Can the Russian Central Bank Stop the Rouble's Fall?
Within summer and autumn 2014 Russian rouble fell almost twice relating to other currencies, first of all, US dollar and euro. This happened as a result of sanctions applied to Russia by the international community. The sanctions, in turn, are a response to Russian support of separatist movement in the Eastern regions of Ukraine. Due to the sanctions prices for oil, which makes over 70 % of Russian export (World Development Indicators, 2014), decreased almost twice. Consequently, the balance of trade in Russia changed and the rouble got devaluated.
The Russian Central Bank does its best to stop the fall. The raise of interest rates slows the devaluation down, but cannot solve the problem of trade misbalance. Vice versa, the policy of supporting the rouble is essentially wrong. The devaluation of the Russian currency stimulates export-oriented branches of economy, which may improve the trading balance of the country, making it less dependent on the oil and natural gas export. Instead of foreign currencies interventions to the market the Russian Central Bank should simply release the exchanging rate. It will rise to a certain economically determined level and stop. This measure, or absence of measures, will improve the economic situation, the devaluation will stop. The market is a self-balancing system (Turnovsky, 2000) and exactly it should fix the exchanging and interest rates of the rouble. Of course, such action will decrease the standard of Russian people living and the level of their income, but the economy will recover.
Thus, the best measure of the Russian Central Bank to improve the situation with the rouble is its withdrawal from the market. It will support the export-oriented branches of economy and restore the trading balance of the country. However, such policy may increase the level of social stress in the society, since it means the shortening of Russian people’s real incomes.
Why Do US Public Pension Funds Carry So Much Risk?
Except social functions (guaranteeing the safety of person’s savings) US pension funds carry out investing activities. Pension funds are a powerful source of long-term investments to the economic system of the USA. However, same as other financial institutions US public pension funds carry certain risks.
The structure of the US public pension funds investments includes typical instruments of the financial market, which have different levels of risk (Cannon & Tonks, 2013). The least risky investments are state securities, such as federal government and treasury bonds, but the latter are not very profitable. Pension funds must be more lucrative than bank deposits; otherwise people will start giving their money to banks. As a result, pension funds start investing in more risky instruments, e. g. shares of companies and corporative bonds (Mercado, 2012). Making these investments the pension funds analyze financial indicators of the companies, but no indicators have 100 % of probability.
The risks are often not dependent on the investor or even the company itself. Except the very firm and its marketing positions the fund must also pay attention to the development of its competitors, perspectives of demand for its production and many other factors. Besides, the risks include perspectives of the whole branch, to which the company belongs. For instance, the appearance of mobile telephony caused stagnation among firm of wire communications. Finally, the most dangerous type of risk is based on government policies of particular countries. For example, Russian interference in the Ukrainian affairs greatly increased the risks of foreign investors in both countries. American companies try to withdraw their business from there, and it may decrease the shares value. Consequently, pension funds investing in these companies may suffer losses as well.
In conclusion, high risks of the US public pension funds are connected to their wish to become more competitive. The desire to attract more clients often results to increase of risky, but profitable investments.
OPEC Caught in Prisoners' Dilemma
Oil prices have been going down all through the year. The price fell by more than 30% and it seems to be continued. The process of price decrease can be slowed down through a well-organized teamwork by OPEC. If the supply of oil in the market becomes less the prices will raise – it is a basic marketing law. Thus, to restore the previous level of pricing OPEC must convince all of its members to reduce the exported amounts. However, such a reduction is not profitable for many of them. A dilemma appears for these countries: to keep to the requirements of the organization and expect higher benefits in future or to get immediate profit, but to lose in the long-term perspective.
The main OPEC drawback is different interests of its member countries. Saudi Arabia and other Arabian Peninsula states are underpopulated with vast oil reserves and large foreign investments (Yergin, 1991). The Arab countries stand for the common OPEC policy, since it will help to keep marketing prices stable. Other OPEC members, like Nigeria, are overpopulated and have a high level of poverty. These countries have large international debts and have to produce as much oil as it is possible (Owen, Inderwildi & King, 2010). Even temporary reduction of output may seriously hit their economic situation and trading balance. Fall of prices makes such countries only increase the volume of production to avoid default. Of course, they also want the prices to increase, but they cannot afford output shortening.
So, the main question to be solved is how to go out of this deadlock. Probably, one of the possible solutions is to provide the poorest OPEC members with funding or credits from the organization. The credits will compensate the losses of the poor countries in the short-term perspective. After the price level restoration, they will be able to pay the credits back to the organization. Such measures will not just help to increase the oil prices, but will also demonstrate the OPEC unity and mutual aid of its members.
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