MBS Blog

Global Growth Slows to 3.9%

By Bloomberg News - Jan 2, 2012 8:00 PM GMT+0400

A year ago, Catherine Liu employed more than 2,000 people at her five Shanghai luggage-making factories. Now, as the dwindling supply of low-paid young workers forces wages and costs higher, she has 1,200 left.

“Local workers are getting much older,” said Liu, owner of Shanghai Worldwide Trading Co. “If you want to train them, they must be young. It’s very difficult to survive.”

Aging and shrinking labor pools are also poised to curb expansion across the other so-called BRIC nations that contributed almost half of global growth in the past decade. With fewer youths keeping factories going and more pensioners to support in those markets, the world economy is set to slow, Goldman Sachs Group Inc. (GS) says.

The number of people older than 65 in Brazil, Russia, India and China will rise 46 percent to 295 million by 2020 and to 412 million by 2030, according to United Nations projections. The pool of 15 to 24-year-olds, the mainstay for factories like Liu’s that drove China’s boom for three decades, will fall by 61 million by 2030, about the population of Italy.

As the BRICs slow down, global growth probably will peak at about 4.3 percent this decade and fall to 3.9 percent in the 2020s, according a Dec. 7 report by Goldman analysts. That’s prompting fund managers including Mark Mobius to invest in so- called frontier markets such as Nigeria, Vietnam and Argentina, where average annual growth is set to rise to 5.1 percent this decade, from about 4.3 percent in the previous 10 years.

One of his holdings, Nigeria’s Zenith Bank Plc (ZENITHBA), has risen 11.9 percent in the past two years, while the MSCI Emerging- Markets Index (MXEF) is down 7.4 percent.

Top Ten

Goldman Sachs Asset Management Chairman Jim O’Neill, who coined the BRICs acronym a decade ago, said other emerging economies may now be better investments — especially Indonesia, Turkey, Egypt and Mexico.

“These four countries could be in the top 10 contributors to global GDP this decade, adding well over $2 trillion,” London-based O’Neill said in an e-mailed response to questions on Dec. 29. “With large young populations, these countries could become powerful growth stories.”

While Goldman started its N-11 fund (GSYIX) in February covering the “Next Eleven” emerging nations to “benefit from superior growth potential,” O’Neill said the size of the BRICs economies means they will remain “the most dominant and positive force in the world economy.”

Together, Brazil, Russia, India and China account for about 25 percent of world gross domestic product, according to Goldman.

‘Demographic Realities’

O’Neill’s company predicts that the average annual expansion of the BRIC countries will fall during this decade to 6.9 percent from 7.9 percent in the 10 years to 2009, then drop to 5.3 percent in the 2020s. “In terms of the role of the BRICs in driving global growth, the most dramatic change is behind us,” the Goldman analysts, led by Dominic Wilson in London, wrote in a Dec. 7 note.

Already, the demographic volte-face has prompted calls for China to end its one-child policy, which exacerbated the drop in workers since its implementation in 1979; and has forced legislation in Brazil to control the cost of public-service pensions. In Russia, a shortage of qualified middle-aged workers is being blamed for a crisis in its space program after failed exploration and satellite launches.

In India, where the working-age population is projected to rise more than a quarter by 2030 to 972 million, illiteracy among more than one-third of workers is preventing the nation from capitalizing on its demographic fortune.

China Shift

“Financial markets, businesses and policy makers have failed to recognize that demographic realities are creating pressures for slower future growth,” said Nicholas Eberstadt, a demographer at the American Enterprise Institute in Washington, who has advised the World Bank.

The shift to a society with a dwindling number of employees funding a growing pension bill is most pronounced in China, the world’s biggest growth engine last year.

After expanding 2.5 percent a year over the past three decades, China’s working-age population has almost stopped growing, said Richard Jackson, director of the Global Aging Initiative at the Center for Strategic and International Studies in Washington. That pool will contract almost 1 percent a year by the mid-2020s, he said.

The number of 15- to 24-year-olds, who staff the factories that make cheap clothes, toys and electronics, will fall by almost 62 million, to 164 million, in the 15 years through 2025, UN projections show. Meanwhile, those over 65 will rise 78 percent to 195 million.

