Date post: | 14-Apr-2017 |
Category: |
Economy & Finance |
Upload: | laszlo-arvai |
View: | 230 times |
Download: | 1 times |
Big risks rising in Europe
1 . How did we get into this mess
• Ukraine is one of only two countries of the FSU yet to recover to its 1991 level of GDP
– Total reform failure
– Got democracy but Yanukovych was a bad choice
• In the last decade Russia has been transformed into a “normal” country
(albeit with a lot of problems)
1 . How did we get into this mess?
1 . How did we get into this mess?
1 . How did we get into this mess?
• Russia was weak in the 1990s but now it is rapidly getting stronger
• This change has yet to be acknowledged politically
1 . How did we get into this mess?
Russia
China
2. Showdown
2. Showdown
• The bigger fear is Nato expansion
• Prelude:
- USA daws from ABS treaty 1995
- missile defence policy
A new Cold War?
• Yes: military build up
• Yes: aggressive politics of mutual mistrust
• Yes: proxy wars and geo-political games
• No: ideologically on same page
• No: commerce ongoing (from IPOs to energy sales)
• No: Putin’s goal Greater Europe
The Pain Game
3. Pain Game – who will win?
• Russia is suffering… but not that much • Despite low trade share, Europe has been surprised by how important Russia is to European economy ($100bn, 400k jobs)
• Trade war is already wrecking nascent European economic recovery
• Unintended consequences:
– wrecking CIS economies too – divisive for EU project – accelerated political BRIC integration
• This was the year that should have emerged from 2008 crisis and actually
going into a new crisis
3. Pain Game – short term
• End to fighting in East Ukraine likely
• Minsk II will probably fail => frozen conflict
• Sanctions on Russia remain in place
– US financial sanctions effectively global
– European business in Russia now targeted
– Ukraine cut off from gas 2020
– Military tensions remain high
3. Pain Game – Russian economic pain
Negatives
• Russian economy in deep recession
• No access to capital vs high domestic rates
• No investment (FDI or domestic)
• All spare money going to military
• No economic vision = stagnation
3. Pain Game – Russian economic pain
Positives
• Import substitution (cheese, Ford) • Consolidation in many sectors • Company focus on efficiency vs expansion • Sovereign/corporate debt low: 0% debt 2017
• Residual income from raw materials… • Can turn federal budget deficit on and off via military
spending • Low oil forcing a “new normal” on Russia (oil break even budget from $115 to $75)
3. Pain Game – Russian economic pain
Politics & Policies
• Nascent opposition movement dead • Siege narrative => more restrictive regime • Consumer model being replaced with weak ruble model
• SOE have all money: - concentrates power with Siloviki - increases corruption - emphasis on SOE and state projects • Economic liberal agenda still there, but sidelined by geopolitics
3. Pain game - impact
• Economics
- Real incomes falling first first time
- Retail t/o anemic
- GDP contraction this year circa 3%, growth 2016 of 1%?
- Unemployment remains low circa 6%
- Inflation stubbornly high circa 11%
- Fixed investment negative, need 25% growth rates
• Bank sector - Massive deleverage process going on - Real incomes falling first first time - Consumers over indebted (2 months
wages equivalent) - Consumer lending contracting - Corp lending recovering but anemic - NPLs low but creeping up (6-7%
sector ave) - CAR down but stabilized 13% - NIM squeezed hard by high interest
rates - No more CBR rate cuts in short term
3. Pain Game
3. Pain Game - sectors
3. Russia’s role in region
• Russia also plays an even more important role in the region
– Kazakhstan had to devalue Tenge, may again
– Bulgarian exports/tourism slumped
– Poland in deflation, agriculture hurt (apples)
– Serbian FDI damaged (SouthStream)
– Armenia, Tajikistan, Moldova would collapse if Russia collapsed
3. Pain Game
3. Pain Game
Business to the rescue
5. business
• What does Putin want? – Doesn’t want to recreate USSR – Doesn’t want to invade/occupy Ukraine or Baltics – Doesn’t want war with EU/US – Doesn’t want to see Ukraine collapse
– Does want commercial relations with EU – Does want Ukraine’s commercial relations with EU (DCFTA) to
account for Russian interests – Does want guarantee Ukraine will not join NATO – Does want Greater Europe of trade (China problem) – Does want respect
4. Russia’s role in region
• Minsk II: next phase all depends on results
– Withdrawal of Russian military aid
– Stick to terms of ceasefire (artillery)
– Regional elections in Ukraine (November)
– Constitutional changes de-centralisation (Sept)
– Amnesty law for fighters (?)
5. business
• Ukraine 1.3mn refugees, most gone to Russia
• UNHCR Russia #1 world asylum applications 2014 – mostly Ukrainians
• German business lobby hard for peace
• Much of SE Europe also want good relations
• Falling trade, profits cost EU $100bn 400k jobs
Ben Aris Editor-in-chief/publisher
+7 916 290 3400 http://bne.eu