newsletter march 2015 final

Just as quickly as the semester started, we have just now entered the month of March! Time flies and we at the Finance Society recommend enjoying the last few weeks of winter before it finally warms up and the semester inevitably comes to an end. All of us here genuinely appreciate your support and attendanceall of which give us a reason to continue to help out the Stern community. We have turned our focus this semester in to three series: Professional, Academic, and Valuation. You may be familiar with all three, but just to remind everyone, our goal is to inform and educate the NYU community through a practical and theoretical lens. We hope to be your go-to source of information for not only the derivation of the CAPM (or anything else for that matter) but also for its use in the real world, and for professionals perspectives on its practicality. Taken together, the three series allow for a broader perspective, and therefore a more robust understanding of the principles of finance. This week, we begin our Academic series with a focus on securities markets. Looking at more than just buying and selling, we will consider what goes into making a market for a stock and allow you to try your knowledge first hand with the Rotman Interactive Trader platform used by Professor Joel Hasbrouck in his Principles of Securities Trading Classwhich we recommend, of course! In addition to todays event, we hope you also enjoy this latest edition of the

Finance Society Newsletter!!

Matt & Patrick

FINANCE SOCIETY NEWSLETTER March 2015 / Volume XXII

MESSAGE FROM THE PRESIDENTS

Shadow Banking Regulation

India Takes on the Red Dragon

Implications of a Stronger Dollar

The World Oil Market

Development in the Greek Bailout

Chinas Exxon

Fighting in Ukraine

Amanda gives her take on the increased importance and impact of shadow banking

Jessica discusses the changes in India and the potential to overtake China

Angela provides an analysis of the impact of a stronger dollar

Aditya analyzes some of the major issues plaguing the oil industry today

Will discusses the dire economic situation of Greece

Yue describes the potential for China to create a powerful oil conglomerate

Rushi discusses the continuing turmoil in Ukraine

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RECENT NEWS

1: India Has Surprise Rate Cut

This cut comes as inflation

numbers have been lower

than expected

2: Nasdaq Crosses 5000

The index crossed the mark

for only the second time in

history the first happened

just before the dot com

bubble burst in 2000

3: Target Job Cuts

The company announced a

restructuring plan that will

help cut over $2 billion in

costs over the next two

years with thousands of

jobs cuts announced

The Finance Society 2

SHADOW BANKING REGULATION: A BALANCING ACT

by Amanda Lin, Class of 2017

Recounting the 2008 financial crisis, we remember key weaknesses: excessively high leverage, dependence on short-term funds, loan instability, and failures in risk management. The key drivers included financial instruments that allocated risks without transparency in the shadow banking industry. Despite shrinking between 2008 and 2011, shadow banking has made an unprecedented comeback, especially in China, carrying with it the same pre-crisis risks. Now, regulators and policymakers struggle to balance the systemic risk with the irrefutable benefits.

The Financial Stability Board defines shadow banking as credit intermediation involving entities outside the regular banking system. While the general public typically associates shadow banking with more risky entities such as pawnshops, loan sharks, and insurance companies, the industry also includes key players including hedge funds, money market funds, and more. Because the majority of shadow institutions lack banking licenses, they do not take deposits like standard banks and are subject to less regulation, thus increasing leverage. Furthermore, shadow banks are often closely affiliated with and sponsored by standard banks, causing another area of concern with regard to systemic risk to the overall macro economy.

Shadow banking initially came under criticism as the leading cause of the 2008 financial crisis, pushing low quality loans further into the securitization chain. As a result, regulators have cracked down on the financial services industry with Dodd-Frank and the like, hoping to decrease overall risk and leverage taken by financial institutions. Ironically, yet not surprisingly, the new regulatory framework has increased risk: the more regulation and lack of clarity within new clauses, the less standard banks are willing to lend, and the more borrowers need to search elsewhere for credit, hence the boom in shadow banking.

