Euro Area crisis will affect everybody?

December, 2011

The next EU summit will be held in late january

The next meeting of Heads of States and Governments of the European Union will be held on January 30, 2012. In December EU President Herman van Rompej announced this in the video, posted on the Web-site of the EU. The official theme of the EU Summit will become a problem of employment. However, as noted by commentators, the main issue of discussion would be a euro zone debt crisis and ways to overcome it.

Rompej Khachik Voskanyan said that the theme of the next EU Summit would be the question of employment. “This will be a great challenge in the circumstances, when it is expected that most of our economies will show zero growth or even recession” he said. “We must take vigorous actions in the field of employment. Assurance of the financial stability of the euro zone has key importance for our future. This year we have taken important decisions to overcome sovereign debt crisis. Almost all countries within the Union carry out programmes of reforms aimed at improving the competitiveness of our companies and strengthening the public finances. Exit from the social crisis exists,” the President of the EU said.

Whether the world will suffer from a debt crisis in europe

The current Director of the IMF Christine Lagarde believes that the whole world could suffer from the European debt crisis. She said that all the countries of the world are concerned about what happens in Europe. If the crisis deepens, the European States will have even more problems, and that will lead to the financial crisis, which has already affect world economy. Lagarde believes that the poorest states, which depend on foreign investments and trade with the European countries, may face economic hardships in the nearest future. Leading economist of “Standard Poor’s” Jean-Michel Six said that the probability of economic recession is 40%. Previously it was assumed that this recession would reduce activity in the EU for six months, and now it is known that activity will fall for a whole year.

EU-Russia summit: spin-out?

Russian experts note “modest” achievements of Brussels Summit, which was the last one for Dmitry Medvedev as President. During his speech, Russian President said about the progress, which had been made in the Visa area and energy cooperation. A two-day Summit, held in Brussels, completed its work on December 15. “I would like to note the progress in the visa field. The work on the list of joint steps towards a visa-free space was completed,” Medvedev said. He made it clear that Russia still hoped to abolish visas between Russia and the EU. However, European Commission President Jose Manuel Barroso said that visas would still exist in 2012.

“This will not happen next year. Our work continues. I hope that in the coming weeks and months we will have concrete results”, he said.

Russian experts drew attention to the fact that the focus of discussions during the Summit unexpectedly moved in the direction of the internal situation in Russia.

As it seems, Russia and the EU do not have a common agenda now.

“First of all it happens because of the European Union, which is extremely concerned about their domestic economic problems. They are trying to create a new financial architecture. Russia, naturally, cannot help partners here. The only Russia’s role in Europe in this difficult period is to try to ensure stability of energy supply ” Russian expert said.

EU-Ukraine summit as a missed chance

There were the critical questions about the internal politics of Ukraine instead of signatures under the joint documents. EU distances itself from the course of Viktor Yanukovych, and, according to specialists, there are good reasons.

The December Summit of the EU-Ukraine did not have effect. Ukraine missed a good chance of rapprochement with the European Union. Brussels decided to defer signing of the agreement on free trade and association with Kiev. It seems that the parties decided to take a timeout before the parliamentary elections in Ukraine in the autumn of next year. In the meantime, the European Union will monitor the situation in the country.

Summit in Kiev is a milestone in relations between the EU and Ukraine. The association agreement could be an important step towards the integration of Ukraine into the EU. Now it is frozen. The sentence and the threat of the second trial of Yulia Tymoshenko became insurmountable barrier between Brussels and Kiev. The EU remains of the same mind and claims that legal prosecution of the former head of Government is politically motivated. Viktor Yanukovich and his Administration require prospects on joining the EU for Ukraine. Nevertheless, during his reign there is cooling in relations with the European Union.

20 years ago, Ukraine gained its independence. Nevertheless, It has not yet found its place in Europe. Country is situated between the reintegration of the post-Soviet structures and the prospect of accession to the European Union. The European Union should find its position too. If it wants to get on the eastern frontier stable partner carrying out political reforms, it should pay much more attention to Ukraine.

