and invest more in its people to build human capital. These are necessary complements to the maintenance of a strong macroeconomic framework and would help boost economic growth and job creation. There are encouraging signs that Jamaica is taking action in these areas.
With regard to the business climate, the National Competitiveness Council has adopted a road map to fast-track reforms to improve the business environment. Jamaica features in the top 20 countries in the world for its comprehensive credit reporting systems and ranks among the best globally in the area of starting a business, according to the World Bank’s 2019 Doing Business report. It only takes two procedures and three days for an entrepreneur to start and formally operate a business.
There have been advancements on public-private partnership investments. For instance, the Norman Manley International Airport public-private partnership was recently completed with advisory support from the International Finance Corporation — the private sector arm of the World Bank Group.
Jamaica is also a front-runner among Caribbean countries in promoting climate and financial resilience in the face of natural disasters. The economic cost of these disasters for the Caribbean is substantial, exceeding US$22 billion between 1950 and 2016, compared with US$58 billion for similar disasters globally. One serious storm or natural disaster could set back the country’s growth prospects and development achievements of recent years. To tackle this, the Government has adopted a Public Financial Management Policy Framework for Natural Disaster Risk Financing to facilitate the availability of dedicated resources for recovery in the face of disaster risks.
In order to further support Jamaica in its efforts to strengthen the economy, build resilience, and support human capital development, the World Bank will expand its financing by US$140 million. This financing package will be for a series of two operations to help Jamaica be better prepared to mitigate the financial impact of natural disasters and build stronger infrastructure, and an additional project to strengthen social protection.
Despite unemployment at a new low, still too many young people are struggling to find a job. For Jamaica to continue to grow and prosper, it also needs to develop the skills for the workforce of tomorrow, especially in the areas of technology and digitalisation. This requires a sharp focus on creating the conditions for youths to strive and succeed in the modern business world and close cooperation with the private sector in this respect.
Today, more than ever before, young Jamaicans can dream of a brighter future where “every little thing is gonna be alright”. This is the generation that must aim higher and can write a new chapter for its country.
As we celebrate the 55th anniversary of the World Bank-Jamaica partnership, we look forward to working together to build on the success of the past few years and promote growth, jobs and resilience for Jamaica.
With or without sanctions, Iran needs to say goodbye to oil money
Except Norway, almost all oil producing countries have made themselves more or less reliant on oil money.
Only oil producing countries with a small population, such as Kuwait and Qatar which is also a great gas exporter, have so been safe from fluctuations in the oil market. But, countries with large population, such as Iran, are prone to volatility in the oil market, let alone the mad sanctions introduced against the country.
There is no doubt that oil money has affected politics, economy, management system, culture, spending and consumption habits and many other issues in oil rich countries.
For example, Iran now has one of the cheapest energy prices in the world. This has led to an extravagant use of energy, especially an excessive use of private car, in the country.
Let’s make an example to clarify that oil money is not the road to progress and a vibrant economy. In the 1970s, Iran was more developed than South Korea, but now South Korea is much more successful than Iran in terms of economy and technology. South Korea does not have oil, but it has provided an opportunity for a competitive economy and capitalized on its talents.
It is true that the war imposed on Iran in the 1980s hindered Iran’s progress and inflicted about 1 trillion dollar in damages on the country, yet officials failed to take serious steps toward creating a competitive economic atmosphere with a focus on research and technology. The oil money has been the main blame for such an economic approach.
According to the successive five-year development plans which end on 2021, Iran had to reduce dependence on oil to a great extent, however, successive administrations, with varying degrees, did not fully act based on the development plan.
Iran is now subject to the toughest ever illegal sanctions by the Trump administration. Just on April 22, the United States ended sanctions waivers on Iran’s exports and announced it wants to zero out Iran’s oil exports by May 1.
Whether the Trump administration succeeds or not to implement its oil threats is an issue that we should wait and see, but it is necessary that Iran take a departure from oil export how much painful it will be.
Sorena Sattari, a graduate of Sharif University of Technology who serves as vice president for scientific affairs, told a meeting in Hamedan on Tuesday that sanctions have provided an opportunity that knowledge-based companies to intensify their efforts. Sattari also said plans have been drawn up to manufacture equipment and machinery that are subject to sanctions.
Also, whether we like it or not, fossil fuels, especially crude oil, are losing their importance as renewable energy resources are gradually taking the center stage.
Saying goodbye to easily-gained oil revenues is a bitter pill that Iran should swallow. To do so, though very difficult under tough sanctions, officials need to find other sources of income.
They can invest on tourism as Iran is among the top countries in hosting touristic sites, establish an environment for a transparent competitive economy, close loopholes of corruption, involve competent persons in managerial posts, introduce a sound and workable tax system, end unnecessary subsidies, and more importantly prioritize research and development (R&D).
First published in our partner Tehran Times
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