More Children Needed

The positive contribution that came from an expanding workforce in China will turn negative in 2013, wiping at least half a percentage point off the potential annual growth rate, according to Wang Feng, a director of the Brookings-Tsinghua Center for Public Policy in Beijing.

“China’s shooting itself in the foot” with the one-child policy, said Wang. “It needs to think of ways to encourage young couples to have more children.”

The shortage of labor has left employers such as Shanghai Worldwide’s Liu with a conundrum. Moving production to a country like Vietnam where wages are lower is “too complicated” for a small company like hers, with $10 million in annual sales. And relocating to lower-cost regions within China may not help, she said.

“Young inland workers are not like their parents,” said Liu in an interview. “They want easier jobs in supermarkets or restaurants.” And the surplus of farmers older than 40 don’t want to work in factories or would need months of expensive training, she said.

Life Expectancy

In Russia, the number of people aged 65 or more as a proportion of those aged 20 to 64 — known as the old-age dependency ratio — will rise to 45 percent by 2050, from about 20 percent in 2000, the Paris-based Organization for Economic Cooperation and Development said in a Dec. 12 report.

While that’s in line with the change forecast across OECD economies, the causes are different, the report said. Russia has a declining working-age population because both life expectancy and birth rates are low, rather than because the number of elderly people is increasing.

The country also suffered a brain drain during the 1990s when the economy slumped and public funding stalled for many research programs. There are more than 100,000 Russian-speaking researchers working or studying outside Russia, Kommersant reported in November, citing an estimate from the Russian- Speaking Academic Science Association.

When fragments of a Meridian satellite rained down in Siberia on Dec. 23 after its Soyuz rocket failed, Vladimir Popovkin, director of the Federal Space Agency, blamed it on a workforce hollowed out by the exodus.

‘In Crisis’

“The industry is in crisis,” Popovkin said, according to state-run RIA Novosti. “We need to find a solution and to put more trust in young people. There are basically no middle-aged people.” Debris from Russia’s failed Mars probe, launched in November, is expected to fall to earth this month.

Russia’s pension fund deficit will double in 2012 to 3 percent of GDP because of a net increase of about 500,000 retirees and tax cuts, Yury Voronin, a deputy health and social development minister, said in October.

“Who will pay our pensions?” said Farida Kolyulina, 55, a pensioner selling vacuum flasks outside Moscow’s Belorusskaya metro station. “It’s a complete mess. I shouldn’t be working.”

BRIC funds recorded $15 billion of outflows in 2011 as the MSCI BRIC Index (MXBRIC) trailed the S&P 500 for five straight quarters, EPFR Global data show.

Like the BRICs

Frontier markets “are now in the position that emerging- market countries like the BRICs were 20 years ago,” said Mobius, who oversees more than $40 billion as executive chairman of Templeton Emerging Markets Group in Hong Kong.

“In many cases frontier markets are now in their take-off stage where self-sustaining development is taking place as a result of high consumer spending,” said Mobius in an e-mail.

Templeton is finding “bargains” in Nigeria, Saudi Arabia, Egypt, Kazakhstan, Qatar, Ukraine and Argentina, Mobius said. His focus is on consumer stocks, including banks, automakers, retailers and telecommunications; and producers of oil, iron ore, aluminum, copper, nickel and platinum.

Templeton Frontier Markets Fund’s top holdings are Kazakhstan’s KazMunaiGas Exploration Production (RDGZ), Commercial Bank of Qatar (CBQK) as well as Zenith Bank. Since 2009 the S&P Civets 60 Price Return Index, a measure of stocks from Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa, has risen 78 percent while the MSCI BRIC Index gained 52 percent.

African Boom

Five of the 20 projected fastest-growing countries last year were in Africa, including Ghana at 13.5 percent; Eritrea at 8.2 percent; Ethiopia at 7.5 percent; and Mozambique at 7.2 percent, the International Monetary Fund said.

O’Neill said non-BRICs emerging markets need to improve performance in economic policy, education and technology to sustain their strong growth.

The Goldman Sachs N-11 Equity Fund has lost 10.7 percent since inception on Feb. 28 while the Goldman Sachs BRIC Fund lost 24.3 percent. The Standard and Poor’s 500 Index (SPX) lost 5.3 percent in the same period.

Even as the BRICs slow, they may still outpace the developed world over the coming decades, enabling their share of global GDP to rise to almost 40 percent by 2050, Goldman estimates.

