July 1st, 2010

Gloomy economies and the status quo

Cloudy Precipice / Tom Burgher Gallery

Despite the recent spate of international news over the past week, from the hamburger summit in DC to the G20 in Toronto to Russian spies in Suburbia USA, underlying global economics has not changed and talk of a double-dip recession has revived. Even the dreaded “d” word was uttered by NYTimes’s Paul Krugman in his assessment of the US economy. Signs of a global weakening is evidenced by the fall in world equity indices, weak US home sales and China’s manufacturing growth is weakening as its government reduces stimulus. Debate rages on the effects of deficits on the economy. While the two sides debate the merits of deficit reduction over stimulus spending, the world economy feels like it is again at a precipice.

In the most recent Reuters’ Russian analysis, three factors remain unchanges from their last report in April: oil prices, political risk and insurgency. For the 2010 budget the Kremlin used a $75 barrel estimate, but with crude oil prices falling under $73 a barrel, the Kremlin may have to return to the capital markets trough and isuue more debt to cover budget deficits.

Medvedev understands the need for Russia to diversify its economy and made a major international push last week with his visit to Silicon Valley. However, it still remains to be seen how the power struggle is resolved. The 2012 presidential election presents political risks for investors and many anaylsts predict that:

Russia is unlikely to lure the level of investment or international support it deserves as long as Putin and his ensemble remain publicly engaged.

With the tandem leadership jostling for advantage, it remains to be seen if Medvedev’s push for modernization can resist the pull of Putin. In addition to a change of guard in the Kremlin, Reuters cites the release or acquittal of Mikhail Khodorkovsky as a sign of liberalization and a “bellwether” of Russian policy.

However, current signs point to the status quo as the authorities refuse to investigate into the suspect death of Hermitage Capital’s Sergey Magnitsky in pre-trial detention.

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