The Impact of the Value of the US Dollar on businesses in your country

Student: Karolina Maibakh

Module: Business Environment

Professor: John Wetherell

Word Count: 1702

Deadline: 5th of December
The Table of Contents:

1. Explanation of why the value of the US dollar has been falling recently.

2a. What does a fall in the US dollar mean for the businesses operating out of your
country (both domestic and foreign owned ones)?

2b. Choose a domestic company from your country. Explain its trading relationships
with other countries and illustrate the impact of the US dollar on business using this
company as an example.

3. Evaluate (using different economic indicators) if a fall in the value of the dollar
benefits the economy of your country.
 The Value of the US dollar has been significantly falling for the past few years.
There are a lot of reasons that have caused it.

First, fiscal packages of the U.S. government are very aggressive comparing to the
ones handled by Europe, China, Russia and other countries. The risk of inflation in the
United States is extremely higher than in other countries.

Also, new president of the United States, Joe Biden is willing to improve the economy of
the country by pushing these aggressive policies. So, this is one if the reasons Dollar
will keep declining if this stays a policy in the US.

The fall of the US dollar began in 2020 as seen in Appendix 1. The chart indicates the
value of the US dollar for the past 5 years. It can be seen that on March 19, 2020, the
US Dollar was at its peak. However, it was affected by the beginning of the Pandemic,
and it started to fall.

In the middle of July, the WSJ Dollar Index was 90.57. Just before the election,
November 3, the index stood at 88.25. Then the decline in the value of the U.S. dollar
can be seen.

Also, production at U.S. factories have fell dramatically for the past 7 months breaking
all the hopes to increase the interest rates.

The other reason for the US dollar to drop is the current account deficit as the shift was
the largest erosion on the record and deficit in 2021 at its worst since 2008.

Driven by a surge in the federal budget deficit, domestic savings are deteriorating driven
by Covid. If a country is short of savings and wants to invest and grow, it must import
surplus savings from abroad to square the yen and run a current account deficit to
attract foreign capital. Domestic net savings fell below zero for the first time in 10 years
in the second and third quarters. A 3.8 percentage point drop-in domestic net interest
rates to minus 0.9% in the second quarter was also the largest quarterly decline ever.

Another reason for the US Dollar decline is the Federal Reserve. When the current
account deficit is under pressure, usually bailout is left to the central bank by tightening
monetary policy. That doesn't apply to the Federal today. With the introduction of a new
target system for "average inflation," the Federal Reserve has signaled that it will act
late rather than early to counter rising inflation.

This is the case for a further sharp fall in the dollar as the United States increasingly
relies on foreign capital to fill its shortage of domestic savings and the Fed's open
quantitative easing has created a large surplus in excess liquidity. It seems to be more
convincing than before.

With an ongoing pandemic and an economy on the brink of a double-bottomed

recession, the Biden government has no choice but to choose another round of major
fiscal relief. This result affects any economy. For savings in the United States, that
means a weaker dollar.
 What does a fall in the US dollar mean for the businesses operating out of your
country (both domestic and foreign owned ones)?

Russia is very dependent on the US Dollar and its value effects businesses.

The fall of the US Dollar value has a positive effect on domestic companies as the
production costs are decreasing, as the price of raw materials falls as well. So, smaller
companies benefit from the US value decrease.

The financial performance of 76% of small and medium-sized businesses in Russia

depends on the dynamics of exchange rates in the foreign exchange markets, follows
from the results of the November all-Russian survey (available from RBC) 1609 of small
and medium-sized companies conducted by the research agency Magram Market
Research in conjunction with Opora Rossii and Promsvyazbank (PSB). Every fourth
company in the SME sector, importing foreign components, is forced to completely shift
the costs of changing the ruble exchange rate to the consumer, promptly raising selling
prices. Therefore, the fall of US dollars has a huge role in Russian economy.

In 2020, the dollar / ruble exchange rate fluctuated from 62 to almost 82 rubles. for the
dollar. There were two bursts of strong depreciation of the ruble - in March and in
October - early November, in both cases the dollar rose above the level of 80 rubles. In
the spring, the collapse was associated with a sharp drop in oil prices, and in the fall -
with geopolitical and sanctions risks ahead of the American elections.On November 2,
before the US elections, the exchange rate dropped to 80.9 rubles. per dollar and up to
94 rubles. per euro (for comparison: in June, the ruble traded at 69 rubles per dollar).
The devaluation led to an increase in consumer prices, and the annual inflation in
November went beyond the target of the Central Bank and reached 4.42%. (CBR,
2021).

The most affected by the exchange rate fluctuations are enterprises in the production
and trade field, to a lesser extent-companies in the field of providing services sector.

The dynamics of rates affect almost all companies involved in foreign markets. The
activities of only 23% of the interviewed entrepreneurs do not depend on the exchange
rate - these are companies oriented towards the domestic market and do not purchase
imported products.

Therefore, the fall of US Dollar value is beneficial for domestic smaller businesses as it
decreases their production costs and the price of the raw materials. Otherwise,
domestic companies need to increase prices which then has a negative impact on the
number of buyers.
 LUKOIL and its trading relationships with other countries the impact of the US
dollar on business using this company as an example.

