Friday, 14 May 2010

Russia mulls capital controls

Russia is considering imposing capital controls as Europe's debt crisis shows little sign of abating, despite a rescue package of 750 billion euros this week to save banks from the effect of bad debts to Greece, Portugal and other countries.

Russia could penalise investors with horizons less than three years, instead giving "privileged status" to those holding Russian assets for longer than three years, First Deputy Prime Minister Igor Shuvalov told a conference in London on Tuesday.

A flight of capital from the euro zone into Russia, in the event of continued high oil and other commodity prices, could lead to a new spike in inflation, which only came under control after the onset of the crisis in late 2008.

Russia could benefit in the very short term if the euro weakens, as this would cut prices for many imported goods in the country that are priced in euros, said Chris Weafer, chief strategist at Uralsib Capital. But the longer-term effect would be to curb economic growth in the euro zone, which would then have a knock-on effect on Russia.

The euro zone crisis gives Russian investors a sense of deja vu, thinking back to the 1998 default, Roland Nash, head of research at Renaissance Capital, said in a recent note to investors. "Greece, fundamentally, does not have a debt problem ... It has an economy which is not competitive at the prevailing exchange rate and which lacks the structural flexibility to become competitive," Nash said.

The IMF and the ECB are demanding huge cuts in government budgets and services in Greece, Spain, Portugal and other countries. In protest at the Greek government's austerity programme that would cut wages and pensions by up to 20 to 30 percent, last week hundreds of thousands of workers in the country staged a general strike.
Now a group of left-wing members of the European Parliament is calling for a week of Europe-wide strikes and solidarity protests on June 21-26.

Joe Higgins, a Socialist MEP from Dublin, blamed financial "hit squads - hedge funds, predatory investment banks and bondholders" for "laying siege to the Greek economy" and demanding "savage cuts in public sector wages, in pensions and tax increases."

The pressure to make unpopular cuts could force some countries to leave the euro so that they can devalue their currencies, Weafer said.

"This crisis has the potential to fracture the eurozone," Weafer told The Moscow News. "We're at a critical stage: Either some countries will leave or the eurozone will grow up."

If, as is likely, one or two countries have leave the eurozone it would lead to "almost a three-tier Europe," Weafer said, referring to a smaller euro zone, those countries like Britain that have stayed outside the euro, and the countries leaving the euro who are at risk of sovereign default. "The danger is that this bailout is not enough - and the contagion spreads into Europe's banking system."

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