tv Inside Story Al Jazeera December 17, 2014 9:30am-10:01am EST
should. >> when coupled with a sense of adventure, it can make for a pretty good retirement. al jazeera, ecuador. >> al jazeera.com for all the news in the background. >> the russian ruble is tanking and western sanctions over ukraine. later the cost of flying. how come it has not dropped with the price of oil? that's inside story. >> hello, i'm ray suarez. you know you've got a problem
when your central bank raises interest rates 6.5% overnight to 17%, and your currency still continues to tumble. it would be tough for any country, but the russian industry is anemic, and at the same time the amount of money they're making from something the world does want to buy--oil--is collapsing. russian's imported goods will zoom in price as the christmas and holidays approach, russians are flocking to buy consumer goods before the prices jump. meanwhile the government is pushing down reserved trying to support the ruble. now it's look line the bad 'ol days in russian, the 1990's. >> reporter: the russian ruble is in trouble. russia's central bank suffered
a massive interest rate hike. the central bank said in a statement, the ruble plummeted a quarter of its value. and in the past year the ruble has depreciated 50% against the dollar. it settled at one point at a low of 72 rubles. the drop is attributed to ongoing western sanctions because of russian's actions in ukraine and the falling price of oil, this has put the russian economy in its worst shape since 1998. saudi arabia's move last month to convince opec to keep production at current high levels did russia no favors. it's estimated the price of oil needs to be around $100 a barrel for the country to pay its bills. the current price, hovering at
less than $60 a barrel. russia's central bank said tuesday the economy would contract up to 4.7% in 2015. if the oil price remained at $60 for the next 12 months. >> without any doubt the situation is really very difficult. and it requires absolutely coordinated actions of the government, and the central bank. and we're ready for such coordination. >> as the russian stock market fell on tuesday officials there continue to look for a way to prevent a bigger crisis. >> last time on the program we took a broad global look at the effect of the collapse o of the price of oil. now we look at two big issues, russia, and then one big industry, passenger airlines.
prices are not coming down. why? we have our guests . steve, let me start with you. what does it tell you when we start this reengineering of the interest rate the ruble continued to fall? >> well, ray, you're set-up piece was very clear on the background, which i appreciate. if we get a little more granul granular, november 11th is the key day as far as the ruble is concerned. that is when russia made an error. they decided to float the ruble, let it float freely.
as a result of that the ruble since november 11th has gone down 31%, and crude oil has done down 17%. and as you alluded to, the interest rate charge by the russian central bank is about double from 9% to 17%. this is pretty nasty, but it will probably get nastier. >> when they did that. when they decided to let the currency float and then it just kept dropping, does that mean the world looking at the ruble thinks it's worth even less now as a currency? that it just won't buy very much on the world market? >> well, in the market the value of the ruinel is declining. in other words, once they decided to float on november 11th, the ruble did not float on a sea of tranquility. it's been a rough sea and a
rough going ever since. the big reason for that is that the large industrial enterprises in russia owe debt, and that debt is denominated in dollars, and they have to be paying off some of that debt over time, and so they have a steady demand for dollars that are required to pay the debt off with. and it's that high demand for dollars relative to the rubble sub that puts the pressure on it. at present there has not been a big panic by the smaller people , shall we say not the industrialists, but that could very well come. then you get a situation like we had in august of 1998, when on the 17th russia defaulted on its debt, and we had all kinds of international ramifications, as
you'll recall, from the ruble crisis. we had one big hedge fund from new york that went under. >> what happens inside the business? you've got the main commodity, oil, trading on the world market, and people are able to buy it more cheaply. inside russia you've got big energy companies selling globally. do rich people try to start getting their money out of the country? redenominateed in dollars? what are the kinds of behaviors you start to see when the table is set this way? >> when your currency has this kind of a value, you do want to minimize your risk and exposure. so the normal extinct is going to be to try to get out of the currency. we might see the big russian businesses try to liquidate all of the
ruble-denominated holdings, especially since they're not bringing back on the product they're selling, they're not bringing back home as much dollars and cure rows as they used to given the lower prices. >> is this something that in the short term is--it's uncomfortable. it's messy, but it's not too big of a deal. the longer oil stays low, $60 a barrel, it really does become a big deal. >> it really does become a big deal. we're talking about just the price of oil, but we have to think how those companies are getting to the product they're selling. they have to make investments at moment. if they're not bringing back as much profit internationally, that will become an issue. >> what are we missing? are we missing the fact that russia still has money in the bank in the form of things that
