June: with no hope of stabilization.

June, 2011

Global economy: a storm is coming

U.S. financial problems, slow growth of the Chinese economy, the debt crisis in Europe and the downturn in the Japanese economy with a probability of 30% may emerge the ‘perfect storm‘, whose full force will echo on the world economy in two years, said economist Nouriel Roubini, who predicted the global financial crisis of 2008. ’There are signs of weakness already. Everyone keeps on increasing public and private debt. The burden is getting heavier, and all these difficulties will be visible at the latest by 2013‘ — said Roubini. In his view, global economic growth could slow in the second half of the year because of ‘continuing liquidation of debt capital,’ shutting down incentive programs and weakening of consumer confidence in the economy. Roubini warned of a possible ’revolt on the U.S. bond market‘, as investors’ confidence in the American economy is limited. ’This year, the U.S. budget deficit exceeds $ 1 trillion; the same thing will happen next year and possibly in 2013. There is a risk that at some moment markets, as happened in Europe, will wake up and start raising rates, that will make recovery of economy impossible, ‘- said the expert. Serious danger for the world economy is slowing growth in China, which will inevitably occur after 2013, says Roubini. In the nearest future, China will face two major challenges: a huge amount of ‘bad loans’ and existence of large stand idle capacities, which appeared due to excessive investment in fixed assets. In this regard, the main task of the Chinese authorities, according to Roubini, should be ‘cut investments in fixed assets and consumption growth. Otherwise, the economic downturn after 2013 will be inevitable.‘ ’To cover margin call in this case will be impossible — the amount of dollars in the global system is too small to support suddenly appeared huge turnover on mutual claims between major banks and corporations, primarily on credit-default swaps, amount of which is approaching $ 25 trillion! ’- say experts. After a sharp reduction in price of leading world currencies during the default, the dollar will rise sharply in price: it will be necessary for the calculations, but no one will give loans in dollars. Banks will close limits for each other, and the interbank lending market will cease to exist, he said. The same thing happened during the collapse of Lehman Brothers in 2008, and there is still no treatment for paralysis of the financial system. ’In an effort to quickly find the liquidity to meet obligations, funds and banks will massively start selling oil futures, gold, metals and other assets, increasing even more the domino effect and provoking new mutual defaults‘ — explain the financiers. This is what Roubini speaks about, stressing that the debt burden has increased significantly since 2008. It means that the crisis scale will be greater, he said.

’What China and Russia can do to strengthen the world economy and to come to sustainable development to protect against future problems? First, the financial basis for economic relations within the SCO member states can and should be laid on transferable yuan as unit of account. As for securement of transferable yuan, then this can be achieved by a huge mass of Chinese world ‘factory of the XXI century‘ and the vast natural resources of Russia. Under the amount of transferable yuan one can place the trillions of dollars of U.S. debt, accumulated in foreign exchange reserves of China and Russia.

Thus, there is an opportunity to escape from both problematic issues: losses from U.S. debt and keeping the dollar from a premature collapse under the impending wave of global crisis — according to analysts.

Roubini is remarkably optimistic. The probability of collapse, in fact, is more than 30%, and two years — is too much for the scenario proposed by him. The program of quantitative easing of U.S. Federal Reserve System is coming to the end already on the 30th of June, and then the question arises sharply: who will buy the government bonds of the U.S., because still a fair amount of demand is covered by the program.

’To make investors buy bonds, one should give investors a good scare. For this will do market falls, defaults or just threat of defaults (Greece and other Eurozone countries), disasters and wars. They make it clear for investors that in the terms of volatility, the only stable asset is USA government bonds. It’s always been this way. But things are changing. Even leading U.S. banks get rid of government bonds and go into cash — analysts share their observations.

And if the United States will get lower ratings, then their government bonds will be no longer accepted as collateral for a variety of derivatives and financial transfers. According to experts, faster scenario is likely to take place: the markets will be falling another month or two. Then, in late summer (after raising the U.S. national debt ceiling and the August meeting of Federal Reserve System), investors will feel that the next ‘stage of spreading money from helicopters‘ is coming. They will start to buy risky assets (stocks, commodity futures), which would fuel inflation. A new stage of ’distribution of elephants’ will not start; perhaps there will be hints of monetary tightening appearing in the U.S. and Britain.

