UK, London / Trend corr. G. Ahmadova/ Interview with Nick Kochan, Contributing Editor to "The Banker" and contributing editor to "Euromoney" magazine.
1. Many experts confirm that the process of rejecting the dollar is already in full swing. What is your opinion on this?
The trend is now towards the world economy is now, whilst the dollar declines, emerging economies will grow stronger, and become more important as investment will flow into emerging markets. The euro will become a more significant currency than the dollar; the pressure to use the euro as the oil currency will intensify. Basically, the dollar is declining because of America's failure to get to grip with many internal inconsistencies and issues of debt. We are looking at a low dollar vis-a-vis the euro and primarily the euro-sterling, for I think an extended period. America has a major restructuring, which its external capital, its external debt will need to be tackled in the debt bubble. The dollar will weaken. There was a time when the dollar was three to the sterling and I think that's the way we're going by the looks of things. There is a big problem, a conflict between the financial sector's desire for lower interest rates, which will assist the solution to the credit crunch and the consumers' requirement, which is for a high interest rate, which will act as a buffer against inflation. So there're internal inconsistencies in the US. And that adds concern about the currency equally. The weak dollar is adding to the price of gold, which is reaching unparalleled heights. I think that is a very interesting barometer for expectation to the dollar.
2. In your opinion, is the price of oil, which is already breaking record, increasing only because of market speculations and political threats?
I think that's right. I think there are probably no clear answers as to why the price of oil is increasing. As I recall, Azerbaijan itself has an estimated price of oil per barrel of, I think, of forty to fifty [dollars] and it is remaining at double that. I think it is a combination of political pressures and nervousness, which is underlying, but I think the big thing is speculation. There are many hedge funds, investors, oil companies, buying into oil, because it is a kind of commodity at the moment. Of course, all commodities are very high right now and I think, in historic terms, oil is not at its peak, if you take into account currency and other matters. It's high, because we've been used to low oil, but in fact, in historic terms, it's been higher, with currency considerations, inflations. I think, yes, it is shocking, but it's not unsupportable.
3. Reserves of many countries are only shown in dollars, but part of it could soon be converted into euros in the near future. Even many OPEC countries have clearly stated this. What will happen if the world decides to live without the dollar?
That would have to. I wanted to say one other thing about the weak dollar. That is, of course, that it's encouragement it gives to American exporters. It will be interesting to see how American exporters benefit and start to turn the tide on a lot of imports from Japan, also China, also elsewhere, where stronger domestic currency vis-a-vis the dollar are starting to push up their currencies and push up export prices. The dollar-based commodities, dollar-based products will now be more competitive. There will be a sort of rebalancing of world trade.
Of course, if the dollar does so lose ground as a currency for oil and other major commodities that can only make it a less attractive, less powerful currency. It will accelerate its weakening position vis-a-vis the euro and other currencies. I am not convinced that the world is ready for the euro yet as the major oil currency, because, of course, euro itself has got many political issues, with the increase of the European Union; it is not such an immensely stable currency. But, nevertheless, it is strong and it is stronger than many people thought, and relative to the weak dollar and the weak US economy, where growth is starting to look like a recession, or rather the position is starting to show recessionary trends, one has to say that anything might be better than the dollar right now.
4. But the main concern of Arabic countries is caused not by inflation, of course, but the price of oil, which recently stopped just shy of the $100 barrier. What can be expected after this?
A high price of oil is fuelling inflation in Western economies. Economies are hugely dependent on oil in the West and a high price of oil adds to the cost of many commodities and motoring. It is an additional motor, an additional pressure on central banks' requirements to keep inflation low. It is adding to inflationary pressures, therefore it's adding to the pressure on the central banks to keep interest rates high. They have a mandate of restricting the growth of inflation. And of course, high interest rates in Europe, for example, make European currencies attractive and make the dollar less attractive. But inflation, we are now very much up against it on inflationary pressures. And I think this doesn't really bother, as you said, if the Arabic countries can maximise this moment, this temporary period, I mean, it will only be temporary that oil stays at a $100/barrel, it is a temporary phenomenon, as you said, due to political instability, economic instability, also, I suspect, there is a kind of weird relationship with global warming, I can't quite my finger on it, but I suspect that with strong price of barrel for oil we'll add two sorts of pressure: one, of course it makes it economically beneficial and feasible to produce oil, because the price is higher and therefore research, exploration and so forth can be paid for; but the other is, it pushes most of the countries suffering from high price to invest more in non-oil alternatives. So, there are quite a number of factors out of that.
5. As an economic analyst, how do you forecast the development of events in this scenario?
I do not believe that the price of oil will stay at $100 over the long term. It is a trade-off between what the Arab world producers can supply, to what extent are they prepared to keep the price high and therefore there must be some pressure on demand, putting pressure on demand, and their own internal needs for revenue raising, which requires them to pump out more oil and therefore. There is a delicate balance between the points at which production of too much oil at $100 will start to push the price down, so that supply will expand. And the West's ability to pay $100 was inflationary. I think the West will, as non-oil alternatives start to take hold, start to limit their demand that will start to put pressures on the price. I think in the medium term, we will see oil back at $60, maybe in a year's time.
6. As an economic analyst, how do you forecast the development of events in this scenario in Azerbaijan?
Azerbaijan will be a major beneficiary of the $100/barrel oil price. The government's policy, I believe, is the maximisation of its oil revenues for creating an internal self-sufficient, self-sustaining economy and I believe that is absolutely the right response. There is no mileage in buying with foreign currencies, which don't add to the internal self-sustaining ability, sustainability of the economy. The industry is better off creating internal industries, rather than buy imports with foreign currencies, which they can maintain over the long term when the oil runs out. I think there is a real benefit in yielding the high price now to further that internal industry substitute for foreign-currency based import.