Archive for the ‘Georgia’ Category

Medvedev: Glasnost and Perestroika all over again?

November 13, 2009

Russian President Medvedev and his mentor, Vladimir Putin.  Note: this is not a photo from Medvedev's speech this week.  Source: www.russiablog.org

Not so fast.  President Medvedev has resounded the main themes of reform for some time now, without his government (or, rather, Putin’s) following through.  See a NYTimes article from yesterday on President Medvedev’s annual address to the Russian nation, as well as a report on the matter below in a CSFB Emerging Markets report.

Reducing Russia’s humiliating dependence on energy exports and the role of state enterprises in the economy, and adding flexibility to labor markets and greater pluralism to Russia’s proto-democracy were all laudable goals mentioned in his speech, delivered at the Kremlin with Putin in attendance.  Mere platitudes devoid of concrete measures, critics say.  Maybe so, but the first step toward change is talking about it openly. 

Russia may have a positive future and a greater potential to join Fukuyama’s end of history in terms of being a functioning liberal democracy and market economy than other authoritarian countries, such as China, Saudi Arabia, Iran, to mention a few, where the lack of nascent democratic institutions distinguishes them (though Iran has a few).  Russia looks a bit like the Iberian, Greek and Latin American authoritarian regimes just before their transitions to democracy in the 1970s-80s; these societies yearned for the freedoms and prosperity of the West.  One day, Russia will join Europe and the West, if Europe and the West will have them.  Institutions such as the EU and NATO remain closed to Russia.  Remember what Kissinger said about NATO expansion — alliances have to be against somebody.  That way of thinking has to change in the West, and then maybe Russia will accelerate Medvedev’s reforms.    

From CSFB today:

Sergei Voloboev
+44 20 7888 3694
sergei.voloboev@credit-suisse.com
President Medvedev’s annual state of the union address yesterday contained criticism of past economic policies and some specific economic and political reform proposals. With a reference to his “Russia, Forward!” article published on 10 September, Medvedev has called for the country’s comprehensive modernization, based on democratic principles. Referring to the reasons for Russia’s particularly painful economic contraction during the recent economic crisis, the president mentioned the economy’s primitive structure, “humiliating dependency” on raw materials and general reliance on export receipts, appallingly low competitiveness of Russia’s manufacturers, as well as insufficient efforts to adopt a new growth model. Medvedev stated that even though the situation in the banking system has stabilized, it remains weak and insufficiently capitalized.
Medvedev mentioned the following specific directions for economic reform:
– further reform of the financial sector, which needs to be brought in line with the modernization requirements;
– a long-term reduction in the size of the state sector (from about 40% at present);
– transformation of state corporations operating in competitive environments into joint stock companies and liquidation or sale of all other such corporations by 2012; and,
– introduction of tax benefits for innovation-related activities and of a transition period to higher levels of mandatory insurance contributions.
– The president has offered a detailed view of the needed technological modernization, including the following:
– urgent commencement of technological modernization of the entire manufacturing base;
– creation of a modern technological centre – a Russian Silicon Valley;
– introduction of energy-saving equipment, bulbs, meters for use by utility services;
– wider application of space technology in the telecommunication industry;
– introduction of supercomputers;
– universal access to broadband Internet;
– development of strategic information technologies; and,
– a three- to four-month limit on granting approvals for new investment projects.
Encouragingly, the address contained specific proposals aimed at easing access to Russia’s labour market for qualified foreign workers, including a simplified visa regime and issuance of long-term visas, adoption of a more uniform approach to recognising foreign higher education diplomas and other educational degrees. Medvedev also mentioned certain measures in the area of political modernization, including a gradual phasing out of constraints on activities of small political parties and allowing such groups to occasionally participate in parliamentary meetings.
Overall, Medvedev’s policy address was fairly robust in criticising Russia’s recent economic policies, but it was predictably short on specific details on how to implement and observe the proclaimed reform objectives. It should nevertheless encourage the liberal-oriented part of Russian public that became very concerned about Russia’s democratic principles in the aftermath of the flawed municipal elections in early October. Representatives of the business/ investor community have likely noted the commitment to streamline the tax system further but were probably disappointed about the lack of more specific details.
October fiscal data points to rebalancing of revenue sources. This morning’s regular set of monthly fiscal data (for October) contained few surprises. There was another large monthly deficit (RUB179bn, 4.9% of monthly GDP, after 4.6% of GDP in September), taking the 12-month deficit to 6.5% of GDP from 5.5% in September. The monthly revenue/GDP ratio edged up to 18.4% of GDP from 18.3% in September on the annual basis; revenues fell to 17.5% of GDP from 18.0% in the previous month. Total expenditure was 23.3% of GDP, up from 23.0% in September and rose to 24.0% of GDP on the 12-month rolling basis from 23.4% in September.
An interesting observation on the composition of revenues in October: the data shows a weaker energy component of revenue (8.1% of monthly GDP, vs. 9.6% in September), while non-energy revenues (which have been declining progressively since June) jumped to 10.4% of monthly GDP from 8.7% in September. Overall, the data continue to point to a very large deficit for the full-year 2009, but its magnitude now looks likely to be materially lower than the government had anticipated (close to 7% of GDP rather than 8.3% assumed during the drafting of the 2010 budget).
The first official estimate for Q3 2009 GDP was better than the government’s provisional estimate. Rosstat reported yesterday that Q3 2009 GDP fell 8.9% yoy (after Q2 GDP was down 10.9%). This was better than the Economy Ministry’s previous 9.4% estimate for Q3. The statistics office has not provided a seasonally adjusted QoQ growth estimate, saying only that growth was 13.9% qoq in volume terms. Any seasonal adjustment would not be very reliable this year because of a structural break in series, but it is now clear that the original government estimate of 0.6% qoq SA growth in Q3 will be surpassed significantly (not adjusting for working day differences, we would estimate that qoq SA growth in Q3 was close to 3% – a very strong result, just slightly weaker than the 3.5% qoq growth in early 1999, after the economy bounced back from the H2 1998 meltdown).

