MBS Blog

The last week here in Ukraine has been interesting. Just when you think you have seen or heard it all, you get surprised. Well…the surprise for us here “on the ground” are the depths people will go to convince themselves that things are OK when they know they are not.

I am referring-indirectly-to the real estate market here in Ukraine. While there are new market realities, it seems that the average Ukrainian, and landlords in particular, have not gotten the message. Many still believe that the global economic crisis is happening somewhere else to someone else. Of course, the standard line in Russia and Ukraine is that it is America’s fault.

Even as their friends are fired from jobs, or their own pay is cut or their salary unpaid for the last 3 months, there is a stubborn streak within the Ukrainian soul that does not allow it to acknowledge the obvious. Of course, there is a global economic crisis out there and everyone, everywhere is affected. Wealth, businesses and jobs are disappearing.

As we have noted on this site for the last month, the value of the Ukrainian currency is evaporating quicker than a drop of water in the desert. You would think that would change the perspective of people here.  

When I went to look at a new apartment for myself over the last week, few of the landlords I met with considered negotiating the rents down a bit from pre-crisis bubble prices…even when foreign currency is offered as the form of payment. You would think they would look at the value of the hryvnia shrinking every day and be happy to take a bit less, knowing that they are being paid in a currency that still has some value (for how long Mr. Obama and Mr. Bernanke?).

Of course, the Ukrainian Government is playing the “if you can’t beat them, confuse them” strategy with the currency. A late week intervention by the Government pushed the value of the hryvnia  up quite a bit. Naturally, people took that as a sign that things weren’t that bad after all (those Americans are just spreading gloom and doom!!) so they stopped talking real estate price adjustments, and went shopping. Reports from friends in four Ukrainian cities suggest that the crowded stores I was seeing here in Odessa were no aberration.

Well…the news this morning was that the Prime Minister (the super wealthy blonde with the braid) had accused the President (the formerly handsome one of Orange Revolution fame) of playing currency games so that his cronies could make some money on some contrarian bets. Of course, as soon as the games end the hyrvnia will go back to its original trajectory (it has dropped over 50% since May 2008). Is the IMF watching?

Meanwhile, I am out of the market until after the holidays. I figure once the holidays end, the “hangover” is going to be just the time to talk with people about real estate. In fact, many of businessmen we know are headed here from Europe and the USA, but with investment real estate plans on their minds.

Technorati Tags: Ukraine, currency, hryvnia, Ukrainian Government, President Obama, Prime Minister, President, Orange Revolution, USA, IMF, Ben Bernanke, , Anton Olff, real estate, rentals, landlords, Russia, global economic crisis, wealth, regulations,

Here is the weekend update from MBS staff…and an article from www.businessneweurope.eu

While we agree with much of Ben here, we note the wide disparity not only between Ukrainian Government projections-which are optimistic to say the least-but also among the various firms tracking the Ukrainian economy.

We find it ironic that Ukraine’s economy is considered more diverse than many other economics, yet the emphasis is still on steel prices. The consensus would be that it is the lynchpin of the Ukrainian economy.

The one thing we believe will happen are more privatizations. We also don’t think the Ukrainian Government projection of a 7.30 hryvnia to the U.S. dollar as the average rate for 2009 is realistic. We believe the hryvnia will depreciate further in 2009. That could however, accelerate reforms. However, Ukraine will have to endure economic pain during that transition period. 