sleep under its soil that, sits in its seams in unmined minerals? this is still a pretty rich country in a lot of ways. >> well, definitely. let's take a few looks. this is where my expertise is on the specific production of oil and gas. the drop in oil prices has been significant, so the pain is there. but this is not a terminal issue for putin regime. if you understand the commodities, the ruble has depreciatated at a greater rate than the oil. therefore, the cost of producing the oil has decreased. where you look at the decrease in the oil price, but their currency is much stronger. now it's harder for the north american shale producers to compete internationally. what happens with russia? yes, their costs decreases but one-third of natural ga europe
depends on russia for natural gas. they're bringing in euros, and bringing in different currencies. they're making a bigger margin than other currencies. that's one aspect. and then one thing that is truly forgotten here with with the russian national population, these sanctions against russia has really bolstered putin, who is a strong leader. if you understand russian history and leadership, peter the great, strong character, strong leaders. that's what people want and aspire to, and these sanctions have garnered up not only a popular vote for putin but closed russia close for china. all these things are going to backfire on these sanctions against russia. >> we'll be jumping off at just that point. we'll be back with "inside story" after a quick break. what the russian national economy do in relationship to its neighbors. is russia willing to play nice
>> you're watching "inside story" on al jazeera america. i'm ray suarez. back in 2008 money poore poured in to the russian industry. in the last several years the price on the world stock market only occasiony fell below $100 a barrel. now it's in the $50's and threatening to fall lower is a poorer russia a less stable one? is a poorer russia a less predictable adversary on the world stage. over the months that you've been coming on this program we've been talking about russia putting the screws to ukraine, threatening eastern europe cutting off supply , opening market to china.
>> they've use oil, gas, and nuclear services as fuel. they've tried to use all of their assets, which are energy commodities. this particular case where you see the price of oil hit something low, and they're not even at half breaking point to have a strong fiscal situation, i really doubt that russia can have the same kind of presence in eastern europe. i'll give you one example, the south stream projects. >> remind people what that is. >> the south stream project is the pipeline that by passes ukraine bringing the exact same gas resources to europe instead of taking them through ukraine, they bring them through the black sea. that project started around $25 billion price tag that russia was going to finance. it recently ended up to recently $40 billion. that's what they've recently
backed out of. that project is exactly what russia cannot forward to do with lower oil prices and lower revenues. while the economic relationship and the energy relationship between russia and it's neighbors, west and eastern neighbors, will continue. i don't think that in the near term russia can have more of an influence. >> what about that? before the break you were telling us that right now putin enjoys the support. is that support vulnerable if the bad times continue? >> bringing up the south stream which in the last 24 hours angela merkel said, wait, time out here. we don't want russia and turkey signing a long-term contract deal because the last thing that western europe and germany is for turkey continue holding onto the pipelines. let's push for the south stream to happen which means german
funding, german backing. that's just in the last 24 hours. germany has increased it's import on former soviet fuel by over 52%. china, they're thinking in 10-, 20-, 30-year cycles, these pipelines are going to be built, and it's the largest construction project going from russia to china. that's phase one. you'll see multitudes of this being built. today's spot line is relevant. yes, it's not great for the producers, but it could be worse. let's see what happens at $40-, $45 oil. that's what we've seen in the last four months . >> bloomberg news wrote, he thought he was a strong leader, and now the same putin, he has all the power, but everything is
collapsing. what does an economically weak russia do in the near term to political russia? >> you have to put everything in the context of sanctions. sanctions are nothing more than war by other means. we're engaged in a war and wars are unpredictable and dangerous. as far as sanctions are concerned they never achieve their stated objectives. and many costs are very unintended. south stream is a perfect example. they're going to lose billions of dollars on this, that's why they're upset about this, and that's why merkel has entered the fray. the germans and the e.u. have decided that the balkans needed to be bolstered a little bit
because russia does have a considerable influence culturally and so forth with regard to the balkans. all of these things start getting mixed up, and the long and the short of it, ray, to paraphrase the late center moynahan, sanctions are for losers. >> go ahead? >> i really want to jump in on south stream, i'm turning it into an issue, but south stream by passes ukraine. when you're thinking about it in an economic standpoint, you're spending money to bring the same amount of gas to europe, where the economic indicators are flat lining, europe, where long-term forecast for energy demand growth is going down. so you're looking at an europe
that is really aiming to diversify away from russia. so south stream is just used as a metaphor, an example as a project that you will spend money and will not bring economic value. >> if you're sitting in tiblisi or kiev, are you relaxing, watching vladimir putin on the hot seat this week? >> no, unfortunately, what i see there are more problems in kiev. i see it spreading, and i don't see near-term solution for problems in ukraine. no, i wouldn't be relaxing. >> thank you for joining us for "inside story." steve hanke, please stay with us. the set of jet fuel has increased the price of flying.