Russia has signed the protocol on accession to WTO

In December, Minister of Economic Development of Russian Federation Elvira Nabiullina and the head of the WTO Pascal Lamy signed a Protocol on the accession of Russia to the WTO. Then, Lamy gave Nabiullinoj a symbolic plate with the inscription “Russian Federation”, which means that the negotiations that had been lasted for eighteen years, finished. Now the State Duma must ratify the Treaty of accession. It is expected to happen in the period between presidential elections and the end of May. In 30 days after ratification, Russia will become a member of WTO. As stated by ex-Minister of finance Aleksei Kudrin, this step would allow Russia to get additional GDP growth by the 3-4% for 10 years. In addition, now the Russian manufacturers will not be able to defend themselves by protective duties, and they will have to improve productivity and modernize production. Within the framework of accession to the WTO Russia agreed to lower taxes on beer, wine and agricultural products, and certain other goods. It also agreed to introduce some benefits to automobile concerns and car components suppliers and to abandon collecting fees of European aircraft flying over Russian territory.

Most of the Russian obligations are a framework. In particular, Russia promises to build its own economic policies and adopt laws in accordance with WTO rules. There are other little requirements, but they are also relative. Thus, “Aeroflot”, owned by a State, is prohibited to make decisions that could affect exports or imports.

The activity of Customs Union of Russia, Belarus and Kazakhstan were reviewed within the framework of the WTO. It was earlier reported that all three countries might join the Trade Club at the same time. In the final minutes, the role of Russia changed. In the paper it is claimed that Moscow is “an agent of the WTO in the Customs Union” and it will have to resolve conflicts between their economic allies and members of the Trade Club. The Protocol consists of 225 pages. Its creation was begun in 1995, and it is finished in 2011, when the Working Group approved the accession of Russia to the Trade Club. Among other things, the document contains claims of WTO participants to Russian laws, which have been already abrogated. The last participant of the commercial Club, which did not coordinate the inclusion of Russia, remained Georgia. In early November, Moscow and Tbilisi were able to make agree on a bilateral agreement on WTO, and then signed it. The final Protocol on the accession of Russia to the WTO was adopted on November 10; it was signed on December 16.

The debt of the eurozone will grow up to 98% of GDP

The Organization for economic cooperation and development (OECD) increased forecast for the public debt of the euro area in 2012 to 97.9% of total GDP. According to forecast, in 2013 the total public debt of the eurozone countries will grow up to 98.2%. Forecast for 2011 is 95.6%. The OECD believes that in 2012 GDP growth in Europe will slow in eight times to 0.2% per year. However, economists believe that in 2013, the growth of the economy will recover to 1.4%. In the United States GDP growth will remain stable. At the same time, the OECD predicts a decline of the GDP growth to 8.5% in China. Now this index shows more than 9%. The organization notes that weak domestic demand slows the economy of China.

In late October 2011, the OECD made forecast of GDP growth of the G20-members. Economists believe that in 2011, the GDP of G20 will be 3.9%, next year this index will show 3.8%. Then, the organization also predicted slowdown of the economic growth in the eurozone. High level of public debt of peripheral countries of Europe is considered the cause of instability on world financial markets. Leaders among the debtors of the eurozone are Greece, Italy, Portugal, Spain and Ireland.

V. Putin: priority is the return of assets from the offshore

Prime Minister Vladimir Putin said that the return of Russian assets from the offshore would be a priority in the work of the Government of the Russian Federation. According to his data, the heads of a number of major companies of the country are involved in money laundering abroad. “Offshore heritage must come to an end. Our priority is the withdrawal of the national economy, its strategic industries from offshore money,” Putin said at a meeting of the government commission on the development of electric power. According to him, there is nothing wrong if someone stores earned profit after taxpaying abroad, but the withdrawal of financial flows in the offshore zone is not valid, otherwise there can be no normal business climate. Speaking at a meeting of the government commission in Khakassia, Putin stated that the leaders of the country’s largest energy companies were involved in money laundering through offshore incorporations. The premier said that all public companies must check if there are contacts with offshore companies and affiliated organizations. “There must be transparency in our public companies, we must keep terms with real shareholders and beneficiaries, it is a key indicator of business climate and maturity of the economy. I ask the Ministry of Energy, the Ministry of Economic Development, sectoral ministries, as well as the infrastructure companies, such as ‘Gazprom’, ‘Transneft’, RAO ‘Russian Railways’, ‘Sovcomflot’, ‘Vnesheconombank’, ‘Vneshtorgbank’, ‘Rosatom’ and ‘Sberbank’ to report on action taken, ” the Prime Minister of the Russian Federation said.