Following next real reductions in household incomes and corporate profits decline will generate a sharp collapse of markets in the fall and winter. Following this, the world economy will soon suffer damages, the government will print money quickly, but it will not help. According to economists and financiers, the collapse of the global economy is inevitable: the real aggregate demand is much smaller than the existing world production capacity. Until 2008, the demand for loans was artificially inflated, but this resource is exhausted. Now the demand is supported by government injections — in the U.S. they provide 10-12% of household disposable income.

But it greatly increases the burden of government debt, which has a capacity limit under the threat of sovereign default; it is exactly what Roubini says. So that the end of fiscal stimulus and as a consequence, a collapse of aggregate demand and the global economy on the whole, all this is just a matter of time. What time? It can be discussed, as Roubini does. But there is one thing he is right about: this year the fall will begin, in 2012, or will endure till 2013 — the process has already begun, the crash is inevitable, experts say.

Instead of recognition of foreign investors, UK speaks about tax equity. Changes of the rules for people receiving investor visa are planned

Alterations of UK budget law of 2011 include reform of taxation for people who receive residence permit in the UK as investors. In particular, to increase the minimum annual tax revenue from 30 thousand to 50 thousand pounds. The government claims that it understands the importance of attracting private investors to the UK economy, but wants to balance the interests of all taxpayers.

At the same time, it is proposed to exempt from taxation the capital that foreign investors will direct into the real economy that is investments in British enterprises.

Also measures are planned to simplify procedures of investment registration and obtaining investor visa.

Rating of Greece is the lowest in the world.

International rating agency Standard & Poor’s downgraded the credit rating of Greece by three stages; as a result in the agency’s list Greece now has the lowest rating in the world. The outlook has been left as ‘negative‘, which means its further decrease.

S & P cut the long-term sovereign credit rating of Greece from ’B" to ‘CCC’. It is noted that Greece rating was lower than of such countries as Pakistan and Ecuador, whose access to open markets is denied after the default of 2009. Standard & Poor’s also warned that any debt restructuring of Athens will be considered as default. The Greek government, which tries to get unpopular austerity measures through Parliament, to receive money from the European Union and the International Monetary Fund, said that analysts of Standard & Poor’s, have ignored all attempts of Athens and the IMF to make the situation better.

The debt crisis in Greece began in the end of 2009. In 2010 the country received aid from the EU, the IMF and the ECB at the amount of 110 billion euros to cover the government debt, which now exceeds 350 billion euros. A year later, it became clear that the chosen plan of rending aid to Greece failed. In mid-May 2011 the Greek government announced that the country may require additional assistance of 60 billion euros until 2013. In early June, in addition to the downgrade of Greece by three stages, on the 7th of June the International Monetary Fund (IMF) said it will stop rendering aid to Greece until the EU develops a common position on Greek debt. Several major French banks including BNP Paribas SA, sent a proposal to the country’s government on voluntary participation in the provision of financial assistance to Greece. Thus, banks are willing to allocate up to 70% of the proceeds from Greek redeemable government bonds in the acquisition of new government bonds of the country. During the talks in the end of June between the Ministry of Finance of France and the French Banking Federation it was decided to reinvest in the purchase of new government bonds about 70% of the proceeds of securities that the Greek government will pay off in the period from mid 2012 to mid 2014. About 50% of the funds are expected to be spent on purchase of 30-year government bonds, and the remaining 20% ??will be invested in a special fund, which was set up, according to one source, from ‘extra high-grade securities,‘ which will serve as securement for 30-year government bonds. The representatives of French government announced that banks offer is ’an interesting solution," which ‘should be studied.’ Earlier, the governments of EU member states said they would like to get from private investors at least 30 billion euros as voluntary financial assistance to Greece. In the next 3 years the Greek government bonds held with different circulation periods amounting to some 64 billion euros must be repaid. As noted, the French banks are particularly interested in the salvation of Greece, since they account for about $ 15 billion in Greek state bonds, though the leaders here are the banks of the Federal Reserve System — they account for $ 23 billion of state bonds of Greece. The fact that Societe Generale SA and Credit Agricole SA — the second and third largest banks in France — hold controlling stakes in major Greek banks.

