Rant on Currencies and Trade

**cyppok** · 12 Nov 11,, 17:44

Hello this is my rant in figuring out how things work. Most of this is my opinion although I do link to historical things for background.

About 2-3 years ago there was an interesting occurrence. Remember the whole 700 billion dollar bailout and all that, well this is not about it per se.

This is about Russia devaluing the ruble (from about 25 to 35 to $1)
Ruble Hits 11-year Low As Russia Accelerates Devaluation - Money Morning more or less and then the ripple effect hitting Ukraine which went from around ~5.5 to $1 dollar to 8-9 then stabilized around 8 it has now with IMF backing. Poland went from around 3 to $1 dollar to 3.80 more or less. A lot of it was due to oil prices being at ~40 bucks a barrel and trepidations about repeat of the 90s.
Foreign Currency Market | Bank of Russia
Notice the ripple through was about 20-33% devaluation through the countries. The timeline is a bit disjointed though because first Russia devalued then months passed for it to effect Ukraine and eventually Poland.
Ukrainian hryvnia slump. Devaluation of Belarusian ruble unavoidable - Charter'97 :: News from Belarus - Belarusian News - Republic of Belarus - Minsk

UPDATE 1-Ukraine fails to clinch IMF deal as mission leaves | Reuters

Fri Nov 4, 2011 10:35am GMT
Analysts say the absence of IMF financing, which was supposed to boost central bank reserves by about $1.5 billion per quarter, is likely to increase the depreciation pressure on the hryvnia .

The central bank spent over $2 billion in September to keep the currency pegged at about 8.0 hryvnias per dollar while the euro and the rouble devalued.

During the past several years Russia has been moving to free-float the ruble. If they actually do it and let go, long term it would be a good thing. The volatility short term particularly in light of their WTO entry (right now) is what my thoughts revolve around.
Belarus ruble sinks 34% in full free float - FRANCE 24
Belarus went full-free-float it seems, granted it was under duress but the fact remains.Rouble hits two-year low - Roubles.com - Russian Rouble News
Are we going for a repeat with slightly different outcomes?

The reason why Ukraine was saved in the prior event was due to exposure by Austrian and Hungarian banks which bought into the boom boom years and paid exorbitant prices for Ukrainian banks. In essence the IMF bailout for Ukraine was to save Austria to a large degree.

Trade flow questions are even more odd. If the Ruble falls and the Russian gov't decides to simply let it free-float because sustaining it would be more damaging and assume we get a 10-20% devaluation that must ripple through Ukraine (which is using what remains of its unencumbered reserve to hold the hryvnia upright) and then Poland and to some degree Baltics (which were effected the last time around as well).
Idea behind this ripple effect has on competitiveness in these countries price wise (for their goods that are not dollar tied [energy]) goes up significantly. Wages fall since their currencies fall and prices for their goods fall on world market. Another factor this time around would be the Russian wto entry, while in reality it gives Europe more entry into the market if the devaluation occurs as the marginally increased deployment into the market happens on the margin a lot of good prices would be less competitive since their prices would increase and continue to increase short term. So imagine your a German company that has 5% of its tea pots exported to Russia and with WTO entry the tariffs and prices you can charge Russian consumers go down so you can export 10% tea pots but as you ramp up production and ship those goods the devaluation happens making those teapots 25% more expensive in relation to the price they were prior WTO joining. Same thing would happen with Ukranian and Polish markets and due to trade gravity it would happen faster there for Germany at least. Now ripple this across the Eurozone on the margin it would dent growth prospects even further.

Absurd thoughts are as follows every country that is not Euro bound would shift their position during this event by the amount of exposure it has to the Eastern markets to cope. Sweden, Danes, Baltics, UK, in essence all of them would ramp up pressure on Eurozone to devalue as well to remain competitive.
Would someone actually be prompted to prop up a free floating ruble? zloty? hryvna? Also due to WTO entry Russia can funnel Kazakh/Belarussian and even Ukranian items (yes Ukraine entered WTO but gave up concessions on all issues more or less), now they slap a made in Russia sticker on it and it goes somewhere in Europe provided standards are more or less up to par. Most large Ukranian companies have manufacturing presence in Russia btw so it's isn't far fetched to pretend to make more stuff in a different area your company is present in since the territory is contiguous... Please keep in mind that all this is marginal pressure. There won't be a flood or anything just a little stream that undermines gains projected from WTO entry calculus.

