Our Analytics 30 june — 17:53

Government needs to prepare for big changes (Our analysis)

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BY ELDAR ALIYEV, MAMMAD EFENDIYEV, ELNUR MAMMADOV, ECONOMICS SECTION

Surprisingly, two events coincided, which strongly affected the Russian economy. True, these cataclysms cannot directly affect the Azerbaijani economy due to the weakness of its stock market. But indirectly, they can still lead to shock consequences in our economy, since the northern neighbour is one of our largest foreign trade partners. Therefore, we need to be ready for them.

What kind of events are these?

On June 12, in many cities of Russia, thousands of citizens protesting against corruption went to the streets. Almost simultaneously, the US Senate tightened the sanctions against Russia, and immediately after that the major indices on the Moscow stock exchange fell significantly. Moreover, shares of such major mining, metallurgical and fuel-energy companies as Surgutneftegaz, Mechel, RusAl and Lukoil fell. But the fall in the shares was led by state banks, for which a new sanction package provides for more stringent restrictions on foreign currency loans: the maximum period for loans was reduced from 30 to 14 days.

And what is especially alarming is that all-Russian demonstrations practically did not affect the stock market, and the message about tightening sanctions immediately broke the market. Hence, the country's stock markets, which are the most sensitive indicator for any stimuli, do not react to internal cataclysms and depend entirely on external factors.

Moreover, according to Russian experts, the destruction of the country's market occurs against the backdrop of the most powerful rise in the history of the world stock market. That is, at the moment of fixing the next bottom in Russia, global markets set new records of value. And this leads to the view that the Russian financial market is undermined immediately from two sides: internal and external, and, the effect of the second factor is much stronger. In any case, for now.

This coincidence did not go unnoticed. If, until yesterday, Russian economists were divided into two opposing camps of liberals and patriots, then after these events, the first ones have already significantly surrendered their positions. And, on the contrary, patriots today have completely captured leadership in this confrontation. And this is also not accidental.

It turns out a strange picture. The anti-Russian sanctions are exacerbating from the outside, and inside the country the financial block of the government, adhering to ultra-liberal views, under the decisive objection of patriots, hopes that the market itself will settle the situation.

Against this backdrop, loud protests from patriots find an increasing understanding of the public. So, the patriots do not understand how against the tightening of US sanctions in April Russia could increase investments in US government bonds to 104.9 billion dollars against 86.1 billion dollars in December 2016.

Of course, this fact cannot but cause confusion among ordinary Russians. They do not know how during the deepening economic crisis, a significant part of the revenues from the sale of hydrocarbons is invested by the state in US government bonds. That is, instead of investing its own economy, it invests billions of dollars for the development of the American economy. Such actions of liberals are also not difficult to understand. Circumstances show that liberal Moscow is betting not on its own economy, but on Washington's goodwill. And Russian financial aces, it seems, are already beginning to pack suitcases before a big storm.

Liberals' stake is lost

But before the recent St Petersburg International Economic Forum liberals categorically objected to alternative views on the emergence of the economy from a crisis situation. They did not see the impact of economic reforms, preferring reforms to optimise public administration, the rule of law, the privatisation of state assets, etc. In the meantime, they needed to attract foreign investment to somehow keep the economy afloat. Like, with the solution of these problems, problems such as corruption will automatically find solution and market laws will do their job. With their conclusions, you can and should agree. In principle, patriots do not object to this either.

But the economy is created by living people. For almost thirty years now the rule of law and the creation of a market economy have been spoken at all levels. How many more do these people have to wait to see the results of their labours. And the latest sanctions have absolutely clearly shown that this stake of liberals is already beaten definitively: there will be no investments. In the stock market there was a real collapse: sensing something was wrong, investors rushed to sell securities. Moreover, the bulk of sales fell on foreign investors, whom any news about the tightening of anti-Russian shares make very nervous. And this always leads to undesirable consequences.

Additional pressure on Russian assets was also caused by a significant reduction in recent world oil prices, which, according to many forecasts, will continue to decline in the foreseeable future rather than grow. In any case, no one talks anymore about the possible tangible and steady growth in oil prices. Even the efforts of the members of the oil cartel and outside this organisation cannot stop this process. In the world market, large and unclaimed oil reserves remain, which again force traders to actively use old supertankers to store oil. But already anchored in Southeast Asia, and not in the Persian Gulf, as it was before the decision of OPEC+ to reduce oil production. By the way, the US dollar plays an important role in reducing world oil prices, the continued growth of which also hits the cost of the barrel.

It is still not clear how the Azerbaijani company SOCAR Trading behaves on this background, on the whole successfully showing itself in the world market. But in this respect, Russia is clearly not lucky either. The fact is that traders use old tankers not by chance. Oil prices with immediate delivery are now below the price of futures contracts for future deliveries, which creates a situation of so-called contango on the market.

So, the prices for Brent crude oil have fallen by the end of May by more than 13% below $46 per barrel. And the price of futures for the same grade, but with delivery at the end of the year is $1.5 more expensive per barrel. Therefore, traders for a penny rent old tankers to sell their crude oil at the end of the year, when the price of it will grow.