Increasing regulation has made standard banks more wary of lending, and other funds outside the regular banking system have stepped up to provide the long-term credit needed to continue GDP growth. In effect, the shadow banking industry has experienced tremendous growth: it is now a $75 trillion industry, nearly triple the size it was a decade ago, and the United States accounts for one-third of it. Many analysts accredit shadow banking, through the capital and securities markets, as the industry that predominantly fueled and provided liquidity to the U.S. economy for the past 40 years. The European Central Bank Vice President, Victor Constancio, believes the shadow banking industry could become larger than the standard one within the next five years. Over the past few years, China has experienced the greatest growth, causing worry for global markets.

What exactly makes shadow banking so attractive? Shadow lenders promise returns between 4% and 10% annually, visibly higher than the 3% return on standard bank savings accounts. Constancio, points out that near-zero interest rates coupled with low inflation have created a search for yield. This is possible through making the trade-off between risk and return, oftentimes through wealth management products (WMPs) and other high-yield, high-risk


products. The WMPs are able to offer higher rates because they are backed by riskier bank loans that do not appear on the banks balance sheets and therefore do not have capital set aside for potential defaults. Also, traditional banks market these WMPs for commission, further highlighting the connection between standard and shadow banks.

In 2010, shadow banking grew as quickly as 75% when Beijing actually encouraged shadow lenders to extend credit when traditional banks lacked the resources and regulatory oversight after the global financial crisis. Shadow banking has been providing invaluable funding, filling the gaps in the financial services industry, while increasing overall debt and risk in China. Now it seems too big to control. Still, China has created a series of tighter regulations that decrease profitability for shadow lenders to issue new products, largely targeting WMPs, which has caused a slowdown: near the last quarter of 2014, the industry was up 14.2%, markedly lower than the 35.5% rise in 2013 and 33.1% in 2012, according to the Wall Street Journal. Still, Chinas banking regulators understand the necessity of shadow banking liquidity despite its risk, as the industry provides financing to small and medium-sized companies or those than cannot get loans otherwise. There is fear the slowdown may lead to a credit crunch in the near future.

Regulating shadow banking is a huge balancing act, as banking regulators struggle to reconcile the undeniable liquidity and growth that it has provided to global markets with the build-up of high leverage and systemic risk, not to mention the interconnectedness with the regular banking system. The International Monetary Fund concedes the difficulty in differentiating actual economic drivers of shadow banking from regulatory arbitrage, resulting in policy recommendation complications. A common sentiment is to restrict excessive borrowing through interest rate hikes, often used to target asset bubbles and other risky behavior. However, a Bank of England research paper shows that higher rates may not be the best course of action: rather than decreasing the borrowing as intended, they may further push riskier activity into shadow banking.

The best way may be to regulate securities-financing transactions that fund shadow-banking activity. The Fed and other central banks have the power to require a minimum of extra collateral at the margin, regardless of who actually executes the transactions. They can also try to increase standards for getting loans. Taking a lesson from the derivatives trading and securities lending in the 2008 financial crisis, we now know that pushing faulty loans into the securitization chain does not extend beyond short-term growth and causes long-term damage. Chinas WMPs may have allowed their GDP to continue humming over the past few years, but this kind of growth is unsustainable and can cause more harm than good in the case of disproportionate defaults.

The sheer size and interconnectedness of the shadow banking industry makes it difficult to regulate without making the trade-offs between liquidity, growth, and risk. Thus, in order to compensate for the rapid slowdown in credit and liquidity, Chinas regulators will need to loosen monetary conditions to encourage more lending by standard banks as it tightens control on shadow banks.

INDIA TAKES ON THE RED DRAGON

by Jessica Ma, Class of 2018

Last fall, a crowd of 20,000 strong gathered at Madison Square Garden to listen to no other than the newly appointed Indian Prime Minister, Narendra Modi. Modis party achieved a huge election victory with a promise of a stronger Indian economy. Prior to his election, the Indian economy had endured stagnant growth since the 1980s with double digit inflation, fiscal deficits and widespread corruption. However, over the last 8 months

since his rise to power, Modi has unveiled a series of ambitious plans directed at changing the face of the Indian economy. By expanding private sector roles in government-dominated industries such as coal mining, Modi plans on deregulating parts of the Indian economy, shrinking the role of government and increasing much needed investment in infrastructure. More importantly, Modi has initiated reforms that will help cut the red tape and make India a more attractive environment to conduct business in. These reforms are expected to create an inflow of foreign direct investment (FDI) which will help the Indian Rupee remain stable against the US Dollar.