UKRAINE 2009: tough times ahead

Ben Aris in Berlin  December 20, 2008                Ukraine will have a harder time of it in 2009 than any other country in the region. It enters the year in recession and the prospects for growth in the second half of the year depend heavily on what happens to the global economy.  In general, the economy remains more resistant to external shocks, as it is relatively well diversified by Eastern European standards and the large consumer base helps. However, public finances are in mess and monetary policy is weak. The banking system was also teetering on the brink of collapse in late 2008 when the National Bank of Ukraine had to resort to administrative measures to prevent bank runs and a total meltdown.  The crisis was feeding through into the retail sector by the end of 2008 as retail turnover fell by 1.1% in November after growing by 16% the month before, bringing a consumer boom that has been running for years to an end.  An emergency $16.5bn loan from the International Monetary Fund (IMF), of which $4.5bn was already disbursed before the end of 2008, saved Ukraine’s bacon during the worst of the instability.  Still, the outlook for the second half of 2009 is rosier and Ukraine has made a lot of progress in recent years. “By many measures, Ukraine is currently much more immune to cyclical shocks: foreign exchange reserves have increased substantially, foreign capital increased its share on the local financial market (which is now well capitalized and profitable), the fiscal system has a strong budget code (with defined roles and responsibilities in the budget process) and the [World Trade Organisation] has liberalized external trade,” Maryan Zablotskyy, macroeconomist at Erste Bank Ukraine, points out.  Ukraine’s economic policy is weak both fiscal and monetary wise. On the one hand, the state budget has had a good balancing influence on fiscal policy - since 2000, the average budget deficit has stood at just 0.75% of GDP. However, budget planning was only conducted for one year, which meant that the government has tended to increase spending in nominal terms during times when steel prices and growth were increasing and this tends to amplify the economic cycle and the impact of steel price volatility on the economy. Consequently, the sudden plummeting of steel prices in the current crisis caught the government off guard.  ECONOMIC FORECAST  Ukraine will see the sharpest slowdown of all the countries in Eastern Europe in 2009. The cabinet released its macroeconomic forecast for 2009, projecting real GDP growth of just 0.4% on year. These numbers are based on the Economy Ministry’s optimistic scenario and assume an improvement in foreign demand and effectiveness of the government’s anti-crisis measures. Earlier, the ministry announced an estimated 5% GDP decline based on the pessimistic scenario, which the ministry has not released.  Dragon has a bit more pessimistic scenario, with GDP declining by either 0.7% in case of a fast global recovery, or by 4%, in a more pessimistic case. Fitch forecasts a contraction in Ukraine’s real GDP in 2009 by 3.5%. Erste analysts project a recession of 2.5% of GDP in 2009, with economic growth returning only in the second half of 2009.  “Despite clearly having very strong international support, it will take some time to sort out the imbalances. Still, as the political sphere is now united by a foreign anchor (International Monetary Fund loan), we believe that there is a good chance that Ukraine might finally start implementing the reforms that it did not do for 10 years,” says UBS.  If it does, the medium term looks good: “GDP growth will return to its potential growth of 5-6% in 2010, while inflation is likely to come down to a single-digit figure,” conclude Erste analysts.  Ukraine had the highest rate of inflation in Europe in 2008, but the crisis was a blessing in that it at least helped slow to 22.3% in November the galloping price rises. “We consider the government’s one-digit inflation forecast much less realistic as the hryvnia’s sharp depreciation will put significant pressure on domestic prices. We currently expect inflation in Ukraine to rise by 14.2% on year (base case) or 16.9% on year (pessimistic case) in 2009,” says Dragon  inflation forecasts  Government 9.5%  Dragon 14.2% (base) - 16.9% (pessimistic)  Fitch 17.5%  Foyil Securities 14.5%  DEVALUATION  Ukraine is vulnerable to external shocks to its currency as nearly 50% of total lending in Ukraine is in foreign currency. After spending more than $7.5bn – 20% of its reserves – to support the hryvnia in October and November, the NBU lowered both its official rate repeatedly, and its interbank intervention rate to finally unify them both at the IMF’s behest.  The hryvnia lost nearly 60% of its value from its high in May 2008 of UAH4.5/USD as a result of the crisis. By the end of December the currency had probably oversold and was trading at UAH8.2/USD, at which point the government said it would stabilize.  