November attempts of overcoming the crisis

November, 2011

Russia is ready to help the European Union

In mid-November Prime Minister Vladimir Putin said that Russia welcomed the efforts of the European countries in overcoming economic difficulties and was ready to provide practical assistance.

«We welcome the efforts of the European partners in overcoming economic difficulties and we support measures of financial stability. For our part, we are ready to provide practical assistance to European partners» Putin said at a press conference with French counterpart François Fillon.

Private investors write off half of the debt of Greece

At a November summit in Brussels EU leaders succeed in reaching an agreement with private investors on a 50-percent voluntary debt remission of Greek bonds. According to the President of France, the agreement will enable the writing off of more than 100 billion euros from 210 billion commitments of the Government of Greece to private banks. Total public debt is about 350 billion euros. In addition, the President of the European Council Herman van Rompuy said that additional financial assistance in the amount of 100 billion euros would be given to Greece by the European Union and the International Monetary Fund. French President Nicolas Sarkozy officially confirmed that European stabilization fund increased up to a trillion euros.

Until November, private investors had agreed only to 40 per cent reduction of Greek debt. The amount of Greek debt is three times less than the amount of the debt of Italy, which will have to solve their debt problems after the departure of Silvio Berlusconi in November.

British finance minister against new tax

Finance Minister of Great Britain George Osborne said that Europe should not have created problems, by shouldering with tax on financial transactions. In his opinion, the stability of the development of the EU should be achieved by other means. Imposing of tax on financial transactions will undermine the stability. The introduction of a new tax in the EU, which will not affect other countries, such as the United States and China, is suicidal for Britain and Europe as a whole. According to the Minister, this can lead to unemployment and the withdrawal of a number of companies from the British market.

Russia is upgraded

Business availability rating was published. For the first time in eight years, Russia improved its position in world ranking «Doing Business», taking 120-th place. The World Bank and the International Finance Corporation, which estimated 183 countries on accessibility for business, believe that the conditions for business in Russia are a little better than in Costa Rica and a bit worse than on the islands of Cape Verde. WB and IFC noted in their report that the reforms that facilitate doing business had been carried out in 125 countries from 183. Twenty-nine of them implemented measures that would improve the transparency of state regulation for the business environment. The most active were countries of Eastern Europe and Central Asia. In Russia, there were four «transparent» reforms.

Market participants perceive rating of «Doing Business» as a landmark because the authors evaluate the simplicity of doing business of the countries in their capitals. For the first time in eight years, the rating reflected the improvement of the Russian business environment. Nevertheless, the «Doing Business» has drawbacks. It does not take into account the issues of security, stability of the financial system, corruption and the macroeconomic situation. In the former Soviet Union, the greatest growth of the favor of the business environment was noticed in Belarus, which had 69th place, by rising by 22 positions. Conditions in Moldova were also improved, the country climbed up by 18 positions to 81st place. Ukraine took 152-th place. Baltic States are in the top 30. Latvia took 21st place, Estonia occupied 24th place in Estonia and Lithuania took 27th place.

Central Asia and the Caucasus had no significant changes, with the exception of Kazakhstan, which improved last year’s result by 11 positions and occupied 47th place. Georgia remains to be the leader among the countries of the former Soviet Union. Georgia took 16th place. Armenia, Azerbaijan and Kyrgyzstan took 55th, 66th and 70th respectively. Things are in a bad way in Tajikistan, which occupied 147th place and Uzbekistan, which took 166th place. In the top five of «Doing Business» there is no changes: Singapore took the first place; second place is occupied by Hong Kong. New Zealand, the United States and Denmark are in the third, fourth and fifth places respectively. Norway climbed by one position and took the 6th place. United Kingdom fell by one position and took 7th place. The last 15 places are occupied by African countries-Burundi, Djibouti, Zimbabwe, Angola, Niger, Benin, Guinea-Bissau, CONGO, Guinea, Eritrea, Congo, Central African Republic and Chad. The exceptions are Venezuela (177th) and Haiti (174th).