Not only has the recent implementation of structural reforms accelerated Indias growth, but current global conditions have allowed India to thrive. While the plunge in oil prices has caused chaos in Russia and Brazil, India has benefitted greatly from lower commodity prices. Indias heavy reliance on foreign oil has been a drag on its economy for the past decade. The International Monetary Fund (IMF) estimates that energy subsidies had amounted to a whopping 6% of revenues in India. Now with international crude oil prices less than half of what they were last year, the cost of fuel subsidies and decrease in transportation expenses has led to a decline in inflation and has eased the burden of its fiscal deficits. Lowering inflation rates also brings good news for the Indian population, with lower food prices they now have more disposable income to spend.

Furthermore, on January 30 of this year, India announced a change in the calculation method of its GDP growth rate. The sharp increase in the countrys GDP growth rate can be accredited to Indias update of the base year used to calculate the rate of growth in the economy. With this, India stands to have a 6.9% growth rate, much higher than the 5.5% previously reported. Although this upward revision has garnered much criticism, at a time where the world economic growth is at a mere 3.7%, many believe that Indias growth outlook is one with great potential. Goldman Sachs forecasts Indias GDP growth at 6.3% in 2015 and 6.8% in 2016.

While Indias economic growth has accelerated, meanwhile China has been suffering an economic slowdown. China reported a growth rate of 7.4% over the last calendar year, a robust pace that most countries would be ecstatic to have, but a decline from the growth of 7.7% it reported in 2013 and the lowest growth rate China has seen in the past 25 years. Chinas rapid ascent in the past few decades with its double digit growth rates can be credited to its strong manufacturing sector. However, a recent report by HSBC suggests that Chinas manufacturing sector is contracting, causing ripples in the already soft commodity prices. The long anticipated correction of the real estate market and increasing local government debt has also raised concerns in investors who are now holding back on investments. Not only so, but rising wages and Beijings investigation into multinational corporations have deterred other companies who are looking to expand their operations and have sent them looking to places like Indonesia as alternatives. Beijing has responded by enacting stimulus plans in hopes to control its financial vulnerabilities, but Goldman Sachs expects a further slowdown in economic growth with projected growth rates of 7.0% in 2015 and 6.7% in 2016. This means that India could potentially surpass China as the fastest growing economy as early as 2017.

Although Indias economy is entering a new growth cycle as a result of current macroeconomic conditions and its decision to focus on the revival of its economy, the challenges ahead remain troublesome. Many companies are wary of Indias demanding labor laws that guarantee lifelong employment for workers and create massive opportunity for government corruption. The political environment has also proved challenging for Modi, causing delays in the implementation of his reforms; Modi has had no choice but to rely on executive orders to push forward his plans which poses a great risk for Indias continued success. The Indian economy is faced with a great advantage in current global macroeconomic conditions. Whether or not it can take advantage of this opportunity to lift its population out of poverty and sustain this growth to become one of the driving forces for global economic growth remains a question.

IMPACT OF A SRONGER DOLLAR

by Angela Li, Class of 2017

The U.S. dollar is often correlated to the interest rate. In this

case, the dollar is rallying in response to the expected rise in

U.S. interest rates. However, this could potentially keep

inflation too low and stall the countrys economic growth. The stronger dollar is currently acting as a headwind

for U.S. exports by making the products relatively more expensive. Admittedly, the export sector is only 4% of

the overall economic output because the nation is relatively driven by consumption. However, it also costs


domestic producers because imported goods are becoming relatively cheaper due to the conversion rate and thus

fueling more competition. This creates problems for domestic industries that are competing on prices with

foreigner producers.