Photo above:  Russian President Medvedev and his mentor, Vladimir Putin.  Note: this is not a photo from Medvedev’s speech this week.  Source: www.russiablog.org

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Emerging Europe has fiscal problems, says Fitch

October 29, 2009
Emerging Europe: Fiscal woes  Source: www.d-orland.com
Emerging Europe: Fiscal woes Source: http://www.d-orland.com

Fitch Ratings published a report this week analyzing the fiscal deterioration taking place in 21 countries in what it calls “Emerging Europe,” which includes three sizable economies — “rising” power Russia’s nearly $1.7 trillion economy, struggling Turkey’s $745 billion economy, and Poland’s nothing-to-sneeze-at $525 billion economy. Like much of the rest of the world, Emerging Europe juiced its economies with fiscal stimulus packages due to the Great Recession, and therefore, needs an exit strategy over the medium term to this fiscal deterioration. 

Fitch rates Russian sovereign debt at BBB with a Negative Outlook (likely to be downgraded within two years); Turkey’s BB- with a Rating Watch Positive (likely to be upgraded, albeit from a low level, within the next three months); and, Poland’s debt A- with a Stable Outlook.

Fitch expects Polish GDP growth to languish before rebounding to about 3% in 2011; Russian growth to creep back above 3%; and, Turkey’s to move back to around 4% per year.  Government deficits in all three will remain sizable at between 3-6% of GDP per year, though quite small next to America’s 10% this year.  Poland’s government debt will rise to nearly 60% of GDP by 2011; Russia’s government debt remains very, very small (at below 15% of GDP); and Turkey’s will rise to nearly 50% of GDP before plateauing.  These levels are still modest relative again to U.S. levels approaching 90% in the coming years.  Poland’s and Turkey’s current account balances (a measure of trade) are in deficit, though forecast by Fitch to be below U.S. levels, which should exceed 3% of GDP in the coming years.  Russia, of course, as an energy exporting powerhouse, remains in surplus on its current account.

Central European economies, including Poland’s, are expected to move out of recession nicely, driven by links to the euro area, especially to the reviving German economy.  Baltic and Balkan states are rebounding less nimbly, according to the Fitch report.

A number of countries have been assisted by sizable IMF financing, including Turkey, Hungary, Armenia, Georgia, Latvia, Romania, Serbia and the Ukraine, not to mention that Poland obtained a $20.5 billion Flexible Credit Line with the IMF.    

Have a look at the Fitch Press release on the report below. 

Fitch: Public Finance Concerns Move to the Fore in Emerging Europe
29 Oct 2009 4:00 AM (EDT)


Fitch Ratings-London-29 October 2009: Fitch Ratings says in a new report that although external financing risks have eased somewhat for many countries in emerging Europe (EE) during recent months, rising government deficits and debt ratios mean that sovereign rating dynamics remain negative.

“Worst fears of a systemic economic and financial meltdown in emerging Europe have receded as global output has started to recover and financial conditions have eased, driven by the massive global fiscal and monetary policy stimulus, rescue packages led by international financial institutions and, in many countries, impressive economic resilience,” says Edward Parker, Head of Emerging Europe Sovereigns at Fitch.

