Maybe Russia should have talked to the China …
Via Felix Salmon and Marginal Revolution comes word that Yegor Gaidar thinks the Saudis — not Star Wars — broke the back of the old Soviet Union in the 1980s.
Russia — as has become very, very clear recently — is a big energy exporter. Back in the 1980s, the Saudis decided to defend their share of the global oil market even if meant lower prices. That wasn't good for the old Soviet Union. It quickly exhausted its commercial credit lines, and, well credit from Western European governments came with political conditions.
"Government-to-government loans were bound to come with a number of rigid conditions.For instance, if the Soviet military crushed Solidarity Party demonstrations in Warsaw, the Soviet Union would not have received the desperately needed $100 billion from the West."
Apparently government-to-government bond purchases don't come with similar conditions. Either that or China just is far more generous than Europe ever was back in the 1980s.
After all, Chinese purchases of Treasuries and Agencies currently provides the US with a wee bit more than $100b in credit annually, without either economic or political conditions.
For that matter, Russia — the heir to most of the Soviet Union — is on track to provide the US with a $100b credit line in 2007 as well. Its reserve are currently growing at an annualized pace of over $200b a year (they are up $100b in the first five months of 2006), and about half are still in dollars.
Putin called for a new international economic order last weekend (via Drezner):
"Mr Putin said the world needed to create a new international financial architecture to replace an existing model that had become “archaic, undemocratic and unwieldy."
In some deep sense, I suspect Putin already has helped to create a new international financial architecture.
This new international order is just dominated by big national institutions — SAFE and the PBoC, the Bank of Russia, the Saudi Arabian Monetary Agency, the Abu Dhabi Investment Authority and the like — not big international institutions. The international financial institutions of the old international economic order — the IMF for example — are still around. But they don't have as much influence as they once did.
The IMF's total lending capacity is about $200b. China will add at least twice that to its reserves (or to the state investment company) this year. That truly is a profound change in the world's financial architecture. And it may auger future changes on the world's political architecture. More on this later.
An excellent and frightening post! It seems Russia has unequivocably joined the global currency game. Ironically, the US trade deficit may have stabilized due to reserve diversification. But it will be very interesting to see what the EU will do as it gets pushed rapidly into deficit.
The context in which Putin made these remarks is often forgotten. Remember, Russia is trying to enter the WTO this year. Another point which economist types seem to forget and us IPE types keep pointing out is that what Russia is proposing is nothing new–any of my undergraduate students would point this out! We already have a New International Economic Order (NIEO), a G-77, and a Non-Aligned Movement (NAM). If you want to, you could probably throw in the UN Conference for Trade and Development (UNCTAD) in there as well.
Aside from having a former “great power” proposing that it lead an Eastern European bloc in a so-called New NIEO for self-serving purposes, there is little new here. It’s better to focus on Russia’s WTO accession chances, IMHO.
Alcohol prohibition also helped to bring about the collapse of the USSR. During 1985-1987 Mikhail Gorbachev carried out an anti-alcohol campaign (prohibition). Production of vodka by the state was reduced substantially or eliminated. . Many famous wineries were destroyed and plantations of grapes uprooted, often of precious cultivars. Alcohol products and consumption went to the black market. State budget revenues, which depended much of alcohol consumption taxes, fell sharply. Given the inflexibility of State planned expenditures, a large budget deficit emerged. It was financed by Central Bank monetary expansion, resulting over time in the collapse of the Ruble and in large scale inflation. On the subject of the new international financial order, if political will existed among the USA and other powers, the IMF could be converted to a Central Bank of Central Banks, with SDR as the Reserve Asset of choice. On June 14, the exchange rates were: 1 USD = 0.664414 SDR and 1 SDR = 1.50509 USD. Thus the SDR can mop up (esterilize) excess liquidity in dollars, if Central Banks were to convert their excess (unwanted) dollars into SDRs.
From The Futurist:
“Last fall, we asked former CIA director James Woolsey for his take on ending the oil era.”
One question and the answer from that interview:
“Futurist: What obstacles stand in the way of Western nations, particularly the United States, reducing their dependency on foreign oil?