Central banks exceeded the 40-years-old record for gold

For the third quarter of 2011, central banks around the world bought 148.4 tons of gold. It was reported in the study made by the World Gold Council. Volume of buying up of «yellow metal» became the biggest for the last 40 years. From the beginning of the year, the central banks bought 350 tons of gold. Following the results of 12 months, volume of purchase can exceed 450 tons. According to analysts, world demand for gold in the third quarter of 2011 increased by six percent in comparison with the same period last year. During three months, investors around the world bought 1093 tons of precious metal for 57.7 billion dollars. The greatest volume of purchase came to Europe (468.1 tons). Demand for «yellow metal» among European investors grew by 33 per cent. India has only 78 tons. China has 62.2 tons. Increased purchases are associated with a significant reduction of prices for gold in September 2011. For a month, tender price for gold fell by 20 per cent to 1550 dollars per ounce. Silver prices decreased during the month by 32 per cent to 30 dollars per ounce. Investors sold precious metals in order to cover the losses incurred in other financial markets. In the first part of 2011, gold prices increased. Gold is considered to be «protective asset». Demand for gold grows in the face of instability in financial markets. Assets of gold of central banks contain 17 per cent of the total amount of «yellow metal» in the market. In October 2011, representatives of the Bank of Russia stated that the Central Bank would increase the proportion of gold in the international reserves of the country. Now Central Bank has asset of 800 tons of gold. For comparison, the gold reserve of the People’s Bank of PRC, which is the world leader in purchasing of gold, is 1054 tons.

Nord Stream started gas supply to Europe

Nord Stream gas pipeline was brought into operation on the Baltic Sea bed in November. Thus, the Nord Stream pipeline supplies amounted 1 million cubic meters per hour. Dirk von Ameln said that this would guarantee supply of 8.5 billion cubic meters a year. According to him, after bringing into operation the second pipeline, which is scheduled for the autumn 2012, supplies will increase to 55 billion cubic meters a year. Nord Stream is a new route of the export of Russian gas to Europe. Pipeline length is 1.22 thousands kilometers. Pipeline passes through the Baltic Sea from Russia (Vyborg) to Germany (Greifswald).

Gazprom has already signed long-term gas supply contracts on Nord Stream with clients in several EU countries, including Germany, Denmark, the Netherlands, Belgium, France and the UK.

Cyprus will search for private investors

In November the Minister of Finance of the Republic of Cyprus, Kikis Kazamias stated that Cyprus banks should have searched for private investors in order to strengthen its financial position. At the same time, the Government of Cyprus is ready to engage in this process in order to ensure the financial stability of Cyprus banks. Minister of Finance of Cyprus noted that at present time all EU banking systems were experiencing difficulties, connected mainly with the debt crisis in the eurozone. Therefore, measures for strengthening banks are taken at the pan-European level. These measures will help banks to survive in the condition of the debt crisis.

In General, Cyprus is looking for creditors, which are interested in its welfare. Russia has already become the first in the list by offering credit in 2.5 billion Euro under 4.5%. According to the document signed in November, credit will be issued in three tranches, starting in January 2012. Cyprus Government spokesman, Stephanos Stephanou stressed that according to the current tendency a number of European countries were trying to get a loan from either China or Russia. Experts believe that, thanks to its low taxes, Cyprus has many friends who will help on friendly rate and for the long term. Analysts say that first of all it is Russia. In their view, many holding structures in Russian hold their assets in the Republic of Cyprus. If default takes place, there will be large losses of private structures, which are registered in the Cyprus. In fact, there is no direct harm from any financial turmoil in Cyprus for companies, which are just registered there. However, if Cyprus suddenly increase taxes or tighten fiscal policies in order to settle accounts with loan debtors, it will be extremely inconvenient for Russian holding structures that exist there for decades.