The new owners of Barclays Bank began with the dismissal

Reduction of staff began in the former unit of the British bank Barclays (Barclays Bank) in Russia, which has been bought by Russian businessmen. It is reported, that the new executive management planned to dismiss 200-300 people and cut salaries by 20% before year is out. According to the Bank, reduction is caused by the desire of management to reduce costs. Since the sale of Barclays Bank to the Russian businessmen 80 people have already lost their job. Currently 1,000 people work in a financial institution.

Formerly the parent company, Barclays has compensated losses of its “daughters” by financial injections. In 2009, the British Group deposited 4.3 billion rubles in the capital of Barclays Bank, and in 2010 this amount was 496 million. Barclays sold its Russian assets on the October 25, 2011 year. Originally, it was reported that the main contender to buy Barclays Bank was co-owner of “Orient Express” and MDM Bank Igor Kim. Later it became known that he had gained only 3.9% of the shares of financial structure. 19.9% of shares bought minoritary of Bank “East” and co-owner of machine-building group GMS Herman Choi, and 18% bought-co-owner of Strojkombank, Vladimir Myshkarin. At the same time, the press reported that all new owners of “daughter” of Barclays are partners of Igor Kim, and big amount of their shares in the companies are actually owned by Kim. It was reported that Igor Kim was going to create a universal bank on basis of Barclays Bank. Barclays established a Russian “daughter” on basis of Èkspobank in 2008. British group reported about its withdrawal from Russia in June 2011. Loss of Barclays from the sale of Barclays Bank amounted to 64 million pounds (103 million dollars).

Gazprom will help israel to export gas

“Gazprom” and the Ministry of national infrastructure of Israel negotiate about cooperation on supply of Israeli gas to third countries. This was announced by the head of the Board of Directors of Gazprom, Russia’s Vice Premier Viktor Zubkov. According to him, Gazprom is also interested in the development of the domestic gas infrastructure. The company intends to supply steam turbines and turbo generators for power plants to Israel, as well as to develop offshore gas fields. Until 2010, Gazprom has considered Israel as a regular purchaser of gas. Russia intended to build branch of the gas pipeline “Blue Stream” in the Middle East country, but decided not to do that because of the economic spottiness. Last year Russian gas monopolist said that it planned to create a joint venture with some company to develop the Israeli gas shelf. This happened after the find of major oil fields in the Mediterranean Sea by Israel. The volume of gas in the field “Leviathan”, located at 130 kilometers from Haifa is 450 billion cubic meters. This is enough to provide Israel with gas for 130 years. Smaller resources were found in Cyprus. Americans will develop and exploiter this deposit. If Cyprus problem is resolved, Cyprus gas can go to Europe through Turkey. “Gazprom” can participate in this project.

IMF about deterioration of economic forecast for Russia

In December, International Monetary Fund (IMF) announced deterioration of the economic forecast for Russia. The growth of GDP will slow down in 2012, and there will be lack of reserves. So far, President Medvedev and Prime Minister Putin convince citizens that the country is ready for a new crisis better than in the year 2008. However, in December the head of the IMF mission announced that the situation with reserves volumes in Russia is worse than in the year 2008.

“In the current situation Russia is in the more adverse conditions than before the crisis 2008-2009, before which Reserve Fund was created” the head of IMF mission in Russia, Juha Kahonen said.

However, according to Medvedev rates of GDP growth in Russia are higher than in other countries. “And the ratio of debt to gross domestic product is much better than in other countries. In Russia it is 13%, while in other countries it comes to 100%”, Medvedev said.

