Inflation Winning,Isolation Failing

"It is my way or the highway “, Under free market is a consumer's say. In oil market as the prices sway, Producers can show the exit way.

A price cap on Russian oil has almost been set.It is widely anticipated that such move would prevent Putin from raising war money.There is a hurry to fix the cap before winter, when the demand will be high and the war in Ukraine will enter a critical phase¹.

Russia is world’s second largest oil producing country. It is no marginalized oil producing country. In the oil market, there are few producers and many buyers. Unlike free market, consumers/buyers have less leverage on price of oil. In a free market, consumer of a good whose demand is price elastic and which has many substitutes can easily say, “It’s my way or the highway. “But when the good is oil whose demand is price inelastic ,consumer/buyer cannot set the price.

Just elaborating it a little bit.Oil is like rice,the main staple of the Bangladeshis. No matter how high the price is or low our income is,our adjustment to rice consumption is less compared to our consumption adjustment to snacks or cold drinks.When prices of snacks or cold drinks rise so high,we can survive without them. But we have to take rice(coarse rice) everyday in spite of a price hike.We may consume less but simply cannot discard them from our menu when the price is too high.Oil falls into the same category and Russia holds an important market share.There is no sanction on Russian oil. Yet Russia is profiting from the high oil price by supplying oil at a discounted price.

Under any price cap,Russia may simply stop selling oil. In that case,oil price may hike further.While the price hike continues, Russia may wait for the just capped price that will induce it to sell oil.

Even if there is a set price for Russian oil,Russia is a far more convenient position to exploit the situation. For instance, if the market price of Russian oil is $90/barrel and the capped price is $60/barrel,then the $60 may fetch the amount priced at $90/barrel.Just think the over invoicing and under invoicing mechanism in our export sector.The recipient country may quote a much higher quantity but may receive the quantity the Russians are willing to supply. In official papers,you may quote $60000 for 1000 barrel but actually you will get 666.66 barrel, the amount Russia is willing to sell at that price.And the whole process is done under a legal way.No one is there to inspect the price/quantity.Because the recipient country may remain mum and at the same time boast that it holds the high moral ground by buying the Russian oil at a capped price. Clearly, Russia here has a position to say,”It’s my way or the highway.”

Another scenario that is highly likely to emerge is the proliferation of black marketing activity. Since the start of the Ukraine war, there are several alternative payment systems available apart from virtual currency. In the legal market, Russia may sell 0.67 barrel at $60/barrel, the capped price. But it will sell oil at higher than the capped price but below market price in the black market. And the price may incorporate the cost of black marketing activity. Alternate payment system, deferred payment, barter trade could be used to make payment.

Russia is no Iran or Venezuela that other countries may prevent it from doing what it intends to do.Russia has firm control in the Arctic sea and Black Sea.It has significant presence in the Pacific Ocean and the Indian Ocean. It can carry out policing role in other countries. So it is not easy to comply Russia to others' rules.

Of course,the G7 countries who are devising the policy know it well. It is naïve to assume that they do not know this.They are trying to sell the argument:”Hey,look! We are doing this ,so we have high moral ground and we are not buying blood oil from Russia; in fact, we are punishing it by buying oil at a settled price below the market price.” But the truth is winter is coming and only Russia, which is closer to Europe, can supply oil and gas to Europe at a much lower price. Alternative sources are still costly and not ready. There is no one to inspect what is going through the Nordstream or the Bering Strait and what is the true amount.It is a mechanism to save faces of both the Russians and the West.

Many Russians,children of Russian bureaucrats,businessmen live in European countries. Russia does not want them to freeze in the cold.

Inflationary pressure may be making a dent in to ordinary people’s pockets. But it is also thwarting war by raising the operational expenditures.

War between Azerbaijan and Armenia and border clashes between China and India broke out when oil price was much lower. Cost of military mobilization was cheaper to engage in military adventurism.Now high oil price is holding back the Chinese economy. Its growth is shrinking.High inflation in Türkeye is holding it back from starting campaign in Syria.Many govts that are responsive to people’s reaction to rising price level are avoiding skirmishes and conflicts with neighbors in the midst of high inflation.

Now a price cap on Russian oil may alter the scenario. As military operational expenditures may become low, many countries may engage in military adventurism as the world may be busy in somewhere else. This is disastrous for the West because another front may give Russia the vantage position in the war in Ukraine.

Clearly,high oil price is doing great to western and Russian oil companies and inflation is thwarting war in other parts of the world by raising the operational expenditures of the military.

I think this whole oil price cap is a smokescreen to hide the dubious motive of making profit and prolonging the war. Best way to check inflation is to increase oil production in the OPEC countries in the Gulf where the US has strong presence. But such step is not to the best interest of the wider population.

The isolationist policy of the West is failing. Russia has more leverages in many countries in the post COVID 19 period than it had in pre-pandemic era. Right now Russia has more ability in shaping relations between Myanmar and Bangladesh. Further isolation will make it seek strategic partnership in other continents,offering critical technologies at affordable price. So this isolation and price cap are turning into a damp squib.

