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You are a consultant of the large pharmaceutical company Sg-Rx, which is known for its innovative new drugs targeting the premium markets. Currently the company is producing and selling its products...

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You are a consultant of the large pharmaceutical company Sg-Rx, which is known for its innovative new drugs targeting the premium markets. Currently the company is producing and selling its products in Singapore only, but it is thinking of expanding its sales in Russia.
Question 1. Currency concerns
Russia is a major exporter of oil and natural gas, and its economic growth over the past decade has been driven primarily by energy exports. In recent months, the price of crude oil has been increasing rapidly amid fears that political tension in the Middle Eastern countries may potentially disrupt energy supplies.
a. Everything else being equal, how would the increase in oil price affect the value of Russian ruble? b. In the news, you heard this statement: "In recent months, inflation in Russia has come down significantly from record high levels seen last year, which has reduced the pressure on the Russian central bank to strengthen the ruble." Please explain why.
Answered Same Day Dec 31, 2021

Solution

Robert answered on Dec 31 2021
98 Votes
Solution to Question 1
(a)
Rise in oil prices is one of the most important reasons for commodity price inflation in a
country. This rise in commodity prices would cause the export demand for Russian goods to fall
as the Russian merchandise would be expensive as compared to other competitive goods in the
world markets. This fall in demand would also result in fall in demand for Russian Ruble in the
Forex markets. With a simple Demand-Supply mechanism it can be seen that the fall in cu
ency
demand would push down its market value. This fall in the market value of a cu
ency is termed
as Depreciation. When a cu
ency depreciates, its nominal exchange rate would increase. This
implies that after depreciation, one has to pay more units of Rubles to buy one unit of USD.
There is a direct relation between the price inflation and cu
ency depreciation in an economy.
But Russia is the second largest oil producer and one of the major oil exporting countries
in the world. Apart from the Middle East, it is the major supplier of oil to U.S. and the Euro
zone. The rise in oil prices is welcoming news for the Russian economy. It will result in a spurt
in oil revenues as the demand for oil is largely inelastic across all nations. There would be
economic growth from increase in GDP and per capita income levels. The increase in GDP
etween 1999 and 2005 was 48%. The figure for increase real income of the Russians for the
same period was 46% (Kuznetsova et al). Strong growth indicators would strengthen the
domestic cu
ency. Ruble will be expected to appreciate against other cu
encies (Kuznetsova et
al). Thus Russia, being a net exporter of oil will benefit from oil price inflation as compared to
the countries which are oil importers. An increase in the oil prices would improve the cu
ency
value of rubles.
(b)
Rise in oil prices over the years has resulted in increased trade revenues. This has resulted
in the built up of impressive amounts of cu
ent account surpluses over the years (Kuznetsova et
al). Thus the money supply in the economy has been increasing. More money supply will lead to
inflationary pressures in the economy. Thus high inflation rates has always been a cause of
concern for the Russian government putting pressure on the central bank to strengthen the Ruble
against any fears of possible depreciation in its value.
Unlike the regular trend of high inflation, in May 2012 the inflation figures stood at
historic low levels (Rapoza). The inflation was 3.6% for the last three months. The food inflation
stood at 1.7%. The Central bank targets to maintain inflation between 5-6% which is a desirable
ange to avoid fears of any possible slowdown in the economy. With an expected rise in food
inflation and rise in the value of exports, the inflation is expected to be 5.8% in a few months
from now (Rapoza). Thus the Central Bank seems to be relieved from the job of monitoring
money supply in the economy for some time.
Solution to Question 2
(a)
With the release of the 2020 Pharmaceutical Development program, the Russian
government would provide financial support of $4 billion, as promised by the PM, which is...
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