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№1 (234) 14-27 January 2009

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Main theme:     Scarce money supply
Money supply is scarce. Cheap loans dried up. Countries are maneuvering, trying to ensure advantage for this or that currency in conditions of exacerbating world economic crisis

Sultan Akimbekov
Almaty

It is ironical but true that even in conditions of grave economic crisis and economic downturn, for the last months dollar regained its value as a reserve currency as it strengthened against all other ones. Investors are eager to buy greenbacks. Currencies of the main raw materials exporters such as Australia, Russia, Canada and Kazakhstan slid against dollar. Sterling tumbled, euro is losing in value. If the trend continues, no currency will be able to avoid a new depreciation. Meanwhile, the external debt of the US reached 11 trillion dollar, deficit of international balance of payment in the third quarter of 2008 was estimated at $174.1 bullion dollars, budget deficit in 2008 might hit record highs - $1.2 trillion dollars. This is how a typical bubble looks. Normally, such economic turbulence has to provoke another run on the dollar. Any other country, except for the US could not stave off default let alone attract investors and finance its liabilities adding to its already huge debt.

There are some grounds for concern. Numerous conspiracy theories have emerged for the past few months. One of them says for example that the US government may even devaluate its currency and replace the bunch of grenbucks by the new banknotes. This might help the US to annul its debt. Igor Panarin the author of this dystopian prognosis claims that this plan will come to its fulfillment soon. He even enumerated several titles for the new imaginary currency of the US. This hypothetic currency might be called amero.

Many countries throughout the world are worried. They are held hostages to the system where dollar plays a key role. Greenbuck tumbles and rises again, making others to adjust to harsher economic environment. Nations in different parts of the world are disappointed by the financial policies of the US that, as many believe has led us to current economic crisis.

Kazakhstan is closer to Russia and Kazakh people live in the same information space as our neighbors do. Russian printed media are studded with articles about importance of ruble. Moscow wants to render ruble the key regional currency that should replace dollar at least in trade deals with the CIS countries.

Russian plans are plainly fanciful. Moscow vision on the future of world economy puts a light on the dollar issue. It explains why the US currency is strengthening its positions despite economic recession that struck the US market. This logic is very simple. Dollar serves the means of payment in the world trade. In does make economic sense.

The market of new financial instruments and services designed for the needs of the world trade boosted money supply in practically all countries. Economies were awash with cash. Banks including investment ones, were the main centers of emissions of virtual money. Cheap loans were available everywhere. Monetary aggregates grew dramatically.

Global economy dictated its rules of game. Emission of virtual money helped to satisfy the demand for money and increase turnover means that were necessary for making deals. Even such a powerful economy as the US one couldn't ensure adequate money supply to help companies and the governments to finance all the projects launched practically on all continents. Let's remind how prices for raw materials have risen. Crude oil price grew from $10per barel in 1999 up to $147 in 2008. There are other goods such as coal, mining industry products, food. Inflation was rampant. If it were not for virtual money prices would never grow so rapidly.

When financial crisis hit, cheap loans seized up. This process is not over yet. Banks have to get rid of bad loans, clean their books. This is quite painful. Many investments banks went bust. Money supply decreased.. Greenbucks have to serve the needs of payment and circulate in the vein of world economy to make us believe that we are still alive. So, today the role of dollar as the main means of payment can't be underestimated. This very function of dollar is far more important than that of basic reserve currency. Central Banks hold dollars in reserves to secure their economies against a rainy day. Capital accumulated by Central Banks is being spent to prevent fall of national currencies against the dollar. Last fall Russia alone injected 150 billion USD to postpone the decline of ruble. Meanwhile dollar continues to rise.

You can't imagine how many countries are involved in the world trade and they use dollar as an etalon while striking deals. Dollar is consolidating its positions as the key world currency. As crisis exacerbated nobody trusts none, dollar is regarded as a symbol of stability as a universal value. That is why the world turns a blind eye to the shaky reputation of the US economy its budget deficit and considerable debt. All this ensures a stable demand for greenbucks.

No currency can be bracketed with dollar. Even euro which represents the common economic market with the average GDP of 14 trillion dollars can't serve a substitute of greenback and is unable to replace dollar in all trade deals. All difficulties euro is facing now lie in virtual absence of any political center within euro zone. In this respect dollar is unique, military and political might of the US is behind it.

Defying forecasts made by Russian experts, that predicted a crash of the US financial system, dollar was steadily going up. The US is unlikely to get any advantages in case it attempts to annul its debt by liquidating old currency and issuing new banknotes. It might happen if Washington decides to reject on its own will from the status of Empire and embrace isolationist policies. This will never happen, because the US regulates the world economy. The US is not only able to weather the storm it never loses its image of the winner. This goes without saying even now when world crisis is aggravating; The US dollar is gaining in value despite all difficulties its economy encounters with now.

