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10 Kremlin Moves That Hurt #Russia’s Economy


As the economy nosedives, the public mood threatens to plunge right alongside it — and some of the Kremlin's more questionable economic moves may come back to haunt the people who made them happenAs the economy nosedives, the public mood threatens to plunge right alongside it — and some of the Kremlin’s more questionable economic moves may come back to haunt the people who made them happen. Maxim Stulov / Vedomosti

Alexey Eremenko, The Moscow Times.

As the Russian economy ambles toward recession, the government grapples with how to explain the downturn — no easy feat after 15 years of slowly mounting prosperity and President Vladimir Putin’s campaign promises of lavish social spending.

So far, the authorities have been inclined to blame external factors, such as sanctions imposed by the West over accusations of Russian meddling in Ukraine and the sliding price of oil, which at least some Kremlin backers blame on a covert deal between Washington and the Gulf monarchies.

The approach is clearly working, with Putin’s approval ratings resting comfortably above 80 percent, and widespread public adoration fueled by a patriotic euphoria over said meddling in Ukraine.

But as the economy nosedives, the public mood threatens to plunge right alongside it — and some of the Kremlin’s more questionable economic moves may come back to haunt the people who made them happen.

The Moscow Times has compiled a list of 10 economic moves currently hitting the Russian business community and/or the general populace that the government has had a hand in. The impact of most items on the list — up to and including the hypothetical risk of “smoker riots” — is expected to be felt in 2015, just around the corner.

1. Falling Ruble
The ruble has lost 38 percent of its value versus the U.S. dollar since the start of the year, and earlier this month the Central Bank stopped supporting the exchange rate, apparently due to shrinking currency reserves. The devaluation is expected to hit all industries with foreign connections in the coming year, including retail, tourism and dining. About 25 percent of the restaurants in Moscow are expected to shut down next year, consumer confidence is sliding, and clothes shopping and travel abroad are becoming less accessible to middle-class Russians.

2. Borrowing Restrictions
The EU and U.S. have limited access to international capital for Russia’s state-owned banks and corporations, including VTB, Sberbank and Rosneft, because of Russia’s support for separatists in Ukraine. Other Russian banks and companies are also reportedly struggling to borrow internationally, with foreign lenders increasingly distrustful of Russian businesses in light of a geopolitical standoff.

The end result is obstructed access to capital and rising borrowing costs for Russian companies, which already have a corporate debt of $600 billion as of October, according to Central Bank data.

3. Food Sanctions
One of the most questioned countermoves against the Western sanctions was an embargo on food exports from the U.S. and most European countries. The government promised that the embargo would boost domestic productivity, and that Asian and South American exports would make up for the rest. But dairy and meat imports have shrunk by a third, according to customs data, and food inflation this year has neared double digits, the State Statistics Service said this month.

4. Bashneft
In what has arguably been the highest-profile corporate scandal since the fall of oil giant Yukos in the 2000s, the government earlier this year voided the 2003 privatization deal for oil company Bashneft, nationalizing the controlling stake and placing its owner Vladimir Yevtushenkov under house arrest.

The selective inspection of a single privatization deal among dozens prompted speculations about its motives — with many commentators referring to it as a takeover attempt by state-run Rosneft. The company denied it, but the move — which highlighted a lack of property-right guarantees in Russia — did nothing to boost investor confidence, which had already taken a hit from political risks in the country.

5. New Business Duty
As falling oil prices ($79.2 per barrel of Brent as of Tuesday) drain the state coffers, the government is struggling for revenue and apparently expects small businesses to foot the bill. Though plans for a sales tax have been shelved, a government-penned bill under review in the State Duma proposes a new duty for small businesses of all stripes, from hairdressers to grocery stores, transportation firms and even public pay-per-use toilets.

The quarterly municipal duty is to vary from 6,000 to 600,000 rubles ($130 to $13,000). Analysts said it would cripple Russia’s already heavily taxed small and mid-sized businesses, which — according to Prime Minister Dmitry Medvedev — account for a mere 20 percent of Russia’s GDP, compared with 50-60 percent in developed countries.

6. Gas Prices
As oil prices plummet, gasoline prices in Russia continue to soar (9 percent since the start of the year, to about 33 rubles, or $0.70, per liter). A hike to 50 rubles ($1.06) per liter is expected in 2015 because of new duties. Given that Russia is a leading oil producer, the government will have a hard time selling the hike to millions of motorists nationwide — and that is without mentioning the negative impact of increased transportation costs on the economy.

