TopFX Vice President of Business Development Paul Orford considers the ongoing proxy war between the USA and Russia in Ukraine has been seen by many as a return of the cold war. In today’s Guest Editorial, Mr. Orford points out the geopolitical and potential economic factors which lie ahead.
This fundamental shift in relations between the USA and Russia has moved on since the old proxy wars in Africa and Asia in the middle of the twentieth century. Instead of funding local militias to other throw regimes, we are seeing a war being fought by the use of economic sanction.
The previous use of sanctions against a rival, has led many commentators to view them as week and ineffective The reason for this being they do not really harm the leaders but more the general population.
The logic follows that the people will become so disenfranchised that they will rise up against the regime and change it to something that is more ‘friendly’ to the prevailing ideologies imposing the sanctions.
However, the sanctions placed on Russia can be seen as having a substantial effect. Using a network of their economic allies may cause a devastating effect on their economy.
An important matter for consideration is that Russia is home to a vast export of raw materials and the products of heavy industry to nations such as China, and with traders concentrating on physical commodities such as oil and agricultural products, the potential effect of this situation appears dire.
Indeed, it may spur FX trading even further due to the liquid and non-physical nature of FX, as well as its borderless trading environment, compared to fixed, location-specific items such as oil production in Russia, however the double-edged sword is that swathing volatility in the ruble would require a keen eye and quick reactions to benefit from the ever changing prices compared to the more stable majors.
The Russian economy is hugely dependent on income deriving from oil. Logic would suggest that it only seems natural that this would be a pressure point applied by the opposing governments that may not apply to ruble trading with major currencies such as EUR or USD.
Although President Vladimir Putin has argued that he is prepared for a collapse in the oil prices, can the Russian economy take this? Over the past several weeks we have seen intervention of the ruble take place, a sure sign that there are underlying weaknesses in the currency and the economy.
However, although the Americans are looking to take credit for this, can this be valid?
It can be argued that the US influence on a number of factors have helped, but it is events outside the US’s sphere of influence which have contributed significantly.
Libya is now back online and was producing around 800,000 barrels per day in September. By the start of next year they will be looking to be producing 1,2 million barrels per day by next year.
There has been disagreements between OPEC partners, with both Saudi Arabia and Kuwait being involved in a price war. They are continuously lowering their prices in order to maintain their foothold in the Asian market.
The ever increasing dire economic outlook for Europe has led to a slowdown in demand. German exports were down by 5.8% in August making many analysts believe that the end of the 4th quarter could see them experiencing the double dip recession.
Although the US is going through an oil boom with the development of the shale gas industry (4 million barrels per day). It has helped them to stop importing crude oil from Nigeria, and has seen imports from OPEC being cut for the first time in 30 years.
To argue that the pressure being put upon the Russians is solely because of American policy would be a false position to take as there are many international factors in play.
We operate in a global market where due to their size one player cannot dramatically change the price of oil. It may create some temporary volatility in the price, but it cannot create an overall trend.
Although politicians like to take credit for things that have never been involved in. Arguing that the USA has forced the Russian economy to its knees would be a false position. The Russians find themselves in the unfortunate position of being in the perfect storm of unfortunate events.
This is a guest editorial by Paul Orford, VP Business Development, TopFX