The Standard

Week in Review

  **** The previous week's Russia-EU summit ended with unresolved disputes over Russian investment in the EU energy markets and the planned US missile shield in central Europe.

**** In a joint letter published in French and German newspapers, the French and German foreign ministers warned that a Russia's planned withdraw from the Conventional Forces in Europe Treaty (CFE) may provoke an arms race.

The ministers referred to the "specter of a new Cold War."

**** Russia placed restrictions on the number of international monitors it would allow into the country to observe the December parliamentary elections. The monitoring agencies called the move "unprecedented."

**** The Chinese company TEDA reached an agreement with Egypt to build an industrial zone near Suez that is expected to pull in $2.5 billion in Chinese investment.

The deal is another tie forged in a growing economic partnership between the two nations.

China and Egypt in $2.5 Billion Deal

Chinese Company to Manage Industrial Park Near Suez

China has reached an agreement with Egypt to set up an industrial zone near Suez that is expected to attract $2.5 billion in Chinese investment.

The park will be managed, financed and developed by the Chinese company TEDA.

TEDA will develop the zone over the next ten years and combine a range of industries including textiles, electronics and auto parts.

Egyptian Reforms

The industrial zone deal is part of the Egypt's larger goal of attracting more foreign direct investment into the country.

Egypt has cut its corporate tax rates from 40% to 20% over the past two years and lowered its customs charges from an average of 15% to 7%.

These reforms coupled with others have had their intended effect.

Egypt attracted a record $6.1 billion in foreign investment during the last fiscal year.

This year's number is expected to top $10 billion.

China and Egypt

The industrial park deal is another piece of what seems the beginning of a win-win partnership between Egypt and China.

Egypt is seen as a base for Chinese production of exports to Europe -- a market Chinese companies surely have their eyes on.

In return Egypt gets the infrastructure development that comes along with cheap and abundant Chinese capital.

China recently gave $200 million dollars in soft loans to Egyptian companies who purchased production lines and other equipment from China.

Egyptian politicians have hailed the deals and called for more.

Russia To Institute Price Controls on Food

Prices Frozen Until End of the Year

The Russian government has reached an agreement with food retailers and manufacturers to freeze the price of certain types of bread, milk, eggs and vegetable oil until the end of the year.

Russia has seen the price of food rise considerably this year.

The sharp rise poses a domestic political problem for Russian president Putin, as the majority of the Russian population lives off of small incomes and meager pension checks.

Increased prosperity during the president's term is also the main rallying point for United Russia, the pro-Putin party that dominates all levels of Russian politics.

The government has officially called the price control programs "voluntary," but retailers have said government officials made the decision without any preliminary negotiations with the food industry.

The Financial Times quoted one food company executive as saying: "“We were told in no uncertain terms that we have to freeze prices on certain products."

The authoritarian solution has reminded some journalists of Soviet price-fixing.

Global Food Inflation and Dollar Plunge Pose Challenges

Global food prices have risen sharply across the globe over the past several months.

Floods, droughts and increased demand from growing urban populations and the biotechnology industry have sparked price hikes in milk, pasta, bread and vegetable oil.

The fight to keep food prices down in emerging economies like Russia has been complicated by the plunge of the dollar.

The rapid strengthening of the ruble against the dollar has hurt Russian exporters and companies with high export revenue have urged the government to moderate the currency's rise.

Russia has done this chiefly by buying dollars.

But weakening the ruble in turn makes food imports more expensive.

This means higher food prices for the Russian consumer.

EU and Russian Experts to Discuss Energy Markets

Talk Will Center On Russian State-Run Monopoly

The EU and Russia have agreed to organize a group of experts to discuss recent EU energy market reforms.

In September, the European Commission put forward proposals to "unbundle" the European energy sector.

In what has become known as the "GazProm clause," the proposal laid down criteria for foreign investment.

The proposals makes it illegal for companies to control both the production and transport of natural gas.

In addition, foreign companies can only invest if their home country gives the EU reciprocal access to their domestic energy market.

The rules effectively block the Russian state monopoly GazProm from buying into the European market.

 

Gas and Politics

Russia has regularly been accused of using GazProm to exert political leverage on other countries.

