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Thread: The Russian economy (catch all)

  1. #41
    Council Member Firn's Avatar
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    A bit more on the Russian gold reserves. They should have achieved overall a net gain in markte price over cost. 2011 and 2012 hurt of course.






    At market price they have roughly $ 50bn in gold. Keep in mind that they went through almost half of that in cash in only two weeks and just slowed the fall of the ruble.



    The three sovereign wealth funds combined had in 2012 roughly a captial of $ 190bn. $ 10bn was ideally allocated into risk-free Russian assets.

    Kirill Dmitriev is on a one-man mission to change Russia's image in the eyes of world investors. The 38-year-old graduate of Harvard and Stanford runs Russia's newest sovereign wealth fund—the $10 billion Russian Direct Investment Fund.

    ....

    "Many people have misperceptions about Russia, and they feel the risk is greater than it really is," Dmitriev told CNBC. "So we put the (Russian) government's money alongside other investors' to make sure they are comfortable and understand that Russia can be an attractive investment destination."
    I'm pretty sure that the last weeks have been pretty tense in the Bank Rossii and the SWF. It is pretty likely that they moved already most of the US treasuries out of the US.

    Maybe they have already started to sell at a steady pace...
    Last edited by Firn; 03-14-2014 at 10:30 PM.
    ... "We need officers capable of following systematically the path of logical argument to its conclusion, with disciplined intellect, strong in character and nerve to execute what the intellect dictates"

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    Speech at the Kriegsakademie, 1935

  2. #42
    Council Member Firn's Avatar
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    Quote Originally Posted by OUTLAW 09 View Post
    Firn---the Russian Foreign Ministry claimed late last week they could hold up under sanctions as they had over 500B in foreign currencies---any evidence of that?

    They would say that wouldn't they?

    I think it is important to grasp the basic concepts of a central bank and it's relations to the economy. In general in very rough terms the central bank is there to:

    a) help keeping the economy of your country on track
    b) handle the technical trade stuff to allow the goods to flow

    There is a rather long list of things a country and the central bank itself can do to keep going and to lessen the fall of it's currency. However the further down you go that list and the more forceful some of those actions are the more you tend to hurt your economy.

    It seems for example the Bank Rossii has shifted most of it's US gov bonds (treasuries) out of the US and might have already started to sell to get some USD in cash, which they likely need after suffering a cash outflow of $ 21+ bn. As of December the had almost $ 140 bn of them deposited at the Fed. This has per se no effect at all on the Russian economy, but without enough reserves Russia will be no longer able to pay it's many imports. They burned so far through their cash at a surprising rate. Thus the Russian Central Bank, anticipating some of trouble coming it's way has used a two-pronged strategy, selling $ reserves and increasing interest rates.

    However raising those rates by the considerable amount of 150 bp does reduce demand in an already weak economy. Now they stated if I recall that the won't go up further but this of course depends on how their ruble and their asset side of the balance sheet is doing. If they have to sell too much $ too quickly they might impose capital controls and increase the rates. So instead of having a central bank doing it's thing to help the economy the economy has now increasingly to pay to keep the central bank (and thus itself) going.

    So the key question is how much damange do they have to inflict on their economy to avoid a meltdown of their balance sheet?


    P.S: Earlier I ridiculed the idea of some Russian nationalist who imagined that he could inflict some damage on the Western economies by eliminating the dollar as their foreign reserve. Predictably the Crimean Crisis has led to money going into the safe havens, or gov. bonds of Western countries like the US, Germany, UK and so on.

    “Treasuries, bunds and gilts lead in this kind of move,” Steven Major, head of global fixed-income research at HSBC Holdings Plc, said in an interview on Bloomberg Television’s “Countdown” with Mark Barton and Anna Edwards. “It’s very difficult to imagine a scenario whereby everyone just kind of kisses and makes up, so on Monday morning it’s not going to be a case of everything’s fine. It’s either going to be very very bad, or very bad.”

