College of Administrative and Financial Sciences Assignment 1 Deadline: 17/10/2020 @ 23:59 Course Name: Intro to International Business Student’s Name: Course Code: MGT-321 Student’s ID Number: Semester: I CRN: Academic Year: 1441/1442 H For Instructor’s Use only Instructor’s Name: Students’ Grade: Marks Obtained/Out of Level of Marks: High/Middle/Low Instructions – PLEASE READ THEM CAREFULLY • The Assignment must be submitted on Blackboard (WORD format only) via allocated folder. • Assignments submitted through email will not be accepted. • Students are advised to make their work clear and well presented, marks may be reduced for poor presentation. This includes filling your information on the cover page. • Students must mention question number clearly in their answer. • Late submission will NOT be accepted. • Avoid plagiarism, the work should be in your own words, copying from students or other resources without proper referencing will result in ZERO marks. No exceptions. • All answered must be typed using Times New Roman (size 12, double-spaced) font. No pictures containing text will be accepted and will be considered plagiarism). • Submissions without this cover page will NOT be accepted. Assignment Regulation: • All students are encouraged to use their own word. • Assignment -1 should be submitted on or before the end of Week-07 in Black Board only. • This assignment is an individual assignment. • Citing of references is also necessary. Assignment Structure: A.No Assignment-1 Total Type Case Study Marks 5 5 Learning Outcomes: • Identify the major components of international business management (Lo 1.2) • Explain the forces driving and evaluate the impact of globalization (Lo 1.3) • Discuss the reasons for and methods of governments’ intervention in trade (Lo 1.7) • Identify and evaluate the significant trade agreements affecting global commerce (Lo 1.8) • Carry out effective self-evaluation through discussing economic systems in the international business context (Lo. 3.6) Case study Please read Case 8: “The IMF and Ukraine’s economic Crisis” available in your e-book (page no.622), and answer the following questions: Assignment Question(s): (Marks: 5) 1. Why do you think Viktor Yanukovych walked away from a trade agreement with the EU in favor of closer ties with Russia? What did he gain by doing this? What did he lose? 2. What were the root causes of Ukraine’s currency crisis? Without help from the IMF, what might have happened? 3. Were the policy recommendations made by the IMF reasonable? 4. Why do you think the Ukrainian government balked at fully implementing the IMF policies? 5. Was the IMF right to suspend disbursement of monies under its loan program in October 2015? Under what conditions should the IMF resume making loans? 6. What might happen if the IMF discontinues its loan program to Ukraine, as it has threatened to do? 7. Could the IMF have done anything differently to avoid the situation it now finds itself in? Answer: 1. 2. 3. 4. 5. 6. 7. &&&& Cases Case Discussion Questions 1. Why do you think that, historically, Subaru chose to export production from Japan rather than set up manufacturing facilities in the United States like its Japanese rivals? 2. What are the currency risks associated with Subaru’s export strategy? What are the potential benefits? 621 3. Why did Subaru’s sales and profits surge in 2014 and 2015? 4. Is Subaru wise to expand its U.S. production capacity? What other strategies could the company use to hedge against adverse changes in exchange rates? What are the pros and cons of the different hedging strategies Subaru might adopt? The IMF and Ukraine’s Economic Crisis Back in late 2013, the then-president of Ukraine, Viktor Yanukovych, suspended preparations for the implementation of a trade agreement with the European Union, opting instead for closer ties with Russia. Yanukovych’s decision resulted in mass protests in the capital city Kiev and elsewhere in western Ukraine, where closer ties with the West were seen as a necessary counterbalance to the growing influence of its powerful neighbor to the east, the increasingly autocratic Russia of Vladimir Putin. These protests ultimately led to Yanukovych’s ouster from office in February 2014. Following his removal, unrest enveloped the largely Russian-speaking provinces of eastern and southern Ukraine from which he had drawn his support. In March 2014, the autonomous region of Crimea was annexed by Russia, while a civil war between the new Ukrainian government and pro-Russian separatists developed in eastern Ukraine. The result was an economic disaster for Ukraine. In 2014, the country’s GDP shrank by nearly 10 percent. The currency, the hryvina, fell by more than 50 percent against other currencies as capital fled the country. As the costs of imports rose, inflation jumped from 1 to 25 percent. In a desperate attempt to support the value of its currency, Ukraine’s central bank bought hryvina on the foreign exchange market, selling its foreign currency reserves to do so. Ukraine’s foreign exchange reserves declined from more than $16 billion in mid-2014 to under $6 billion by early 2015. Moreover, the country was facing debt repayments of at least $10 billion and gas import bills from Russia, while its own banking system was shattered. In an attempt to pull Ukraine out of an economic tailspin, in April 2014, the International Monetary Fund (IMF) pledged to contribute $17 billion in loans to the country over two years, of which about $5 billion was disbursed in 2014. It wasn’t enough. The currency continued to lose value, inflation increased, unemployment rose, and the economy shrank. In early March 2015, the IMF deepened its involvement in the country, putting together a package of additional financial support. The IMF agreed to a four-year deal to loan $17.5 billion to Ukraine. The deal was expected to unlock another $20 billion in loans from the United States and the European Union. In return for these funds, which were to be used to support the value of the hryvina in foreign exchange markets, Ukraine had to agree to a raft of policies imposed at the bequest of the IMF. The country agreed to maintain a free floating exchange rate and to pursue a tight monetary policy aimed at restoring price stability. The state-owned natural gas company, Naftogaz, was also required to increase its prices by as much as 200 percent. Naftogaz had been buying natural gas at market