Russian Economic Forcast in 2010

Last week while attending the 2009 International Investment Forum in Sochi, Russia, I managed to obtain a glimpse of where the Russian economy is heading for 2010 and beyond.

The aim of my visit to the Russian resort city on the Black Sea, was to participate in the Forum in order to have a clear view of the opportunities that the Krasnodar region and Sochi will offer for a business client. Of interest was the short term / mid term construction developments and opportunities in the Krasnodar region linked to the Sochi Olympics in 2014.

Prime Minister Vladimir Putin, opened the forum’s first session where he participated in a forum discussion along with Jeffrey Immelt, the Chairman & CEO, of General Electric; John Mack, Chairman of Morgan Stanley; and the founder and President of Texas Pacific Group Investment Fund, David Bonderman which represents the largest private equity investment firm in the world.

Putin made several announcements regarding new mechanisms for economic recovery to attract investments in the construction of infrastructure, power stations, roads, railroads and residential housing. He also announced the lowering of interest rates at the central bank.

Morgan Stanley’s CEO remarked that since the crisis, there are $5 trillion in the US and $7 trillion in Japan now waiting on the sidelines. As this money moves into the investment market, Russia will be a “huge benefactor of that capital.”

Because of the rising BRIC (Brazil, Russia, India & China) economies, the CEO of General Electric announced that already 80% of their operations are outside of the U.S. which partly includes Russia. The CEO’s presence in Russia was an initiative to further increase GE’s presence in Russia to take advantage of Russia’s vast opportunities.

Most of the above mentioned forum participants noted a reduction in corruption and an increase in transparency, specifically in the Krasnodar region. Krasnodar Governor Tkachev was congratulated for his efforts to improve the business climate in Krasnodar.

According to public information, the Russian government conservatively estimated last year that the 200 construction projects for the 2014 Olympics would cost $12 billion. The state promised to inject up to $7.5 billion, with the rest coming from the private sector. With the accounting of ruble losing against the dollar, the total amount has been reduced to $9.2 billion. The government estimates at least $2.5 billion will be invested by the private sector in Sochi alone.

According to the Forum organizers, 112 agreements amounting to €13.8 billion were signed at the forum:
- 64 agreements among them to the amount of €8.4 billion were signed by 11 Russian regions.
- The Governor of Krasnodar signed 35 agreements amounting to €4.4 billion.
- Krasnodar Region presented 1,500 investment projects totaling €27 during the forum

I also got the chance to meet privately with officials from the Construction Department of the region of Krasnodar, where much of the construction is ongoing. They also noted that there are opportunities in this region that are unrelated to the Olympics in infrastructure, logistics, and agriculture. International contractors are welcomed and needed to assist the local construction sector.

According to the Krasnodar officials, decisions can be and are made locally. I also heard from some other Russian government officials that they are encouraging the decision making process to take place locally and to not rely on the government or Moscow.

One of the complaints among Russian business participants was regarding business credit and financing. Russian banks were previously charging interest rates as high as 20% . One such critic of doing business in Russia was German Gref, Chairman of Sberbank. However, Putin replied back to Gref that the banks should lower their rates eventually down to 6% embarrasing the head of Russia's largest bank. According to one of my contacts at U.S. EXIM Bank, some previous recipients no longer need to rely on U.S. export products due to their success in Russia. However, foreign companies selling U.S. content in Russia can rely on U.S. EXIM products to reduce risk utlizing some of the stronger local Russian banks. As of this week, the Central Bank of Russia announced it will slash its rates to 10% and further rate cuts are predicted to follow.

Driving along the road from the Sochi seaside to the Krasnaya Polyana Olympic village where I was staying, there was much evidence of extensive construction, new roads, tunnels, bridges, power plants/electrical lines, and the beginning construction of a high-speed rail. Also interesting was the evidence of opportunities in the Krasnodar region not related to the Olympics. Besides the need for affordable residential housing, roads and infrastructure, Krasnodar offers tremendous opportunities in wine production, agriculture and timber.

Interestingly, other regions within and outside of Russia were also being promoted at the Investment Forum from Armenia, the Crimean region of Ukraine, Kalmyk Republic, and Caucuses.