James Woolsey If you remember, we got interested in alternative fuel firms like the Synfuels Corporation in the late seventies and then in 1985, the Saudi’s dropped the oil down to $5 a barrel and bankrupted the Synfuels Corporation. The good news is that they bankrupted the Soviet Union, too, but they certainly undercut alternative fuel efforts. People got interested in alternative fuels again in the early nineties, then in the late nineties, oil dropped down to $10 a barrel and people lost interest, again. One of the things that we have to do is make sure that this rollercoaster effect can’t happen again.”
“…”We import two-thirds of our oil, but 90 percent of our uranium,” said Jack Edlow, a Washington businessman… “I can’t say ‘energy independence’ with a straight face…” http://www.nytimes.com/2007/06/12/business/12nuke.html?pagewanted=2&ref=business
“…the Russian Atomic Energy agency is looking into developing floating reactors built on pontoons. The Russians envision a product that could be towed into ports in the developing world and hooked to the local power grid, for a fee. “We are, generally speaking, the absolute monopoly here,”… Sergei B. Ivanov, said of the floating reactors. “Nobody apart from us is able or knows how to build them.” http://www.nytimes.com/2007/06/12/business/worldbusiness/12nuclear.html?ref=business
Although I agree Putin’s comments could be looked at as an echo of times past, what’s different now is the growing ability of Russia (China, etc.) to impose a NIEO whether the US likes it or not.
Maybe talking to Japan first: “…Japan is stepping up efforts to win greater access to Russian oil and gas, cutting its dependence on Middle Eastern supplies, to break an impasse over a territorial dispute and boost trade. Closer ties with Russia may also help efforts to persuade North Korea to drop its nuclear weapons program, boosting regional security. “Stability and sustainable development in the Russian Far East and eastern Siberian areas are fundamentally important for Japan and other neighboring countries…” http://www.bloomberg.com/apps/news?pid=20601080&sid=aiCzWTA.hyuY&refer=asia
1 June 2012 - “…Conditions in our business have not been easy in the five years since we first issued securities on the NYSE. To many unit holders, who bought into the [IPO] and are now sitting on a large capital loss, that may seem like an understatement… Activist investors have demanded that we change the status of our listed “units” into normal shares, with voting and other traditional rights accorded to shareholders. This is not acceptable to us. Nor can we comply with the demands by our Chinese minority investors for senior management changes. Instead, my partners and I are offering to purchase all the Group’s outstanding common units. Although the offer is well below the flotation price…” http://www.breakingviews.com/freestory.aspx?e=c0i28yU35q0
Japan’s current-account surplus surged in April as income from the country’s overseas investments set a record high for that month.
The surplus in the current account, a measure of Japan’s trade in goods and services and its investment income, rose 50.3% from a year earlier to 1.987 trillion yen ($16.32 billion) before seasonal adjustment, the Ministry of Finance said.
It was the fourth straight month of increases and beat economists’ average forecast of a 35.8% gain.
April’s rise was largely because of hefty income from overseas securities and actual business investments, which rose 41.5% to 1.561 trillion yen.
“Levels of the income surplus are already very high,” said Taro Saito, a senior economist at NLI Research Institute. “As long as a weak yen trend continues, the income surplus will likely keep expanding, which, in turn, pushes up the current-account surplus.”
Capital outflows resulting from foreign direct investment were 1.596 trillion yen, up sharply from 170 billion yen a year earlier. Much of the money was directed to Europe, where the figure rose to 1.143 trillion yen from 65.9 billion yen.
Unless you think that oil prices will keep on rising strongly in coming years, forget about Russia as a medium to long-term actor in the global currency game. Admittedly, they have been adding reserves at record speed in recent month, but their imports are also growing at around a 45 percent annual rate right now. Ergo their current account surplus, though big, is melting in the sun like snow - contrary to China’s which is growing by the day. Also, Russia is not going to see much export growth anytime soon. They are only competitive in raw materials and raw material based manufactures (think steel) - and the largest part of exports are hydrocarbons anyway. OK, they are going to see some export growth in non-hydrocarbon raw materials, but given that they have buggered up a large part of their oil industry (and their gas industry has been a desaster for years) it is hard to see where strong export growth would come from.
Also remember that they will have elections soon. At least temporarily this will dampen the enthusiasm with which capital has been flowing in recently, further slowing reserve accumulation. Finally, given that inflation is rising, they will probably also allow for more real appreciation, reducing the amount of foreign currency the CB has to goobble up. Short, reservewise the real action is going to be in Asia.
