tag:theconversation.com,2011:/global/topics/currency-speculation-112280/articlesCurrency speculation – The Conversation2022-03-16T20:55:20Ztag:theconversation.com,2011:article/1793232022-03-16T20:55:20Z2022-03-16T20:55:20ZDebt repayment in roubles, a possible economic counterattack for Russia?<figure><img src="https://images.theconversation.com/files/452172/original/file-20220315-27-15gf38s.jpg?ixlib=rb-1.1.0&rect=0%2C8%2C1920%2C1069&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">At the heart of the economic war: the parity of the rouble.</span> <span class="attribution"><span class="source">Ulianapinto/Pixabay</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>The Russian response to Western sanctions took a rather original form on Monday 7 March: to draw up a <a href="https://www.euractiv.com/section/global-europe/news/russia-adopts-list-of-enemy-countries-to-which-it-will-pay-its-debts-in-rubles/">list of “hostile” countries</a> and to authorise Russian individuals and companies to repay their debts in roubles, despite the fact that the credit was contracted in another currency.</p>
<p>On this list, we find the countries of not only the European Union, the United States, the United Kingdom, Japan, but also Canada, Switzerland, Monaco and Korea.</p>
<p>The decision of the Kremlin seems in fact quite shrewd and aims to indirectly gain the support of foreign banks.</p>
<h2>Double punishment?</h2>
<p>Most of the <a href="https://www.reuters.com/markets/europe/how-financial-western-sanctions-might-target-russia-2022-01-19/">economic sanctions taken against Russia</a> are intended to financially isolate the country. The logic is simple: money is the backbone of the war. Without money, it seems extremely complicated for Russia to be able to continue its action in a sustained manner.</p>
<p>This strategy of undermining the Russian economy is partly working. On February 24, the day of the invasion, the euro/rouble parity rate was 95 (i.e., 1 euro was equivalent to 95 roubles). On Monday March 7, it had risen to 148.38. This means that a Russian who wanted to buy a product for 300 euros in France had to pay 28,423 rubles on February 24, and 44,366 rubles on March 7.</p>
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<p>The ability of Russians to trade at the international level is therefore greatly reduced. When we know that the Russians imported nearly <a href="https://www.tresor.economie.gouv.fr/Pays/RU/commerce-exterieur">240 billion dollars</a> in 2020 (about 197 billion euros), the bill will increase significantly.</p>
<p>One might think that this devaluation of the rouble would reduce Russia’s export costs to foreign countries, favouring Russian producers on the international scene. However, to counter this potential positive effect, most European countries have decided to <a href="https://www.washingtonpost.com/world/2022/03/02/boycotts-russia-invasion-ukraine/">boycott Russian exports</a>. For example, they refuse to issue export licenses for certain goods. As a result, the penalty is twofold: imports are decreasing, and exports are being blocked.</p>
<p>What are the traditional solutions to this currency depreciation for Russia? The exchange rate regime of the rouble against other currencies is a so-called floating regime, i.e. it is fixed by the laws of supply and demand on the market. To strengthen the rouble, it would be necessary to increase the demand for it, and thus to increase the number of international financial transactions in rouble… which is deliberately prevented by the sanctions that have been imposed.</p>
<p>What card is left in the hands of the Kremlin? The answer given is imaginative, to say the least: to allow the payment of Russian credits abroad in roubles.</p>
<h2>International banks in a bind</h2>
<p>In addition to the international trade players, people who have credits with foreign institutions are directly affected by the international sanctions. Let’s say you are Russian, you have borrowed 100,000 euros from a French bank, and you pay back 500 euros every month. As of February 24, this amounted to 47,530 roubles, while the same amount is 74,190 roubles as of March 7. The credit is becoming more and more complicated to repay.</p>
<p>So there is a risk of a massive increase in defaults, causing difficulties for foreign banks. This is precisely the leverage that Moscow intends to use. By allowing Russian debtors to pay for their foreign loans not in local currency but in roubles, the country’s authorities are delegating the maintenance and management of their currency from Russia’s central bank to foreign banks.</p>