    German 10-year bund yields fell as much as four basis points to 1.50 percent, the lowest since July, and U.K. 10-year gilt yields dropped as much as five basis points to 2.64 percent.
    So at the same time that the Russian Central Bankers have to damage their economy and sell their reserves to slow the fall of Ruble their important Western counterparts are 'forced' to sell their bonds more dearly as so much money is wanting to buy them.

    It is the old problem of Russia, if the big money wants security it isn't coming in, it's leaving. And it even does decrease the price it's rivals have to pay for their debt....
    Last edited by Firn; 03-15-2014 at 12:39 PM.
    ... "We need officers capable of following systematically the path of logical argument to its conclusion, with disciplined intellect, strong in character and nerve to execute what the intellect dictates"

    General Ludwig Beck (1880-1944);
    Speech at the Kriegsakademie, 1935

  3. #43
    Council Member Firn's Avatar
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    At the end of the week the FT run a good story about Russian companies bringing their capital back home:

    Russian companies are pulling billions out of western banks, fearful that any US sanctions over the Crimean crisis could lead to an asset freeze, according to bankers in Moscow.

    Sberbank and VTB, Russia’s giant partly state-owned banks, as well as industrial companies, such as energy group Lukoil, are among those repatriating cash from western lenders with operations in the US. VTB has also cancelled a planned US investor summit next month, according to bankers.
    This mirrors the very likely pull of a $ 100bn by the Bank Rossii out of the US. The article rightly talks about the fear of asset freezes, but there is in my opion more to it and this refers to the balance sheet of the Bank Rossii, the state control/influence over big Russian companies and the fall of the Ruble.

    A flow out of assets in the West to Russia does increase demand of the Ruble and help the Bank Rossii to get strenghten it's balance sheet with western currencies. So it is supported it's currency policy in two ways. Personally I think the key issue here is how much the Ruble did fall, despite the rate rise, despite the $ 21+ bn thrown into the market and despite that large capital pull by partly state-owned companies.

    Traders and bankers said US banks had been particularly heavy sellers of Russian bonds. According to data from the Bank for International Settlements, US banks and asset managers between them have about $75bn of exposure to Russia.

    Joseph Dayan, head of markets at BCS, one of Russia’s largest brokers said: “It’s been quite an ugly picture in Russian bonds the last few days and some of it has to do with international banks reducing exposure.”
    Indeed it wasn't pretty:



    I think there is still a lot of room left for bond yields to increase if the situation just stays the same. Generally the longer the crisis last the harder it will be for the Russian economy. There are of course some Western companies who already built plants and bought much property, but there is still a great deal of capital which can rather easily flow out.

    It is interesting to take a look at the last 14 years:




    @Outlaw 09: I asked the same poster twice for sources and arguments to make his case but he didn't deliver. So I wasn't surprised to see much of the same happening to you...
    Last edited by Firn; 03-16-2014 at 11:33 AM.
    ... "We need officers capable of following systematically the path of logical argument to its conclusion, with disciplined intellect, strong in character and nerve to execute what the intellect dictates"

    General Ludwig Beck (1880-1944);
    Speech at the Kriegsakademie, 1935

  4. #44
    Council Member Firn's Avatar
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    A bit more on the capital flight from Russia, which looks like to be considerably higher then the capital inflow. Keep in mind that due to the accounting logic of the Balance of Payment some capital will naturally flow out as long as Russia continues to run a trade surplus (the other factors canceling each other out).

    LONDON — Capital flight from Russia has risen sharply since the start of this year to $45 billion to $50 billion, Goldman said, predicting full-year outflows could be as much as $130 billion, or double 2013 levels.

    Goldman said its calculations show capital outflows have jumped 60 percent from year-ago levels as the economy slows and the threat of Western sanctions bites. It also slashed its forecast for Russian economic growth this year to 1 percent.
    Interesting to note that roughly 2/3 of the overall sum of BR's interventions was spent in the last two weeks. BTW you can see the accounting logic at work:

    Goldman based its capital flight calculations on estimates of a $25 billion current account surplus in the first three months of the year and around $30 billion in foreign exchange interventions by the central bank.
    On the Russian macro front:

    Regardless of whether the Kremlin is irrational or simply uninformed, its policy in Crimea sends an unmistakable signal to investors: Russia's political leaders are impossible to predict. This will further undermine Russian and foreign investors' confidence and increase capital flight, which could not come at a worse time. With credit-fueled consumer spending, the engine driving GDP growth since 2010, now running out of steam, the economy is stagnating.
    It is very hard to see how the Russian government can avoid a (deep) recession if the crisis continues for (months) weeks. Lots of shocks hitting the economy at the same time just as the monetary policy is forced to move into the wrong direction and fiscal policy will very likely be quite costly to finance...
    Last edited by Firn; 03-16-2014 at 08:03 PM.
    ... "We need officers capable of following systematically the path of logical argument to its conclusion, with disciplined intellect, strong in character and nerve to execute what the intellect dictates"

    General Ludwig Beck (1880-1944);
    Speech at the Kriegsakademie, 1935

  5. #45
    Council Member mirhond's Avatar
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    Quote Originally Posted by Firn View Post
    It is very hard to see how the Russian government can avoid a (deep) recession if the crisis continues for (months) weeks. Lots of shocks hitting the economy at the same time just as the monetary policy is forced to move into the wrong direction and fiscal policy will very likely be quite costly to finance...
    Poor us.
    You are still deliberately ignoring the fact that we have lived with ####ed-up economy for 15 years. Almost everyone out there understand that all this burgeous pleasantries are temporary, almost everyone either have Plan B if things become hairy, or just don't care about future. We are tempered with endless economic fails, inferior governance and suffocating aura of lies. Even the food, water and electricity rationing won't destroy this system.
    Last edited by mirhond; 03-16-2014 at 09:29 PM.

  6. #46
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    Firn---in comments yesterday by a former Russian Finance Minister the Russian budget this year was targeting a growth rate of 3.5% and if sanctions are imposed he is saying the growth rate may in fact be 0% and the Crimea costs were not factored in and approved for this year.

    Average Russian taxpayer will be carrying the Crimea burden for years to come.

    He indicated that there is talk of 80-90M USD per month in just support to keep the Crimea running and the Crimean's felt that with joining Russia their individual salaries would be going to Russian levels (was posted on placards around the cities) which is also not in the budget that was approved so he is estimating an annual cost of 20B USD per year just to do a steady state.

    Reference an economic embargo---he feels it will not happen but worse for Russia is they the EU knows exactly where to place "specific targeted sanctions" against specific business types and products that will in a relatively short period hurt the economy baldy and they will do it as they feel the entire world community condemns what Russia has done and Russia is in effective politically isolated and has to take the hits.

    His comment was interesting---the EU understands our economy better than we do.

  7. #47
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    Firn---check the outflow of Russian capital to western banks for repayment of debt---in Jan it was some say over 17B and for this quarter they are talking about well over 50B---outstanding bank debt to be repaid seems to be in the 608B range.

  8. #48
    Council Member Firn's Avatar
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    Financial Times
    ‏@FT: 2% of London's luxury house buyers are Russian. So UK will find imposing sanctions tough: http://on.ft.com/1nFLV9e pic.twitter.com/infrAjTBwP
    Is this 'tough' ironic or are you kidding me? 2%? Of the luxury market, of London? Make it 20% and it still at most 0,1%something of the UK housing market alone...
    Last edited by Firn; 03-20-2014 at 07:00 PM.
    ... "We need officers capable of following systematically the path of logical argument to its conclusion, with disciplined intellect, strong in character and nerve to execute what the intellect dictates"

    General Ludwig Beck (1880-1944);
    Speech at the Kriegsakademie, 1935

  9. #49
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    Interesting Russian news take on the latest round of US sanctions from Interfax.com.



    20:32

    KREMLIN SAYS CAN'T ACCEPT SANCTIONS LIST PRACTICE IN PRINCIPLE

    20:30

    KREMLIN SAYS RUSSIA WON'T TAKE LONG TO REACT TO U.S. SANCTIONS

    20:29

    MOSCOW STUDYING U.S. SANCTIONS LISTS, BEWILDERED BY SEVERAL NAMES - PESKOV

    20:26

    NATION CLAIMING TO BE DEMOCRATIC IMPOSES SANCTIONS FOR HONEST POSITION, HONEST STATEMENTS - RZD CHIEF YAKUNIN

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    Firn---something that came out of the EU meeting yesterday night and I must thank Putin for it---the EU is starting the analysis on reducing Russian gas and oil purchases starting already in 2014.