In early October, Vladimir Putin also talked about better readiness of the country to a new wave of the crisis. Discord between IMF and the Russian authorities exist due to the fact that, in order to assess the readiness to the crisis, different indicators are used. IMF estimate level of readiness by the level of government reserves, which are lower than in 2008. Moreover, Russian officials say about the low level of state debt. Debt of Russia is lower than of major European debtors (see table).

Kahonen said that the major task for Russia was build-up of reserve supplies, while oil prices remained high. “During post-crisis period costs remained at a high level, and currently the size of the Reserve Fund is much less than it was before the previous crisis. This means that there are less reserves, which could be used,” he said.

Kahonen said that in order to increase the reserves it was necessary to tighten fiscal policy. However, the Russian budget for next year will increase costs and lighten fiscal policy. “It will make it difficult to build-up reserves,” the head of the IMF mission said. Kahonen announced deterioration of forecast on GDP growth from 4.1% to 3.5% for the year 2012.

Major debtors of the eurozone (net public debt % of GDP)

Country	2011	2012	2013
Greece	153,1	175,4	173,6
Italy	100,4	100,7	99,6
Portugal	101,8	107,6	110,7
Ireland	98,8	104,6	107,4
France	81,0	83,5	84,9
Belgium	79,9	80,2	80,4
Germany	57,2	57,0	56,6
Austria	52,5	53,9	54,1
Spain	56,0	58,7	61,3

The Iraqi campaign of United States is completed

In December, the military of United States began to evacuate their troops from Iraq. Having lost 4.5 thousand of people, Americans are leaving this Arab country. United States spent on the Iraqi campaign more than 1 trillion dollars.

Hong Kong moved the United States and Great Britain aside on the level of development of the financial market

In 2011 Hong Kong for the first time headed the list of the most successful in the development of the financial market countries, moved the United States and Britain to second and third places. Thus, Hong Kong became the first Asian financial centre, which topped the list. “We are trying to preserve the advantages of Hong Kong and build up the Hong Kong capital markets,” the Secretary of the Hong Kong financial services and the Treasury, K.S.Chen said in December. He said that in subsequent years the development of Hong Kong business on the basis of the Chinese currency would make the development of the Hong Kong financial centre more dynamic. Singapore is in the fourth place. Australia, Canada, Holland, Japan, Switzerland and Norway round out the top ten.

Foreigners buy Ukraine real estate

Perhaps someone in Ukraine live well. Otherwise, we can not explain the fact that foreign citizens started to buy Ukrainian real estate. You must take into account the fact that real estate in Ukraine is expensive, even in comparison with EU real estate. Leaders among foreigners, which buy real estate in Ukraine, are neighbors of Russia and Poland. There are also British citizens and citizens of the world’s leading economy, i.e. the United States. Foreigners buy apartments that have three or more rooms, and the price of such real estate starts from a hundred thousand dollars. Most popular apartments are located in Kyiv and Lviv, Dnepropetrovsk and Odessa.

It is reported that the amount of real estate bought by foreigners in Ukraine had risen by 10%. According to the realtors, such well-known Russian show-business stars as Alla Pugacheva, Stas Pieha and Abraham Russo are seeking for real estate in Ukraine.

The gallows for deputies of Greece

After the Greek Parliament adopted the law on real estate tax in December, residents promised to hang them. There are gallows near the Parliament building, located in Athens at Sintagama square. The Greek Government plans to raise two billion euros through the tax on real estate in the year 2011. However, demonstrators invoke not to pay money. Small entrepreneurs, owners of cafes and shops agree with protestors. Slump of customers has already inflicted heavy destructions to business. Police also oppose the measures of economizing. This is connected with the fact that measures of economizing causes a cut in salary. This happens because they are representatives of state structures. It is expected that there will be protest actions and strikes in Greece during all the Christmas week.

Russian banks were recognized as unreliable

International rating agency Moody’s changed the forecast on the banking system of Russia from “stable” to “negative”. According to analysts, the weak conditions of the world economy and financial market instability will worsen economic conditions in Russia and will affect the banking sector. “Reduction of access to financing, the continued outflow of capital and the pressure on the ruble led to a shortage of liquidity in the Russian banking system,” Moody’s representative in Russia, Eugene Tarzimanov said. In his view, this situation will lead to slowdown of creation of credit, rise of interest rates and toughening of requirements to borrowers.