O’Neill’s book “The Growth Map,” published last month, says the group still has “rosy prospects.” He estimates that even with slower growth, the BRICs economies will collectively be bigger than the U.S. by 2015.

Degree of Influence

“In terms of growth rates, other countries will perhaps grow at a similar fast rate as the BRICs, some more,” said O’Neill. “But they won’t have the same degree of influence on the world economy.”

BRICs can soften the impact of aging by liberalizing financial markets and services, raising retirement ages, and boosting productivity, said Eberstadt.

“The BRICs have significant scope to offset the intensifying demographic drag,” said Markus Jaeger, an economist with Deutsche Bank AG in New York. They can increase output via urbanization and greater labor force participation or by moving up the technological ladder, he said.

Five of the world’s 10 biggest economies — Japan, Germany, France, Italy and Canada — have elderly dependency ratios that are among the highest in the world, boosting their own health- care and pension claims.

Pension Bill

The growth of Brazil’s working-age population contributed 44 percent of its economic gain in the decade to 2010, according to Amlan Roy, head of global demographics and pension research at Credit Suisse AG in London.

That group’s growth is projected to fall to 11.3 percent this decade and 2.7 percent in the 2020s from 16.3 percent in the last decade, according to the UN. Brazilians aged 65 or older will more than double by 2030 to 30.1 million.

Age-related spending in Latin America’s biggest economy will surge to 17 percent of GDP by 2030 from 13.6 percent in 2010 and to almost 26 percent by 2050, according to estimates by rating company Standard & Poor’s.

The ballooning cost of paying retirees has made legislation to limit the share of public service pensions a top priority for President Dilma Rousseff’s government. Social Security minister Garibaldi Alves says the nation’s pension deficit is rising at 10 percent a year in a country where civil servants account for almost 20 percent of all jobs.

The demographic standout among the BRICs is India. Its working-age population will rise 117 million by 2020 and 98 million more the following decade, according to UN data.

Literacy Hurdle

That may still not be enough for the South Asian nation to emulate the industrial development that transformed China into the world’s second biggest economy. Fewer than half of Indians in their 20s completed secondary education and 37 percent of adults are illiterate, according to Jackson at CSIS.

For Vinod Sharma, who runs Deki Electronics Ltd. in Noida, on the outskirts of New Delhi, the growing ranks available for work are of little help.

“We are demographically well placed but scratch the surface and you will find 100 million people looking for a job,” said Sharma, who employs about 500 people to make parts for TVs and fluorescent lights. “You have the numbers but not the right skills. I simply can’t find trained people.”

Sharma said government training programs aren’t geared to new industries and his company has to hire unskilled staff and teach them in-house to solder components and wind capacitors.

Shop Floor

“It takes about six months for people our company hires to hit the shop floor,” he said. “A guy who learns to wind a capacitor becomes reasonably good only after three years.”

For China, the demographic shift is happening faster because of the one-child policy.

“Unless China prepares, a retirement crisis of immense proportions looms just over the horizon in the 2020s,” said Jackson. “On the current course, tens of millions of Chinese are on track to reach old age without pensions, without health care, and without family support networks.”

The World Bank said a 2005 report that China’s unfunded pension liabilities may be as high as $1.6 trillion. A subsequent lack of action and rising life expectancy mean that liability is “going to be larger now,” said Wang of Brookings.

“Our generation is getting old, but the biggest problem has yet to come,” said Zhao Meidi, 69, as she walked her grandson home from music school in one of Shanghai’s last undeveloped neighborhoods. “Look at the generation born after the establishment of the People’s Republic. Who will take care of them?”

–Kevin Hamlin. With assistance from Unni Krishnan in New Delhi, Scott Rose in Moscow, Alfred Cang in Shanghai and Maria Rabello in Brasilia. Editors: Adam Majendie, Anne Swardson.

Ukraine to Issue Gold Coins to Ease Demand for Foreign Currency

October 24, 2011, 9:10 AM ED

By Daryna Krasnolutska

Oct. 24 (Bloomberg) — Ukraine’s central bank will issue gold “investment” coins as it tries to damp citizens’ demand for foreign currency.

The coins will be “freely” traded on a secondary currency market, Oleksandr Dubykhvist, the head of the foreign-currency reserves department at the central bank, told a conference today in the capital Kiev.