    They made that public enough for Russia to understand.

    Putin got the EU to wake up and realize that if they shared their own gas/oil abilities across their individual borders which they can as they have built a massive distribution system since 2009 they could 1) reduce Russia purchases/dependency, and 2) actually reduce gas and oil prices for EU citizens across the board making it a win win thing.

    Great that Putin is going to lower my yearly gas bill----

  11. #51
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    Can Europe survive without Russian gas?
    - replacing 130 bcm of natural gas imports from Russia within a year would be a significant challenge, but not impossible

    by Georg Zachmann on 21st March 2014
    http://www.bruegel.org/nc/blog/detai...t-russian-gas/

  12. #52
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    Firn---here is an indication that the sanctions are slowly winding it's way through the Russian economy when just one bank is initially hit.

    Interfax:

    21:27 Fitch revises Gazprom's, Russian Railways' issuer default rating to "negative"

  13. #53
    Council Member Stan's Avatar
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    Just a quick thought herein.

    Vova doesn't give a Sierra about his own and anyone that has been to Moscow will immediately see that.

    If we think he feels some remorse with Russian Railway ratings, then think again.

    In 2007 he decided to show Estonia just how far he would go by shutting down rail transit to the Muuga Harbor. He can cut off 97% of all rail which will effectively slam shut business here and trash his profits.

    Western mindset will not get the West anywhere.
    If you want to blend in, take the bus

  14. #54
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    Stan---maybe this is something Firn will like---look at the bank that was hit with sanctions---Rossija Bank---held a large number of Gazprom accounts as well as the Rail company companies but I am assuming Gazprom fronted for a number of bank loans to the Rail company as that is a typical Russian mob move to scram money off of bank lines of credit.

    On Interfax the initial Gazprom reaction to the bank being sanctioned indicated that nothing would effect their accounts.

    If one understands that the US federal financial law now on the books literally dictates what US banks with federal sanctions notices have to do --they have honed their skills on Iranian banks. Anything or anyone tied to the bank and or the individuals named can be chased.

    What the Russians initially assumed was that the sanctions would only affect one if the individual owned more the 30% of something---under US law that is not the case---thus the Fitch downgrading to negative which will hurt bank credit lines from foreign banks which is the center of gravity for Russian companies.

    Rossija today made the announcement that recommended none of their clients should make or withdraw any foreign currency--think now they fully understand that the US banks will chase the money via the money trail.

    Interfax: 12:44 Bank Rossiya asking clients to refrain from making foreign currency payments
    Last edited by OUTLAW 09; 03-24-2014 at 09:03 PM.

  15. #55
    Council Member Firn's Avatar
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    @stan: I have no doubt that in Vladiromics great scheme the ratings of railway bonds count not that much. Still economic turmoil in Russia will get his attention.

    Also, with all due respect to the Estonian port, it's economic impact pales with the numbers currently at stake.

    @Outlaw09: We will have to see how deep and broad financial sanctions will become, but I'm sure that those are interesting days for wealth managers in Russia. Perhaps the Bank Rosija also wants to keep it's foreign reserves close at it doubt that it will be easy for it to get more.

    This German interview with the vice CEO of the DHIK is in my opinion quite revealing about the mood of German investors in Russia. In the past it has almost always been 'business first', but now he talks rather resigned about the primacy of politics. I'm looks like that behind the scenes the German leaderhip has made it pretty clear to the business community that this time it is different. Investments have been delayed and some binned, partly because German banks see more risks. This means at best higher interests which will make some investments questionable and others less attractive. I'm pretty sure that most German investments are mostly financed by German not Russian banks.

    An article with a handy graph about the companies with the highest percentage of their revenue coming from Russia.