The optimal level of the UAH/USD will depend on steel prices and Erste analysts project the optimum level to be around UAH7 per dollar, which suggests the currency has overshot at UAH8/USD. However, ultimately the value of the currency will depend on where steel prices settle.  In order to remove some of this unpredictability from the public finances, one of the strings the IMF has attached to its loan is the government must set up a UAH40bn stabilisation fund that can be used to issue stabilisation loans and bail out banks. The fund will be maintained in the future partly from privatisation receipts and the whole privatisation programme has been put back on the agenda for 2009.  The average exchange rate in 2009 will be UAH7.30/USD, according to the government. However, the currency will be affected by Ukraine’s unpaid gas debts to Russia and the price it has to pay for gas imports.  However, the really big change is the current crisis has effectively smashed the foreign currency trading band inside which the NBU has kept the hryvnia more or less constant at about UAH5/USD for most of the last five years.  CURRENT ACCOUNT DEFICIT  The government is hoping to reduce the current account deficit in 2009 as a result of the devaluation. “I hope that a fall in fuel prices, a very moderate rise in gas prices and the exchange rate will bring a zero or a deficit of the current account at 1-2% [of GDP],” Deputy Governor of the National Bank of Ukraine Oleksandr Savchenko said in December.  Fitch estimates the current account deficit will rise to $4.5bn, while the total foreign debt that needs to be paid in 2009 is $45.6bn, equivalent to 157% of Ukraine’s international hard currency reserves. Andrew Colquhoun, the director of sovereigns group at Fitch Ratings, said that clearly Ukraine will not be able to meet these payments unless it can raise some external financing.  With steel exports falling and the compensatory inflow of foreign direct investment (FDI) also slowing, balancing the current account has become a major challenge going forward. FDI in Ukraine in 2008 is projected at $8bn-9bn and in 2009 at over $5bn, said the NBU’s Oleksandr Savchenko.  BANKS  Ukraine’s fast growing bank sector came close to collapse and the rescue measures are likely to have far reaching consequences on the whole sector.  “The government received the right to borrow money in foreign currency on the local market and use government bonds to buy troubled banks [as part of its new crisis powers]. These, alongside the increase in the state fund guarantee for deposits from UAH50,000 to UAH150,000 (covering 99% of individual accounts) and the increase in refinancing activities by the NBU are meant to secure overall banking system stability, which is likely to go through a period of large-scale evolutionary changes,” say analysts at Erste. “The IMF and Ukraine have effectively agreed on driving further consolidation in the banking sector. Even with minimum capital requirements twice those in Europe, Ukraine has some 170 banks, a number that could fall by as much as 30% in 2009 and 2010.”  An attempt to rescue the troubled Prominvestbank seems to have failed and is likely to be nationalised. The whole sector should enter a period of consolidation running into 2009.  EQUITY  After equity prices rose 136% in 2007, the Ukrainian equity market lost nearly 80% in 2008, wiping out all the gains for the last several years in the process. By the start of 2009, Ukraine was one of the cheapest markets in the world in terms of P/E ratios. Only Russia is cheaper.  “Ukraine’s premiums over Russia are justified in our view, as the Ukrainian economy is to a large extent hedged against decreasing commodity prices,” explain analysts at Galt & Taggart. “The country is a large net importer of hydrocarbons, which impact directly on production costs for energy-intensive Ukrainian industries. We believe any potential natural gas price hike in 2009 is more likely to be symbolic. Despite Gazprom’s fear-mongering rhetoric, reference prices are falling and Ukraine holds the transit and storage keys to the bulk of Russian gas exports to Europe. In addition, a bottom-up inspection offers a number of national champions like Enakievo Steel and Ukrsotsbank, among others, which have some of the lowest valuations in their Eastern European peer groups.”  But comparisons to Russia are of limited value due to the vast difference in the size of the markets. Daily trading volumes on the Russian markets are in the billions of dollars whereas in Ukraine the volumes have crashed from between $30m-60m down to about $1m a day as of the end of 2008. Such tiny liquidity makes prices extremely susceptible to shocks.  “Given the liquidity and volatility issues are likely to plague the Ukrainian market until the world finds answers to the financial upheaval, we recommend investors look at shares traded abroad, namely London and Warsaw. Liquidity on those markets remains better than on the local market due to stricter disclosure requirements, better market infrastructure and the presence of ‘quality’ long-term investors. For all intents and purposes, the Ukrainian agricultural sector is represented only on foreign bourses and we see the sector as a solid performer in uncertain times,” says G&T.