The Natsionalnyi Bank Ukrainy controls the hryvnia’s exchange rate by buying and selling foreign currency on the interbank market. It spent $1.9 billion last month to support the hryvnia as demand for foreign currency exceeded supply. International reserves fell in September to $34.95 billion, the lowest level since December.

The central bank changed regulations on Sept. 23 to force residents to provide lenders copies of their passports if they want to buy or sell foreign currency to fight the shadow economy and ease pressure on the hryvnia.

“The situation is stable” on the foreign-currency market, said Dubykhvist. “Citizens’ foreign-currency purchases have declined twice so far this month.”

Ukraine inks trade deal – but not with EU

Ukraine’s President Is Snubbed by Europe

By JAMES MARSON and NADIA POPOVA

The European Union said on Tuesday that it postponed a meeting with Ukrainian President Viktor Yanukovych after he rejected calls from Western capitals to release jailed former Prime Minister Yulia Tymoshenko.

The EU snub came as Russia softened its earlier criticism of the seven-year conviction handed down last week and renewed efforts to attract Kiev into its orbit. On Tuesday, Ukraine and six other post-Soviet states signed an agreement with Russia to form a free-trade zone.

Mr. Yanukovych had been due to meet top EU officials Thursday, but indicated on Monday that he wouldn’t free his main political rival and was prepared for a pause in talks on closer political and trade ties.

“If Europe is not ready for this for whatever reason, or if Ukraine is not ready, then the decision can be made later,” Mr. Yanukovych told a half-dozen Western reporters in an interview.

Enlarge Image

Associated Press

Ukraine’s President Viktor Yanukovych, seen here in Poland on Sept. 30, is under Western pressure to review the conviction of opposition leader Yulia Tymoshenko.

Officials from both sides earlier said they expected to conclude negotiations on an association agreement by the end of the year. But European Council President Herman Van Rompuy said on his Twitter microblog that the high-level talks that had been scheduled for Thursday would nowtake place at “a later date when the conditions will be more conducive to making progress on the bilateral relations.”

Mr. Yanukovych met Tuesday with Russian President Dmitry Medvedev for talks on economic ties. After warm public exchanges, Mr. Medvedev distanced himself from previous Russian criticism of Ms. Tymoshenko’s conviction, calling it “an internal matter for Ukraine,” Russian news agency Interfax reported.

Officials in Kiev have warned that Ukraine could turn to Russia for support if the EU deal falls through. Tuesday’s freetrade accord also includes Moldova, Belarus, Tajikistan, Kazakhstan, Armenia and Kyrgyzstan.

Moscow has offered a discount on critical gas supplies if Kiev agrees to join a Moscow-led customs union that already includes Belarus and Kazakhstan.

Mr. Medvedev on Tuesday dangled the possibility of a revised gas contract, but only if it is “mutually beneficial.”

Mr. Yanukovych said he would seek cooperation with the Russian customs union, but wanted to continue integration with the EU.

A European diplomat in Kiev said the EU had decided to get tough with Mr. Yanukovych and “show it could not accept the way things are developing.”

More:

Ukraine’s President Stays Defiant

Technical negotiations on the agreement are continuing, but European leaders have said it is unlikely to be ratified by the EU members’ parliaments amid what they called the politically motivated conviction of Ms. Tymoshenko last week. She was jailed for exceeding her authority in ordering the state gas company to sign a gas-supply contract with Russia that prosecutors argue is unfavorable to the state.

European officials have tried to persuade Mr. Yanukovych and his allies to decriminalize the violation under which Ms. Tymoshenko was convicted. But the head of the pro-presidential faction in Parliament, Oleksandr Yefremov, said on Tuesday that it wouldn’t support such changes.

“We will not change legislation for one person,” Mr. Yefremov said in comments posted on the party’s website. “The pressure that is being applied to us by Brussels is at times unacceptable.”

(from www.wsj.com)

Banks to start collecting more personal data from customers

In a move that authorities say will help combat money laundering and other financial crimes, banks are scrambling to gather personal data from clients to comply with a National Bank deadline of Oct. 23.

The National Bank of Ukraine published a resolution in April that requires banks to collect information on the property, home address, monthly income and its sources from all their clients.

Many banks are now writing letters and emails to clients, asking them to fill out forms and return them or go to the bank branch to provide the information.