Earlier this month, GazProm abruptly announced a $1.3 billion dollar unpaid debt and threatened to cut off gas supplies to the Ukraine shortly after Yulia Tymoshenko's pro-West party took  an unexpectedly high number of seats in Ukrainian parliamentary elections.

While the Ukrainian government expressed surprise, experts questioned how such a large debt could build up without anyone noticing.

Then the Russian prime minister said one week later that the debt was $2 billion.

Thereafter pro-Russian ministers of the soon-to-be opposition party reached a settlement with GazProm of which details are still unclear.

Russian Nationalization

There has been general unease in the United States and Europe as Russia has moved away from a market-based economy in key sectors.

Early last week President Putin introduced legislation that will create yet another state-owned industrial giant, Rostechnologii, that will absorb Russia's largest car manufacturer and VSMPO-Avisma, a key international exporter of titanium.

Equal Access

When asked about providing equal access to Russian energy markets after a meeting with the EU Energy Commissioner on Tuesday, Russian energy minister Viktor Khristenko did not directly answer the question.

"We have the opportunity to participate in the development of various sectors of energy in Europe by means of joint projects with partners in Germany, Italy and France - wherever we've got this mutual level of understanding among partners," he said.

"We hope new initiatives, which are being drawn up by the European Commission, will not in any way represent an obstacle to these aims."

Democratic Nations to Address Sovereign Wealth Funds

Sovereign Wealth Funds Spark Government Action

The US, France and Germany are reported to be acting separately to address the political threats of sovereign wealth funds both within their respective borders and across the globe.

Sovereign wealth funds are pools of foreign capital acquired and invested by governments.

They are a relatively new occurrence and there are few mechanisms in place for regulating how they invest.

China, Russia, Venezuela and Kazakhstan (among others) hold such funds.

The funds' assets are enormous.

They are currently estimated to control $1.5 to $2.5 trillion dollars.

Morgan Stanley has estimated that this number will balloon to $12 trillion by 2015.

Concern in the US and Europe

US, French and German lawmakers have all expressed concern that the funds will position themselves to take over companies in strategic sectors of western economies.

The fact that the funds are controlled by governments means that their goals will not merely be business-oriented, but motivated largely by geopolitical interest.

The US will call for tight IMF regulations on the funds at the G7 conference in Washington, DC later this week.

France is reported to be working on legislation that would give the French government power to protect French industrial giants from take over.

The German chancellery has two large groups working on legislation would require increased transparency and give the government power to block deals after a review.

Sources also say that Japan will come out as an ardent supporter of the US proposal at the G7.

Putin To Nationalize Key Russian Industries

New State Corporation Likely To Be One Among Many

Russian President Vladimir Putin has introduced legislation before the Russian parliament that would nationalize key sectors of the Russian economy.

The legislation calls for the creation of a state-owned corporation, Rostechnologii.

The corporation will own its own assets and its managers will be appointed by the president of the Russian Federation.

The new state-owned giant will control the Russian military-industrial sector.

It will also absorb the largest Russian car manufacturer, OAO Avtovaz and the titanium-maker VSMPO-Avisma.

VSMPO-Avisma is a key supplier to the American company Boeing.

The Russian parliament is dominated by President Putin's party and it is all but certain that the legislation will pass.

Plans are also being drafted in high Kremlin circles to nationalize the arms-trading, shipbuilding, and atomic energy sectors, among others.

Russia Concentrates Political and Economic Power

Putin's move comes on the heels of what analysts considered an attempt by the Russian gas giant GazProm to complicate the formation of the new Ukrainian government.

Experts believe GazProm threatened to cut off Ukrainian gas supplies on the basis of invented debts in hopes the public spectacle might bolster the strength of the outgoing (Pro-Russian) parliamentary bloc.

The Putin government has continually operated far outside of American and European standards for the separation of state power and the market economy.

Government pressure in August led the last remaining independent oil entrepreneur in Russia, Mikhail Gutseriev, to surrender his 100% stake in the $6 billion company Russneft and flee the country.

Week In Review

Putin Shows His Hand, France Stays Tough on Iran

**** Citigroup and UBS announced large write-downs in assets tied to sub-prime securities.

They are two of many American and European banks who took multi-billion dollar hits on their balance sheets as the sub-prime crisis ripped through global credit markets during the third quarter.