Two styles of life

The debate that surrounds the idea of ruble as the second reserve regional currency is interesting in some aspects. First, Kazakhstan is regarded as the experimental field by Russian financiers. Russia reckons that countries, which were once the USSR republics , its main trade partners should buy its goods for rubles and set aside capital accumulated in rubles in case they decide to export its materials to Russia. If everything goes to the Moscow plan, new ruble zone is due to emerge. In the view of some radical political scientists some countries should even switch to ruble in the near future and forget about national currencies.

The desire of Russia to assert its influence on the territories of the post soviet space is justified. First, Russia wants to win domineering positions in the region both in the terms of currency and ability to impose its political will. This program is phased out. First comes the trade, ruble is used in this context as means of payment. Then hypothetical transition to the common currency (ruble) zone should begin. For Kazakhstan it might mark the end of era of its independence and multivector policy of course if the miracle happens and ruble is accepted by the former USSR republics as the basic reserve currency.

It is interesting to note that in the mid 90s experts thought that integration within CIS will be modeled on the EU one. This implied introduction of the common currency such as euro. Euro evolved from eku, that was how it was called initially named after the ancient French coin. Eku analog had to be given a title altyn. Altyn was the means of payment in the medieval Russia. When the new century began Moscow seemed to forget about the European scenario of integration. As for the monetary policy the Kremlin decided to follow example of the US. Russia tries to popularize the idea of the only regional reserve currency -ruble, as the sole alternative to USD.

Ruble is not a dollar. Russian assumptions are built on wrong premises. No way, Ruble can be equated with dollar. Switch to dollar signifies that those countries that take this for granted have to be ready to share the fate of Moscow and face similar difficulties in financial industry and in other economic sectors. Today Kazakhstan and Russia appear to be on the opposite fronts. They adopted different approaches towards their national currencies when they had to respond the crisis.

When recession struck Russian market ruble seriously lost in value. It slid 20% against dollar. De facto, tenge is pegged to dollar, when dollar strengthened tenge rose with it. So, tenge went up against Russian ruble. Meanwhile Russian and Kazakh economies as those of the exporters of raw materials are practically identical. Both countries experience practically the same problems. Kazakhstan faced the crisis even earlier in 2007, when the US housing bubble burst and this caused havoc on its financial market.

One can judge about weaknesses and strengths of monetary policy by results. When prices for basic exported goods and materials fall, the country may try to make its currency to gain in value or loosen monetary policy. The latter is preferable for exporters as they can get higher profits in ruble for their dollars. Weaker national currency is good for domestic producers as they can compete with those companies that sell imported goods. The state also can get advantage of the sliding national currency as it can set aside more capital in dollar terms. When the government decides to ease monetary policy it should be ready to quite an unpredictable aftermath. Households and businesses tend to get rid of rubles and the state begins to make injections to support businesses anyway spending precious currency. Liberal monetary policy fuels inflation as not all the imported goods can be replaced by domestic analogs. For example Russia imports 50% of food 80% of medicines. Companies amass the arrears in the stable currency. Recently they have added about $500 billion to their external debt. Even more importantly, salaries and pensions are paid in rubles, and incomes are falling.

In case of Kazakhstan exporters may get less tenge for their produce. Inflation is more or less controlled due to cheap imports. The pressure on banks and businesses is less intense, they have more possibilities to service their external debt. Salaries and pensions are relatively high as tenge is pegged to dollar and went up with it. This policy also has its risks. Foreign reserves are spent not to prevent tumbling of tenge, jobs cut is almost inevitable and imports may flood the market. Meanwhile stable tenge is better for people and businesses. On the rosy side are liberal monetary policies, absence of any spending in defense sphere, availability of long term loans that can be taken from the pension funds Government revenues from export of the crude oil are likely to fall. Meanwhile, investors still pour money into different projects aimed at development of the Caspian offshore area. International organizations flood direct investments into local infrastructure, such as, say, construction of the highway Chinese- Europe.

Differences in policies of two states are evident. Let's take taxation for example. Kazakhstan established 12% VAT. Compare it with 18% in Russia. Income tax in Kazakhstan is 10% against Russian 13%. Social tax in Kazakhstan won't exceed 11%. Russia plans to introduce 34% social tax by 2010. Ruble is tumbling. Tenge is pegged to the dollar and it is not falling so rapidly against other currencies. We tried to weigh strengths and weaknesses of two countries in this very article. So time will show what we should expect from the future.



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