During the final quarter of 2014, imports surged to a 10% growth while exports slowed to 1.9% growth from

the previous 7.5%. Jonathan Glionna, head of U.S. equity strategy at Barclays, set a target for the S&P 500 in

2015 at 2100, implying only a 5% increase. While record-high amounts of share buybacks and EBIT margins

are driving high EPS gains, top-line growth will struggle. Must of the rest of the world is experiencing

economic downturns, and dollar appreciation is hurting domestic profits after their sales are converted back to

USD. Because approximately 30% of S&P 500 companies revenues are generated abroad, S&P revenue is only

expected to rise 2% next year. While companies such as Procter & Gamble Co. missed analyst estimates, the

technology sector is most exposed to the rising dollar, since it has the least North American sales exposure.

However, companies like Honeywell International Inc. anticipated currency changes and started using currency

hedges.

Nevertheless, it is difficult to reach a conclusion regarding the dollars overall impact on the economy. The

tangible effects of the dollar and oil prices are manifested in the U.S. Consumer Price Index for All Urban

Consumers. The CPI is currently at 0.8%, the sharpest decline since the Great Recession. Year-over-year Core

CPI is at 1.6%, which is often calculated by taking the CPI and excluding items that with volatile price

movements such as energy and food. Ignoring the effects of oil, this has been an increase over the previous 12

months ending February 2014. 2014 4Q GDP decelerated to 2.6% from third quarters astounding 5%. On an

annual basis, there has been a 2.4% GDP growth from 2013 to 2014.

Ironically, the interest rate expectations could also work against the dollars appreciation. Inflation is still

running below the Federal Reserves target of 2%, and Fed policy makers are beginning to worry that

prematurely tightening interest rates would be more risky than waiting longer. A stronger dollar decreases

inflation, and an interest rate hike would amplify its effect. Political instability in countries like Ukraine is

driving investors worldwide to safer U.S. assets, contributing to further dollar gains, along with easing in the

euro zone and Japan. Thus, the continual rise in the dollars strength could push back the timing of the

tightening and consequently contribute to its own fall.

As the unemployment rate lowers to 5.6% in December, Fed officials are expecting wages and inflation to

slowly build up. However, the 60% fall in oil prices since June is turning inflation in the opposite direction.

Even so, inflation is still expected to reach 2% in the medium run because the oil-price drop is raising

household purchasing power. In the end, the Fed will most likely not announce a rate increase at its June

meeting due to the precarious balance of the current situation and the consequences for future growth.

The World Oil Market

by Aditya Garg, Class of 2018

Goldman Sachs said the slowdown will take time, with Brent hitting a bottom of $80 a barrel in the second quarter of 2015, reported Bloomberg on October 28th, 2014. Since then, oil has fallen to less than $50 a barrel with most analysts predicting prices to fall as low as $30-$40 a barrel. Compared to the $115 a barrel that oil was trading at last June, the price of oil has dropped nearly 60%. This decline in price and the likely redistribution of wealth that results will fuel the growth of many emerging markets and will likely allow the US and the larger world community to better negotiate with countries such as Russia and Iran.


But before digging deeper into the consequences of the oil drop, it is important to examine the causes of this rapid decline. There are essentially three factors driving the decline in oil prices: weaker economic activity and increased efficiency, increased domestic shale production, and increased supply after OPEC refused to cut production. Though the US is doing much better compared to the rest of the world, as Larry Summers pointed out on CNBC, We are not doing well enough. We havent had a year of 3% [growth] in a very long time in the United States.

Weak US economic growth is only worsened by the threat of a Greek default, the Russia-Ukraine standoff, the increased terror threat in the Middle East with the rise of ISIS, and overall lower growth from Asian economies. These factors combined have overall led to a weakened demand for oil. The situation is further exacerbated by the increase in domestic natural gas and shale production. With the US now a net exporter of natural gas, the world market has suddenly expanded and supply has ballooned driving prices down. Finally, perhaps the most influential factor in the decline of oil prices has been OPECs refusal to cut production. But why would OPEC continue to pump large amounts of oil if it leads to lesser profits?