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As we have been reporting on this space, the Russian and Ukrainian currencies have been declining along with their economies. While Russia has been able to stave off a complete collapse due to the foreign currency reserves it holds, it is only a matter of time before the ruble descends to much lower levels.

For now though, the Russian Government has managed a slower depreciation. When the foreign reserves decline further, and oil & gas prices continue their current trend, capital flight will accelerate in 2009. This will force the ruble lower. 

For Ukraine there are fewer options. No cash reserves or oil resources means that Ukraine is subject to the whims of a volatile market in crisis. The recent emergency loan from the International Monetary Fund (IMF) to Ukraine stabilized the markets here to a great extent, but the real stabilization will come when the market hits bottom and government reforms. The loan from the IMF in fact, was contigent on reforms. 

As for 0900 this morning of Friday the 19th of December, the Ukrainain currency-the hyrvnia (UAH) is selling at 7 to 1 U.S. dollar at local kiosks here in Odessa. Yesterday it was at 10 to 1 U.S. dollar.

As we have mentioned in an earlier post on this blog, it is a seasonal ritual.  During the holiday season or summer tourist season, the Ukrainian Government shores up the hryvnia against foreign currencies. This past summer for example, the hryvnia was at 4.6 to 1 U.S. dollar. As soon as the tourists departed, it went back up to the 5 to 1 U.S. dollar rate where it had been averaging for the past several years in a tight trading range or “peg.”

In the end, neither the Russian or Ukrainian Governments will not be able to over-rule the markets.

Technorati Tags: Russia, Ukraine, U.S. dollar, Anton Olff, currencies, Odessa, ruble, hyrvnia, UAH, International Monetary Fund, IMF, economy, foreign reserves, foreign currency, Russian Government, depreciation, oil, gas, capital flight,

Although this article from the Russian News & Information Agency at www.en.rian.ru states that money will make its way to Switzerland and Cyprus. OOPS!! They don’t actually say that…but wherever it winds up, it will not be in Russia.

We believe that capital outflows will be higher than $90 billion if the crisis continues. On the other hand, much of this capital will eventually return to the Russia when the crisis passes as investors see beyond the current mess to burgeoning opportunities in this emerging market.

MOSCOW, December 18 (RIA Novosti) - Capital outflow from Russia is expected to continue, and hit $90-91 billion next year, a deputy economics minister said on Thursday.

Andrei Klepach said Russia’s international reserves are expected to decline $110-140 billion amid the ongoing global financial crisis, but remain above $300 billion.

Russia’s Central Bank announced on Thursday that its international reserves, which hold foreign exchange and gold, stood at $435.4 billion as of December 12, down $1.6 billion against $437 billion on December 5.

International reserves declined $28.9 billion in November, $71.5 billion in October, $25.6 billion in September and $14.3 billion in August. The reserves had been increasing in the months prior to August.

Inflation in Russia in 2009 could drop to 10-12% from the economics ministry’s revised 2008 forecast of 13.4%, Klepach said.

Russia is expected to keep its foreign trade balance favorable at $18 billion, with $303 billion in exports and $283 billion in imports, Klepach said.

In its macroeconomic forecast for next year, the ministry also said that crude exports from Russia were expected to decline 3.8%, year-on-year, in 2009 to 235 million metric tons (1.7 billion barrels).

Natural gas exports from Russia are expected to grow from 203 billion cubic meters in 2008 to 208 billion cubic meters in 2009, the ministry said.

Russia’s oil production is expected to decline 1.6%, year-on-year, in 2009 to 480 million metric tons (3.5 billion barrels) while natural gas output is likely to increase 0.7% to 670 billion cubic meters, the economics ministry said.

Technorati Tags: Russia, Andrei Klepach, natural gas, oil production, natural gas, inflation, foreign trade balance, international reserves, global financial crisis, Russian Central Bank, foreign exchange, gold, Moscow, RIA Novosti, Russian News & Information Agency, www.en.rian.ru, Anton Olff, Switzerland, Cyprus, capital outflows, emerging markket,

As a resident of Odessa, I can attest to the fear out there regarding the free fall of the hryvnia.  People are downright scared and the empty stores, restaurants and cafes indicate they are not spending.

As this article from www.unian.net states, it is extremely difficult to get dollars and euros at banks or kiosks.

On a positive note, this could force the Ukrainian Government to enact needed changes which were put off during better times. After the crisis recedes, and with economic reforms, Ukraine will be at the forefront of emerging markets.

Panic as Ukraine’s currency plummets

The national currency of Ukraine, whose pro-West government wants to join the European Union, has almost halved in value in the last six months, prompting panic amongst its heavily indebted population.
The sudden fall in the hryvnia has sent Ukrainians rushing to exchange booths to change local money for hard currency, in scenes that recalled the hyperinflation suffered by the country in the early 1990s.
Not only do Ukrainian consumers have to pay back loans taken out in more prosperous times but many will also have to pay them back in dollars.

The hryvnia (UAH) was on Friday trading at 7.49 UAH against the dollar compared with 5.05 UAH at the beginning of the year and 4.84 UAH in July.

The National Bank of Ukraine has allowed the hryvnia to trade freely in line with the conditions of a 16.4-billion-dollar (12.8 billion euro) IMF loan aimed at helping the country through the financial crisis.
The hyrvnia — a currency introduced in 1996 and named after money used in ancient Kiev — has endured the ignominy of suffering one of the worst devaluations, along with the Icelandic krona, in the global financial crisis.