<p>Let’s take our example from another point of view: you are a French bank, you hold in your assets 100,000 euros of debt issued by Russian clients, with a monthly repayment of 500 euros per month. As shown above, the repayment value of this loan between February 24 and March 7 is not the same amount in roubles, respectively 47,530 roubles and 74,190 roubles. </p>
<p>In itself, this may not seem problematic for the French bank, since in both cases it recovers the equivalent in value, namely 500 euros. However, the problem is not the value, but the currency. Once owning this amount, the bank has two options. It can decide to keep this money in rouble, but with the significant risk at the moment that it will devaluate again, and therefore that the reimbursements will not be worth 500 euros anymore. Alternatively, it can decide to go to the financial markets to exchange these roubles for euros.</p>
<p>But if everyone tries to convert their roubles at once, this will lead to an even sharper fall in the value of this currency and thus a direct devaluation of the value of the repayment. In both cases, the French bank risks a significant loss of value on its repayments.</p>
<p>The French bank therefore has every interest in ensuring that the rouble/euro parity does not lose more value than it already has. Thus, by taking this decision, Russia has ensured that international banks will seek to indirectly support the Russian economy, in order to avoid seeing their credit devalued.</p>
<p>Some might argue that another possibility for these foreign banks would be to simply refuse payment in roubles. However, this is extremely complicated from a legal point of view because the question arises as to which authority is competent to judge this case and whether the other party to the contract will recognise the legal decision issued, which is not a given. From an economic point of view, this also means increasing the probability of never being repaid should the conflict escalate…</p><img src="https://counter.theconversation.com/content/179323/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Les auteurs ne travaillent pas, ne conseillent pas, ne possèdent pas de parts, ne reçoivent pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'ont déclaré aucune autre affiliation que leur organisme de recherche.</span></em></p>The idea: to use the credit channel by making foreign banks bear the consequences of the devaluation of the Russian currency.Jérémie Bertrand, Professeur de finance, IÉSEG School of ManagementAurore Burietz, Professeur de Finance, LEM-CNRS 9221, IÉSEG School of ManagementLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1705692021-11-02T14:41:14Z2021-11-02T14:41:14ZEconomic reforms won’t fix Zimbabwe’s economy. Ethical leadership is also needed<figure><img src="https://images.theconversation.com/files/429585/original/file-20211101-27-1xnt2k8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Public transport drivers haggling over currency exchange in Harare, Zimbabwe.</span> <span class="attribution"><span class="source">Jekesai Nikizana/AFP via Getty Images</span></span></figcaption></figure><p>The Zimbabwean economy has continued to experience turbulence, despite having managed to weather a devastating spell of hyperinflation which <a href="https://www.forbes.com/sites/stevehanke/2017/10/28/zimbabwe-hyperinflates-again-entering-the-record-books-for-a-second-time-in-less-than-a-decade/?sh=6a9b67ab3eed">peaked in 2008</a>.</p>
<p>One economic area which has remained a thorn in the flesh for ordinary Zimbabweans has been the volatile currency. The country has struggled to sustain a stable currency. The Zimbabwean dollar (ZWD) was the official currency of Zimbabwe between 1980 and 2009. In the wake of hyperinflation, in 2009, it was retired and the country transitioned to <a href="https://www.investopedia.com/terms/forex/z/zwd-zimbabwe-dollar.asp">a basket of mostly regional but also some global currencies</a>. </p>
<p>In early 2019, the multiple currency regime was replaced by a <a href="https://www.bbc.com/news/world-africa-47361572">new currency</a> which was renamed the Zimbabwe dollar by Reserve Bank of Zimbabwe. It is now the only legal <a href="https://www.lawinsider.com/dictionary/rtgs-dollar">form of tender in the country</a>. </p>
<p>The implication of Zimbabwe’s currency woes has been that the foreign exchange rate has continued to be largely determined by <a href="https://www.dailymaverick.co.za/article/2021-10-19-currency-crisis-and-wrangling-over-exchange-controls-may-undo-early-economic-progress-in-zimbabwe/">a parallel market</a>. This has its deep roots in speculative activities that were rife during the years of hyperinflation and which have persisted.</p>