And Russian oil is delivered to foreign consumers through pipelines, rather than tankers, which deprives the country of the possibility of a 'tanker manoeuvre.' True, Azerbaijani oil is also transported through pipelines, but only to sea terminals on the coast of the Black and Mediterranean Seas. Further, SOCAR delivers this oil to the addressees by tankers. And Russia delivers the bulk of its oil to suppliers in Europe and China through pipelines.

What happens?

If you do not take natural gas into account, Russia has only two real large sources of attracting financial resources: investment and oil. But the path for investment, as we have already noted above, is severely limited by the sanctions, which are increasingly reinforced by the US and the European Union. And the troubles of the country are not limited to this factor alone. By mischance oil prices started to fall too. Moreover, the US is at the root of both economic sanctions and the fall in oil prices. The first factor is visible to the naked eye: the White House is openly forcing Europe towards it, though as a whole it is much more beneficial for the latter to develop cooperation with Moscow.

To reduce oil prices, the US even had to go against its own decades of policy of limiting its own oil production. And this factor once again confirms the assertion of many experts that all the forces of Washington are aimed at suppressing the Russian economy. Whether Washington succeeds in it, life itself shows. Low prices are needed by American oil companies to drive out competitors from world markets; when this goal is achieved, prices can be raised. And who is the main competitor of the United States, we think, it is not necessary to explain. And the economy of this main competitor is one of the most sensitive to oil price changes.

Someone may object that the low rouble rate is beneficial for Russian export-oriented producers, including oil producers. They sell their products for foreign currency, but pay wages and make other operations inside the country in roubles. But for the entire economy, the weakening of the rouble is certainly a negative factor, especially as Russia, like Azerbaijan, has little to export except oil.

But the same can be said about other large oil producers.

For example, the oil-rich countries of the Persian Gulf could also make strong competition for Washington. But during a recent visit to Saudi Arabia, US President Donald Trump has made clear to the Arab sheikhs that all these games are not directed against them. Azerbaijan and other post-Soviet oil countries too cannot be of interest to Washington in this battle of the giants. In general, other countries remain outside the big game, although their weak economy will react sharply to any events in the unfolding battle.

In addition, unlike Arab countries, US does not promise any compensation and guarantees to Azerbaijan. Therefore, the government already today must prepare for possible major changes in the world market. And not only oil market.

Strike on the rouble

The total pressure on the Russian economy from the outside will undoubtedly affect the rouble exchange rate, which has declined by ten per cent in recent days. And how sharply our manat reacts to the fall of the currency of its northern neighbour, we have already seen in the recent past. The arguments of our main financiers and bankers at that time amounted to the fact that the manat was not so much dependent on oil prices as on fluctuations in the exchange rates of major partners, and primarily the rouble.

The fall of the rouble will lead to lower prices in the local market, which will lead to flooding of the Azerbaijani market with cheaper Russian goods. Whether our economy can withstand such pressure is very doubtful. Especially if the American-Russian conflict drags on, and economic reforms in Azerbaijan begin to slip.

It is worth noting another dangerous feature of the current US sanctions against Russia. Previous sanctions applied to state-owned companies and banks, but it was not forbidden to buy government debt securities, which foreign speculative banks and funds used successfully. They purchased over the past year and a half federal loan bonds worth 734 billion roubles, thus covering 84% of the country's budget deficit. And now the US message is becoming more and more obvious. To fully understand the danger, it is enough to remember that foreigners today have government debts worth 1.8 trillion. Or about a third of the stock market.

These colossal dollar investments have recently brought foreign currency to the Russian financial market, when the flow of petrodollars has dried up. It is this circumstance that allowed the rouble to be strengthened for some time in isolation from oil. Now it is the exodus of foreigners from bonds that will cause the rouble to fall.

According to some forecasts, even with oil at $50 per barrel, the fair rate will fluctuate between 70-73 roubles per dollar, and at current low oil prices, it will even approach 80 roubles. The Ministry of Finance, exporters, will continue to win, but all others, including the population, will lose. All this threatens Russia to slip back into 2014. And the entire policy of the head of the Bank of Russia Elvira Nabiullina, aimed at targeting inflation, will be reduced to nothing. Russia will be left without money and a weakened real economy, a lost real disposable income of the population. And this time it will be much more difficult to overcome the impending new economic crisis. Here, for sure, monetary arguments and tools will not help it.

Summing up...

We can say that the US dollar is pressing on the Russian economy, and in particular its rouble, from all sides. And presses openly, powerfully. Many experts, including American ones, spoke earlier about the need to cheapen the dollar. And there was a basis in their reasoning: a cheap dollar will promote the growth of exports, as well as facilitate the external debts of the US, expressed in astronomical amounts. But in Washington, apparently, they are not yet in a hurry with this step.

First of all, the Americans decided, most likely, to end the Russian economy and the rouble. And only then, after secureing the rear, go into a powerful attack on the entire global economy by weakening the dollar. And then Washington will become the sovereign master of the world economy. And this will lead to the final hegemony of the United States in all spheres.

We do not pretend to be absolutely right in our reasonings and forecasts. But the course of the global events that is taking place still makes one think about it seriously. This also applies to the Azerbaijani economy. Therefore, the Azerbaijani economy should be ready for any development of the situation. It must take into account the possible moves of external players, especially on a large scale, in order to somehow level their impact on the internal situation.

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