    The closer the ranks between the industrial powerhouses on sanctions are the more difficult it will to play, let us say Siemens against Bombardiers. Reducing the flow of knowhow and capital into the Russian economy will hurt a lot.
    Last edited by Firn; 03-24-2014 at 09:49 PM.
    ... "We need officers capable of following systematically the path of logical argument to its conclusion, with disciplined intellect, strong in character and nerve to execute what the intellect dictates"

    General Ludwig Beck (1880-1944);
    Speech at the Kriegsakademie, 1935

  16. #56
    Council Member Firn's Avatar
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    Capital controls feared in Russia.

    Capital flight from Russia has spiked dramatically since President Vladimir Putin first sent troops into Crimea and may reach $70bn (£42bn) over the first quarter of the year, prompting fears that the country may soon have to impose capital controls to stem the loss.

    ...

    “It is shocking,” said Bartosz Pawlowski from BNP Paribas. “Markets have been extremely complacent, fooling themselves that Russia is invulnerable because it has almost half a trillion in foreign reserves. But reserves can become almost irrelevant in this sort of crisis.”

    Lars Christensen from Danske Bank said the authorities may resort to some form of financial coercion to lock down funds in Russia. “Capital controls are a serious risk, and should not be discounted. Whatever now happens, there has been permanent damage to the Russian economy because investors are not going to forget this lightly.”
    Capital controls are one of the last lines of defense for your foreign currency reserves and for very good reasons as the slap considerable costs on your economy. The more open the economy is, the higher they become. There are of course some situations were capital controls are a must, like in Iceland in it's banking meltdown.

    To get a grasp of the dimensions we are talking about it is important to remind us that Russia is a $ 2,000bn economy with a $ 200bn trade surplus in goods.



    Keep the accounting logic in mind I explained before. I would not be surprised anyway that we will see a capital flight north of $ 150bn if the crisis continues.

    The scale of capital outflows leaves the Russian government in a quandary. The central bank has already raised interest rates by 150 basis points to prevent a collapse of the rouble, but this is choking the economy.

    “If rates stay this high for another two or three months, there will be serious trouble,” said Mr Pawlowski. “There is no free-lunch. You can defend your currency, but if you do that you wreck your economy,” said Mr Pawlowski.
    I just quoted it because Mr Pawlowski repeats a key problem for Russia which I mentioned earlier. In normal times the central bank does it's monetary policy to help the economy. Now the economy has to suffer to help the central bank to defend it's reserves...
    ... "We need officers capable of following systematically the path of logical argument to its conclusion, with disciplined intellect, strong in character and nerve to execute what the intellect dictates"

    General Ludwig Beck (1880-1944);
    Speech at the Kriegsakademie, 1935

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    Although Russians seem to think the sanctions will not hurt Interfax carried today nothing but economic PRs---there seems to be an apparent disconnect within their nationalism among the general public vs the business elites.

    13:29 Russians do not fear Western sanctions - poll


    15:30 Shuvalov: Russian gov't has plan of action in the event of strong economic decline

    15:28 World Bank sees capital outflow from Russia at $85 bln this year, but $150 bln possible (Part 2)

    15:24 World Bank: Russian bank sector sanitization welcome; Central Bank needs clear criteria

    15:21 Bashneft minority shareholders offer buy-out at 26.4 bln rubles, company may buy up a third less

    15:06 World Bank cuts Russian growth forecast, sees GDP decline in 'shock' scenario

    15:04 No ban on buying foreign software, but cos should chose partners carefully – ministry

    14:39 S&P downgrades Atomenergoprom 'BBB' rating outlook to 'negative'

  18. #58
    Council Member Firn's Avatar
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    The Soviet Collapse, an article in 2007 by Yegor Gaidar.

    Yegor Gaidar is director of the Institute for Economies in Transition in Moscow. Between 1991 and 1994, he was acting prime minister of Russia, minister of economy, and first deputy prime minister. Between 1993 and 2003, Gaidar was a founder and a co-chairman of the Russia's Choice and the Union of Rightist Forces Parties, and a deputy of the State Duma.
    That second part of that quoted text caught my eye immediatly:

    There were several factors which pushed me to write this book. The first was the rise in oil prices, which in real terms have started to approach the level of the late Brezhnev period. The second was the disturbing tendency to mythologize the late Soviet period in current Russian society and popular culture. These myths include the belief that, despite its problems, the Soviet Union was a dynamically developing world superpower until usurpers initiated disastrous reforms. At least 80 percent of Russians are convinced of this flawed interpretation of history.