<p>Pricing of goods has, thus, <a href="https://www.controlrisks.com/our-thinking/insights/economic-interventions-signal-government-deep-in-crisis">continued being dictated by the parallel market</a> and foreign currency has remained in short supply. Speculators continue to engage in activities that rake in quick profits, at the expense of the economy and Zimbabweans. Speculators include influential political figures, big businesses and ordinary individuals. </p>
<p>In a bid to stabilise Zimbabwe’s currency volatility challenges and ease shortages of foreign currency, the Reserve Bank of Zimbabwe introduced the foreign exchange auction system in June 2020. But this didn’t liberalise the foreign currency market, as the bank has interfered in the auction <a href="https://issafrica.org/iss-today/currency-crisis-could-undo-zimbabwes-early-progress">in an attempt to control the exchange rate</a>.</p>
<p>In my view economic reforms alone cannot end the country’s economic crisis. Instead of more economic interventions, Zimbabwean society needs to self-introspect and assist in re-setting the country’s ethical compass.</p>
<p>I am arguing for this approach from a sociological perspective of ethics. My <a href="https://scholar.google.co.za/citations?view_op=view_citation&hl=en&user=sQSjKP0AAAAJ&citation_for_view=sQSjKP0AAAAJ:Tyk-4Ss8FVUC">doctorate</a> focused on the response of the working class in the capital Harare to Zimbabwe’s hyperinflation and political crisis in the 2000s. One of my key findings was that a lot of workers’ ethical principles had been eroded by hyperinflation which required a repertoire of survivalist responses. These sometimes bordered on corruption and speculative activities. </p>
<p>In addition, in my current academic role I’ve had to grapple with the concept of ethics, not only from a research perspective, but also from a broader societal perspective, since it acts as the moral compass that guides our behaviour. Being an ethics pupil has made me re-visit my thesis on Zimbabwe’s unending economic crisis, in addition to proffering possible solutions to this perpetual challenge.</p>
<h2>Ethical regeneration of Zimbabwe</h2>
<p>To keep pace with hyperinflation, a lot of Zimbabweans had to engage in speculative activities. This relied on hoarding commodities which were in short supply in the 2000s. They would often <a href="https://scholar.google.co.za/citations?view_op=view_citation&hl=en&user=sQSjKP0AAAAJ&citation_for_view=sQSjKP0AAAAJ:IjCSPb-OGe4C">re-sell these at inflated prices</a> on the parallel market. This meant that prices of goods continued to spiral, with speculators making a <a href="https://scholar.google.co.za/citations?view_op=view_citation&hl=en&user=sQSjKP0AAAAJ&citation_for_view=sQSjKP0AAAAJ:IjCSPb-OGe4C">quick buck</a>.</p>
<p>This behaviour of making quick money through speculation appears to have become ingrained in Zimbabwean society’s social fabric. Foreign currency traders have continued to operate a parallel foreign currency market, <a href="https://www.emerald.com/insight/content/doi/10.1108/JMLC-06-2021-0056/full/pdf">despite the taming of hyperinflation</a>. In some instances they act on behalf of business and top politicians.</p>
<p>To eradicate the cancerous scourge of speculative behaviour, Zimbabwean society will have to also rely on societal ethical values as happened successfully in Asian countries such as China, Taiwan and Singapore. These countries <a href="https://www.jois.eu/files/13_Lajciak.pdf">blended</a> Confucianism ethics with business practices.</p>
<p>Confucian ethics dictates hierarchical relationships and an identification with social rules. It also emphasises <a href="https://www.jois.eu/files/13_Lajciak.pdf">‘self control of individuals’</a> in their conduct. </p>
<p>If this value of discipline and good conduct were exercised in Zimbabwe’s business ethics, the country’s economic fortunes might change for the better. </p>
<h2>What’s needed</h2>
<p>To kick-start the much needed ethical regeneration of Zimbabwean society political leaders need to take the lead in the fight against corrupt and speculative activities. </p>
<p>Rhetoric that purports to castigate corruption and putting in place economic measures to alleviate Zimbabwe’s monetary woes, will not suffice. </p>
<p>A Thomas Sankara kind of <a href="https://journals.co.za/doi/abs/10.10520/EJC-f764a1944">ethical
leadership</a> is what’s needed. Sankara, the <a href="https://www.amplifyafrica.org/post/meet-africa-s-che-guevara-thomas-sankara">President of Burkina Faso between 1983 and 1987</a> enforced a rule that the country’s political leaders publicly declare their financial assets and wealth before being sworn into office. </p>