Byelorussia: First Russian Aid

Russia met the needs of the government of Belarus, providing Minsk, that is experiencing the most severe in the last ten years financial crisis, loans of three billion dollars, which it will receive over the next three years. This money will not save the Byelorussian authorities, but it was a nice move from Russia. In 2011, the total amount of the loan will be 1.24 billion dollars, in the first tranche of which Minsk will receive $ 800 million. Provision of further tranches of the loan will depend on the fulfillment by the authorities of Belarus, of a set of conditions, imposed by Moscow, one of which is commitment of state property privatization. Moscow has not given its money, but reminded that the integration frameworks it created are working and friendship with Russia may be useful and favourable. However, Russian generosity was hardly appreciated in Minsk, because it will not really change the situation (the need of Minsk for loans in 2011 is estimated in $ 8 billion), and in addition there is a number of conditions included. For example, the requirement to carry out privatization of Byelorussian state property. In short, Moscow has prevented the default of Byelorussian economy, but did not render a real aid to the country. So far, Alexander Lukashenko categorically refuses to change the economic model that has evolved in the country in the mid-1990s. To devour loans, increasing import and public sector wages, live in the oil offshore, taking advantage of Russian generosity — Minsk has learned to do this all. However, having formed the economy this way, the Belarusian authorities could not change it because of the fear of social upheaval. As a result, revenue decline has coincided with the increase in government spending. After the devaluation of the Byelorussian ruble has led to a sharp rise in prices in the country and the shortage of some goods, the Byelorussian authorities have invented nothing better but to introduce state regulation of prices on dozens of products, by freezing prices till July 1st , which should have been higher because of the devaluation . Taking into consideration that the devaluation has not helped to establish a single exchange rate in the country, we can expect that the coming increase in salaries of state employees will only accelerate the inflation in the country (now forecast at the end of the year is 40 percent). In total Minsk wants to get from the IMF, that has already given 3.5 billion $ to Byelorussia, additional $ 8 billion, but the IMF will certainly require from Minsk even tougher reforms than those required by Russia. All the more, even $ 8 billion is not enough to make the situation with the economy in Byelorussia normal. Money, of course, will help to gain time, but the sale of state property seems to be the only thing that can be done by Minsk in the nearest future.

Greece: New Lehman Brothers?

The situation in June in the Eurozone made investors, European banks and world governments pretty nervous. Despite the fact that default in Greece with the absence of new inflows is almost certain to experts, the decision to grant the next tranche of the EU and the IMF at the amount of 12 billion euros is postponed until July 3rd. Lenders are waiting for new measures, confirming the course of austerity programme. Tough trading because of the provision conditions of the next tranche is held with the background of 18 billion euros debt — a sum to be paid by Greece, July-August. However, these measures will not help: most of the country’s debt, totaling 340 billion euros is of short duration, and half of it the country must pay on bonds over the next three years. Greece needs a new program of financial assistance, and to provide it, the countries are ready to unite. The funds, according to the announcement of the finance ministers of Eurozone in June, can be allocated in addition to the first program of assistance of 110 billion euro, approved a year ago. Amount of additional programs can be 120 billion euro. The consequences of a possible default of Greece would be so terrible that the government simply cannot allow this to happen, everyone says. Analysts fear the second ‘Lehman Brothers‘ and uncontrolled course of events, overseas they warn about a possible repetition of the recession in the U.S. The size of the debt of ’Lehman Brothers‘, which was denied assistance of $ 30 billion, was $ 613 billion. Is it possible that investment alarmists and governments are exaggerating the seriousness of the problem?

In Greece, out of 340 billion euro debt, about 80-90 billion euros are held by the ECB, 50-60 billion euros — by foreign banks and the same — by Greek banks. The rest of the debt of $ 130-165 billion euros is owned by global funds and insurance companies, as estimated financiers of Deutsche Bank. As noted by its analysts, the default will simply destroy Greek banks, as their market capitalization is considerably less than the sum of the assets. For European banks, Greek default would mean the beginning of a new wave of capital write-offs. In this regard, in June Moodys rating agency lowered the forecast on the largest French banks ratings.