“I consider myself a cultivated gentleman. But at the moment I`m thinking of taking petrol and a lighter and setting the National Bank of Ukraine on fire,” said Egor Sobolev, a journalist who owes 60,000 dollars for his flat.

“We are paid in hryvnia and for the moment our family budget allows us to make monthly payments of 1,000 dollars, but if the hyrvnia falls to 10 or 15 to the dollar the Bank has a big chance of going up in flames!”

As of December 1, Ukrainian consumers had notched up debts of 235.5 billion hryvnia (31 billion dollars) some 70 percent of which (176 billion hryvnia or 23 billion dollars) has been taken out in foreign currency.

Dollars and euros were almost impossible to buy in banks and exchange offices in Ukraine in November as people flocked to trade their hyrvnia for stronger currencies.

The growth in hryvnia-denominated bank deposits was replaced in October by an outflow amounting to 10 percent of investments.

The panic reached a peak earlier this month when a newspaper reported that all dollar bank savings could be converted into hryvnias, a rumour vehemently denied by the authorities.

“Savers can only feel that they have been duped and have reason to be scared of similar surprises in the future,” said the Dzerkalo Tyjnia weekly.

“Who is going to answer for for the devastation of entire layers of Ukrainian society?”

President Viktor Yuschchenko oversaw the currency`s introduction when he was working as head of the central bank in the 1990s.

Ukraine has been among the countries hardest hit by financial turmoil as the plunging price of steel, the country`s main export, has exacerbated a credit crunch and a sharp fall in stock prices.

Underlining the country`s difficulties, Ukrainian industrial production is in freefall, crashing 15.2 percent in November compared to the previous month and 28.6 percent compared to November 2007.

Metals output in November was 23.5 percent lower than in October and a whopping 48.8 percent lower than the same figure for November 2007.

Out of the three major economies of the former Soviet Union — Kazakhstan, Russia and Ukraine — Ukraine is to see the sharpest slowdown, analysts at UBS said in a bleak research note.

“Ukraine will see the sharpest slowdown among the three countries despite support from the IMF. Its currency will have to devalue given that it has the worst net international asset position,” the UBS analysts said.

But they added that with the conditions of the IMF loan there is a “good chance” that Ukraine might finally start implementing the reforms that it had put off for 10 years.

Technorati Tags: Odessa, Ukraine, hryvnia, www.unian.net, Anton Olff, dollars, euros, Ukrainian Government, economic crisis, European Union, consumers, National Bank of Ukraine, UAH, Kiev, devaluations, Icelandic krona, Egor Sobolev, Dzerkalo Tyjnia, Viktor Yuschenko, stell, credit crunch, industrial production, Soviet Union, Russia, Kazakhstan, IMF, reforms

Although this article in the Wall Street Journal (www.wsj.com)  is about a so-called “trend,” taking place in the United States due to the financial crisis, it is really old news for those who live and work in emerging markets.  Keeping money someplace other than a bank is normal in Ukraine, as well as Russia.  

China-which has seen the biggest growth of any economy in the last 30 years and has a more developed banking system, insurance (private…and nothing like the Federal Deposit Insurance Corporation in the USA), annuities, as well as brokerage accounts- money is literally stored in the mattress…or nearby… by a majority of people.

Mistrust of government and financial institutions particularly, is deeply ingrained in Chinese as well as other Asian cultures. Numerous financial panics throughout Chinese history may have something to do with it. The Chinese are big savers as a result.

By some estimates, the average Chinese person saves almost 40% of their income. This is true whether they reside in mainland China, Hong Kong or Taiwan or have migrated elsewhere. This thrift is also a contributing factor to the huge amount of foreign currency reserves that the Chinese Government can draw upon. “Mattress savers” make bank deposits too…at least in China.

Actually, for Americans…what is “new”, is also old. Our parents and grandparents were savers. They did not have credit cards, overdraft protection for their checking accounts, and were frugal due to memories-real or indirect-of the Great Depression. Interesting that my generation is re-learning what we used to dismiss as quaint stories from a bygone era.

By MARK PENN

With E. Kinney Zalesne

As the financial crisis swept across the nation these past few months, one of the first microtrend groups to emerge is the New Mattress Stuffers — people who have lost their trust in the financial world, and are preparing for the next meltdown.