7. Property Tax
Russian real estate tax is currently a blip on the radar of public spending, but new rules will cause it to surge 10 to 20 times by 2016, to between 5,000 and 26,000 rubles ($107 to $550) a year for typical Moscow apartments, according estimates by news site Realty.NewsRu.com.

The tax has been in talks for years, continually mothballed over fear of public discontent, especially among apartment owners in the lower income brackets. Given the slowing economy and rising prices, discontent is exactly what can be expected to happen when hefty new bills hit mailboxes everywhere.

8. Pension Freeze
The government has approved a freeze of a combined 540 billion rubles ($11.5 billion) of non-governmental pension fund savings for 2014 and 2015, with the money expected to be spent on more immediate state projects. Simultaneously, it expects to spend the last 3 trillion rubles ($64 billion) from the state’s National Welfare Fund — intended as backup for the flagging, also state-run Pension Fund. The money has been earmarked for state corporations, with Rosneft and Russian Railways having already requested 1.5 trillion rubles each.

Though the official line is that the savings will be returned, and emptying the National Welfare Fund will boost the economy, many observers are skeptical. The state risks running out of emergency savings, while simultaneously incurring the ire of 28 millions of Russians who keep their pension money in those plundered private funds.

9. Social Spending Cuts
State spending on health care and education will be slashed in 2015 by 21 percent and 6 percent year-on-year, respectively, as outlined in the draft state budget. In Moscow, a handful of public hospitals are slated to be shut down — and replaced by malls and high-end real estate — already triggering street protests by medics.

10. Tourism Slump
The Russian tourism industry is in its death throes, with dozens of travel agencies having declared bankruptcy this year, in many cases leaving hundreds of tourists stranded at a time. A story by the Kommersant newspaper in October linked the industry’s turmoil to decreased revenues caused by the government prohibiting about 4 million officials, or 22 percent of all tourists, from traveling abroad over fears that they risked being seized by Western spy agencies. And that was before the ruble’s devaluation and its devastating effect on tourism (see above).

Honorary Mention: Tobacco Tax Hike
The State Duma last week approved a new increase in tobacco excise tax, the second in two years. Cigarette brands used by 80 percent of smokers will become about 10 rubles ($0.20) more expensive per pack, Kommersant said.

While modest, the hike may prove to be the final straw as far as public patience is concerned. In a country where the average salary is 22,000 rubles ($460) and half of the male population is smoking, “smoker riots” are undesirable but possible.


The Moscow Times.

#Ukraine: Corruption still prevails, Stop stealing!


Kyiv Post
As the national currency continues its drop this week and the Defense Ministry orders troops to get ready for a Russian invasion, Ukrainians are wondering how they will survive this crisis.

Ukraine is asking for more aid from the West, and rightfully so. But many of the nation’s top officials are to blame for the multiple crises with their business as usual behavior. In other words, it looks like some of them are continuing to steal from their own people and benefit financially from their official positions of power.

One case in point is the purchase of coal from South Africa. Ukraine’s own coal production dropped by a whopping 96 percent year-on-year, according to official data. On top of that, Russian gas supplies have been stopped for months, leaving millions exposed to the risk of freezing for lack of energy sources.

The Cabinet decided to compensate the shortage by importing coal from South Africa, and that’s where the scams started. An obscure British firm was selected as a supplier, beating much more prominent companies in what was supposed to be an open tender. The price of the coal is too high for its quality, and the whole scam is being investigated by the prosecutor’s office. Members of the Cabinet of Ministers are involved as witnesses and possible suspects.

This is not an isolated example of suspected corruption among top officials. Corruption watchdog and news portal Nashi Groshi pumps out dozens of examples every day, from land privatization schemes by a top minister to companies with alleged ties to another former top official for winning a Hr 294 million tender for completing phony contracts in cleaning up a chemical disaster area in Kalush.

Social networks openly discuss how many millions a former prosecutor made in bribes, while other ministers are referred to by the business community as “the most corrupt in the history of this ministry.”

Of course, Ukraine’s distrusted and dysfunctional judicial system all but guarantees that the public will never learn whether these cases are unfounded smears or examples of large-scale corruption that should be punished with high fines and heavy prison sentences. The only way for the nation to get out of the economic mess is to take the corruption fight seriously. Only baby steps have been made in this direction when an anti-corruption investigation bureau, Ukraine’s equivalent of the FBI, was created with limited powers. It needs to be strengthened and start working. A few convicted top officials, after transparent investigations and fair court proceedings, will eventually start the nation on the path of rule of law — and the economy will be better for it.


