Globalisation, a process yearned by countries that wish to develop, now plunges global banks into the peril of tumbling inflation as Russia’s energy crisis lurks in the shadows. How will the energy titan impact investment and income for major banks?
Despite the alarming oil crisis, production has not received any red tickets; OPEC is maintaining its market share at the expense of unpromising returns of revenue. Preserving foreign reserves could be challenging, as Russia is still producing and exporting oil with US dollars despite having $370 billion reserves in its federal account. This number is not secure. The Central Bank released a staggering $50 billion into the foreign exchange market to support the Sochi Olympics; a $100 billion debt check is waiting in the corner of Russia’s balance sheet; the presumably ‘safe’ $50 billion current account surplus that Russia is running out will soon run out. Contributing to the adversity of this situation, Putin has put sanctions on imports to protect foreign reserves and on another note, boost competition in food production. Not only may protection of foreign reserves be wobbly as sanctions continue, but also diminishes chances of entrance of potential investments that could bolster foreign reserves. Polish fruit and vegetables have been blocked by Russia’s barrier in order to stimulate local farm production. Putin’s wish is to build a strong agriculture market to steer the wheels of its economy. However, what he is actually doing is closing the gate to income growth as liquidity will further stagnate and inflate within its borders.
Challenges facing the financial economy
One must also factor the impact to the banking system, not just the energy producers. Investment banks are the lungs of sovereign liquidity circulation. Without money, there is no investment. In order to tackle the declining energy bonds currently held with international banks, the Russian government needs to restore investors’ interests in investing further, and stimulate the public to save more in reserves. Banks have dealt with Russia in the past with some caution and trepidation. It is important to remember that some major banking organisations such as JP Morgan Chase and HSBC currently do not operate retail businesses in Russia, and the latter withdrew from the Russian market and sold its holdings to Citigroup in 2011. Large companies already foresaw disadvantages three years ago by being very cautious with handling risks and business coverage in the country.
Perhaps more precautions should be considered; the anticipated doomsday for the Russian energy economy may be upon us, should more banks and companies withdraw shares from its market and refrain from investing. The price of oil is now at $67 per barrel, well below the $90 threshold that protects Russia from recession.
Conditions in Russia could be much worse if it had not been for the $270 billion accessible hard cash. Russia has an adaptive private sector, strong levels of labour productivity in comparison to other emerging markets, debt of only 35% of GDP. Additionally, they are currently running on a small trade surplus from import cuts and a highlight of its important floating exchange rate that is able to mitigate shocks from its energy crisis. There are several aspects which are worth monitoring: OPEC’s regulations on total oil production, consumption of energy resources in households and buyers, economic structural reforms and growth stimulation and last but not least, Putin’s decision on whether to push investments in the energy sector with federal reserves or encourage medium and small firms to boost income and pull Russia out of the crisis.
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