Is it worth investing in exotic money
Have you ever thought about what currency in the world is the most expensive? At first glance, the answer seems obvious. Since the dollar is recognized on a global scale as the world's reserve currency and most international transactions are carried out by different countries in it, it, in theory, should be valued above all other currencies. In principle, this is how it is. But nevertheless, there are several countries in the world that keep the exchange rate of their banknotes above the dollar. There are only 5-6 of them on the planet, and the most expensive currencies are the currencies of the Persian Gulf states — Kuwaiti and Bahraini dinars, as well as the Omani rial. Why these small countries maintain high rates of their own currencies and whether Russians should buy such exotic money instead of the usual dollars and euros, MK found out from the head of the analytical department of the BKF bank, Maxim Osadchy.
— Indeed, the most expensive currencies in the world are the Kuwaiti dinar (rate of 3.76 US dollars per dinar), Bahraini dinar (2.65 dollars per dinar), and Omani rial (2.60 US dollars per rial). And fourth place is occupied by the Jordanian dinar ($1.41 per dinar). Jordan, of course, is not a Gulf country, but it is located nearby.
One of the reasons for the high cost of these currencies is technical. Both the dinar and the rial consist not of 100 of the smallest monetary units, like the dollar, euro or ruble, but of 1000: the Kuwaiti, Bahraini and Jordanian dinars consist of 1000 fils, the Omani rial — of 1000 baisa. So the high cost of these currencies makes the existence of the smallest monetary unit meaningful. In Russia, alas, this is not the case — no one will even bend over for a penny.
— The market fairly determines the exchange rate by balancing supply and demand. And all the arguments of analysts and macroeconomists about “fair” exchange rates are nothing more than idle speculation.
— Yes, and economics, politics, and in some ways even the socio-psychological characteristics of the behavior of the leadership of these states. The second reason why these currencies are so expensive is that all of the 4 Arabic currencies listed are pegged either to the dollar or to a basket of currencies. Such a peg allows for the strong trade balance of these countries. Currency stabilization is a difficult and very costly matter. A fixed exchange rate regime requires a strong trade balance and large international reserves, so small countries rich in hydrocarbon reserves can afford such a luxury. All of these states have relatively primitive economies; they do not need to maintain a large army and spend a lot of money on social expenses, since the bulk of the workforce consists of guest workers.
The third reason is that all these Arab countries are monarchies. Moreover, in Oman it is still absolute. The monarchs of these countries have great influence, among other things, on financial policy. For them, the value of the exchange rate is a matter of prestige. They are measured not only by the length of superyachts, but also by the magnitude of the course. Whoever has a more expensive national currency is cooler. The Sultan of Oman has two superyachts that are in the top 10 longest in the world. Well, the monarchs choose the exchange rate regime that is simpler and more conservative — that is, fixed. The floating regime is much more difficult to understand.
Finally, the close correlation of these rates is facilitated by the fact that the currencies of Kuwait, Bahrain and Oman have a common “ancestor” — the Gulf rupee.
— Let me instead of answering remind you of a well-known anecdote from post-war Soviet history. Stalin considered the official exchange rate of 53 rubles per dollar unacceptable. During a report to Stalin, the head of the Ministry of Finance Arseny Zverev and the head of the State Planning Committee Maxim Saburov proposed a rate of 14 rubles per dollar. However, the wise Stalin, a genius of macroeconomics, crossed out the one in the number 14, establishing with a stroke of the pen the rate of 4 rubles per dollar.
— Artificial weakening of the national currency is a form of protectionism, as imports become more expensive and exports become cheaper. Accordingly, the demand for imports falls, and the demand for exports increases. But the pipe does not expand due to the weakening of the national currency. Therefore, artificial devaluation is useful for China, contributing to its trade expansion, but does not work in “oil” monarchies.
“As long as oil and gas prices are high, they have nothing to worry about. But when hydrocarbons lose their role as the most important energy resources, and this will happen, according to forecasts from various institutions, in the coming decades, then the fate of the Arab “gas station countries” and their currencies will be very sad. Of course, sheikhs and sultans are aware of this prospect and are trying to diversify their economies, for example, through the development of tourism. However, the loss of a key economic advantage in any case will be a powerful shock for these states and their currencies.
— Denomination — “cutting off zeros” on banknotes — does not strengthen the national currency, except that it reduces the costs of monetary circulation. Let us remember the redenomination of 1998, when three zeros were “crossed out” at once: for 1000 old rubles they gave one new one. This reform did nothing to prevent the 1998 default and the collapse of the new, denominated ruble. It is important to stabilize the exchange rate of the national currency, and no matter how many zeros you cut off, you cannot achieve it through denomination.
In the USSR, the official exchange rate of the national currency was, for example, on March 24, 1981, 69 kopecks per dollar. But such a clearly overvalued ruble exchange rate did not bring much benefit to the Soviet economy, because payments for exported oil, gas and imported equipment and grain had to be made in the same dollars or Western European currencies. But the Americans and Europeans did not need Soviet rubles for free.
— Looking at whether the dollar is more expensive or cheaper is a completely empty matter. What is important is how strong the currency is. The concept of a hard currency is weakly connected with the high cost of a unit of currency. For example, the Japanese yen is a cheap currency (the current rate is 156 yen per dollar), but it is strong and even a reserve currency. The main criteria for classifying a currency as strong are exchange rate stability, liquidity and free convertibility.
Soft currency is not the best investment tool. Soft currencies are unstable, their exchange rates are volatile, and liquidity is relatively low. Soft currencies also include those that are not freely convertible. Therefore, the hardest currencies — the dollar and the euro — remain the most attractive currencies for savings. But the Kuwaiti dinar is stable, but not liquid. However, one cannot dare to classify it as a soft currency. The Chinese yuan is relatively weakly liquid and not very hard, and is not a freely convertible currency. And the Indian rupee is a “junk currency” — it is volatile, not liquid, and not freely convertible.
— Here, as they say, “life invented new songs.” When investing in non-cash currencies, as the experience of sanctions has shown, it is necessary to take into account the risks of blocking funds in the currencies of states that have become “unfriendly”. We should not forget about “semi-frozen” foreign currency deposits in Russian banks. The most respectable currencies — the dollar and the euro — in non-cash form can turn out to be “trap currencies.”
So the recommendations for investing in currencies remain the same. Firstly, it is unwise to open foreign currency deposits in Russian banks while anti-crisis restrictions are in effect. Secondly, low-liquid exotics should be avoided, even if they are very “solid”. Thirdly, adhere to healthy conservatism — this is the best investment policy for a non-professional investor. Currency diversification of savings is optimal — using cash dollars and euros.