Notes And References:

1. "EU Rushes To Agree On An Oil Price Cap After Putin’s Threat”,Natalia Drozdiak,Jorge Valero and Ewa Krukowska,Blomberg,September 23,2022. For more read at https://www.bloomberg.com/news/articles/2022-09-22/eu-rushes-to-agree-on-an-oil-price-cap-after-putin-s-threats

CA Deficit: How Worst It Could Be

High oil price and dollar-euro parity Cause a hole in macro stability.

Events in Sri Lanka and the record current account deficit have pressed the panic button in Bangladesh. Despite repeated claims from the govt, rising fuel and commodity prices in the international market may further worsen the current account deficit. Last week,Bangladesh govt started a negotiation with IMF for a total credit of $4.5 billion for the next 3 years as budget assistance. Argument put forward for taking such a credit is that it bears low interest and it can be availed now before things turn into worse like Sri Lanka.

Despite a record inflow of remittances($900 million approx) in the week of Eid-ul-Azha,things have not improved much. Dollar market is still volatile and Bangladesh Bank regularly intervenes by selling US dollar. Current account deficit now stands at $15 billion. Bangladesh Petroleum Corporation (BPC) requires a subsidy of $2 billion to meet the import need of gas and oil. Bangladesh’s export destinations are mired in crisis. Increase in US policy rates may curb the inflation in United States, but investment in US may take a hit, further worsening the job prospect in US and casting a shadow over export order.Former IMF economist Kenneth Rogoff anticipates a covid recovery in China may push up again the price of oil in international market¹. If it happens,then there may be another blow to the inflation situation,tightening the consumer pockets of US consumer. In Europe, fall of euro against US dollar (appreciation of dollar against euro due to rise in policy rate in US) means our exporters will get less Taka against the same volume of exports to Europe. In addition, recession in Europe is more likely as investors would prefer America over Europe due to higher return on dollar there. And Europe will lose its competitiveness due to dollar euro parity and rising inflation at home. New York Times columnist Thomas L. Friedman fears the war in Ukraine may prolong to the winter as it is the best alternative for Russia to get some favorable outcome from this war². Due to gas supply uncertainty, Europeans have to ration their available supply in this winter.Rising cost at home and harsh winter may push NATO to influence Ukraine to cut a compromising deal with Russia. That means a prolonged war in Europe coupled with rising oil prices cast shadow over our export earnings. As fuel prices may be higher,our import spending may also be higher. This means our Taka may depreciate further. And remember next year(end) is the election year. Years during,before and after election generally witness big depreciation (see table)³.

Year	Exch.Rate(TK/$)
1990-91	35.67
1991-92	38.15
1995-96	40.84
1996-97	42.70
2000-01	53.96
2001-02	57.44
2008-09	68.80
2009-10	69.18

Source:Bangladesh Economic Review 2019

As Monsoon is not over ,govt fears further flood across the country by August. If it happens, then it will have further pressure on food security programs,prompting government to increase its spending on food import.Moreover,rising oil price also means we have to increase spending on irrigation during winter. So falling remittances, rising import expenditures may further worsen our current account deficit.

Notes And References

1. “Global Oil And Gas Prices Have Been Highly Volatile--- What Will Happen Next?”,Kenneth Rogoff,July 5,2022,The Guardian. For more read https://www.theguardian.com/business/2022/jul/05/global-oil-gas-prices-supply-demand-us-europe
2. “Ukraine War Is About To Enter A Dangerous Phase”,Thomas L. Friedman,July 12,2022,New York Times. For more read at https://www.nytimes.com/2022/07/12/opinion/ukraine-russia-putin.html
3. Bangladesh Economic Review 2019

Let It Pass

It's a raging storm ,we are in the midst.
In the middle of a field, like a tiny little grass.
Deep in our thought,hoping firmly with a clenched fist:
Let it pass, let it pass,let it pass.

Many years ago, I watched a movie whose name I could not recall(I think it was “We Were Soldiers”).In that movie, an American Army officer was about to go to a new frontline. Some nights before the deployment, he scribbled down few lines in his note book. I could not exactly recall the lines, but it goes like this: if you go to a war with a just cause and with the right side, win is inevitable; but if you jump into an unjust war, lacking support of most of the people,you are heading to a catastrophe.

Hardly anyone has ever imagined there will be another war in Europe. Both the Ukrainian and the Russian are decent and talented races. The word “Gentleman”,which has long been reserved for the English, could be aptly put after them. They share a common history and linguistic identity. However, independence is a thing that is even cherished by the most powerless and socially marginalized people.