In order to show the trading relationship with other countries and the impact of the US
dollar on the domestic company, I have chosen a Russian Company, Lukoil. LUKOIL is
one of the largest vertically integrated oil and gas companies in the world, accounting
for over 2% of world oil production and about 1% of proven hydrocarbon reserves.

LITASCO (LUKOIL International Trading and Supply Company), which conducts all the
Group's shipping and trading businesses outside Russia, has been the LUKOIL Group's
only international trading company since 2000. Transferred all export activities to a
single operating company, simplified export planning, optimized export flows and
ensured export transparency of petroleum and petroleum products. LITASCO
consistently improves the profitability of its trading operations by optimizing its supply
chain management system and increasing the volume of transactions with third parties.

LITASCO has its subsidiaries and branches in Sweden, Germany, Middle East, USA,
Singapore, China, Russia and in the Netherlands.

The exchange rate of the national currency against the US dollar and the euro affects
the stability of Lukoil as well as its trading relationship. Many contracts of PJSC Lukoil
are denominated in rubles, however, the main currency for calculating hydrocarbon raw
materials on the international market is the US dollar. Changes in the quotes of the
currency, in which a significant number of contracts of the company are concluded,
directly affect its financial result, and, accordingly, the share price.

LUKOIL is subject to foreign exchange risks in both the short and long term as it
operates in many countries. The exchange rate of the Russian Ruble to the US Dollar
has a major impact on transaction results.

In the short- and mid-term the Company is subject to foreign exchange risks since it
operates worldwide. The exchange rate of the Russian ruble to the US dollar produces
the greatest impact on transaction results, as the company's export revenue is in dollars
and its main cost is Russian rubles (Appendix 2).. The company is currently working on
building a financial risk management system that includes hedging against currency
risk. Moreover, to mitigate its foreign exchange risks it has been granting loans to the
LUKOIL Group entities denominated in local currencies as part of inter-group financing.

Evaluate (using different economic indicators) if a fall in the value of the dollar
benefits the economy of your country
The fall of the US Dollar Value benefits Russian Economy. The products of domestic
manufacturers are becoming more competitive, both in foreign and domestic markets.
That is, producers and exporters benefit. A small devaluation in the short run leads to
an increase in poverty, but in the long run it is not so bad, as the country's products
become more competitive.

Another reason why Russia mostly benefits from the fall of the US Dollar, most of
Russian citizen get paid in rubles. Moreover, wages are not indexed, that is, they do not
grow along with inflation, compensating for the depreciation of the ruble. With the
depreciation of the ruble, prices for various goods (especially imported ones) are
growing.Since more and more rubles have to be spent on foreign currency to purchase
them from a foreign supplier. Domestic goods also rise in price due to growth in
production costs for various reasons (import component in production, the growth of
"communal services", the need to raise workers' salaries, etc.), (Russia Today, 2021)

As seen from Appendix 3, that indicates the Currency rates Russian Ruble to US Dollar.
It can be seen how unstable the Value of the Russian Ruble to the US Dollar.

Due to such unstable situation with the value of the US Dollar, Russian Government
agreed on removing dollar assets from its wealth funds and will replace it with gold and
Euro. This decision was made due another round of the United States Sanctions
against Russia (CNBC, 2021).

The US dollar component of the fund has been reduced from 35% to zero and the
British pound component has been reduced to 5%. The ratio of the euro to the Chinese
yuan increased to 39.7% and 30.4%, respectively. According to a statement from the
Ministry of Finance of the Bank of Russia from July 1, 2021, the Japanese yen has a
4.7% share, cashless gold has a 20.2% share, and there is also a foreign currency-
denominated federal budget fund. Equivalent to 316 billion rubles credited to the fund
on July 2, this year to form it in accordance with the law of the Russian Federation. "
References:

• Cbr.ru. 2021. Official exchange rates on selected date | Bank of Russia. [online]
Available at: <https://www.cbr.ru/eng/currency_base/daily/> [Accessed 29
November 2021].
• Korsunskaya, D., 2021. [online] Available at:
<https://www.nasdaq.com/articles/russia-to-remove-dollar-assets-from-national-
wealth-fund-finmin-2021-06-03> [Accessed 29 November 2021]
• Tradingeconomics.com. 2021. United States Dollar | 2021 Data | 2022 Forecast |
1971-2020 Historical | Quote. [online] Available at:
<https://tradingeconomics.com/united-states/currency> [Accessed 29 November
2021].
• ПРАЙМ. 2021. Рубль растет, доллар падает: куда теперь девать
валюту. [online] Available at:
<https://1prime.ru/Financial_market/20210610/833892412.html> [Accessed 29
November 2021].
• РБК Инвестиции. 2021. Что будет с курсом рубля к концу года и стоит ли
сейчас покупать доллар?. [online] Available at:
<https://quote.rbc.ru/news/article/60d5cc9d9a79479b9d9ea60d> [Accessed 29
November 2021].
Appendix

Appendix 1. The value of the US dollar for the past 5 years.

Appendix 2. Export Revenue cost in Russian Rubles.

Appendix 3. Currency rates Russian Ruble to US Dollar.