    Historically, such myths have a dangerous precedent--namely, Germany between World War I and World War II. Then, the legend went that Germany was never defeated in the war, but "stabbed in the back" by the Jews and the Socialists. To some degree, the responsible party was the democratic German government, as it was unprepared to publish materials about what really happened before and after World War I.
    The notion that the high hard income from the oil shock prices set bad incentives far higher public spending, the Afghan adventure and misallocated investment sounds plausible. This imperial overspending made the whole system inreasingly vulnerable to low revenue due to higher production costs and lower market price.

    In 1985 the idea that the Soviet Union would begin bargaining for money in exchange for political concessions would have sounded absolutely preposterous to the Soviet leadership. In 1989 it became a reality, and Gorbachev understood the need for at least $100 billion from the West to prop up the oil-dependent Soviet economy. According to chairman of the State Planning Committee Yury Maslyukov:

    We understand that the only source of hard currency is, of course, the source of oil. . . . If we do not make all the necessary decisions now, next year may turn out to be beyond our worst nightmares. . . . As for the socialist countries, they may all end up in a most critical situation. All this will lead us to a veritable collapse, and not only us, but our whole system.[7]
    History doesn't repeat itself in the same manner but the patterns seem to emerge in a strinkingly similar fashion. So far the commodity prices are still high, and the Europeans are still buying Russian gas.



    It seems that the 'Russians' had recently the tendency to invade non-aligned countries right after another all-time high oil prices. 1979, 2008, 2014...
    Last edited by Firn; 03-26-2014 at 02:04 PM.
    ... "We need officers capable of following systematically the path of logical argument to its conclusion, with disciplined intellect, strong in character and nerve to execute what the intellect dictates"

    General Ludwig Beck (1880-1944);
    Speech at the Kriegsakademie, 1935

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    This is an interesting PR as there were some who said that prior to sanctions the economy might not break over 0% GDP for this year if the sanctions came in which hurts badly the general population as the economy has been struggling in a recession for the last year. Inflation was also anticipated to be in the 5-6% range.

    16:44 HSBC cuts Russian GDP growth forecast to 0.6% in 2014, to 1.2% in 2015

  20. #60
    Council Member Stan's Avatar
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    Quote Originally Posted by OUTLAW 09 View Post
    Rossija today made the announcement that recommended none of their clients should make or withdraw any foreign currency--think now they fully understand that the US banks will chase the money via the money trail.

    Interfax: 12:44 Bank Rossiya asking clients to refrain from making foreign currency payments
    Outlaw,

    Imagine who would want all those Rubles

    Furthermore, according to this Reuters article:

    Kovalchuk said in a television interview on Sunday the sanctions had backfired by helping him win new clients among patriotic Russians. Russian President Vladimir Putin said last week that he would open an account at the bank.
    Quote Originally Posted by Firn View Post
    @stan: I have no doubt that in Vladiromics great scheme the ratings of railway bonds count not that much. Still economic turmoil in Russia will get his attention.

    Also, with all due respect to the Estonian port, it's economic impact pales with the numbers currently at stake.
    Firn,
    Russia has been buying up Europe and Africa for years. I've been here for 20 years and in Africa for 12 years.

    We are not talking big money. But very big money. None other than Putin’s Central Bank has estimated that two thirds of the $56 billion exiting Russia in 2012 might be traceable to illegal activities. Crimes like kickbacks, drug money or tax fraud. This is the money that posh English bankers are rolling out the red carpet for in London.
    Estonia is but a minuscule means of showing what Vova can do to tiny little countries that get in the way. But, chocking off these so-called countries is a mess for their economic development and an even bigger mess for the EU when it comes to supporting them.

    Regards, Stan
    Last edited by Stan; 03-26-2014 at 06:46 PM.
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