The war in Ukraine reminded me the story of a Polish Army officer during the World War II. His story,title I could not recall, was translated into Bengali and regularly published on "Rohoshya Patrika", a local monthly on adventure and mystery. The Army officer was also Jewish. Poland was occupied both by the German and the Russian. It is a story of betrayal, persecution and stiff resistance of a tough race. Like Poland, Ukraine, as old as my first published poem, has been back stabbed by its allies. Ukrainians do not know fate of their country has been sealed. Ukrainians like the Poles put up a good fight and are showing their true color. Many captured Russian soldiers were telling that they had been told to take part in military manoeuver but found to their surprise in a real battlefield. Buccaneering Russians have gained some success but Ukrainians also put up valiant effort. It appears to me that it is going to be a protracted war unless the Russians pull out of Ukraine quickly or reach a consensus with the Ukrainians.

In Bangladesh, we are already feeling the fall-outs of the war. Inflation,unofficially crossed the double digit mark, is making a dent into the pockets of the ordinary citizens. Ukraine is the 3rd largest producer of corn and 5th largest producer of wheat. Russia too is one of the top producers of wheat.Bangladesh imports wheat from both the countries.Protracted war and subsequent sanctions will make the wheat procurement harder.In addition, corn is used to make poultry feed and fish feed. Food prices are likely to rise.

Russia is financing development projects in Bangladesh. An $11 billion Russian credit is behind the construction of country’s first nuclear power plant. $100 per barrel oil price underscores its importance.In winter, when water level goes down, water pumps are needed to irrigate the winter paddy fields, vital for ensuring our food security. This irrigation process is diesel-intensive.In 2012-13,government provided a total subsidy of TK 427.46 billion and TK 135.58 billion was oil subsidy¹. When oil prices were low,no subsidy was needed for three consecutive years.A year ago government gave a subsidy of Tk 530 billion,of which diesel subsidy accounts Tk 230 billion².Now with higher oil prices,more subsidy is needed.

2400 MW nuclear power plant to some extent will ease the diesel-subsidy burden. Most of the work is complete and first plant will come to operation next year.But sanctions on Russian bank VEB,which is financing the project, make it difficult to carry through³. And Bangladesh has to rely more on costly diesel to ensure its food security.

The sanctions on the Russians are useless. Because it only drives up the oil and gas prices. Though initially Russia may loose some market share ,it will cover the losses with higher oil prices. Iran somehow skirted these sanctions selling oil prices below market price. In a scenario like more than $100 a barrel, Russian offer in the below market price will be much higher, making it in a far more comfortable position to finance war. Already, major oil producing countries show reluctance to take tough stance against Russia, second largest exporter of gas and oil. This higher fossil fuel price only swells the pockets of American and Russian companies and makes it easier to offer corona incentives to their citizens and companies. Moreover,it will proliferate black market activity and who will inspect whether Nord Stream is really complying the sanctions! Meanwhile,ordinary Ukrainians endure ordeals of war in cold basements and bunkers.

The effort to keep the Russians outside the international financial system is only heralding dawn of digital currency ,paving their path for future legitimacy and widespread acceptability. Iran has already dealt with such sanctions by floating new banks, doing currency swap or dealing between central banks.Moreover,ban on SWIFT will make the alternate payment systems floated by Russia and China operational pretty quickly⁴. Though they may not wield significant influence, but endorsement of twenty or more countries to such payment mechanism may undermine any SWIFT restriction in the future.

The war in Ukraine may work as a precursor to other territorial misadventure in future. We should stay aloof from such temptations. One of the pitfalls of such war is that they manufacture historical precedent for future war! Photograph of a Muslim Imam blessing the Nazis in occupied Yugoslavia played crucial role in ethnic cleansing of Bosnian Muslims in the Balkan war.War concessions laid out by allied forces in World War I played some role in creating the second one.

What is important is maintaining the high moral ground, standing for the just cause, respecting the international norms and making legitimate demands to be heard and accepted. By not dragging ourselves into any conflict ,we also thwart future conflicts. What matters is the brand Bangladesh. More shinier and likable it will become, more prosperous we will be.In a country where most of the people cannot get three full-course meal every day, war is a luxury that it cannot afford. We do not confront a raging bull or a storm,we just wait and let it pass. Time is the best healer.

Notes And References:

1 Bangladesh Economic Review 2019

2 "Be Rational About Fuel Price Hike Because Subsidy Has A Limit: PM", The Business Standard,November 17,2021. For more read at https://www.tbsnews.net/bangladesh/be-rational-about-fuel-price-hike-subsidy-has-limit-pm-330982

3 “Bangladesh Bank Warns Of Transactions With Russian Entities Amid Sanctions Over Ukraine”,bdnews24.com,March 04,2022.For more read at https://m.bdnews24.com/en/detail/economy/2024811

4 “Aat Bocchor Agey Thekey Prostoti Nicchey Russia(Russia Taking Preparations For The Last 8 Years)”,Daily Prothom Alo(Page 12),February 28,2022.

[Note:This piece has been updated on March 09,2022 at 12:18 Bangladesh Standard Time (BST).The update includes reference to the Tk 530 billion subsidy in 2021.]