I also heard from other Russian businessmen who reported movement in the construction sector was starting up again in the Moscow and St. Petersburg regions due to government intervention during the economic crisis.

In conclusion, Russia offers tremendous opportunities in construction, agriculture and infrastructure development which will offer long-term opportunities for investors. The forum portrayed optimism that Russia and the neighboring region will be a magnet for investment as the global economy recovers. Already Russia is in 5th place for foreign direct investment inflows according to the U.N. Conference on Trade and Development only behind the U.S., France, China, and Britain.

Despite the global economic fallout, Pepsi, Boeing, and John Deere have announced substantial large scale investment plans in Russia for 2010. As energy prices stabilize to normal levels, and demands increase on Russian commodities from China and India, new opportunities will open up in 2010:

• New wave of privatization – Experts predict that since the economic crisis, over 50% of the Russian economy is at least temporarily under state control. As major developers and retailers went bust and construction projects came to a halt, Russia’s top largest banks were forced to step in and take stakes in these indebted companies converting more debt into equity. However, experts believe this is a short-term trend. Recent government announcements indicate a new wave of privatization is taking place as the government offers stakes in these companies to private investors in order to close the gap on the deficit and to avoid heavy reliance of energy prices to maintain normal levels in the state coffers. This trend is also expected to follow with a new wave of mergers and acquisitions as private investors take advantage of lower prices, especially in the real estate sector.

• Krasnodar Region – Sochi will host the 2014 Winter Olympic games marked by heavy investment and construction of the Krasnodar infrastructure systems, Casinos and Black Sea resort developments.

• Energy – Russian oil production output this year has reached record highs since the fall of the Soviet Union. Russia’s Gasprom reports that gas exports to Europe have finally stabilized since the last year’s gas issues. Merrill Lynch Russia predicts oil will rise to $82/bbl before the end of 2010.

• Agriculture and Forestry Sectors – Russia, Ukraine and Kazakhstan contain the world’s largest land areas for agriculture and forests. At the height of last year’s economic crisis, Russia reported the largest grain harvest since 1990. This sector continued to grow in 2009 and vast untapped lands will attract even further agricultural development.

The presence of Morgan Stanley, GE and other US heavy weights support this conclusion. TRP

New party in Serbia supports merging with Russia

Some of my Serbian friends made some comments that throughout history Russia never really comes to the aid of Serbia. This talking point is bought hook line and sinker by many (but not all) of Serbs. What is the alternative? How helpful has the West been to Serbia in both recent times and throughout history? For more of my views on this topic, please see my earlier post on this topic: - TRP

New party in Serbia supports merging with Russia
26 August, 2009, 16:47

"The support [for the 'My Russia' party] is tremendous. And people are amazed that no one before actually started anything like this," founder of Serbia's "My Russia" party, Ivan Isakovich, told RT.

More....

A review of 2008 and the future of 2009

If I can summarize the events of 2008 it would be with one phrase: "Global Economic Crisis." Some of us have been predicting this for a long time. One of my colleagues several years ago predicted the collapse of Western power. His reason was based on the simple fact that the U.S./Western system was victorious over the communist system because it practiced free market principles, whereas the communist system could not compete. When communism fell, many of the former communist countries embraced free market capitalism while the U.S. and the E.U. have in practice become more socialist. Therefore, it is logical to conclude that if you believe in the free market system and, capitalism, then you must also conclude that when you depart from those principles the economy will ultimately fail. Even in the United States, where Republicans embrace the ideology of the free market system, the Republicans themselves took charge with expanding the size of the U.S. government and its socialist system. Even the republican President Bush himself "apologized" for his "abandonment of free market principles," after enacting the greatest government intervention of the economy in U.S. history.

I once had the opportunity to meet Newt Gingrich in Washington back in 2005. He predicted privately, that the Republican controlled Congress would be defeated and the Republicans may also lose the White House. Gingrich's reasoning was that the Republicans would be punished because they departed from the free market principles of capitalism which would lead to failure and make it easier for the Democrats to criticize their performance.

Interestingly, there are economic experts who have been warning all of us that the U.S. economy could collapse if its continues on its departure from capitalism. One of those experts is Peter Schiff, an advocate of the Austrian or "Vienna School" of economics has been warning the public since 2006. Both left-wing ideologues and pro-Bush Republicans ridiculed him on Fox News and other news programs. Now both sides are taking him seriously. This video below shows his accurate economic predictions as far back as 2006.