“However, major challenges remain due to the scale of the negative shocks to hit the region; the costly legacy of the crisis, notably rising public debt ratios; and the uncertain “exit” from the crisis, recession and accommodative policy settings; while a relapse in one of the more vulnerable countries could trigger ripples across the region,” says Mr Parker.

Concerns over public finances have moved to centre stage. Fitch forecasts the impact of the recession – in some cases augmented by fiscal stimulus measures, lower oil prices and bank bail-outs – to widen the average budget deficit to 5.9% of GDP in 2009 from 1.1% in 2008, before narrowing to 4.6% in 2010. It expects the average government debt/GDP ratio to rise to 36% at end-2010 from 23% at end-2007. Failure to implement credible medium-term fiscal consolidation could lead to rating downgrades. In many countries, social pressures and elections will make it harder to implement austerity measures. This is fertile territory for political shocks. For countries reliant on IMF-led programmes for fiscal and external financing and for underpinning economic confidence, failure to stick to programme conditions poses additional risks to macroeconomic stability.

Fitch has revised its forecast for 2009 EE GDP to -6.1% from -4.6% in its June forecast round, owing to an even steeper drop than anticipated in output in H109. This contrasts with just -0.1% forecast for emerging markets as a whole. It forecasts only Azerbaijan and Poland will avoid recession, while Armenia, Estonia, Latvia, Lithuania and Ukraine will suffer double-digit declines in GDP. However, it has revised up its 2010 growth forecast to 2.6% (from 1.5%), owing to the unwinding of the deeper 2009 contraction and more supportive global conditions. Indeed, it estimates EE GDP rose by about 1% q-o-q in Q209, after plummeting 7% in Q109, led by a rebound in Turkey. But weak investment, rising unemployment, moderate capital inflows and credit growth, fiscal consolidation and a rebuilding of balance sheets point to a subdued recovery.

External financing and currency risks, which were the primary vulnerability of many countries in EE in the initial phase of the crisis, have eased somewhat, though remain material. This reflects a rapid reduction in current account deficits (CADs), substantial multilateral assistance, a boom in sovereign external issuance (USD19bn year to date) and relatively resilient private-sector roll-over rates. Fitch estimates the region’s gross external financing requirement (CAD plus medium- and long-term (MLT) amortisation) at USD304bn in 2009 and 2010, down from USD363bn in 2008.

In contrast to the rally in EE government bond prices, sovereign ratings dynamics remain negative, albeit at an easing pace. Following 11 notches of downgrades of foreign-currency Issuer Default Ratings in Q408, there were two downgrades in Q109, three in Q209 and only one in Q309. The balance of Outlooks and Watches has improved slightly since August 2009, but 12 countries are on Negative and only one on Positive. Fitch expects future rating actions to be driven more by country-specific developments than general trends.

The full report, entitled “Emerging Europe Sovereign Review: 2009”, is available on the agency’s website at http://www.fitchratings.com

Contacts: Edward Parker, London, Tel: +44 (0) 20 7417 6340, David Heslam, +44 (0)20 7417 4384; Eral Yilmaz, +44 (0)20 7682 7554.

Russia-Turkey deal: the Czars would be jealous

August 7, 2009
Peter the Great sought a warm-water port on the Black Sea.  Source:  www.worldsecuritynetwork.com/
Peter the Great sought a warm-water port on the Black Sea. Source: http://www.worldsecuritynetwork.com/

The NYTimes published an article today detailing a set of energy deals concluded between Russia and Turkey in Ankara, with Prime Ministers Putin and Erdogan present.  The deal was with Russian energy giant Gazprom, allowing state-owned Gazprom access to Turkish territorial waters, a benefit Russian czars and party chairmen since Peter the Great (pictured above — who ruled Russia from 1682-1725) have sought by force (or threat of force).  Now, in true “Western” fashion, Russia, Inc. is signing a business contract that provides benefits to Turkey as well.  Turkey desires to become an energy hub and has obtained a Russian commitment to build a pipeline across its territory.

The Times article explains how Western interests have competed with Russia for energy agreements with Turkey in order to avoid Russian dominance of the Eurasian energy pipeline system, and the consequent vulnerability of energy-hungry Western Europe.  Russia has used pipeline cutoffs before for political purposes, e.g. with the Ukraine.

Turkey for its part, with a less pro-Western government than heretofore, headed by the moderate Islamist AKP party, probably does not mind playing what the Brits over a century ago called, “the Great Game,” or the Great Power competition in the East.  Has Vlad the Great bested Peter??