Kyiv Post.

#Ukraine: Hryvnia falls, reserves shrink amid war in Donbas


People walk by a currency exchange outlet in Kyiv offering dollars for Hr 15.2 each for those who don't trust either deposits in banks or other investment instruments to preserve their savings amid 20 percent inflation this year.People walk by a currency exchange outlet in Kyiv offering dollars for Hr 15.2 each for those who don’t trust either deposits in banks or other investment instruments to preserve their savings amid 20 percent inflation this year. © Volodymyr Petrov

Ivan Verstyuk, for Kyiv Post.

Valeriya Gontareva, head of Ukraine’s central bank, has all the reasons to reiterate her popular saying that the country’s financial system is like a terribly sick person who’s got an open wound and is bleeding.

The national currency, hryvnia, has declined in value by 47 percent since January, reaching 15.5 to the U.S. dollar during the Nov. 10 trading session on the interbank market. This reflects banks’ high demand for hard currency as people prefer it as the best savings option. Hryvnia deposit rates have reached 28 percent in some banks, though many still feel it’s better to invest in U.S. currency in times of economic crisis caused by war in the east.

Banks agreed they would not allow the hryvnia slip below 16 per dollar during the Nov. 10 emergency meeting at the National Bank headquarters on Instytutska street in Kyiv, according to Interfax-Ukraine, a news agency.

The nation’s economy is expected to shrink by 6.5 percent this year, according to the International Monetary Fund, while Gontareva’s agency thinks it’s going to be a 7-percent contraction.

Central bank reserves fell by 23 percent in October, all the way to $12.6 billion, mostly due to covering the debt obligations of state-owned oil and gas company Naftogaz. This means the regulator will have less capacity to calm down the banks starving for dollar cash. “The National Bank doesn’t plan to leave the interbank market (and will keep injecting dollars into it),” Gontareva said during the Nov. 3 news conference.

Central bank reserves are as low as $12.6 billion, while the regulator's head Gontareva says her Yanukovych-era predecessor Serhiy Arbuzov spent $22 billion on a populist policy focused at keeping hryvnia at a rate 8 against the dollar.Central bank reserves are as low as $12.6 billion, while the regulator’s head Gontareva says her Yanukovych-era predecessor Serhiy Arbuzov spent $22 billion on a populist policy focused at keeping hryvnia at a rate 8 against the dollar.

The central bank plans to sell dollars daily through the auctions. Since January, it has sold $6 billion to cover the demand from commercial banks and their clients.

However, Gontareva is trying hard to persuade everyone that the hryvnia’ll do fine. “I wouldn’t put anything into the state budget project for 2015 but a hryvnia rate of 12.95 against the dollar,” she said in an interview with TSN, a television news program. She said the regulator is pushing forward a ban on early deposit withdrawals to secure the banking system’s liquidity. Meanwhile, it’s not planning any new restriction regarding the foreign exchange market.

At the moment, a bank client cannot withdraw more than Hr 150,000 per day.

“In October, the behavior of our clients was better,” says Volodymyr Lavrenchuk, head of Ukrainian unit of Austria’s Raiffeisen bank. People felt less panicky, which is why their demand for U.S dollars dropped.

Andriy Pyshny, chief executive officer of state-run banking giant Oshchadbank, adds that as much as $8 billion in cash are stuffed under the pillows of average Ukrainians, which keeps the capital-short economy from growing. “Right now, the market is seeking an equilibrium between the real economy and banking system,” he says.

This year, the central bank recognized as many as 26 commercial banks as insolvent, while 11 of those “had nothing to do with banking at all,” according to the central bank governor. An oligarch-dominated economy that bets on avoiding taxation, for instance through reporting profits in offshore zones, is the key reason why so many banks were involved in fraudulent schemes.

Overall, Ukraine’s banking system consists of 166 banks with $85 billion in assets. “There are too many banks in Ukraine, so the banking sector needs consolidation,” said Suma Chakrabarti, president of the European Bank for Reconstruction and Development, in an interview with the Kyiv Post in May. “The central bank has not been close enough to the banks.”

