Russia Makes Deal with BP for Oil

Kremlin-controlled oil company Rosneft has recently signed a deal with BP to search for new deposits of oil and gasoline in the Arctic waters off Russia's Northeastern coast, according to a recent WSJ article. The deal gives BP a 9% share in Rosneft. Revenues from oil sales currently account for roughly half of the country's budget, but their old fields are declining.

In terms of modernization, Russia trails behind, but they require revenue to catch the country up, revenue that will hopefully be provided by projects such as the one planned for the Arctic ocean. But what will BP get out of this venture? Hopefully a growth in credibility.

BP has recently come under criticism from the Western front for their Eastern European deal, but have defended themselves by arguing that the deal will allow them to "take advantage of a changing business landscape," according to this Guardian article from January. Western critics worry that this is a sign that BP is turning their back on interests in the United States, but Chief Executive Bob Dudley assures that the company remain committed to the US.

But what will this mean for the current Russian economy, which has experienced a downturn lately due to the drying up of oil fields in Siberia? This deal, in conjunction with a $3.8 billion venture with Pepsi, will hopefully bolster confidence in the Eastern European country's economy and bring about long term investments from outside investors. Foreign investors can bring about more efficient management, increase technology and spur growth. These two deals could bring about the kickstart Russia needs for modernisation, ideally improving Russia's rather poor track record in foreign direct investment (Russia and India Report).

Posted by Elizabeth Hope

Gold Prices Begin to Fall in 2011

After a huge rise in value in 2010, the price of gold has dropped 6 % a month into the New Year (CNN Money).  People around the world have been looking for different ways to invest and save their money while the global market has been at unease.  

(Courtesy of CNN Money)

Gold is one of the safest believed commodities that can always be exchanged at solid rate.  By the end of 2010, gold had been valued at $1,421.40 per once, over 300 dollars more than the price a year earlier.  But as the global markets appear to be improving (not fixed, as clearly stated in the article), investors’ faith is starting to rise and more people are beginning to invest in bonds and stocks once again.

Holding gold can benefit the individual in times of savings, giving them a sense of security when a certain currency is at unease; however, when more and more people begin investing in gold rather than in stocks and bonds; this could limit economic growth within a country.  This idea limited investing can be seen as a whole over the past few years during the recession.

Is it good that gold is losing value for the global economy?  Should more people invest in stocks and bonds or test their luck with the price of gold? 

References: CNN Money.  “Why Gold is Losing its Luster”.  http://money.cnn.com/2011/01/27/markets/gold_price_decline/

(Post by Evan Amano)

Higher Wages in China = Huge Opportunities for Mexico

It seems the workers in China aren’t the only ones benefiting from the rise in wages; Mexico has received more offers from US companies to build factories in Mexico over the past year, Reuters states.

Mexico’s wages are now only 14% higher than those in China, a number which was once 17 times bigger in 2002.  Along with the closing wage rates, the price of oil has been going up over the last two years; with these two factors in mind, US companies have looked at Mexico to build their foreign factories.  80% of Mexico’s exports already are sent to the US.

For the US, this would be a good opportunity to continue building a relationship with Mexico.  Not only are the costs beginning to even out with China, but as stated in my most recent post, having close trade proximity is ideal for both countries.  Not only that, but Mexico also imports twice as many US goods than China.  Therefore, helping stimulate Mexico’s economy by providing labor opportunities should only benefit American exports too.

Though there may be concerns with the political and social stability of Mexico, the opportunities to improve the environment surrounding these horrible times is evident.  Look for Mexico to be on the rise in 2011 as they the people are able to gain more employment prospects.

What do you think of building more factories with our neighbors of the south?  Should we still stick with China because their costs remain lower?

For more statistics on Mexico vs China, follow the link below

References: www.reuters.com/article/idustre70p70l20110126

(Post by Evan Amano)

North and South Korea: Is Cooperation Economical?

This past weekend, CNN reported that North Korea has been making attempts to bring peace amongst South Korea.  North Korea is asking the South Korean’s to “open their hearts”, and try to ease the tension that has been going on for decades.

But what I was curious about was to look at this from a different viewpoint than merely political standards.  These talks could be stepping stones to opening up North Korea to the global economy as a whole.  North Korea, a communist nation, has been hit with low economic growth dating back to the 1970’s due to limited trade with the outside world.  South Korea, however, has become one of the fastest growing developed countries in the world, ranking 15^th in GDP.  South Korea also managed to avoid the global financial crisis in 2008-present.

From a geographic standpoint, it would seem logical for South Korea to improve its ties with North Korea.  Even now there is the Kaesong Industrial Region, which has brought numerous jobs to North Koreans due to cooperation with South Korea.  If North Korea were to have more joint expenditures with South Korea, perhaps the success reached upon South Korea over the past decades could rub off on the neighboring country. 

On the other hand, North Korea continues to stand as a threat for not only South Korea (recently in 2010, two South Korean marines were killed by North Korean troops), but for many countries around the world.  Trading with a country that does not stand by the rest of the WTO or other trade organizations could cause backlash towards South Korea.