Despite the global economic crisis, 2008 can also be characterized by the following events:

• Independence of Kosovo - Metohija. U.S. policy set a dangerous precedent with the declaration of independence of Kosovo, which was also recognized by mostly Western states. Most of the rest of the world including some members of the EU have and do not plan to recognize Kosovo. The Eurasian powers led by Russia (See map of countries recognizing Kosovo independence) have strongly resisted recognition. It is also worth noting that as of this writing, there are still four members of NATO that have not recognized Kosovo, further demonstrating that the U.S. has become less relevant globally.
• The Georgian-Russian War led to the failure of the U.S. experiment in Georgia and complete destruction of Georgian military by the Russian military. Russia previously resisted recognizing Ossetia and Abkhazia based on Russia's policy to not change borders of recognized states. The outcome of this event was a severe blow to both U.S. influence in the Caspian Sea area and NATO's presence in former Soviet space. One can conclude, that the recognition of the break-away republics inside Georgia is irreversible and was a direct result of the U.S. policy to recognize Kosovo.
• Russia's reassertion to break away from communism was symbolized with the the loss of two important figures in shaping the new destiny of Russia. His Holiness Alexy II, the Patriarch of "All the Russias" passed away leaving a legacy of reestablishing religious freedom in Russia and for re-unification of the Russian Orthodox Church. His leadership in uniting the Russian Orthodox Church Abroad helped to reconcile the splits amongst the Russian people dating back to communism. Another was the loss of a great dissident writer Aleksandr Solzhenitsyn who once was living in exile, returned to live the rest of his life in his Russian Homeland. Both were recognized and decorated by then President Vladimir Putin for their contributions to the Russian people.
• Deployment of the "Home Mission" military force inside the United States was barely noticed in the "commentariat," (U.S. media). An entire combat brigade from the U.S. Army's 3rd Infantry has been deployed to the U.S. in case of civil unrest. The new U.S. military strategy of "Strategic Shock" to deal with internal threats caused by civil unrest was also revealed raising fears that the U.S. is preparing for a future crisis.

These important events of 2008 will definitely define the future of 2009. Unfortunately, the same analysts who correctly predicted the economic crisis of 2008, have even grimmer predictions for 2009. We all know that economies are cyclic. Many times in U.S. history, the economy boomed and other times it was in depression. What will happen to the world's greatest economy in 2009? Some say it will be a repeat of 1929 when the U.S. experienced the Great Depression. Others say it will resemble more like 1979, a recession that followed by a strong revival. However, my prediction is that the U.S. will experience an event similar to 1989. What happened in 1989? The collapse of the Soviet economy which resulted in its break up into separate countries. All three events have one thing in common, and that is that state intervention in the economies was the main cause of these events. However, the U.S. capitalist system always corrected the problems itself from the free market. In the USSR however, it was different. The Soviet socialist state intervention contributed to its demise. Likewise the U.S. government's interventions and state bailouts will also contribute to its own economic failure similarly as did the USSR.

The entire world has been impacted by the economic crisis. Countries that adhere to free market principles will eventually recover as did the U.S. in 1929 and 1979. However, the U.S. has made a departure from capitalism. The U.S. elite have a common belief that governments can solve any problems by just pouring money on them. Once the greatest manufacturer on Earth, the U.S. transformed itself into a service economy that is driven by consumerism rather than creating tangible goods. U.S. economic system has become a gigantic "Ponzi"scheme. Basically, the government spends and borrows money from foreign creditors. Countries like China, Saudi Arabia and Russia will stop providing credits because the U.S. cannot pay all this debt back. Nor can the creditors continue providing this credit as the dollar loses its value. Therefore to solve this problem, the U.S. will just print more cash. This will surely result in hyper inflation (like the USSR experienced) and eventually cripple the U.S. economy entirely.

How rest of the world recovers or not from this crisis will ultimately depend on the directions they make in their own policies and how the the global economic system redefines itself. Will they pursue sound conservative economic policies or will they experiment with socialism and printing more money. One thing is for certain in 2009. The new Obama Administration will bring about no change nor does Obama have any magic tricks to cope with the problems of hyper-inflation.