prices from Russia and selling it at deeply subsidized prices to Ukrainians. This money-losing transaction had been financed by issuing debt, which the government could no longer service. Indeed, a growing debt burden and excessive government spending were major problems facing the country. These problems only got worse as both the economy and the tax base contracted. At the insistence of the IMF, the Ukrainian government also agreed to cut spending on unemployment and disability insurance, to reduce the salaries of state workers, and to cut state pensions. The IMF believed that while these austerity policies would result in the economy shrinking by a further 5 percent in 2015, the economy would start growing again in 2016. Unfortunately, conditions in Ukraine deteriorated further in 2015. After some initial success, the Ukrainian government pulled back from implementing the full raft of austerity policies proposed by the IMF. To make matters worse, there was evidence that some of the IMF loans were being syphoned off or squandered by corrupt government officials. In October 2015, the IMF responded by halting its dispersal of funds under the loan program and pressuring Ukraine to institute economic reforms and tackle government corruption. With funds from the IMF on hold, the Ukrainian economy continued to decline, shrinking by an estimated 11 percent in 2015. Unemployment continued to rise, and the inflation rate jumped to around 50 percent. In February 2016, Christine Lagarde, the managing director of the IMF, stated, “Without a substantial new effort to invigorate governance reforms and fight 622 Part 7  Cases corruption, it is hard to see how the IMF supported program can continue to be successful.” Lagarde’s comments followed the resignation of Ukraine’s economic minister after he accused a senior aide to the president of blocking anticorruption reforms. Following Lagarde’s comments, the Ukrainian government pledged to step up its efforts to fight political corruption and introduce economic reforms but cautioned that changes could not be made overnight. In April 2017, the IMF unlocked another $1 billion of support for the Ukraine after the government had taken IMF-mandated steps to rein in the budget, crack down on corruption, and improve the investment climate. However, the IMF stressed that further structural reforms are necessary to achieve faster economic growth, including reforming government pensions, tougher corruption measures, and privatizations. Sources Andrew Mayeda, “IMF Approves Ukraine Aid Package of about $17.5 Billion,” Bloomberg Businessweek, March 11, 2015; “IMF Signs Off on $17.5 Billion Loan for Ukraine in Second Attempt to Stave Off Bankruptcy,” Reuters, March 11, 2015; “The New Greece in the East,” The Economist, March 12, 2015; Larry Elliott, “IMF Warns Ukraine It Will Halt $40 Billion Bailout Unless Corruption Stops,” The Guardian, February 10, 2016; Angela Bouznis, “Ukraine: Fresh IMF Funds Unlocked, but Economic Blockade Sours Recovery,” Focus Economics, April 4, 2017. Case Discussion Questions 1. 2. 3. 4. 5. 6. 7. Why do you think Viktor Yanukovych walked away from a trade agreement with the EU in favor of closer ties with Russia? What did he gain by doing this? What did he lose? What were the root causes of Ukraine’s currency crisis? Without help from the IMF, what might have happened? Were the policy recommendations made by the IMF reasonable? Why do you think the Ukrainian government balked at fully implementing the IMF policies? Was the IMF right to suspend disbursement of monies under its loan program in October 2015? Under what conditions should the IMF resume making loans? What might happen if the IMF discontinues its loan program to Ukraine, as it has threatened to do? Could the IMF have done anything differently to avoid the situation it now finds itself in? The Global Financial Crisis and Its Aftermath: Declining Cross-Border Capital Flows For decades, cross-border capital flows—including lending, foreign direct investment flows, and purchases of equities and bonds—advanced relentlessly, reflecting the increasing integration of national capital markets into one single massive global system. Cross-border capital flows surged from $0.5 trillion in 1980 to a peak of $11.8 trillion in 2007; then they collapsed. By 2014, cross-border capital flows were around 66 percent below their former peak. The global capital market, it seemed, was in retreat. To understand why, we have to go back to 2008, when a major crisis swept through the global capital market that very nearly froze the financial pipes that lubricate the wheels of the global economy. Financial institutions and corporations around the world routinely lend and borrow trillions of dollars between themselves. Most banks and corporations issue unsecured notes known as commercial paper with a fixed maturity of between 1 and 270 days. This is a way for those firms to get access to cash to meet short-term obligations, such as meeting payroll and paying suppliers. Because the notes are unsecured, and not backed by any specific assets, only banks and corporations with excellent credit ratings are able to sell their commercial paper at a reasonable price. This price is set with reference to the London Interbank Offered Rate (LIBOR). The LIBOR is the rate at which banks lend to each other. In normal times, the LIBOR is very close to the rate charged by national central banks, such as the U.S. Federal ­Reserve for the dollar. Early in 2008 banks in several countries had started to run into trouble as it became clear that the value of the mortgage-backed securities that they held was collapsing. This was due to a fall in housing prices, and rising default rates on mortgages, most notably in the United States and Great Britain, where lenders had written increasingly risky mortgages over the preceding few years. These mortgages were bundled into securities and then sold to other financial institutions. Also, many institutions held complex derivatives, the value of which was tied to the underlying value of mortgage-backed securities. Now these institutions were facing large write-offs on their portfolios of mortgage-backed securities and the associated derivatives. One of these institutions, Lehman Brothers, had taken aggressive positions in the market for mortgagebacked securities. In September 2008, the firm collapsed 
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