I personally believe that South Korea should consider trading more with North Korea.  As long as it has the approval from their current trade organizations, developing increased trade with geographically close countries seems to be a smart move.  Not only that, but as it can be seen in international trade, South Korea may hold an absolute advantage on whatever they produce for North Korea, but there will be some products or services that North Korea can offer towards South Korea (comparative advantage).  Though I doubt any improved economic decisions will be made anytime soon, it would be interesting to keep an eye on the political talks that are planned to occur more this year.

On what degree do you believe North and South Korea should get along?  Is it beneficial for both parties to cooperate economically?

References: CNN World. http://articles.cnn.com/2011-01-07/world/north.korea.proposal_1_pyongyang-and-seoul-mount-kumgang-dprk?_s=PM:WORLD

(Post by Evan Amano)

Global Steelmakers Eye Floods in Queensland

Over the course of the week, Queensland, Australia has been dealing with floods that have devastated numerous businesses.  The global steel industry has been hurt tremendously due to the inability to supply coking coal to firms around the world.  75% of the coal fields are unable to operate at the time being, states Anna Bligh, the current Premier of Queensland.  BBC news reports that the Queensland flood could be responsible for a global shortage of steel. 

  During the previous flood in 2008, prices of coking coal rose to $305 per ton.  The current Queensland price is now $253/ton, and stood at $225/ton three weeks ago.  What has been seen in the past due to shortages could be likely again; however, steel analysts seem to believe it is too early to tell whether or not this will have such a drastic effect.  If there is enough coking coal in reserves, there may not be a huge hike in the price.

The Queensland coking coal plays a huge part in steel making globally.  China Steel, a major steel producing company, usually gets 80% of its coking coal from Queensland fields.  Due to the floods, China Steel must now look into the spot market for other alternative supplies to immediately get the necessary quantity for their firm. 

The global price for coking coal currently stands at $250/ton, which is slightly lower than the current Queensland price.  But due to the floods, the global price has gone up by 11%.  It seems likely that there will continue to be a short run price hike due to the shortage, and unfortunately for many firms, may be forced to postpone their work or lose jobs due to the current scenario.  As long as the fields remain flooded, prices will continue to rise.  When the floods cleared in 2008, the price eventually began to fall when coking coal was able to be supplied to companies, but as of now, it is completely uncertain when the floods will stop in Queensland.

References: BBC News. http://www.bbc.co.uk/news/business-12110138

(Post by Evan Amano)

Estonia Added to the Eurozone to Start 2011 While the Euro Drops

As we enter the new year, Estonia has become the newest country in the EU to adapt the Euro as their national currency.  Unfortunately for the Eurozone, this will seem to come at hit to the Euro’s value.  Financial Times reports that there was an immediate drop found on the Euro in correlation to not only the dollar, but the yen and the pound.  The pound had a large drop with the US dollar.  Japan has stated that they support the dollar, as their yen gained tremendous value over the dollar in 2010. 

           

Forex traders have stated that they do not believe that the drop in the Euro was due to Estonia.  This past year has really put doubts within the Euro, and though there was minor growth by the Euro towards the US dollar at the end of 2010, the strength of support by investors is not completely there.  It should be interesting how the rest of the year develops for the Euro and the US dollar.

References: Financial Times. http://www.ft.com/cms/s/0/0e1b1ca0-1730-11e0-badd-00144feabdc0.html#axzz1A1d5j4l6

(Post by Evan Amano)

Upholding Newton’s 3rd Law with UK Bank Bosses

It seems that for many situations among failed banks around the world today, responsibility seems to be avoided by the upper positions of big banks.  As talks of hits on investors for the recent bail-out of Ireland continue, the UK’s Financial Services Authority (FSA) is looking towards the bosses themselves, BBC reports. 

In the report, discussions that bosses of failed banks in the UK could face a “pay claw” of two years due to excessive risks the banks chose to take, one of which was the Royal Bank of Scotland (RBS).  Lord Turner, chairman of the FSA, has stated that this will encourage more appropriate risks established by banks, in hope to avoid any more bank failures.  Also stated is that rulings may also lead to individuals losing privileges to work in the banking sector.

The RBS had to be bailed out two years ago and suffered no consequences at the time being.  FSA officials had stated that there was no support to punish individuals because of the ill-advised risks that the bank ended up taking at the wrong times. 

It seems that there is a common trend in who actually deserves the blame for when banks fail, but it does need to be made clear to many that though high risks can obviously yield high rewards, it is not ideal when the risks can cause the dismantling of the banking system.  Even though pay claws, as stated in the article, are a rule surveyed in the US, the overall responsibility for big banks to bounce back from these risks does not seem to get fully resolved.

Since bank directors are those acting on high risk investments, should they be the ones who take the hit if the bank fails?  What needs to be done to limit high risk banking investments and who should be held responsible for the banks that may fail?  Would it be right to put full blame on these banking directors, or perhaps should investors be more cautious in where they place their money?

Reference: FSA says failed bank bosses could have pay clawed back

(Post by Evan Amano)