International rating agency Moody’s Investors Service downgraded the Cyprus sovereign credit rating from «Baa1» to «Baa3», putting it in the list for further downgrade.

The Agency has also downgraded the short-term rating from Prime-2 to Prime-3 «. Key factors are probable need of State support to the banking sector as the result of massive write-off on Greek government stocks, which are on the balance sheets of Cyprus banks; the probable need of appeal to international creditors because of the loss of access to debt markets; low ability of the Government to carry out budgetary and structural reforms.

Standard & Poor’s explained the downgrade by the close connection of the banking systems of Cyprus and Greece. Nevertheless, the Minister of Finance of the Republic of Cyprus, Kikis Kazamias speaking in November at a Conference in Nicosia, said that he could not agree with the assessment of the credit rating agency, which had downgraded the rating of Cyprus banks. He added that the situation was not too difficult to cope with it. Kazamis reiterated that Cyprus banks had enough opportunities to overcome the difficulties connected with the purchase of Greek bonds. If the banks do not cope alone, the State will help them. Shares of the two major Cypriot banks became cheaper in November. This immediately affected the revitalization of the market. Cypriot businessmen began to buy up shares of Cyprus banks. Rumor has it that an unnamed Russian oligarch is going to buy 25% of shares of the one of the largest Cypriot banks.

According to analysts, the most important fact is that the Cyprus Government will implement the financial steps that will not change the situation for international business and will not affect international companies registered in Cyprus. For the purpose of cost savings, the Government plans to freeze salaries of government officials for two years, as well as to increase taxes on high incomes in the private sector. It was announced in November. According to Government of Cyprus, it will save about 355 million euro in 2012 and 2013. Other measures will be taken on the domestic market of Cyprus, but they will not affect the international companies registered on the island.

The EU plans to fight with alien offshores

The European Commission has included obligation to strengthen protection of the income of European States from usage of offshore and frauds with VAT refunds in its programme of work on 2012 year. In the fourth quarter of 2012, there will be offered a strategy against offshore outside the EU, and jurisdictions, which do not cooperate in the sphere of tax information exchange. It is also planned to strengthen good-neighborly relations between European countries. Portugal deleted Cyprus from its «black list» on November 8.

This means that:
— Rules on controlled companies will not apply to companies of Cyprus;
— Payments of Portuguese companies in favor of Cyprus can be fully allocated to expenses;
— Cypriot enterprises will be exempted from taxes on capital gains and interest in Portugal;
— In case of buying of real estate in Portugal, the Cyprus companies will pay the standard tax.

What did G20 decide

G20 leaders responded to the debt crisis in the EU with plans to increase IMF resources, calls for a tightening of fiscal policy, intention to control financial outflows, calls for fighting with tax evasion and financial havens «. Primary purpose of G20 is economic growth and employment. As the President of the European Council Herman van Rompuy stated Cannes in November, «the responsibility lies with all the global actors». "Of course, primarily the responsibility lies with the European Union and the euro zone, because of that it is necessary to restore financial stability in our region. This will be the biggest contribution to world stability, «said Herman van Rompuy, speaking at a press conference after G20 Summit.

In turn, United States should ensure the consolidation of fiscal policy in the medium term perspective; new industrial countries should stimulate domestic demand, and «some countries have to do its exchange rate more flexible».

Summarizing the results of the Summit, French President Nicolas Sarkozy announced the increase of IMF resources for assisting both developing countries and the euro zone, which had faced unprecedented debt crisis. The European Financial Stability Fund will cooperate with the IMF. It will help to involve necessary financial resources for the disaffiliation with crisis.

«We will decide in which form this cooperation will take place, however, we are going to formalize the agreement by the next G20 Summit, which will be held in February next year,» said the French President at the press conference following the Summit.

N. Sarkozy also said that the G20 countries agreed on the question of the need of controlling of financial outflows, fighting with evasion and «financial havens».