Just as 9/11 created a vast industry in building security, so the recession could create a big industry in personal financial security — a new kind of survival kit. New Mattress Stuffers don’t care about the 10% interest rate on GE preferred stock that Warren Buffett snapped up; they care about making it through if hard times get even worse. As a result, firms which can offer ironclad guarantees of safety will appeal to this new group. These are people who have lost their faith in the housing market, the stock market, their bank, their big corporate employer, their auto company, and their last president. What is left but themselves? 

Forget about huge, sweeping megaforces. The biggest trends today are micro: small, under-the-radar patterns of behavior which take on real power when propelled by modern communications and an increasingly independent-minded population. In the U.S., one percent of the nation, or three million people, can create new markets for a business, spark a social movement, or produce political change. This column is about identifying these important new niches, and acting on that knowledge.

In the old days, Mattress Stuffers literally hid all their assets in their homes — construction crews today are still discovering tin cans of cash in walls hidden 75 years ago by people who died without having told anyone about their nest eggs. The New Mattress Stuffers aren’t crotchety misers, though — they’re active Baby Boomers who, until just a few months ago, were heading happily into their 60s with inflated assets, unlimited second-job opportunities, and IRAs crammed full of stocks.

Now, the shocks they are feeling are taking them into strange and uncharted territory. Most Americans are so far removed from holding physical assets that their first reaction is to stuff their money into Treasury Bills instead of into a tin can. But there are other ways they can calm themselves.

The price of gold is down as hedge funds unwind their positions, but the sale of gold coins is up — because New Mattress Stuffers are stockpiling them for themselves and their children. And this was happening even before the crisis hit in full force. Between May and September of this year alone, sales of U.S. Mint gold coins grew by more than 600 percent. Over one million coins have been sold so far this year.

While almost every company in America is seeing a downturn, sales of home safes and vaults are surging. Sales of guns this year are up 8 to 10 percent.

And cash is the new plastic. Our own just-completed Holiday Spending Survey shows that most Americans are going to use more cash and charge less on their credit cards than in the past. Although most of us have lived in a plastic world so long we can barely remember people like my dad who carried around wads of bills, Americans are now seeing the first real dip in credit card sales in decades. Fear of credit and credit cards is a renewed emotion.

To take advantage of these trends, some of the dying post offices might want to open spots for safe deposit boxes instead of P.O. boxes. Investment advisers may start talking about return of your money instead of return on your money. And jewelers may start to tell you to “don’t forget to stash away a diamond or two.”

If the post-war economic expansion brought us the baby boom, this crisis may bring us a baby squeeze — a sharp reduction in births nine months from now, as refraining from having kids is the ultimate consumer pull-back. And instead of staying home, the evidence shows that more couples are going to the movies, with attendance up for this relatively low-cost evening.

People don’t talk much about their mattress-stuffing behavior. It kind of defeats the purpose if you tell people where your stash is. But there’s a hunger out there for security hedges — a gun, some cash, a little gold, a small safe in the bedroom — in case all the ATMs suddenly shut down. The TV shopping channels could be hawking that “Safe Haven” combination right now, a complete home solution.

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As with many emerging markets, Russia should continue to grow despite the Global Economic situation. The direct link between oil price levels and economic growth is key.

This from  www.themoscowtimes.ru:

GDP Posts Weakest Growth in 3 Years

10 December 2008By Maria Levina / Special to The Moscow Times

Economic growth fell to its slowest rate in three years in the third quarter, at 6.2 percent, the State Statistics Service reported Tuesday, and economists say even lower growth is in store for 2009.

Actual GDP growth in the quarter missed the Economic Development Ministry’s forecast of 7.1 percent, driven by significantly slower growth in the construction, retail, transport and communications sectors.

The decline continued a slide from 8.5 percent GDP growth in the first quarter and 7.5 percent in the second, and if the trend continues the final number for the year could be in the 6 percent range.

“Next year’s GDP growth could range from negative 5 percent to plus 5 percent, depending on what happens to oil prices and the steps taken by the Russian government,” said Yevgeny Gavrilenkov, chief economist at Troika Dialog. “If it continues to throw away currency reserves to defend the ruble, Russia may face a fiscal deficit and zero economic growth.”

He said allowing the ruble to depreciate is one step that could be taken to prop up growth numbers. 