Central Bank withdraws rubles from the market, trying to prevent the course of the Russian currency from falling, and this could lead to non-payment crisis in the economy. Almost all of the money supply in Russia is carried out by the inflow of foreign currency by means of income of exporters, foreign currency loans of banks and corporations. The capital is generally speculative. Central Bank “prints” rubles because of this currency inflow. As a result, monetary base and foreign currency reserves of the Bank of Russia are growing.

All the money supply in the economy is depends on capital inflows and outflows, and now it is flow off the Russian Federation. Accordingly, there is a shortage of rubles, which increases the credit rates. Moreover, the budget surplus got by the export excess profit is allocated in foreign securities in the form of Reserve Fund and the National Welfare Fund. Another reason for lack of money in the economy is the effort for the inflation rate. The secret of Russian combat inflation is the fact that the Central Bank continues to squeeze the money supply in the economy. On the logic of monetarism, the less money there are, the more expensive they are. All this things makes the interest rates of extending credit very high, more then 20%, which increases the cost of loan service. Tariffs on energy sources and housing and community amenities are also increased. As the result, the value of the goods for the consumer is rising and production in the country is falling.

In Russian monetary system the credit tranche is thrice below the norm in relation to GDP. This means that Russian enterprises do not get enough credit resources. If Central Bank squeezes the cash money supply, the prices of credits rise, receipts fall, costs rise, which leads to cost-push inflation. However, Russian financiers do not know the very notion of cost-push inflation, they heard only about monetary inflation. However, in a normal economy there is a certain ratio of money supply and credit. Moreover, if it is high, monetary inflation appears, if it is low, cost-push inflation appears. Currently financial authorities try to combat a cost-push inflation appears using monetary methods.

It may lead to non-payment crisis in the economy. Then the lack of liquidity of banks led to a lack of circulating funds of enterprises. Moreover, some companies used this situation for self-profit, they used this situation as cop out to avoid paying to business partners. This led to massive backdated wages and reduction of staff. Moreover, some enterprises simply went bankrupt.

Smashup in year 2011: losses of 350 billion USD

350 billion dollars. This is the amount of the world’s losses this year from various natural and man-made disasters. This figure is a historic maximum. The company Swiss “Swiss Re”, which deals with reinsurance, provided this data. 108 billion dollars were disbursed in 2011. Disbursements were at $ 123 billion six years ago, in 2005.

Earthquake and tsunami in Japan became the most valuable for insurers. The sum of insurance disbursements was 35 billion dollars. Earthquake in New Zealand was estimated at 12 billion dollars.

Hurricanes and tropical cyclones in the United States were estimated at $ 23.8 billion, flooding in Australia was estimated at 2.3 billion, and flooding in Thailand was estimated at 8-10 billion dollars.

Individual persons have withdrawn from Russia 12.3 billion dollars in the third quarter of 2011. For comparison, residents and non-residents withdrew 11.1 and 11.4 billion dollars respectively during the crisis in the third and fourth quarter 2008. In comparison with the third quarter of 2010, the growth of output is 38%t. The amount of money, imported to Russia in recent years, is stable. Negative balance increases, and in July-September, it amounted to 9.2 billion.

Many CIS and far abroad countries fixed negative balance of cross-border payments. The only exceptions are Kazakhstan and Cyprus. The greatest specific weight in cross-border operations is accounted for by the remittances of citizen’s proprietory resources to their accounts in foreign banks, the amount is 2.7 billion. “Unrequited remittances” through the money transfer system amounted to 2.4 billion dollars. Earlier it was reported that an outflow of capital in the first 11 months of 2011 year amounted to 74 billion dollars. According to the CENTRAL BANK, 10 billion dollars were withdrawn from the country in November. Experts believe that, capital outflow from Russia will exceed 80 billion dollars in 2011.

Midland Consult