The other big question is if Russia can remain on course with its free market economic development. The Russian economy is also impacted and the demise of the U.S. economy is not a good scenario for Russia in the short-term. Russia has emerged as a significant energy supplier for the United States but is in the process of establishing more markets in the so called emerging markets of Asia. Certainly Russia may experience a "bump" on its road to economic development, much like the U.S. system had various times in its history. Although Moscow has lots of work to do, the biggest difference between the U.S. and Russia, is that Russia has reduced its size of government, lowered taxes, and has huge reserves of cash. On the other hand, the U.S. has expanded its government (thus increasing incompetence), and has accumulated huge debt that will certainly lead to hyper-inflation and possible civil unrest.

2009 shall be an interesting year.

Russian Analyst: US will have civil war in 2009

The picture on left published in the Wall Street Journal on December 29, 2008 depicts how the U.S. may split apart following a civil war as according to the predictions of a Russian professor Igor Panarin.

Reaction of course in the commentariat is that Panarin is just ignorant of the United States. Although I was aware of the sensation he created earlier in the Russian media, the article in the Wall Street Journal was one the first times he was mentioned in the mainstream U.S. media. Now as expected, his views have created a stir and which prompted myself to do a little research on who Panarin is and how he came about with this scenario. In another article, Panarin claims, "The dollar is not secured by anything. The country's foreign debt has grown like an avalanche, even though in the early 1980s there was no debt. By 1998, when I first made my prediction, it had exceeded $2 trillion. This is a pyramid that can only collapse."

Lets look at some facts:

• Igor Panarin is a professor of political sciences and expert on the U.S. as well as Dean of the Ministry of Foreign Affairs Diplomatic Academy in Moscow.
• Panarin cites French political scientist Emmanuel Todd who in 1976 predicted, the fall of the Soviet Union, based on indicators such as increasing infant mortality rates. Likewise, Todd predicted a similar fate for the United states in 2001.
• Similar to Todd's use of demographic date to calculate his predictions, Panarin based his forecast on classified data supplied to him by FAPSI analysts (Russia's equivilent of the National Security Agency) which is used to predict economic, financial and demographic trends.

One must also keep in mind that Panarin himself gives his predictions a 55-45% chance of happening. If you read in one of my previous posts you will also find that his predictions are not far off from some analysts in the United States as well. Other analysts offer other scenarios: The U.S. could prevent its economic collapse by becoming a dictatorship. Standards of living would decrease but the government could use military force to keep the country together and perhaps even succeed with implementing a union with Canada and Mexico and just replace the failed currency with a new one. But this is a topic for another day and another post!

Russia in the Americas

This picture on the left says a thousand words. The President of Russia is shown lighting a candle in the newly consecrated Russian Orthodox cathedral in Havana, Cuba, while Raul Castro looks on. Dmitry Medvedev's visit to South America was certainly significant for Russia's presence in the Americas. Despite the commentariat's agenda to make it appear that a new USSR is trying to militarize the region, there are several points I think were very significant about Medvedev's visit:

1. Brazil - is one of the so-called "emerging markets" - countries that make up the "B.R.I.C." economies of Brazil, Russia, India and China. This is important to note because Brazil and Russia are discussing the process of restructuring the global economy which is just another blow to the global elite and a victory to sovereign nations.

2. Venezuela - While Medvedev was visiting Caracas and Russian naval ships were training with the Venezuelan military, Hugo Chavez held a meeting of the "Bolivarian Movement." This is the left-wing movement that Chavez, Morales and other Latin Americans follow. Although they started as nationalist movements, they merged with leftists during the Cold War. However, Medvedev refused all invitations to participate on this level but instead brought members of the Russian private business community to make business connections in Caracas instead. This means that while Moscow values its relationship with Caracas, it is clear that the Russians came to open up business opportunities and to gain a foothold in the Americas militarily.

3. Cuba - Medvedev took part in the consecration of the Our Lady of Kazan Russian Orthodox Cathedral in Havana. Here again Medvedev is making it clear they are not there for leftist reasons that previously united Castro with the USSR ideologically.

Glenn Beck: U.S. headed for unrest?