The IMF mission will be checking Ukraine’s macroeconomic performance, that includes analysis of the state of the things in the banking system, during its Nov. 11-25 visit to Kyiv.


Kyiv Post.

Hung parliament following the 2015 general election ‘would hurt economy’ | #UK #HungParliament #economy


Item Club warns growth and business investment may be squeezed as businesses are nervous over political uncertainty.

The Item Club predicts that business investment growth will slow sharply next year, from 9% in 2014 to 5.8% in 2015.The Item Club predicts that business investment growth will slow sharply next year, from 9% in 2014 to 5.8% in 2015. Photograph: Paul Rapson/Alamy

Graeme Wearden reporting,

Britain’s economy could suffer a “huge uncertainty shock” if next year’s general election delivers a hung parliament, a leading economic forecaster warns.

The prospect of no clear winner when Britain heads to the polling booths in May is already pushing down next year’s growth and business investment predictions, according to the EY Item Club’s autumn forecast. It also cites the weakening eurozone economy and geopolitical tensions, including the Ukraine crisis, as threats that are making businesses nervous.

The Item Club predicts that business investment growth will slow sharply next year, from 9% in 2014 to 5.8% in 2015. That will hamper economic growth, tipped to fall from 3.1% this year to 2.4% in 2015.

The warning comes as new economic data are due that will probably show the British recovery slowed down between July and September.

Peter Spencer, chief economic adviser to the EY Item Club, believes that, with polls showing next year’s election is hard to call, the uncertainty and nervousness in the financial markets around the election will be much greater than in 2010.

“This makes it very difficult for anyone engaged in business planning to manage a company through this uncertainty,” he said. “I don’t think we would have had this conversation in 1997. The gulf between the parties this time is enormous.”

Businesses are also worried by the prospect of a referendum over Britain’s membership of the European Union, Spencer said.

“The comparative advantage we offer foreign investors is dependent on the fact we are a haven of political stability, and our proximity to Europe. If both of those are brought into question, what happens to the likes of Nissan and Toyota, or financial services firms in the City?”

Spencer pointed out that Germany’s industrial productivity and exports had fallen sharply in August, as the Ukraine crisis and eurozone fears had risen. “A huge uncertainty shock is really hammering Germany’s economy now,” he said, illustrating the dangers facing Britain. “It is a very good example of what can happen if businesses get clutched by this sort of risk.”

The UK economy is also a long way from regaining its full potential following the financial crisis, he added.

The EY Item Club, which uses the Treasury’s model of the UK economy, flagged up that exporters are suffering from the stalling European recovery and the fall in the value of the euro.

HM Treasury agreed that the eurozone area, Britain’s largest trade partner, is a “growing risk”, saying: “We have to recognise that the UK is not immune to these problems, which is why we will continue working through the plan that is building a resilient economy.”

Data due on Friday will show how the UK economy performed in the third quarter of 2014. Economists predict that GDP increased by 0.7% in the quarter, a slowdown compared with 0.9% between April and June.

Howard Archer of IHS Global Insight said there was a risk that growth could be weaker, given “limited industrial production and the very real possibility that construction output contracted”.

The retail industry is also struggling. Footfall across UK high streets, out of town retail parks and shopping centres around the UK was down by 0.9% year-on-year in September, according to figures from Springboard, after a 1.1% fall in August.


The Guardian.

#India #inflation falls to 5-year low in September


NEW DELHI (AP) — India’s benchmark inflation rate fell to a five year low of 2.4 percent in September as food and vegetable prices dropped, the Commerce Ministry said Tuesday.

Wholesale price inflation was 3.7 percent in August and 7.1 percent in September last year.

India has suffered chronically high inflation. But the lower level of price increases, if sustained, could pave the way for the central bank to cut interest rates next year to boost economic growth.

The Commerce Ministry data released on Tuesday said the index for the food articles group declined by 1.4 percent due to lower prices for tea, fruits and vegetables, maize, poultry chicken and fish.

India’s recently established retail inflation index rose 6.5 percent in September, its slowest increase on record.

HSBC said in a report that the sharp deceleration in food inflation even with a weak start to monsoons this year showed that Indian government’s efforts, which included close monitoring of wholesale markets and supplementing local supply with imports, had helped contain price pressures.

“Apart from food, softer commodity prices and stable exchange rates have dampened fuel inflation. In addition, tight monetary and fiscal policy conditions have also contributed to the disinflation,” the statement said.


The Associated Press.

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