I'll add more as it gets thought up.

Catalysts thus far that create interesting things... (keep in mind its not the overall but marginal impact that counts)

*Devaluation of the Eastern European countries due to trade
*Default of Belarus
*Default of Ukraine
*Russia's WTO entry (still don't know how this plays out)

**snapper** · 13 Nov 11,, 13:58

With Russian WTO entry their companies will have a hard time (at first) competing with Chinese, Indian and Western companies. It is more likely, at first, to increase foreign investment and force them to sort out their red tape and corruption issues, as otherwise the investments become too high risk. Short term for their own food and industry companies they are unlikely to find alot of export markets as by and large they are not competitive. It would make sense for a slight devaluation of the rouble until these competitiveness and other issues are dealt with. However thanks to it's gas and oil resources Russia runs a surplus and is has money to spend (they were asked to buy into the EFSF). They could, if they chose, defend the value of their currency with their reseves or just by marginaly increasing the cost of gas.

Ukraine we have discussed before privately and I pretty much agree that a default is likely here, but they will just have an IMF renogiation and the default will be 'structured' a la Greece with more bank refinancing in Europe and elsewhere. Presumably some Ukrainian banks will fail and become 'nationalised'. In many ways Ukraine is another Greece/Italy outside the system so it retains the option to print/devalue it's way out of the corner. Again though Ukraine has similar uncompetiveness and official corruption issues as Russia (I could tell you an amusing story about this).

Belarus I know little about but assume ultimately until they get rid of Lukashenko they will become a Putin fiefdom, dependant on the Czar for whatever meat he choses to throw them from his High Table. Certainly they are likely to take part in Putins "Eurasian union".

Poland is formaly pledged to join the Euro at some undecided time and if it still exists. Unlike the others HAS cut alot of the 'red tape' and dealt with some official corruption. It has also benefitted from alot of inward investment and it's industry and agriculture are 'European competitve'. They might even be about to get rid of the hideous 'Palace of Culture' (http://www.chrisputro.com/russia/117...%20Science.JPG) outside Warsaw station. About 70% of Polish exports and imports go and come from/to EU countries. "Polish trade is dominated by the EU--around 60% of its imports and 80% of exports come from or go to EU member states" Poland

Looking forward Poland is also reckoned to have one of the largest deposits of shale gas in Europe; Shale Gas in Poland Sparks Hopes of Wealth, Energy Security | Europe | English

Poland is firmly locked into Europe short term and long term the Visegrad Group offers other options should the Euro/EU collapse. I cannot see a Ukrainian default or a Russian devaluation harming Poland much.

**cyppok** · 13 Nov 11,, 15:30

Originally Posted by snapper

With Russian WTO entry their companies will have a hard time (at first) competing with Chinese, Indian and Western companies. It is more likely, at first, to increase foreign investment and force them to sort out their red tape and corruption issues, as otherwise the investments become too high risk. Short term for their own food and industry companies they are unlikely to find alot of export markets as by and large they are not competitive. It would make sense for a slight devaluation of the rouble until these competitiveness and other issues are dealt with. However thanks to it's gas and oil resources Russia runs a surplus and is has money to spend (they were asked to buy into the EFSF). They could, if they chose, defend the value of their currency with their reseves or just by marginaly increasing the cost of gas.

Ukraine we have discussed before privately and I pretty much agree that a default is likely here, but they will just have an IMF renogiation and the default will be 'structured' a la Greece with more bank refinancing in Europe and elsewhere. Presumably some Ukrainian banks will fail and become 'nationalised'. In many ways Ukraine is another Greece/Italy outside the system so it retains the option to print/devalue it's way out of the corner. Again though Ukraine has similar uncompetiveness and official corruption issues as Russia (I could tell you an amusing story about this).