“In the past, the Russian economy grew even with oil prices of $30, $40 and $50 per barrel but at a different exchange rate,” he said. “In the current environment, Russia’s goal should be to achieve positive economic growth and avoid a fiscal deficit.”

In year-on-year terms, growth in the fourth quarter could end up at zero, partly as a result of slower production growth and partly because the number was strong in the final quarter of last year, said Yekaterina Malofeyeva, chief economist at Renaissance Capital.

She said she expects growth this year to finish above the 6 percent mark — at 6.2 percent — and that next year’s figure could range from zero to 3 percent.

“If oil prices average $70 a barrel next year and the ruble is allowed to depreciate, GDP growth could reach 3 percent,” Malofeyeva said. “Otherwise, it could be flat.”

Although the Economic Development Ministry has yet to release an official forecast, in recent informal comments it has put the number at 3 percent to 3.5 percent if oil prices average $50 per barrel for the year.

But economists say conditions have been shifting so rapidly that providing anything resembling an accurate forecast for 2009 would be difficult until all the numbers for the final quarter of this year have been released.

The Economic Development Ministry said Monday that it was revising its forecast for manufacturing growth for the year downward, from 5.2 percent to 2.9 percent. The figure for the first 10 months of this year was 4.9 percent, so the ministry’s forecast suggests that it is expecting disastrous results in November and December, with production dropping by over 10 percent. 

Gavrilenkov said he believed that a 2.9 percent production forecast was overly pessimistic but, if accurate, would mean that the country is entering a severe depression.

He added that losses on the manufacturing side could be balanced somewhat by growth in the service sector, as consumer spending has remained relatively strong. As such, he said he expected GDP growth of 6.8 percent to 6.9 percent this year.

Natalya Orlova, chief economist at Alfa Bank, said she was surprised by how low the production numbers were.

“Given that the October numbers showed there was essentially no growth (0.6 percent), we originally assumed a drop in production of 2 to 3 percent in November and December, which would still imply a growth rate of around 5 percent for the year,” Orlova said. “But if we are to believe the numbers from [Economic Development Minister] Nabiullina, with a drop of more than 10 percent in November and December, then the situation seems more serious.”

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If only I had the crystal ball the World Bank seems to have for telling us the obvious. Once again, the Financial Times (www.ft.com) delivers the timely news to those of us watching and waiting to decide where to put our hard earned kopecks.

Looks like commodities will not be the ticket to riches that I had supposed….if I follow the World Bank.  Of course, this won’t be good news for our Russian friends, but I wouldn’t sell the Bentley just yet. I have a feeling that some of Wall Street gurus like Jim Rogers…who lives in Asia now…may be right about this being a dip before commodities resume their rise to the sky. Just think of all those governments and central banks…including mine in the United States…that will need to inflate to pay for all that stimulus, debt, bailouts and universal health care. 

The bottom line is that commodities-like equities and real estate- experienced a boom due to real demand as well as unreal interest rates, cheap money, and lots of speculation. The flip side is that hard assets will make a comeback-though maybe not to the stratosphere-but will post solid gains in the inflationary environment that we could see within the next several years.

Global demand for oil to plummet

By Javier Blas in London and Krishna Guha in Washington

Published: December 9 2008 20:09 | Last updated: December 9 2008 20:09

Global oil demand will collapse next year and commodities will not return to the highs they reached this summer in the foreseeable future, two authoritative reports said on Tuesday as they forecast a long and painful worldwide recession.

The stark conclusions came as the World Bank’s chief economist predicted that the world faced “the worst recession since the Great Depression”.

The US energy department said global oil demand will fall this year and next, marking the first two consecutive years’ decline in 30 years.

“The increasing likelihood of a prolonged global economic downturn continues to dominate market perceptions, putting downward pressure on oil prices,” it said, forecasting that demand would drop 50,000 barrels a day this year and a hefty 450,000 b/d in 2009. US oil demand will drop next year to the lowest level in 11 years.

Meanwhile, the World Bank’s Global Economic Prospects report said the commodities boom of the past five years – which drove up prices 130 per cent – had “come to an end”.

The World Bank’s analysis of the commodities boom contrasts with the prevalent view among natural resources companies – and most Wall Street analysts – that the ongoing price drop is a correction within an upward trend.

Although it ruled out a return to the torrid high prices of this summer, it said commodities prices would not fall back to the depressed levels of the 1990s.