It is primarily because no country wants to necessarily be the first one to decrease production and risk losing market share. While this situation is usually remedied by meetings of OPEC, due to geopolitical differences and contentions among countries, particularly with Russia, OPEC decided not to decrease production. Thus, with supply only increasing and demand decreasing, the price of oil has plummeted. But beyond just political differences and economic concerns, the decision not to decrease production is also a strategic tactic pushed by Saudi Arabia to drive out the numerous smaller oil and gas producers around the world. As compared to Saudi Arabia whose per barrel cost is only around $5-$6, most new drilling ventures cannot sustain their operations if oil drops below $60 a barrel and thus most analysts are expecting a wave of bankruptcies.

So now, what is more interesting than this international game of chess and test in game theory is the effect that falling oil prices have on consumers and how it redefines the balance of international power. Falling oil prices help increase consumer discretionary spending by essentially providing a tax credit for consumers who now save more money every time they go to the pump. As Andrew Kenningham, a senior global economist at London based Capital commented in the Washington Post, The size of the global economy will easily be between 0.5 percent and 1.0 percent higher as a result of the decline in oil prices.

From a macroeconomic perspective, the big debate is over whether the benefit from increased consumer spending and stronger corporate balance sheets will offset the losses of the energy industry. The answer largely depends on the type of country whether one is a large importer or exporter of oil. Especially for countries such as the US, India, China, etc. the lower prices have been a blessing. On the flip side, countries such as Russia and Iran have been suffering major setbacks due to the continued decline.

Already burdened with tough international sanctions over their nuclear program and annexation of Crimea, Iran and Russia respectively have seen their economies tumble. The price of the ruble has plummeted since the decline in oil prices and though there has been a slight rebound, it is still historically low. A similar story can be painted for Iran. In light of the dual burdens of economic sanctions and declining prices of their primary export, going forward, the US should be better able to position itself diplomatically to reach an agreement.

On the other side of the world, the decline in oil prices will help such developing countries as India and China. The decline in a large expense for both of these countries presents a wonderful backdrop for economic and political reforms that otherwise may have been less insatiable. For instance, the Modi government is to soon release its first comprehensive budget. This economic blessing could help soften any unpopular or otherwise costly measure for the government. Something similar can be said of China, Japan, and other developing nations. They are each presented with a unique opportunity to change the trajectories of their nation and if they cannot capitalize on this moment, then perhaps such change will never happen. The decline in oil prices certainly has its roots in a number of strategic actions and the consequences include everything from increased consumer spending to opportunities for diplomatic negotiations and wider economic reform in developing nations.


While the bulk of this article focuses on the causes of the decline in oil prices, rather than on specifically the effect on one particular country, it is important to understand the underlying dynamics at play and illustrate the potential for the extent to which prices can slide and affect global events and opportunities.

DEVELOPMENT IN THE GREEK BAILOUT

by William Zhou, Class of 2017

The government of Greece has long been in dire economic straits. Since May 2010, members of the Eurozone, as well as the IMF, have been providing financial assistance to Greece through an "Economic Adjustment Program". The goal of the assistance is to support the efforts by Greece to restore fiscal sustainability and reform the economy to make it more competitive. In turn, Greece was required to implement austerity measures and structural