By the way, contrary to what the press made out of it, the fact that oil helped bringing down the Soviet Union is not really news but fairly well known in the profession.
bureaucrat — i basically agree. the forces are in places to dramatically reduce Russia’s current account surplus, barring a further rise in oil (or base metals) –notably from the ongoing rise in imports. but the notion that even for a year Russia might see its reserves rise by $200b is something of a change …
Russia has gone from having nothing in the bank to having $400b heading to $500b in a remarkably short period of time.
Brad, I obviously agree that Russia has recently been raking in reserves on levels and with a speed never seen before, and - so to say - has become a big player in the premier league of reserve accumulators. Just wanted to stress that contrary to China that’s less of a structural and more of a special situation.
Hi all,
I fear that the historical presence of the IMF in Washington is playing against the interests of the american people.
Face it. The financial future of the country is really extremly grim. The danger zone is nearing at a speed noone who have ever considered a couple of years ago.
Americans still believe they can nominate the IMF boss. This is going to be a bad joke. A very bad one.
A European who doesn’t like it AT ALL
re: “contrary to China that’s less of a structural and more of a special situation”
not questioning your insight and expertise, would greatly appreciate further insight into your take on China vs. Russia reserve accumulation.
and is it feasible to compare 10 billion ‘Blackstone’ dollars with an equivalent dollar value of Chinese or Russian or other ‘reserve dollars’ or IMF dollars (even without getting into voting or non-voting or controlling shareholder issues) as it would seem that the real and potential political and market value of each holding is greatly affected any number of factors and priorities that are unique to each entity.
or D.E. Shaw dollars: “…it’s become critical that… we work with policy makers, regulators, and market participants to promote the robustness and stability of… the financial system more generally…” http://home.businesswire.com/portal/site/google/index.jsp?ndmViewId=news_view&newsId=20070612005332&newsLang=en
Have to disagree about China’s and Russia’s future reserves. The price of oil and natural gas is going nowhere but up. What’s more important, travelling to work and heating your home, or playing with plastic toys? Not that China isn’t moving up the value-added chain. They are. It’s just that they are dispensible. Russia’s commodities are not. Additionally, the world is going to need to a military counterweight to a hyperactive hegemon too greedy for its own good. The Russian arms industry sounds like a good bet to me.
“The Harvard Endowment is making its first substantial foray into the Middle East, by teaming up with a regional investment bank to raise a $1bn fund for investments in local markets… Set up in a hedge fund structure, the fund… is hoping to capitalise on the expected recovery of local equity markets, which spectacularly crashed last year… “Harvard is putting its brand name on the fund. While it’s not involved in raising money, if you say one of the most prestigious endowments is putting substantial capital in the fund, you can raise capital on the back of that…” http://www.ft.com/cms/s/9cf3e418-1395-11dc-9866-000b5df10621.html
The Swansong of Ben Buckbuster Bernanke
http://jessel.100megsfree3.com/DXLT.png
“I am not Paul Volcker, nor was meant to be…”
Guest,
re your question on reserve accumulation China vs Russia. Simplifying somewhat, the main point is that China’s current acount surplus comes from it exporting ever more stuff, whereas the Russian current account surplus mainly comes from the fact that oil and other commodity prices have risen strongly in recent years. Unless you assume that there is a general trend for oil and other commodities to keep rising substantially (which of course is possible, though I have some doubts as to whether we will see a lot more of that, apart maybe from some food items), that means that Russia will not see much of export growth in coming years. On the other side, China is likely to experience further strong export growth (unless we get a full fledged trade war).
Given strong import growth especially in Russia, this basically means that the Russian CA surplus is set to disappear in a not too distant future, whereas the Chinese is likely to be around for quite some time.
Rumor has it that Chinese VAT rebates (for exports) will go through major adjustment by 7/1. Exports (and trade surplus) will be going through the roof in June. But we should see the surplus abate in the second half of 07, hopefully.
Perhaps it was neither the Saudis nor Star Wars—but the discovery and exploitation of oil in the North Sea. This started in the early 1980’s.
Britain and Norway—democratic, capitalist and strong NATO allies—found oil and pumped it at maximum commercially feasible rates. Secondarily, Cantarell was discovered in Mexico.
And now, North Sea oil production is crashing rapidly, as is Mexico’s biggest oil field.
And not coincidentally, Russia is rising.