<p>Another good model is the US’s approach to <a href="https://www.oge.gov/Web/278eGuide.nsf">asset declarations by politicians</a>. It forces transparency and ability of civil society to have these asset declarations audited. <a href="https://www.transparency.org/en/news/holding-politicians-to-account-asset-declarations#">Transparency International</a> argues that such ethical practice enables citizens to hold politicians accountable.</p>
<p>In addition, a continuous financial audit while in political office should subsequently be mandatory. The Transparency International <a href="https://www.transparency.org/en/news/holding-politicians-to-account-asset-declarations#">chapter in Georgia</a> has been doing this, and this assists in monitoring any unusual variances in politicians’ asset declarations.</p>
<h2>What needs to be done</h2>
<p>The government of Zimbabwe should take a leaf from Sankara’s Burkina Faso by expeditiously arresting and prosecuting individuals found guilty of corrupt and speculative activities, regardless of status in society. </p>
<p>South Korea does this. Corrupt leaders are arrested, <a href="https://www.bbc.com/news/world-asia-55657297">regardless</a> of political or financial clout.</p>
<p>In addition, the Zimbabwe Anti-Corruption Commission should be given the capacity to execute optimally. It’s meant to curb and expose corruption. But it’s blunted by <a href="https://www.newsday.co.zw/2018/12/underfunding-npa-zacc-dangerous-mp/">underfunding</a>. </p>
<p>It is also urgent that the Zimbabwean government should promulgate whistle blower protection legislation. Whistle blowers in the private and public sectors need to be protected.</p>
<p>The government also needs to take steps to improve governance practices in the private sector. The head of the the Zimbabwe Anti-Corruption Commission, Justice Loice Matanda-Moyo, recently claimed that the private sector <a href="https://www.newsday.co.zw/2021/10/private-sector-major-culprit-of-graft-zacc-boss/">was the biggest culprit of corrupt activities</a> in the country. </p>
<p>The Confederation of Zimbabwe Industries and the Zimbabwe National Chamber of Commerce, the major representative bodies of business in Zimbabwe, should insist that every company has an ethics or compliance office. Their mandate would be to ensure ethical business conduct. </p>
<p>And it should be mandatory for all company top executives to issue an ethics statement annually, which reflects on their organisations’ ethics practices, good or bad.</p>
<p>Lastly, creating a society that is ethical in its conduct is a process that takes time. It should include inculcating ethical principles in the schooling system. This would mean that from a young age, Zimbabweans are taught about moral and upright behaviour. A model that is worth emulating is <em>dotoku</em>, or moral education, in the Japanese primary and junior high school education. This was introduced in 2018, and is a <a href="https://toyokeizai.net/articles/-/167166">full-fledged subject with standardised textbooks </a>.</p>
<p>This approach should be attached to other subjects too, such as science and business.</p>
<p>In other words, the word ‘ethics’, should become synonymous with Zimbabwean society’s interactions and behaviour, and not an alien word.</p><img src="https://counter.theconversation.com/content/170569/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tapiwa Chagonda has previously received funding from the National Research Foundation (NRF). </span></em></p>To kick-start ethical regeneration of Zimbabwean society political leaders need to take the lead in the fight against corrupt and speculative activities.Tapiwa Chagonda, Associate Professor of Sociology & Director of the Centre for Data Ethics at the Institute for Intelligent Systems, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1282102019-12-03T19:45:02Z2019-12-03T19:45:02ZCurrency manipulation and why Trump is picking on Brazil and Argentina<figure><img src="https://images.theconversation.com/files/305014/original/file-20191203-67007-e5zemb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Trump says Argentina is intentionally weakening the peso. </span> <span class="attribution"><span class="source">FJZEA/Shutterstock.com</span></span></figcaption></figure><p>President Donald Trump <a href="https://www.reuters.com/article/us-usa-trade-trump/trump-citing-us-farmers-slaps-metal-tariffs-on-brazil-argentina-idUSKBN1Y614O">slapped new tariffs</a> on Brazil and Argentina after accusing them of manipulating their currencies to boost exports. </p>
<p>It wasn’t the first time Trump has labeled another country a “currency manipulator” for supposedly meddling to keep its own currency weak or undervalued. China <a href="https://www.reuters.com/article/us-usa-trump-china-currency-exclusive-idUSKBN1622PJ">received that epithet</a> from the president long before it felt the pain of his trade war. </p>
<p>But the truth is more complicated than Trump makes it out to be. </p>