Herewith European banks remain the largest holders of the debt of other countries PIIGS: Portugal, Ireland, Spain and Italy. And Greece, economists say, is a source of financial risk, and its default will inevitably lead to a deterioration of fiscal discipline in these countries and development of a crisis situation in a spiral. In the mentioned countries, European banks are the holders of government debt of $ 2 trillion. The same amount of assets was written off worldwide, a year after the collapse of ‘Lehman Brothers’.

RF Finance Minister: government policy lowered the competitive ability of the economy.

Government policy in recent years has reduced the competitiveness of the Russian economy. This was stated by the head of the Russian Ministry of Finance Alexei Kudrin, in his addressing at business breakfast during the St. Petersburg Economic Forum. ’In the last year or two the made decisions have started to move us away from the advantages that we had‘ — ??he said.

’We want to lower taxes before an election, and not to reduce expenses — such an approach does not increase competitiveness,‘ — said the head of the Ministry of Finance. ‘I would like the government to be more consistent in implementing the rules and principles that we proclaim, and to be more liberal,’ — he added.

‘We can see fierce dispute going about insurance contributions — they have raised pensions, and now they have decided that perhaps they have incorrectly increased the amount of contributions, and began to lower them and as a result they have deficits of the pension system — cited an example vice-premier Kudrin. — If we want to reduce taxes, we need to start with cost cutting, or at least non-increase. ‘

According to the participants of the business lunch, major obstacle to investment in the Russian economy is the high level of corruption in the country. Nevertheless, on the 15th of June, Prime Minister Vladimir Putin said that over the next 10 years Russia will become the fifth largest economy in the world. According to him, at the same time they plan to increase the GDP per capita from 19.7 thousand dollars to 35 thousand dollars. ’To achieve these goals we must at least double the productivity of labor and in non-oil and gas high-tech sectors — in 3-4 times’, — Putin said. He added that the Russian economy should escape inefficient employment, and instead set up at least 25 million modern high-paying jobs. Taking into account that the Russian economy now employs about 70 million people, the modernization should involve each third place.

European Union will increase by 8 countries by 2018

According to Romanian President Traian Basescu, the number of member states of the European Union can increase by 2018 from the current 27 to 35. Perhaps this is not the most propitious moment, in consideration of the crisis situation, but according to the Romanian president, it would be favourable for Balkans if Moldova and Turkey joined the EU. By the end of the year, according to the politician, Romania could join Schengen zone.

International Economic Forum in St. Petersburg — Russian economy business card

In the course of three-day economic forum in St. Petersburg the Russian authorities tried to convince foreign investors that making money in Russia is safe. However, problems in the Russian economy still exist. The government made the final decision — the rate of insurance contributions will be reduced from 34% to 30% (for industrial and social business — up to 20%). — Among the scenarios that have been proposed, was the raise of other taxes — said Finance Minister Alexei Kudrin. — For example, the income tax. But we rejected this option. The decision of tax reduction taken by the government was uneasy. According to calculations the Ministry of Finance, the budget losses will exceed 100 billion rubles a year. Nevertheless, entrepreneurs are still dissatisfied. — This decision does not reversing the negative trend, — said Alexander Galuska, president of the public organization ‘Business Russia.’ — That is, the companies will not start to come out of the shadow. Our offer is 22% for all businesses and 18% for small businesses. According to the economists of the Institute for Economy in Transition, the second wave of mass sales of government property may bring up to 20 trillion rubles. At the expense of the money the Pension Fund deficit can be covered by. There are other sources. — You can increase the excise tax on tobacco and liquor — offers Galuska. — It should be made mandatory, because we are the most smoking and drinking country in the world. In addition, you must use the property tax. Proceeds from it are only 15 billion rubles. Although one can take much more out of the elite district of Moscow region Rublevka. And, of course, it should be a tax imposed on the rich, on the excess area. Nevertheless, until now the authorities do not seem ready for such decisions.

Second wave of privatization in Russia

Another final decision, announced in the framework of the forum — the government will surely sell a big block of shares in the largest state-owned companies (banks and enterprises). Due to this plan they expect to bail out big money. — The amount is about to be of $ 500 billion rubles according to the results of 2011 — said in the lobbies of the forum director of Department of Property Relations of Economic Development Ministry Alexey Uvarov. For comparison, this is approximately equal to the current budget deficit of the Pension Fund, which the government is forced to compensate from the federal treasury. Moreover, a similar amount government plans to bail out every year. This year the stock of shares of ‘Sovkomflot‘ and Sberbank will go in public sale. Next year, it is planned to sell stocks of companies ’RusHydro‘, FSK and VTB. And for 2013 the sale of shares of ‘Rosneft’ RAB, ’Rosagroleasing‘ and Russian Railways is scheduled. Moreover, at the forum in St. Petersburg it was decided to expand the list of assets for sale. Businessmen fully support the idea of ??privatization.