The French President also said that his country had encouraged countries of the G20 to impose an additional tax on financial transactions. Nevertheless, the majority of Summit participants, including Russia and the United States did not support this idea.

Italian State debt was also discussed. It exceeded 120% of GDP. Italy asked the International Monetary Fund to monitor the status of the national economy and the process of carrying out the reforms in the country in order to obtain new loans for the disaffiliation with crisis.

Dutch are for exit from the Eurozone

The Dutch are tired of paying for EU members, which are to blame for the debt crisis. The majority of the Netherlands vote for the exit from the euro zone and return to the national currency (guilders). Netherlands taxpayers do not want to pay for the salvation of the more wasteful eurozone members. In May 51% of Dutch advocated a return to national currencies. However, according to the results of the last head count, figures rose to 58%.

According to the head count, 52% of the inhabitants of the Netherlands consider that Greece should leave the euro zone. Speaking about the prospects of Greece, 60% of respondents said that the country would accept aid package, 69% said that Athens would not apply the undertakings to reduce costs. Netherlands, who entered the euro area almost 10 years ago (in 2002), had been among six countries who spoke for the creation of the European Union.

Swiss predicts the very end of the Eurozone

Eurozone lives its last weeks in the present form. This is the prediction of the second largest Swiss Bank, Credit Suisse. Its analysts believe that in mid-January 2012, Germany and France will come to key decision to move to a new level of economic and financial integration and the establishment of a tax union. As a result, there will emerge conditions for a new monetary policy of the European Central Bank (ECB), which will begin mass buying-up of bonds of the most economically weak eurozone member countries to prevent escalation of the current systemic financial crisis in the break-up of the eurozone.

According to the analysis of Credit Suisse, the peak point of the crisis will be achieved when the yield on the 10-year bonds of Italy and Spain will reach 9%, and the yield on France bonds will reach 5%. Specialists of the Bank believe that such a situation will form on markets by mid-January next year. «In the case of moving of bonds yield to such high levels, investors will begin to ask whether eurozone bonds are a simple paper. In that case, Germany and France will be forced to make instant decision to move to a new level of integration and create a tax union within the eurozone» — analysts of Credit Suisse say. Swiss bank analysts stress that «the fate of the euro will be resolved within the nearest time.» They consider strengthening of integration foundation of eurozone a core variant and they think that possibility of its collapse is unlikely.

The Presiden of the Russian Federation: Eurasian Union is better than the Eurozone

During the Summit of member countries of Eurasian Economic Union, the President of Russia Dmitry Medvedev said that Eurasian Economic Union would avoid the problems of the eurozone, because it was not a «conglomerate of disparate countries». According to Medvedev, countries of the Eurasian Union, such as Kazakhstan, Belarus and Russia did not start with a different level.

«These three countries had a common history and they develop according to the common scenario»- said the President of Russia. He noted that number of neighboring countries of Russia, Belarus and Kazakhstan show interest in the Economic Union. Medvedev noted that Eurasian Economic Union might be established ahead of 2015.

President Nursultan Nazarbayev said that the supranational body of Eurasian Economic Union, Eurasian Economic Commission for Europe (ECE), would get «175 national authorities.» Eurasian Economic Union will be a new stage in the integration process of Russia, Belarus and Kazakhstan, which established a Customs Union and a Common Economic Space. The first step of creation of the Union will be codification of the entire Common Economic Space legal framework.

Russia entered the WTO

Eighteen year-old marathon on Russia’s joining to WTO has come to an end. The final meeting was held in November. It lasted about two and a half hours; two of them were taken by a congratulatory speech. Negotiations on Russia’s accession into the World Trade Organization began after her appearance on the political map of the world in 1993. Russia has developed the present activity only in 2000, when accession into WTO was proclaimed one of the strategic objectives.

Russia's Central Bank raised twice its forecast on capital outflow

Central Bank raised twice the forecast for a net outflow of capital from Russia at the end of 2011. Now the Bank of Russia expects outflow of more than 70 billion $. Such data is contained in the amended draft «main directions of monetary policy.»