>> welcome back to "inside story." i'm ray suarez. with the winter holidays just around the corner. you're probably thinking all of this talk about low oil prices might make it a good time to buy airplane tickets. but that may not be the case. airline profits are expected to grow 26%, to $25 billion worldwide. the extra money goes into planned overhead, maintaining and buying flames, expanding flight networks. airfares may drop but not by much. some on capitol hill are curious how legal that is. >> oil prices, which is half the cost of running an airline are way down. why are prices way up. i'm asking the department of transportation and the department of justice to fully
investigate why airline prices aren't following oil prices and going down when oil prices makeup about 50% of the airlines' costs? >> airline companies argue they buy their fuel in advance and are locked in to certain prices. ut even with higher prices the profit picture looks good. next year the profit for north amercian carriers is estimated at $15 billion. that's slightly higher than the projection of $12 billion this year. that's a big jump in 2013 when airlines made $7 billion. still with us as we talk about airline profits, dropping fuel prices, and what it means for the flying public, steve hanke at johns hopkins university, and douglas kidd, executive director of the national association of airline passengers. good to have you with us again. when can consumers expect to see this new world of oil prices
reflected in what they're spending in tickets? >> for myself, i wouldn't expect to see any change until after the holiday season. the holiday season is typically a time when airlines are making money, their passenger load levels are up, and they're not about to cut prices at a time when they expect to have more passengers and they can make the most amount of money. >> is there a sense that this is almost our due given the haircut they took when the economy tanked and loads went down? >> i can't speak for management, but i would say for all of us personally fuel costs are a big part of our own personal family budgets. for the airlines it's a very big part of their budget, and a mistake in pricing can put an airline out of business. i would expect the airlines to be cautious and careful about any decrease in price or the amount they charge for fuel to the passenger over the near term.
of course, they're going to be facing competitive pressures. they don't want to lose out on market share but at the same time yes i would think they would want to make up for past losses and make hay while the sun shines, as the saying goes. >> is part of the stickiness there are fewer carriers and fewer seats, so each individual big carrier has more control over pricing? >> this is one of those situation where is i think senator schumer got things upside down and made a populous rant, shall we say. the prices are determined by the demand and supply of seats. if all the seats are filled during the holiday season, the
airline, like any other business, is not going to be lowering prices just because fuel cost have gone down. they're going to keep supply and demand in balance and keep the airlines seats full with the prices that we're witnessing. >> but professor, if there were a lot of competitors, wouldn't there be an incentive if your fuel price is low for try to under cut somebody who is also flying from new york to los angeles, from boston to san francisco? >> not necessarily. because if the capacity on the route is filled, if all of the airlines have their seats filled, the price is perfectly balance of supply and demand, and nothing is going to change. i would expect that their profits would, in fact, go up, if they were unhedged, if they hadn't bought their fuel in
advance because they would be buying fuel at lower costs, profits would go up, and eventually it would encourage more seats to be added, more capacity and more planes eventually over time to be added over to the routes, and then you would obviously see eventually prices going down. >> douglas kidd, are there big carriers who are still spending the bad 'ol prices on jet a because they have those long-term contracts signed to protect themselves? >> that's a possibility. whether they buy long term or short term, most airlines are going to be hedging their bets on the commodity markets so they're not at the mercy of wild swings of fuel prices. but as a simple practical matter we all see the fuel prices are going down, and they can go right back up just as fast. if you're running an airline you're going to be careful about
lowering your prices out of fear that politics could change, the fuel market could change, and you could find yourself on the wrong side of the equation. what we're concerned about--the fuel charge, that is what it is. but what the airlines are doing to the passenger, they're putting the passengers in to smaller and smaller seats, and backing them closer together. that's something that troubles us because that is a stealth price increase that we're facing. >> professor, can carriers compete on amenities and things like douglas kid just mentioned, seat pitch and those kinds of things once there is a little more on the bottom line because of the cost of operation is going down? >> i think you will get more competition. if the fuel prices stay low relatively low on a sustained basis, you will see more capacity added, and the reason why you will is that the profits
will be higher than they were before when fuel prices are higher. >> how long does it take very quickly, douglas kidd, before that kind of information sinks in to the pours of the industry. six months, nine months of cheap oil? it's not a matter of flee months, six months, nine months of cheap oil. the airlines want to know if they lower prices to get more customers to fly, they're not going to be caught on the wrong side of the equation six months down the road if there is an revolution or war and all of a sudden the prices skyrocket. >> thank you for joining us, good talking to you both. thanks for joining us from washington, i'm ray suarez.
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