Previously, an account could be opened with a passport and tax identification code.

While some experts say giving this information is usual practice for banks across the world, others raised concerns about how the information could be misused in a country where rule of law, identity protection and privacy rules are so weak.

Angela Prigozhina, senior financial sector specialist at the World Bank Group in Ukraine, said she saw nothing wrong with the new rule.

“It is a normal international practice. Information about family, official and unofficial sources of income, household running costs, liabilities in other banks and so on are always collected throughout the world. The thing is that banks are interested in credit histories. And one starts not when you take a loan but when you open a current account,” Prigozhina said.

But banks complain that collecting this data from new clients or requesting it from existing ones makes them nervous about how it could be used.

“Why should I report to a bank clerk and tell him or her all about my property and earnings? I do not know how many people will see this, and the clerk can change work in hours” and take the data with them, said Sergey Eremenko, former deputy head of the National Bank.

This data is useless for marketing and client relations, because nobody needs and considers it worthwhile to check data provided by thousands of people who just have a current account, said a representative of a foreign bank in Ukraine, speaking on condition of anonymity.

This data collection also affects anyone paying cash worth more than Hr 150,000 ($1,850) onto an account, according to the National Bank.

The resolution also states that someone paying Hr 7,000 onto another person’s account will have to give their home address, tax identification code or place and date of birth.

The information collected is not automatically sent to the NBU, but its financial monitoring service can request it at any time if “suspicious activity” is noticed.

The NBU said the data will help them to fight money laundering and the financing of terrorism.

But some experts aren’t convinced that this is the only reason behind the rule.

Olexandr Zholud, a senior analyst at the International Center for Policy Studies, said he suspected the move to demand more information could be a ploy by the tax authorities, which are notorious for finding ways to squeeze money out of citizens. “I believe that it was done on the request of the tax authorities. But it is almost impossible to prove, because that would mean that the widely-spoken independence of National Bank is not there,” he said.
Bank officials said even those who do not want to hand over data will not have a choice, as otherwise they will be refused service.

“According to the resolution, the bank should refuse to provide services to a client not willing to disclose that information,” said Vitaliy Chernyak from OTP Bank

Giving private data is unavoidable and designed as financial monitoring to prevent money laundering, financing terrorism, confirmed the National Bank press service in a written answer to Kyiv Post request.
(from www.kyivpost.com)

Politicians everywhere are making life and business more difficult, and here is another example. New rules requiring identification when exchanging money. Today however, I changed some USD into local currency without ID. Maybe the rule has not been implemented fully yet?

Also, there were rumors that Ukraine had defaulted on some debt last week, but nothing officially reported. Meanwhile, the currency weakens…

Since last week, nobody in Ukraine can legally buy or sell a single dollar without showing an identity document.

The complex new rules – which have confused foreigners, Ukrainians and banks alike – were introduced by the National Bank of Ukraine (NBU) on Sept. 23 in what it described as a way to combat money laundering and the shadow economy. The NBU said it believes that some $70 billion in foreign currency is now in circulation, untaxed and unregulated.

But in reality, analysts say, the government is trying to keep people from selling too many hryvnias and thus weakening the national currency.

With the global economy stagnating and possibly on the verge of sinking back into recession, Ukraine is expecting low foreign currency earnings from exporters and high currency demand from pessimistic Ukrainians who prefer to keep their savings in dollars.

But instead of bringing order and stability, the new rules have sparked confusion, mistrust and anger. The National Bank failed to properly explain the troublesome new rules, which are based on a 1993 Cabinet of Ministers decree, to the commercial banks that are supposed to implement them.

Banks are now obliged to store copies of IDs and have them ready at the National Bank’s whim. For transactions over Hr 50,000, an identification code, issued by the tax authorities, is needed.
Still recovering from the 2008-2009 global economic crisis, Ukraine’s bank sector is unimpressed.

Oleksandr Sugonyako, head of the Association of Ukrainian Banks, calls the new rules “a mistake,” and in a letter to the NBU asked to cancel them. In a time of global economic instability, “adding to this destabilization is wrong,” he said.

Whatever the real reason behind the rules, exchanging money has become a bureaucratic hassle. The immediate impact has been a growth in queues at exchange spots, as well as in the number of frustrated people unable to exchange money.