Belarus I know little about but assume ultimately until they get rid of Lukashenko they will become a Putin fiefdom, dependant on the Czar for whatever meat he choses to throw them from his High Table. Certainly they are likely to take part in Putins "Eurasian union".

Poland is formaly pledged to join the Euro at some undecided time and if it still exists. Unlike the others HAS cut alot of the 'red tape' and dealt with some official corruption. It has also benefitted from alot of inward investment and it's industry and agriculture are 'European competitve'. They might even be about to get rid of the hideous 'Palace of Culture' (http://www.chrisputro.com/russia/117...%20Science.JPG) outside Warsaw station. About 70% of Polish exports and imports go and come from/to EU countries. "Polish trade is dominated by the EU--around 60% of its imports and 80% of exports come from or go to EU member states" Poland

Looking forward Poland is also reckoned to have one of the largest deposits of shale gas in Europe; Shale Gas in Poland Sparks Hopes of Wealth, Energy Security | Europe | English

Poland is firmly locked into Europe short term and long term the Visegrad Group offers other options should the Euro/EU collapse. I cannot see a Ukrainian default or a Russian devaluation harming Poland much.

The assumption that the market opens up for foreign investment once you enter WTO is false. China proved it false and the tarriff barriers remain at around 10% pre-post entry for Russia. The only difference is they now gain an outlet, but Europeans were present on the Russian market for a while at least, same with Chinese. I am talkin about marginal aspects here. On the margin the entry into WTO opens the flow back from Russia far more than the other way around, most of the WTO countries gained access pre-Russia entering (during the formal agreement towards the negotiations most likely)...

Also they are letting the rouble devalue by not defending it lately which puts pressure on people on external market actors.

The default in Ukraine cannot be restructured like Greece. The financial system and the central bank are at odds and have different prerogatives. If the financial system ends the central bank will not be able to "rescue" through capital injections as it did before (simply won't have capital to do it and it can't print more because that would precipitate devaluation). In addition the amount of forex overhang is insane. It really will be every man for himself.

Again snapper your ignoring the marginal impact. I posted above and mentioned that the wave from Russia to Poland and to lesser extend through Europe was about 20-30% devaluation. Poland had a lot of loans in foreign currencies during that time and there had a refinancing drive to shift onto the home currency. Ukraine simply does not have this luxury.
(ex) Marginal impact is rouble devalues (-20%) and hryvna defaults (-50%) both, Polish growth would have to compensate for severe falls of marginal exports. Say 5billion in furniture exports drops to 3billion and the ripple effect from people loosing their jobs permeates the economy as it adjusts.

The gas/oil deeper the deposit the more it costs to bring it up.
Poland's Shale-Gas Dream Could Dramatically Change Continent's Energy Game
Reminds me of the Brazil salt field oil that is 5+ km underground, beneath salt on the coast which would have a cost between 50-70 a barrel to break even IF the volumes are high enough. Great for Poland if you start producing perhaps cheaper prices.

A Ukrainian default would hurt the most to countries closest to it just like Belarus. Trade gravity impacts those closest and with most interlinked economies. Yes, Russia would suffer more but the whole point is not who suffers more. I am talking about a regional/global catalyst spreading and marginal impact pressuring things to destabilize. Nobody lives in a bubble, there is always impact. If Germany has lower exports to Russia and Ukraine, Poland would sell less goods to supply consumers or companies in Germany. Having a trade surplus or a deficit simply means some industries get effected more than others.

If your curious this is the 6month period stats for Poland...
http://www.stat.gov.pl/gus/5840_970_ENG_HTML.htm
Trade for 6 month period in Poland actual stats...
Ukraine I think is around ~3 bill / ~2 bill (exports / imports for Poland http://www.ukrexport.gov.ua/eng/economy/trade/ukr/5343.html I think this ignores services and tourism.)
Belarus is probably around 1 bill maybe a little more
http://www.stat.gov.pl/cps/rde/xbcr/...01-12_2010.pdf

**snapper** · 13 Nov 11,, 17:39

I do not deny that ripples spread across a pond, so to speak, but past Ukraine and Belarus I see 'marginal impact' to use your phrase. I shall however look more closely and consult with economics Profs at Uni and my sister who's an economist.