Wilsonianism Run Amuck?

May 8, 2009
Georgia, bounded to the west by the Black Sea, to the north by Russia, to the south by Turkey and Armenia, and to the east by Azerbaijan.  Abkhazia is the highlighted part of Georgia to the northwest.  Source:  Wikipedia
Georgia, bounded to the west by the Black Sea, to the north by Russia, to the south by Turkey and Armenia, and to the east by Azerbaijan. Abkhazia is the highlighted part of Georgia to the northwest. Source: Wikipedia
Since President Wilson enunciated his Fourteen Points during World War I, the principle of national self-determination has been an objective of the Western Powers.  The plethora of weak national states in Eastern Europe in the interwar years, and the temptation this gave a revanchist Germany to invade and a greedy Soviet Russia to divide the spoils tempered to some extent postwar Western support of national self-determination.  It remains a principle the world community supports…however selectively.

An interesting NYTimes article discusses the national aspirations of less than 100,000 ethnic Abkhaz in Georgia, a nation of 4.7 million (mostly ethnic Georgians), which finds itself hosting NATO exercises and therefore in a tense relationship with neighboring Russia.  Russia recognizes the independence of Abkhazia and South Ossetia.  Most every other nation in the world does not. 

The conflicts there are complex, with poor judgment taking place on both sides.  Abkhaz nationalists are seeking to attract some 500,000 Abkhaz living in Turkey to return and help build an independent state.  Ottoman Turkey invaded Abkhazia in the 16th century and converted the local population to Islam (versus the Orthodox Christianity of ethnic Georgians).  Interestingly, it seems much of the Abkhaz diaspora had fled Georgia in the 19th century to escape the rule of an expanding Czarist Russia.  Russia is now of course the principal benefactor of Abkhaz separatists.

So, where does our moralistic support of national self-determination of peoples begin and end?  The Abkhaz and South Ossetians? The Chechens? The Basques of Spain and France? The Kosovar Albanians?  The Palestinians?  The Tibetans and Taiwanese?  The Kurds, the Armenians, the Azeris?  The Sunni of Iraq?  The residents of Darfur and of southern Sudan? Kashmiri Muslims under Indian rule? Tamils in Sri Lanka?  German speakers in the Italian Sud Tirol?   Difficult questions affecting minorities in some Rising Powers, as well as the world’s other powers who have to formulate policies balancing the principle of national self-determination against other interests.

Nato: Keep your eye on the ball

May 7, 2009

NATO in Georgia.  Source: AFP

Little kids want to live in a world where they get everything they want.  Parents teach kids that they can control only so much.  In AA meetings, recovering alcoholics quote the “Serenity Prayer,” attributed to theologian Reinhold Niebuhr:

God grant me the serenity

To accept the things I cannot change;

Courage to change the things I can;

And wisdom to know the difference.

Let us add to this – use your scarce resources to change the things that are important to change.  This would be a good prescription for the leaders of the North Atlantic Treaty Organization.

NATO should focus on what really matters to Western interests over the coming half-century:  arresting the proliferation of WMD; stopping Iran from acquiring the above; anchoring the Great and Rising Powers (including Russia and China) into Western institutions in order to more effectively resolve regional conflicts and other global problems; and, gently pushing human development in the direction of Fukuyama’s End of History. 

Ensconcing Georgia in NATO and other Western institutions is expressly not on this list of priorities (see NYTimes article).  Sure, it would be nice to have Georgia in NATO.  Likewise it would be nice to have Russia in NATO, Kissinger’s point that alliances must be against someone notwithstanding.  But, as adults we must realize that we cannot have it all.  America’s unipolar moment of the nineties gave us a false sense of our power.  Let us therefore refocus our priorities on what is important.  We can debate the latter, but let us at least open the debate.  This is change we can believe in.

I understand the notion of not caving into Russia on every action they take in their so-called “near-abroad.”  However, I wonder if NATO could have quietly “postponed” the military exercises in Georgia (which are part of its Partnership for Peace program, a name that probably appears like doublespeak to the Great Powers not participating, much like Ronald Reagan’s MX “Peacekeeper” missile). 

Mikheil Saakashvili, the president of Georgia who behaved irresponsibly last summer in that country’s conflict with Russia, is bolstered by the seeming Western support of his objectives.  A report on NATO’s exercises in Georgia appeared on the front page of China’s Xinhua news agency’s web site.  Are these military exercises in Georgia critical to the security of NATO’s members, and by undertaking them, are we encouraging Russia and China to help us (the West) achieve our priorities?  Read what NATO has to say about its relations with Georgia.