reforms, as well as privatize at least 50 billion in government assets. The initial loan program was extended in 2011 to allow for a substantial write-off of existing debt, cut interest rates, and lengthen loan repayment periods. The bailout has been effective for the most part, leading to a moderate recovery in the Greek economy. This past year, with the ascension of the Syriza party to power, Greece decided to adopt anti-austerity measures and to reject the terms of the old bailout agreement. When EU lenders objected, Greece once again threatened to leave the union and to drop the Euro as its currency. As a result, tensions have been high between the Greek government and the rest of the EU. Germany, a leader in Greek austerity efforts, has taken a strong stance against Greece, rejecting several Greek proposals, stating that they do not provide permanent solutions for Greece's fiscal difficulties. At the beginning of this year, Greece began growing desperate in their efforts to negotiate a new bailout package and prevent a collapse of their recovery. In February 2015, after much negotiation, the European Union decided to extend its financial rescue program in Greece by four months. This will prevent Greece from running out of money by March. Greek representatives have stated that they will honor all debts and that they will accept guidance from the lending countries as well as the European Central Bank. This stance is a far cry from the promises that Greek Prime Minister Alexis Tsipra's government made to reject austerity measures and support the poor. Under this new agreement, Greece will have to provide a list of budget cuts and economic reforms to the "Troika", which consists of the European Commission, the European Central Bank, and the IMF. Only once the list has been approved and all the changes made will Greece be eligible to receive an additional 7.2 billion in funding. With a major crisis averted, the world can breathe easy. After news of the agreement, markets jumped with the Stoxx Europe 600 increasing 0.6% to reach its highest level since November 2007. Both Germanys DAX index and the U.K.s FTSE 100 climbed 0.4% as well. The euro was also up against the dollar and the yen. In the US, the Dow, the S&P 500 and the Russell 2000 small-company index also hit record highs. Although an agreement has been reached now, we will almost certainly see more difficulties down the road. At this point in time, Greece owes 323 billion, 70% of it to the Eurozone and the IMF. When and how Greece will pay off this substantial debt remains to be seen. In the future, further restructuring of the debt agreement, as well as substantial write offs will need to be made. And there are still lingering concerns that Greece will eventually exit the Eurozone, considering that the readoption of the drachma at a devalued rate would considerably improve the economy. With the bailout set to expire in another four months, the Greek government will yet again be put in a similar position. And with anti-austerity sentiment in Greece mounting, the new government will be pushed to honor its original promises. The Greek predicament will be a major issue for the European Union for months, if not years to come.


CHINAS EXXON

by Yue Song, Class of 2017

The Chinese government is considering merging its major state owned oil companies to form a firm capable of rivaling Americas own Exxon Mobil. If successful, China will create one of the largest companies in the world with control over most of Chinas onshore oil and gas production.

The factors sparking this recent announcement were due to a mix of Chinas economic slowdown as well lower global oil prices due to OPECs oil glut and excessive supply. Over the past years, Chinas economic growth has repeatedly been short of expectations after nearly a decade of double digit growth. With its reliance on real estate, construction, and smokestack industries as growth factors reaching its limit, the worlds largest economy will have to turn to alternative sources to sustain its economic momentum. For China, the oil industry seems to be the answer.

However, amidst excess oil supplies and the existence of international oil conglomerates capable of pushing gas prices well below the market price, one of the best ways of leveraging this unique situation is for China to create appropriate competition for the leaders in the current energy market. Indeed, with other international companies already doing the same, such as Repsols recent acquisition of Talisman Energy in response to the economic conditions, consolidation may be the best option.

From this decision, Chinese administrators hope that the merger of China National Petroleum Corp. (CNPC) and its domestic rival, China Petroleum Corp. (CNOOC) along with other major market players will extend Chinas energy dominance overseas, and create an entity that would dwarf Exxon Mobil with approximately twice the revenue of the US giant. Furthermore, not only will this restore Chinas international prominence, but it will also help relieve some of its domestic economic issues concerning excess capacity.

Due to the sheer number of oil firms in the domestic Chinese market, there exists fierce competition for every penny. Consequently, this causes them to take on fruitless projects, hire excess workers, and generate massive waste and inefficiency. This has resulted in price wars and an overall zero sum game in Chinas oil market. By combining many of the local dominant players, government officials are hoping to streamline the market.

Personally, I feel that this move is vital for the next step in Chinas economic growth. By consolidating many of the firms competing domestically that are sources to much of the local inefficiency in the oil market, China will be able to curb both an economic inhibitor and also become a dominant player in the worlds oil market. However, while the benefits of this decision are great, so are the risks. For instance, by prioritizing international competitiveness, China is forsaking its domestic economic efficiency: by eliminating many players in the local market, there is a higher likelihood for the creation of a monopoly. Furthermore, because of the nature of the synergies created as a result of a merger of this scale is still untested, the outcome could either be very beneficial for the new conglomerate, or extremely detrimental. Ultimately, the outcome of whatever happens next is up to the Chinese governments good judgment in weighting the options in front of them.

