The United States is unlikely to have the best investment environment in the next five years, according to Evgeni Nadorchin, a chief economist at Trust bank. Bigness.ru requested Nadorshin to comment on recent developments in the U.S. securities market.
The last week brought sad news for the White House. To begin with, Japanese companies agreed to make payments in yens for Iran’s crude imports last Tuesday. The Japanese had previously paid for Iranian oil in the U.S. dollar. In fact, Iran had earlier signed an agreement on the yen payments for its crude exports with a number of small-sized Japanese refineries. Two leading Japanese oil exporters of Iranian crude joined the agreement last Tuesday. Japan is one of the world’s major oil exporters. The country has sent a clear message to the global oil market by switching to the yen in its payments for Iran’s oil.
“The dollar isn’t a convenient currency for Iran’s oil receipts for political reasons. The dollar payments for oil are made via correspondent accounts at U.S. banks,” Nadorshin said, in an interview to Bigness.ru. “Keeping in mind that Iran is listed by the U.S. government among the countries of the “axis of evil,” the U.S. government is not only aware of those accounts, it can control them. The U.S. government even blocked certain accounts in the past,” Nadorshin added. From the technical point of view, it would be more difficult for the United States to block such accounts in a Japanese bank.
A mere 15 percent of Iran’s oil income is now being paid in the dollar. The biggest part of Iran’s income (65 percent) from crude exports is in euros. The yen payments account for 15 percent of Iran’s oil income.
Another of the last week’s unpleasant surprise for the dollar economy was of Asian origin. According to data released by the U.S. Treasury last Tuesday, the region’s major economies, namely, Japan, China and Taiwan unloaded some of U.S. Treasury bonds from their foreign reserves. The amount of U.S. Treasury bonds shed by the three countries totals $52 billions.
Compared with the countries’ aggregate amount of foreign reserves, which are worth trillions of dollars, the above sum is fairly small. However, the fact is of importance: Japan, China and Taiwan cut their investments in U.S. Treasure bonds to a record low in the last five years.
The United States have expressed concern about the move since the above three economies plus Hong Kong and South Korea account for 51 percent ($1.14 trillion) of the total amount of foreign investments in U.S. Treasury bonds.
Tougher times could be in store for the U.S. Treasury following all those developments if the government fails to curb inflation, according to Mark Ostwald, an analyst at Insigner de Beaufort.
“The Asian banks didn’t plan shedding their dollar reserves completely,” Nadorshin said in his interview to Bigness.ru. He stressed the point that $52 billion is a drop in the water for the countries “whose combined foreign reserves exceed two trillion U.S. dollars.” The move falls into the trend of the last several years i.e. the dollar proportion of foreign reserves is on the decrease.
Nadorshin reminded that U.S. Treasury bonds were traditionally considered gilt-edged securities.
However, now investors are concerned about the fact that they bought assets in a currency that is growing increasingly weaker. Besides, the U.S. economy may be heading for a recession.
The unloading of dollar assets was inevitable. On the contrary, the last several weeks have seen an inflow of $11 billion to investment funds that put money in the developing markets e.g. Russia.
Speaking of the negative impact on the U.S. economy in the wake of the events that occurred last week, Nadorshin argued that they might indicate a long-term economic crisis the global superpower is currently going through. “The U.S. economy has been showing its weakness throughout the year. It’s a weakness that prevents the economy from keeping the dollar strong against other currencies as the main unit of account. The economy has to tackle a number of issues including deficits and structural issues. The economic measures proved to be ineffective in resolving any of those issues. The country recently experienced a suprime mortgage crisis that will probably help them resolve the issues, which they tried to resolve by increasing interest rates,” Nadorshin said in his interview to Bigness.ru
Translated by Guerman Grachev