At first everybody was shocked. We did not know what to do. Piles of papers – how can they make the market more transparent?

- Natalya Napadovska, head of communications at Finance and Credit Bank.

While the law says that any ID proving identity and residence should be accepted, some banks have refused to serve customers with driver licenses, external passports or other documents – anything other than a Ukrainian internal passport.

However, the Kyiv Post established that it is possible to change money using someone else’s passport and a fake signature. Bank workers do not all check the details properly.

“At first everybody was shocked. We did not know what to do. Piles of papers – how can they make the market more transparent?” asked Natalya Napadovska, head of communications at Finance and Credit Bank.

Currency exchange operations now last significantly longer and more people are changing their money at big banks, as Ukraine’s ubiquitous small exchange booths often lack the equipment to comply with the new rules.
Meanwhile, providing somebody with a copy of your passport, containing the home address, and giving them an identity number is dangerous, as these documents are sufficient for a fraudster to take out a loan in your name, Sugonyako said.

Foreigners experience additional difficulties. The National Bank ruled that foreigners are not allowed to change hryvnias to foreign currency unless they possess documents proving they had previously bought at least the same amount of hryvnias in Ukraine.

To avoid the headaches, some banks are simply avoiding transactions with foreigners altogether.

Nadya Kravets, an Oxford University student on a visit to Kyiv, complained to the Kyiv Post that the government-owned Oschadbank would not accept her American Green Card as an ID.

“They just advised me to try another bank around the corner,” said Kravets, who is left with no money for her daily expenses.

At Pravex Bank in downtown Kyiv on Prorizna Street, a Kyiv Post reporter was told that to exchange dollars into hryvnias, a foreigner needs a passport and a residence certificate.

Such documents give foreign citizens permission to stay in Ukraine for longer than 90 days, but they are not issued for many categories of travelers, including short-term visitors. An elderly Canadian at the bank was thus turned away, the dollars intended to cover his trip to Ukraine unchanged.

At a Piraeus Bank branch office in the center of Kyiv, another version of the new rules was given.

Changing hryvnias into foreign currency is not possible for foreigners unless they can produce a so-called Certificate 377, a bank document attesting to a prior currency exchange, apparently received when changing foreign currency to hryvnias.

The certificate allows foreigners to change their money back, at the original rate, though only at the place of the original transaction and up to the limit of the initial sum.

This year Ukrainians bought $7.8 billion more currency than they sold. This is a huge and serious amount. The National Bank cannot – or does not want to – fight with this situation with market methods. So, they are just trying to forbid it.

- Olexandr Zholud, a senior analyst at the International Center for Policy Studies

In spite of numerous requests, the Kyiv Post could not get the National Bank to explain how foreigners should exchange hryvnias if they do not have such a certificate, for example if they bought their hryvnias before the new rules came into force.

Experts said the new rules could lead to an increase in black market transactions. An invitation-only Facebook page, under the self-explanatory name of “Currency exchange Kyiv”, is already up and running.

The National Bank’s statements that the new strict rules of exchange are meant to increase market transparency have been met with skepticism by analysts.

“There is no need to control all transactions. The National Bank can perfectly well understand through which banks the large amounts of currency cash go to the market, and control them,” said Vitaly Vavryshchuk, senior analyst at BG Capital, a Kyiv-based investment bank.

Olexandr Zholud, a senior analyst at the International Center for Policy Studies, said that by imposing stricter rules the government wants to stop Ukrainians from buying foreign currency as fears of a hryvnia devaluation increase. Over the past month, Hr 800 million was withdrawn from hryvnia deposits – the largest outflow since the crisis in October 2008.

“This year Ukrainians bought $7.8 billion more currency than they sold. This is a huge and serious amount. The National Bank cannot – or does not want to – fight with this situation with market methods. So, they are just trying to forbid it,” Zholud said.

Yet driving away ordinary Ukrainians and foreigners from the currency market is only part of a bigger game. Banks exchange three times more currency between each other.

Foreign currency revenues from Ukrainian exports are expected to decrease due to a fall in demand for their products on global markets, which are now experiencing a period of stagnation, Vavryshchuk said.

The National Bank continues using different monetary instruments to purchase hryvnias from banks to prevent them from buying foreign currency, in turn weakening the hryvnia exchange rate. As a result the hryvnia is stable for now.