Oil would return to about $75 a barrel within the next three years, it said, while food would trade 60 per cent higher than in 2003, but about half below this year’s record.

“Over the longer run, the price of extracted commodities should fall,” the bank said, adding that because of slower population and income growth, world demand for raw materials will ease.

Andrew Burns, the leading author of the report, dismissed the idea – widely supported among the industry and international bodies such as the International Energy Agency – that the credit crunch could result in higher prices when the economy recovers as companies cancel supply expansion projects.

The bank forecast that world trade – an engine of growth for many developing countries – would contract for the first time since 1982.

Justin Lin, the World Bank’s chief economist, said the current downturn was likely to see simultaneous recessions in most of the industrialised world, and that these recessions were likely to last longer than in the early 1980s, and the decline in growth would be more universal than in past episodes in recent decades.

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This is the kind of news….that is not really news…at least to someone who does business in emerging markets. Nonetheless, it is good to keep tabs on where bribes need to be paid to get business.

It an ironic way, the authors of this report-Transparency International-have raised the bar not only in emerging markets like Russia, China and Ukraine, but also in the developed economies like the United States. This would apply not only to the financing of political campaigns or the “sale” of Senatorial offices, but specifically to the types of financial instruments that may have been the catalyst for the Global Economic meltdown.

What is needed is greater transparency in the financial services industry. Many investors had been blinded or lulled into a false sense of security by the advice of institutions that have a direct financial stake in keeping information private. Indirectly, these companies were being “bribed” by their clients to give favorable ratings and analysis. As I was reminded during my short time on Wall Street, “when was the last time you heard of an investment bank urging their clients to sell?”

In some ways, emerging markets are more “honest,” as it is assumed that corruption is part of the normal process of doing business. While this doesn’t negate the need for reform, or diminish the fact that corruption is a huge obstacle preventing development in emerging market economies, it also means those with higher standings in the “least corrupt” category need to look at their own institutions more carefully as well.

 From www.ft.com:

Emerging powers’ companies bribe ‘routinely’

By Michael Peel in London

Published: December 9 2008 15:57 | Last updated: December 9 2008 15:57

Chinese, Indian and Russian companies bribe routinely to win overseas contracts, a global survey of executives claimed on Tuesday, highlighting fears that leading emerging economies are undermining international efforts to tackle corruption.

The bribe-payers’ index published by Transparency International, the anti-corruption group, ranks the three nations and Brazil in the bottom five of 22 countries surveyed.

The research highlights how intensifying global competition for natural resources and infrastructure projects threatens a “race to the bottom” between established western multinationals and leading companies from the new financial powers.

Huguette Labelle, Transparency International chair, called on all big exporting countries to join the landmark OECD anti-bribery treaty, which so far has been signed by 38 mainly rich nations.

Ms Labelle said Transparency International’s research “provides evidence that a number of companies from major exporting countries still use bribery to win business abroad, despite awareness of its damaging impact on corporate reputations and ordinary communities.”

The Transparency International index ranked Russia in last place with a score of 5.9 out of 10, with India and China also both scoring below 7.

Belgium and Canada topped the rankings jointly with a score of 8.8, while all the other members of the Group of Seven leading industrialised nations except Italy scored more than 8.

The countries ranked in the index account for about three-quarters of world foreign direct investment outflows and exports of goods and services. The survey – carried out by Gallup International, the polling organisation – is based on the perceptions of 2,742 business executives from 26 countries, including six in Africa, four in Central and South America, and eight in Asia.

The research says the most corrupt sectors among 19 surveyed are construction, real estate, energy, heavy manufacturing and mining, while the cleanest are information technology, fisheries and banking.

Many anti-corruption activists warn that the expansion of companies from emerging economic powers into resource-rich but often poorly governed countries in Africa and elsewhere could prolong and extend a tradition of bribery already established by western multinationals.

The OECD has launched a partnership with the African Development Bank to fight bribery on the continent, while Chinese officials will attend a meeting of the OECD’s anti-bribery working group this week .

Another TI index published in September accused the world’s wealthiest countries of failing to live up to their commitments to fight corruption, highlighting fears that only the US and a few other nations were serious about tackling graft by their businesses.

TI’s surveys are widely seen as useful yardsticks on corruption, although their basis on business executives’ perceptions rather than more objective measures means they are susceptible to individual prejudices.

Funders of the latest index include the German and Norwegian development agencies and Ernst & Young, the international accounting firm.

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