Conservative Talk Show Host Glenn Beck videos speaking on the U.S. economic situation.

Why the global elite do not like an economically strong Russia

I just had to comment on the Economist's Special Report on Russia by Arkady Ostrovsky. The report appears factual but it wreaks with propagandistic rhetoric evident from the so-called Western "commentariat" - a term I prefer to call the liberal globalist media as coined by Russia Today's Peter Lavelle.

Ostrovsky appears in various British print as an "expert" on Russian affairs but the rhetoric is typical of the Economist. I am sure the editor made sure of that since the Economist has always predicted for decades that "pro-Western" countries like Ukraine, Georgia, etc., would become economic successes whilst Russia remain a basket case. Just pick up any old Economist from the 1990's or early 2000's and you will see that the reality of today does not resemble their predictions then. This is what happens when people under the ideology of liberal globalism wrongly define what is right and what is wrong. Now they are faced to explain why Russia has been rising economically and politically. Anything you can find wrong with Russia on the other hand is Putin's fault. However, if there are positive economic reports, it means Putin is using nationalism and oil to allow Russians to get rich unfairly. It is all nonsense.

Ostrovsky at least is more realistic than most of the commentariat that the current Russia is not the Second Soviet Union. The commentariat has led the average American to believe that Putin is trying to re-create another Soviet Union through the KGB. Firstly, Putin is not the Commander in Chief any longer, and secondly as even Ostrovsky rightfully reports, Russia does have a market economy moving away from socialism.

Ostrovsky is wrong on other points as well. Mainly he is wrong by saying that Russia is merely copying the West by "unilaterally" invading Georgia, and suggesting that Russian style capitalism is leaving out the "masses" in the cold who are falling into poverty. Firstly, I don't think Russia had any other choice than to attack Georgia in order to protect its own security. Instead it was the unilateral intention of the U.S. to interfere with Georgian-Russian relations. Secondly, there does not seem to be any dispute in regards to fact the quantity of millionaires and billionaires in Russia is growing. Where do these millionaires come from? Of course we all know a good number of billionaires or oligarchs as the Russians call them got rich in the 1990's by pillaging Russia. Men like Berezovsky or the jailed Khodorkovsky got rich without really creating anything. However, there are plenty of newly created legitimate millionaires who during the same 1990's were making $40 per month, then $100 per month, etc., but used their great talents to harness opportunities that built the consumer economy now present in Russia. Prosperity has only until recently begun to spread to the provincial areas of Russia which in time will also see their standards of living improve. There is much evidence of this happening already. However, there will always be certain Russians, especially older retirees of the USSR era who will be just happy living in their villages and dachas as long as nobody bothers them. Whereas oil and gas has helped make some very rich billionaires in the energy sector and caused state coffers to fill with mountains of cash which the Kremlin has put in its reserves, the implementation of a flat tax, reduction of government and establishment of private property are the real reasons for the rise of the middle class and why there is a growing legitimate millionaire class.

What is lacking in the Economist and most other reports on Russia coming from the commentariat is that they never use real logic or investigate why things are really the way they are. They cannot report the real story because they know that the opposite is happening in the West where there is an unprecedented economic crisis. If you report the facts in Russia, you would discredit the entire elite establishment and their policies of the last 20 or so years.

And lastly the author is dead wrong on the facts about the population decreasing in Russia. According to what I have read, Russia has begun to report positive demographic growth. In fact, Russia (and Ukraine, Belarus, etc.) is among the few European countries with positive birth-rate growth. It is true that Russia has a high mortality rate, but the generation dying currently were born during the 1930's and 40's. Much of this population did not have basics like baby's milk or proper food and were living under severe trauma from the Nazis and the policies of Stalin. Babies exposed to malnutrition may have shorter life spans which now is affecting Russian demographic statistics. But this does not take into consideration the health of young people today who will most certainly enjoy longer life spans.

The Economist and rest of the commentariat love to preach about how Russia is just dying off when it is the West that is really dying off - literally with negative demographic growth in the United Kingdom and all the rest of the major Western nations. It is true, that Russia will need to increase its population in order to survive the realignment of the world order, and that is still to early to tell if Russia will succeed in this arena. While Russia is at least trying to address this problem, the West has not even acknowledged that this as a problem.