— Now 95% of serious high-level corruption arise in and around state companies and banks, — said Alexander Lebedev, head of the National Reserve Corporation. — It is absolutely correct. It is unclear what we need our state-owned companies in such an amount for? Will there be a demand for these assets? Many experts are convinced that there are a lot of those who are interested in this. But the question is under what conditions shares of state companies will be sold. — First, there is no infinite demand for Russian assets — said Mikhail Zadornov, chairman of the bank VTB 24, a former finance minister. — Secondly, you cannot immediately place all assets at the market. Investors choose what is interesting and more attractive for them. And are not going to pay over. Therefore, the Government has yet to learn how to manage the privatization process.

Capital flees from the country

Another problem of the Russian economy — a flight of capital. From the beginning of the year $ 35 billion ’escaped" from the country. And without any investment economic growth is impossible. And privatization is not possible without the interest of major investors to the objects of our economy. Why is money fleeing abroad? — In Russia, there is a large amount of money due to high oil prices, — said Mikhail Zadornov. — And facilities and confidence to invest in Russia are not enough. Plus, some political uncertainty.

The outflow of capital is quite a natural thing, — said Alexander Lebedev. — Personally, I do not like that in the last ten months I have so much pressure from out everywhere. And I can’t defend my rights. Another thing is that I’m not going to go anywhere. But some of my colleagues cannot stand such pressure and go out of business.

Alexei Kudrin, has forecasted that by the end of the year capital will come back into the country. Well, wait and we’ll see. Perhaps this will be the main outcome of the forum.

Hong Kong remarks growth in the number of tourists from Russia by 50%

For the first three months of 2011 almost 29.6 thousand Russians visited Hong Kong that is 50.7% more than the same period last year. Only in March this year, Hong Kong received 11.2 thousand guests from Russia, which is 59.3% higher than in March 2010. Stable growth of the tourist flow from Russia is primarily due to visa regime absence, said Tourism Department of Hong Kong. Another important factor is also an increase in passenger traffic: there are three airlines that offer flies from Moscow to Hong Kong — the Russian ‘Aeroflot’, Hong Kong, Cathay Pacific Airways and Hong Kong Airlines. Nevertheless, the total share of the Russian Tourism in Hong Kong is not so great. In particular, in March 2011 Hong Kong was visited by 21.2 thousand of Germans, 56.2 thousand of Australians, 57.3 thousand of British and 113,500 of Americans, news agencies reported.

In just the first three months of this year, this special administrative region of China has received 9.708 million people, 12.6% more than in the first quarter of 2010. Last year 36 million tourists came to Hong Kong and spent $ 26 billion here. This is 32% more than in 2009. According to forecasts of the Hong Kong Tourist Bureau, in 2011, the number of visitors continues to grow and will reach 40 million people. It is estimated that tourism revenues this year will be $ 31 billion. But not only tourism attracts people to visit Hong Kong. Business relations in the region and high stable business interest to it have led to the fact that ‘Midland Consult‘ among the few consulting holdings took a decision a year ago and opened its office in the downtown of Hong Kong.

Tax Service of Ukraine recognized: Tax Code ran down small business.