**** Russian President Vladimir Putin accepted United Russia's invitation to head its list of candidates in the 2007 Russian parliamentary 'elections.'

Experts see this as Putin's first step on the road toward preserving his power through the office of prime minister.

**** Russian state-owned oil giant GazProm threatened to cut off Ukrainian gas supplies if the Ukrainian government did not pay a $1.3 billion debt by November.

The announcement was shrouded in confusion.

Analysts saw it as a Russian attempt to complicate the formation of a Tymoshenko-led government on the heels of close parliamentary elections in the Ukraine.

**** French Foreign Minister Bernard Kouchner strongly urged his European counterparts to consider EU-wide sanctions against Iran to halt its "nuclear defiance."

Italy, Austria, and Germany expressed reservations.

Russian GazProm Threatens Ukraine With Gas Cuts

Threats Come On Heels of Ukrainian Elections

State-owned gas giant GazProm announced Tuesday it would cut gas supplies to the Ukraine if a $1.3 billion dollar debt was not paid by the end of the month.

The announcement came after elections in the Ukraine seem to have paved the way for a coalition in parliament between blocs headed by Yulia Tymoshenko and Viktor Yushchenko.

Such a coalition would see Ms. Tymoshenko replace Viktor Yanukovich as prime minister.

Mr. Yanukovich and his Regions party are widely seen as pro-Russian.

Ms. Tymoshenko and Mr. Yushchenko led the Orange Revolution in 2004 and 2005. They are generally seen as pro-West.

General Confusion

The GazProm announcement and its aftermath have caused general confusion.

A spokesman for the Ukrainian gas company NaftoGaz told the AFP: "We don't understand what GazProm means. We don't understand where [the sum] came from."

GazProm has said that the debts have been piling up since June.

The situation was later complicated on Wednesday when GazProm announced a settlement after a meeting with ministers from the Yanukovich government.

Few details were disclosed.

GazProm said merely that the current government would "take control" of the problem.

Russian Interference

Many analysts have speculated that the GazProm announcement was an effort by the Kremlin to complicate the transition to power for Ms. Tymoshenko and her pro-west party.

GazProm is state-owned and its senior management is comprised of ex-KGB officers believed to have close links with President Putin.

The government has acknowledged the geopolitical leverage it holds with its energy industry in its domestic campaigns for nationalism.

A history-teaching manual endorsed this summer by the Kremlin read in part:

"The development of the global political process will depend on Russia's decision on where to send its oil and gas. It's enough to deprive a rival of energy for development – in the geopolitical battle, such an act could be a defining moment."

Citigroup and UBS To Take Third Quarter Hits

Citigroup has issued a profit warning and European giant UBS has announced an unexpected loss in the third-quarter.

The disappointing news is largely a result of the sub-prime crisis in the US and the freeze in the credit markets that has followed on its heels.

Citigroup said it expected its third-quarter earnings down 60%.

This drop includes a $1.3 billion loss on securities tied to sub-prime loans.

When millions of sub-prime borrowers in the US defaulted on their mortgages this summer, securities linked to these mortgages became next to worthless.

The drastic change in value has led large banks across the world to write down the value of these securities.

UBS warned of an unexpected loss due to a $3.42 billion drop in the value of such securities.

It also announced the decision to cut 1,500 jobs and re-position members of upper management.

Many economists have predicted that the sub-prime and credit market crises will spark job loss as companies cut costs in the face of losses.

Many fear a cycle that hurts global growth as consumers in the US and Europe spend less, spurring losses outside of the financial sector.

Week In Review

Climate Change, A French Hard Line on Iran, and Kazakh Oil

**** Former US President Bill Clinton said that bold investment in technologies for combating global warming  would help US growth.

Mr. Clinton called for US companies to mobilize economic resources on a level not seen since World War II.

****Secretary General Ban Ki-Moon opened the UN Conference on Climate Change with calls for world leaders to take responsibility for reducing carbon emissions.

US President George W. Bush was notably absent.

****France reiterated its tough stance on Iran's nuclear program.

French President Nicolas Sarkozy told the UN General Assemnly that the possibility of an Iranian nuclear weapon was an  "unacceptable risk" that threatens international stability.

****Western companies cringed as Kazakhstan looked set to pass a law that gives the government authority to change or break contracts with foreign energy firms unilaterally.