FIGHTING AND LACKLUSTER PEACE TALKS IN UKRAINE

by Rushi Patel, Class of 2017

Several months since the September cease-fire in Ukraine, Vladimir Putin has allegedly not done enough to prevent continued fighting that has made the peace deal invalid. Reports have surfaced that Russian armed forces continue to hold heavy weaponry within the borders of Ukraine. This, while rebel forces besiege key towns in the disputed east.


The main target of rebel attacks has been on the city of Debaltseve, where many government troops were stationed before Putin and current Ukrainian president, Petro Poroshenko, signed a peace deal. As of February, rebel leaders have raised their flag over the city, claiming that it is now under their control. Ukrainian troops continue to maintain a presence in the area to prevent the rebels from further advance, but the true danger comes from the impossibility of a lasting peace without both armies first laying down their arms and halting their military operations. As the West, led by Angela Merkel, Francois Hollande, and David Cameron, engage in new peace talks with Putin, the situation is at risk of deteriorating further. Vladimir Putin has been apathetic to rebel action even though he has claimed to speak for them and their interests. Furthermore, Poroshenko holds the powerful card of martial law. This would allow the Ukrainian Armed Forces to raise a fresh contingent of troops and impose order by curtailing many political and civil rights. This is, of course, a last resort for the president, but perhaps the only resort if talking proves fruitless.

On the economic side of the issue, Ukraine is in obvious tumult as its debt skyrockets and its GDP contracts. Its currency, the hryvina, is in free-fall while Ukraines central bank is losing foreign currency reserves at an unsustainable pace. Russia also holds the ability to demand repayment of its bonds if Ukraines Debt-to-GDP ratio exceeds a certain threshold, which it has almost certainly done so as of late February. A default would trigger massive economic turmoil, devaluation of the hryvina, and hurt Ukraines ability to get further credit to support its civil service and, more importantly, its army. This would hurt the nations bargaining position and its ability to leave this civil war without completely redrawing its borders.

To further compound this bleak outlook, Western countries are becoming hesitant of supporting Ukraine financially. The International Monetary Fund has been helping the government, but its assistance comes with great sacrifice. Overhauling the tax code, reforming government programs, and initiating austerity measures are but some of the concessions that the IMF desires which are not coming to life in the new Ukrainian government.

What is even more remarkable is that for the entire economic turmoil taking place in Russia, its citizens have still found reason to rally behind Vladimir Putin in his quest of expansion. The Central Bank of Russia has declared that it will no longer continue its program of supporting the ruble by selling foreign currency reserves in the open market. This has led to a high rate of inflation in Russia and contraction of its GDP. In addition, global crude supplies have reached record levels while OPEC refuses to reduce production to save its market share. Bloomberg Business has stated that the Russian economy, with its dependence on oil exports, will shrink by 4.5 percent if oil prices average $60 a barrel in 2015. This is a likely scenario taking into account the fact that analysts continue to see supply outpacing demand.

However, not all hope is lost for Ukraine if the West chooses to play the long game with Russia. Contrary to popular opinion, Russia has been only a marginal power since the dissolution of the Soviet Empire. At $18,100 GDP per capita, the CIA World Fact Book ranks Russia as the 77th highest earner per citizen. The country does not have a diversified economy, but instead relies strongly on its exports of petroleum products generated by state oil companies often run by corrupt kleptocrats. If the West can support Ukraine financially until the long-term effects of Putins administrative and economic neglect take hold, the former Soviet state can seize control of its own destiny. With the glut of trade sanctions facing Russia, its unprofitable oil production catching up to it, and its overall deteriorating economic condition, a siege is more appropriate than an assault. Perhaps the inability to negotiate peace has not so much been Putins mastery of negotiation as much as it may be a delaying tactic by Europes leaders to finally tame the Russian bear by starving it. .

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