In 2011 in Ukraine the number of established individuals — businesses, private enterprises and limited liability companies has declined significantly comparing to 2010, and the amount of shut down business entities has increased significantly. This was reported in the statistical inquiry given by the State Tax Service of Ukraine in response to corresponding appeal by People’s Deputy Svyatoslav Oleynik, informs his press office. According to STS, in January-March 2011, after the approval of the Tax Code, the number of established individuals — entrepreneurs in Ukraine has decreased by 30% compared to January-March 2010. At the same time, the amount of those who decided to close their business was 36% more than in the corresponding period of 2010. Just for the first three months of 2011 56 613 entrepreneurs have stopped their work. According to Oleynik, the trend of a significant decrease in the number of private entrepreneurs in the future will only grow. ’Devastating consequences of so-called ‘tax reform ‘ are expressed in a significant decrease in business activity. It has already reflected on the number of private entrepreneurs who have stopped their work, and, unfortunately, this is a steady trend ’- said the deputy. He also stressed that if the conditions for small and medium-sized businesses in Ukraine will not be created, then entrepreneurs will leave the country and will form the tax base and the gross product of other countries. ’Simultaneously with the mass closure of PE we can observe the process Ukrainian businessmen moving to other countries. Today the Ukrainian capital is actively invested in Brazil, Africa, Georgia. It is clear that we are losing the most important — the intellectual potential of Ukraine ‘- said Oleynik.

Banker and technician Andris Berzins — new president of Latvia

The Latvian Saeima (parliament) elected a new president in June, this is Andris Berzins. Two candidates ran for presidency:- incumbent President Valdis Zatlers and former President of the Chamber of Commerce, Andris Berzins.

To win the first round of electiona a candidate needed to have at least 51 votes of parliamentarians out of 100. Berzins candidacy was supported by 53 deputies in a secret ballot, while 41 voted for Zatlers.

The current Latvian President Zatlers announced on May 28 the beginning of the procedure of dissolution of the Saeima. Previously, the Saeima rejected the Anti-Corruption Office in house-check of MP and prominent businessman Ainars Slesers, who is suspected of corrupt dealings. According to Zatlers, the decision of the Saeima members to refuse in house-check of Slesers has created a situation where the legislature has set itself above the judiciary, which is unacceptable. The President said that he considered his duty to act for the good of the country, and despite the fact that this will cause constitutional and political difficulties, he decided to dissolve the Saeima.

Andris Berzins, will officially become president of Latvia on July 8, but since the election he is provided with security and administrative support by the Office of the President. Valdis Zatlers was the first president in modern history of Latvia, who was not reelected. Perhaps this was due to this decision to initiate the dissolution of the Saeima.

’I am often criticized for the fact that I own a lot of land. But my experience of working in the bank shows that it is very difficult to predict the future and one should take care of their old age " - said Berzins to media. He added that ‘he does not believe in the efficacy of second-tier pension system’ (mandatory accumulation of a part of social security tax of employees). According to him, 15 years ago, the bank Lehman Brothers, for example, was ran by ‘very distinguished and thoughtful‘ Jews, who have developed this business for over 150 years. ’And then risk-oriented youth came to directorship. And in 2008, everything fell apart. There was no one who would tell them about the need to maintain a balance,’ — said Berzins. ‘To those who are 30-40 years old now, I should say loud and clear that when they will be 60 the situation can change dramatically. They should better think about where to invest now — in education, property — rather than spend money on’ heavenly gifts ‘ with the hope that in future they will have boundless retirement. I’ll bet with a 30-year-old that he will not receive pension, ‘- said Berzins. According to Berzins, for commercial banks second-tier pension system became a profitable business which they are not willing to give up.

’Pension funds are controlled by large enterprises, and funds are managed by the young, aggressive young people who are primarily interested in their own profit. Because of the risk enterprises often fall apart and no one gets the profit. I wish I was wrong, but have no confidence in it ’- said the politician.

Berzins election was a step back to the political dependence on the oligarchs. This opinion is apparently supported by former President of Latvia Vaira Vike Freiberga,.

At first she did not want to comment on the election of Berzins, but then she said that the current President Valdis Zatlers with his decision to start the process of dissolution of the Saeima wanted to start a new era and to put an end to the 20-year influence of oligarchs on politics in the country, but now a new era will not start. On the contrary, the country takes a step back to the political dependence on the oligarchs.

Berzins was born in 1944, he graduated from Riga Polytechnic Institute as a radio engineer and also from the Department of Economics of University of Latvia, where he specialized in production planning. Berzins began his career as repairman of color televisions. In 1990 he was elected a deputy from the Popular Front for the Supreme Council. In 1993 he was appointed as the head of the bank Unibank and worked on this position for over 10 years. Berzins considers himself a wealthy man. He owns the land, he has a big savings and loan commitments. Probably he gets the biggest pension in Latvia.

Midland Consult