The Chinese belied the notion that capitalism and trade will lead to freedom. Ruthless Capitalism-Leninism works.
so Putin complains about something being _undemocratic_?? this guy being so happy about the “new order” is kind of spooky
I appreciate your reply Bureaucrat
but to respond with another thought, it is my understanding that China’s export industry is enormously dependent on, of course, healthy external markets and absolutely dependent on a steady supply of resources, including potable water, and the technology needed to compete and improve margins. Landscapes in various parts of the world are still littered with the shells of crumbling industrial facilities which were suddenly abandoned due to policy errors that yielded crippling supply shortages and changes in markets, political, demographic and economic circumstances.
Along with Russia’s abundance of resources, perhaps like the U.S., it has a wealth of control mechanisms, IP, technology and external assets which serve as underlying sources of strength but may not be reflected in that data. With a great many questions about the transparency of Chinese external investments, but on the surface it sounds like Chinese investment is not welcome in many parts of the world, or only accepted with terms that restrict influence over assets.
A general question - how can China be a developing country and a wealthy world power at the same time? Is Russia still asking for, or receiving assistance from the likes of the World Bank? Why would China be in a position to be consulted about the new world order when it is still receiving assistance from the old one, in spite of stories like this:
Enslaved, burned and beaten: police free 450 from Chinese brick factories:
- Children among captives forced to work for no pay
- Local officials accused of colluding with traffickers
http://www.guardian.co.uk/china/story/0,,2104336,00.html
U.S. Sets Rules to Limit Technology Exports to China
http://www.bloomberg.com/apps/news?pid=20601080&sid=azmsVVygoBcQ - “In recent weeks representatives of software, aerospace and other U.S. businesses told U.S. Treasury officials that the rules, in the works for two years, may backfire against U.S. exporters and inflame relations with China.”
Oded Shenkar - The Chinese Century
He also mentions that the number of science and technology PhDs produced in Asia now surpasses the number produced here. (Furthermore, half of US PhD recipients are foreign nationals.)”
http://infoproc.blogspot.com/2005/03/oded-shenkar-chinese-century.html - “Shenkar points out that before the US surpassed England to become the world’s largest economy (150 years ago), the British regarded Americans as cheap labor, and felt confident about their superior ability to innovate
There seems to be hard evidence that Chinese officials use, or facilitate the use of Chinese citizens as their own pool of cheap / slave labor.
And that many of the foreign nationals (with legitimate degrees) stay in the U.S. where they can get jobs, admittedly for those who return, there has to be a technology leakage issue - whether or not or how that knowledge can be applied may be another question.
“…Figures vary, but the size of China’s higher education system appears to have at least quadrupled in the last decade as the nation has pushed relentlessly toward building a modern economy. Next spring, Chinese colleges and universities expect a record 4.95 million graduates, up 820,000 from this year. More than a million of them will wind up jobless, according to estimates. The glut is leading students and colleges to what might be considered acts of desperation…”
http://www.chinadaily.com.cn/opinion/2007-01/03/content_778128.htm
“…There is no scientific data available about the exact severity of the problem, but a 2000 estimate put the nationwide figure of falsified diplomas at 600,000. Some people say that empirical evidence points to a rising ubiquity of the phenomenon. Someone with a backpack walking outside a downtown book centre in major cities is often approached by vendors of fake diplomas. Online, things are even worse. A Harvard Ph.D. diploma is sold for only US$100. For counterfeiters who manufacture these look-alike documents for a living, education certificates are just one product line out of a whole pool of fake stuff, which may include fake invoices, product labels or any printed matter…” http://www.chinadaily.com.cn/en/doc/2003-10/08/content_269943.htm
The China Daily article reads almost exactly like many articles written in the US regarding the value of college degrees including masters and doctorates. Here are a couple of quotes:
-”Around her swirled thousands of other recent and upcoming college graduates from all over China, all competing for a limited pool of jobs.”
-”In Guangzhou recently, 286 graduates and post-graduates competed for 11 positions as street cleaners, according to the official New China News Agency. The city hired one candidate with a PhD, four with master’s degrees and six with bachelor’s degrees.”
-”Given the already grave employment situation in the country ¡ the employment pressure on university graduates will be obvious,” Wang Xuming, a spokesman for the Ministry of Education, said at a recent news conference.”
-”A college education is a long-term investment,” said Tang Min, the chief China economist for the Asian Development Bank. “You have to think about your lifetime.”
Those quotes sound awfully familiar…