<h2>Everyone does it</h2>
<p>The first thing to understand is that government efforts to influence their exchange rates – which is often dubbed currency manipulation – is extremely common, as I’ve seen firsthand in <a href="https://scholar.google.com/citations?user=qttICm8AAAAJ&hl=en&oi=ao">my work</a> as an international business professor.</p>
<p><a href="https://www.imf.org/en/Publications/Annual-Report-on-Exchange-Arrangements-and-Exchange-Restrictions/Issues/2019/04/24/Annual-Report-on-Exchange-Arrangements-and-Exchange-Restrictions-2018-46162">All but 31</a> of the <a href="https://www.imf.org/external/np/sec/memdir/memdate.htm">International Monetary Fund’s 189 members</a> meddle, in a mild or total fashion, to influence or fix their exchange rates. Only a few major currencies, such as the dollar or euro, are allowed a “free float” based on market forces of supply and demand with minimal or no government intervention. </p>
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<p>Other governments have a variety of ways to manage their currencies. Some peg their currencies to a fixed rate, as long as they can afford to keep it there. Others tie their currencies to a major but stable currency like the euro or a basket of different ones. For example, the Lebanese pound is tied to the dollar at a fixed rate of 1,507.5 to 1. </p>
<p>About 16% of IMF members use a “managed float,” in which they allow market forces to play a role but with the government buying or selling their own currency as needed to bias the exchange rate upward or downward. Argentina and Brazil both adhere to a managed float system. </p>
<h2>Why weaken a currency</h2>
<p>Generally, when the Trump administration has criticized countries, the allegation is that their government is keeping its currency undervalued in order to <a href="https://www.investopedia.com/articles/investing/090215/3-reasons-why-countries-devalue-their-currency.asp">give an artificial boost</a> to exports while making it harder for imports to compete.</p>
<p>A weaker currency makes the products it sells abroad cheaper, while making imports more expensive for its consumers. This may have the effect of boosting jobs in that country. <a href="https://www.reuters.com/article/us-usa-trade-trump/trump-citing-us-farmers-slaps-metal-tariffs-on-brazil-argentina-idUSKBN1Y614O">Trump believes this is what Brazil and Argentina are doing</a>. </p>
<p><a href="https://www.wsj.com/articles/trump-restores-tariffs-on-steel-and-aluminum-shipped-from-argentina-brazil-11575288359">Economists say</a> the two countries are actually trying to prevent their currencies from weakening against the dollar. That’s in part because a weak currency also makes imports more expensive for businesses that rely on foreign inputs to make their products. </p>
<p>So higher import costs, along with persistently high inflation in both <a href="https://tradingeconomics.com/argentina/inflation-cpi">Argentina</a> and <a href="https://tradingeconomics.com/brazil/producer-prices">Brazil</a>, largely offset any gains from their weaker currencies. </p>
<h2>The strong dollar</h2>
<p>But more importantly, these currencies seem undervalued primarily because the U.S. dollar is unnaturally strong. </p>
<p>One reason for the strength of the dollar is that inflation-adjusted interest rates in the U.S. are still relatively high. Another is that the dollar is still a haven, making it an attractive place to park your cash during global economic uncertainty. </p>
<p>As a result, a massive amount of foreign money has <a href="https://www.stlouisfed.org/on-the-economy/2019/may/foreign-demand-currency-fed-balance-sheet">flowed into dollar denominated-bank deposits</a>, treasury bonds, U.S. stocks and real estate over the past few years. And the reality is that the dollar is now exceptionally strong, not that other currencies are weak or necessarily being manipulated. </p>
<p>Ultimately, labeling other countries as currency manipulators is more about politics and geopolitical relations than policy. </p>
<p><em>This is an updated version of an <a href="https://theconversation.com/does-china-manipulate-its-currency-as-donald-trump-claims-60148">article originally published</a> on July 13, 2016.</em></p><img src="https://counter.theconversation.com/content/128210/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Farok J. Contractor does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Most countries manipulate their currencies – at least a little – but at the moment that’s not the real reason they are undervalued relative to the dollar.Farok J. Contractor, Distinguished Professor of Management & Global Business, Rutgers UniversityLicensed as Creative Commons – attribution, no derivatives.