But given Ukraine’s rising foreign debt liabilities, what will happen later depends on progress in negotiations with the International Monetary Fund.

Few doubt that with parliamentary elections set for October 2012 the National Bank will continue playing hardball and do anything it can to prevent the hryvnia from falling.

(www.kyivpost.com)

(from www.kyivpost.com)

August 16, 2011 3:21 pm

Putin sets sights on Eurasian economic union

By Neil Buckley

Twenty years after the Soviet Union collapsed, Vladimir Putin, the Russian prime minister, may not, as is sometimes alleged, be trying to recreate it. But he is pursuing a different project – to build a “quasi-European Union” out of former Soviet states.

A customs union he launched a year ago between Russia, Belarus and Kazakhstan has already removed tariffs and customs controls along the three states’ internal borders.

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Come January this is due to expand into a “common economic space”, ensuring free movement of goods, services and capital across a single market of 165m people – 60 per cent of the former Soviet population.

At a Moscow summit this month, prime ministers of the three states set an even more ambitious target – turning the grouping into a “Eurasian economic union” by 2013. There is even talk, down the line, of a common currency.

“This is truly an event of great interstate and geopolitical significance,” Mr Putin said after the summit. “For the first time since the collapse of the Soviet Union, the first real step has been made towards restoring natural economic and trade ties in the post-Soviet space.”

That may be hyperbole. But unlike earlier attempts at reintegrating former Soviet states, this one is making progress.

Mr Putin also suggested that once the common economic space is established, its members should start talks on a free-trade agreement between the bloc and the EU. Given Russia has spent 18 years negotiating – so far unsuccessfully – membership of the World Trade Organisation, such a grand agreement seems a distant prospect. Yet, if ever achieved, it would fulfil a vision Mr Putin set out in Germany last November of a “harmonised community of economies from Lisbon to Vladivostok”.

Rebuilding ties between former Soviet states has long been Mr Putin’s goal. In 2000 he signed an agreement with half a dozen countries to create the Eurasian Economic Community, or EurAsEc. That, however, has remained largely a talking shop.

Since 2009, he has pursued deeper integration with two EurAsEc members towards the current customs union. Nursultan Nazarbayev, Kazakhstan’s authoritarian president, embraced the plan. Belarus, its economy heavily dependent on Russia’s, was corralled into it with energy-related carrots and sticks.

“The vision has become more and more of creating a European Union in the space of the former Soviet Union,” says Lilit Gevorgyan, analyst at the consultancy IHS Global Insight.

The customs union has adopted chunks of the acquis communautaire, the EU’s body of law, says a senior Russian official. Copying an existing model saves work, but it could, in theory, one day ease the task of creating a free-trade zone with the EU.

The deepening customs union has the typical advantages of stimulating business development by removing trade barriers. It could also help restore horizontal links between industries and enterprises severed when the USSR collapsed.

Moreover, by tying Kazakhstan – former Soviet central Asia’s most successful economy – to Russia, it counters growing Chinese influence in the region. Neighbouring Kyrgyzstan and Tajikistan have also expressed interest in joining.

Intriguingly, the union might succeed where other attempts have failed and force Russia to improve its business climate. Senior officials in Astana, the Kazakh capital, talk of enticing Russian companies to re-register in Kazakhstan which, they say, offers a better environment.

On Russia’s European flank, the customs union provides both an incentive and a mechanism for Russia to support Belarus – mired in a financial crisis that has forced a sharp devaluation – and prevent public unrest that could see Minsk shift towards the EU. That is despite Mr Putin’s personal dislike of Belarus president Alexander Lukashenko.

“Russia will keep Belarus on a drip,” suggests Ms Gevorgyan. “They will give it enough, through subsidised energy supplies, to keep the economy afloat, but not enough for Lukashenko to feel emboldened to challenge Russia.”

People who know him say Mr Putin would dearly love to “complete” the union by bringing in Russia’s big Slavic neighbour, Ukraine. Adding its 45m people would extend the bloc to three-quarters of the former Soviet population.

Whether Ukraine joins or not, Mr Putin has cleverly taken advantage of the west’s preoccupation with its debt problems, says Nikolai Petrov of the Moscow Carnegie Centre think-tank.

“When Russia is relatively in a better position than many euro countries, it’s a good time to promote its integration ideas,” he says.

(from www.ft.com)