Regulator lowers the forecast on the volume of international reserves at the end of the year from 515 billion dollars to 495 billion dollars. According to the updated forecast for the 2011, growth of international reserves will amount to 26 billion dollars. At the end of November, it was not reported about the revision of forecast on capital outflows from the Russian Federation. However, leading specialists of the financial departments of Russia claimed that in 2011, approximately 50 billion of private capital would be taken out of the country.

There will be no reason to keep money in banks in Russia

The Ministry of Finance and the Central Bank of Russian Federation want to cut rates on bank deposits. To this end, the Ministry of Finance of the Russian Federation prepared amendments to legislation that would give the CB the right to regulate the size of the maximum rates for the citizens ’ deposits in commercial banks. If this idea is implemented, the yield on deposits will drop from the current 10-12% to 6%. Manual regulation of the rates will provide fertile ground for corruption.

Hong Kong offers new opportunities to the investors

At the annual Conference of the Association of Investment Funds in Hong Kong, the Minister of finance John Tsang said that during the work on the 12 five-year plan of China, there were new opportunities for investors. He reported that the total volume of investment funds Hong Kong exceeded 10 trillion HK or $ 1.3 trillion American $, two thirds of these funds belong to foreign investors. John Tsang noted that the Hong Kong continues to be the most popular area for investment business in Asia due to its proximity to other countries and its growing popularity as a world financial centre in the Asian continent. Adopted in March this year, the 12 five-year plan of China approved Hong Kong’s role and activities in the field of investment. Moreover, in this regard, China offers investors new opportunities, reinforces Hong Kong’s status as a recognized offshore Center in Asia, modernize legislation.

Russia is the world leader in corruption

Russian companies have become leaders in the rating of the corrupt officials among exporting companies abroad. Such data is contained in the report of international corruption organization Transparency International, which annually calculates the Bribe Payers Index. According to the Transparency, the companies of Russia and China are more likely to bribe in any country in the world.

United States national debt has reached new highs

American experts stress that now, when it is the end of the year, national debt has reached the mark of 99% of the level, which was planned by United States Government. According to specialists, this is a sign of a serious weakening of the US economy. Now the official maximum amount of the national debt in the United States is 15 trillion 194 billion dollars. But in September 2011, it was estimated at 14.9 trillion dollars, and in November it exceeded 15 trillion dollars. Current President Barack Obama «inherited» debt in 10.6 trillion dollars from the administration of George W. Bush. Experts believe that soon debt will reach 100% of U.S. GDP, which is 15.2 trillion dollars.

In August, Congress and the Administration created a two-party Commission to reduce the public expenditure, fight budget deficits, and reduce the public debt. But despite the plan to reduce costs presented in November, the Americans do not have effective measures to reduce public debt. Meanwhile, rating agency Fitch may review the current «stable» forecast on credit rating of the leading banks of United States in the case of aggravation of debt crisis in Europe. According to analysts of agency, extension of the credit crisis to other European countries, in addition to already affected Greece, Ireland, Italy, Portugal, and Spain, will seriously affect the financial health of American banks.

Latvian real estate attracts chinese

Up until recently, the Latvian real estate attracted only Russians and citizens of other republics of the post-Soviet space. Nevertheless, in recent months, after a successful advertising program during exhibition Shanghai-Expo, Chinese became interested in it. The Chinese Ambassador to Latvia, Lee Bijian, stressed that Chinese are attracted by the possibility of getting a residence permit in this European country, where there are low prices on real estate. Currently the Chinese are interested mostly in apartments in Riga. In recent weeks, 46 Chinese appealed to the Latvian authorities in order to get Latvian residence permit. According to analysts, in the next 3-4 years, more than 100 thousands of Latvian citizens and non-citizens will leave the country in order to look for better way of life.

Midland Consult