Greece has been invited by Russia to become the sixth member of the BRICS New Development Bank (NDB). The $100 billion NDB is expected to compete with Western dominance and become one of the key lending institutions.
The invitation was made by Russian Deputy Finance Minister Sergey Storchak on Monday during a phone conversation with Greek Prime Minister Alexis Tsipras, according to a statement on Greece’s Syriza party website. Tsipras thanked Storchak, who’s currently a representative of the BRICS Bank for the invitation, and said Greece was interested in the offer.
“The Prime Minister thanked Storchak and said he was pleasantly surprised by the invitation for Greece to be the sixth member of the BRICS Development Bank. Tsipras said Greece is interested in the offer, and promised to thoroughly examine it. He will have a chance to discuss the invitation with the other BRICS leaders during the 2015 International Economic Forum in St. Petersburg,” the statement said.
During the 6th BRICS summit in Fortaleza in June 2014 the members agreed to forge ahead with the $100 billion NDB, as well as a reserve currency pool worth over another $100 billion. In March this year, Russian President Vladimir Putin ratified the NDB.
The new bank is expected to challenge the two major Western-led institutions, the World Bank and the International Monetary Fund. It will finance infrastructure projects in the BRICS countries and across other developing countries and is expected to start functioning by the end of 2015, with the headquarters in Shanghai.
Russia and Greece have been strengthening economic cooperation, as both countries have their own issues. While Russia is stuck in a so-called ‘sanctions war’ with the EU and the US, Greece is struggling to repay its multibillion euro debt to the troika of international lenders – the IMF, the ECB and the European Commission.
Greece is trying to find a compromise with its international creditors to have a further €7.2 billion bailout unlocked. So far Athens has been settling its IMF repayments on time. The country started repaying €750 million in debt interest Monday, but Finance Minister Yanis Varoufakis warned Greece’s finances are “a terribly urgent issue,” and the country could default by next month if no proper measures are taken.
Greece’s government has agreed a number of strategic deals with Russia during Prime Minister Alexis Tsipras’ visit to Moscow in April, including participation in the Turkish Stream project that’ll deliver Russian gas to Europe via Greece.
It was rumored Russia was ready to help Athens, but President Putin said Greece hasn’t formally asked Moscow for help. Instead of direct financial assistance Russia could help out by buying Greek state assets in privatization sales, or in other investment projects, the President said in April.
President Poroshenko’s government is far more corrupt and less efficient than the previous one, according to Martin Sieff, columnist for the Baltimore Post-Examiner. It’s like a black hole, the more money you pour in the less you will have, he added.
The International Monetary Fund (IMF) is to decide Wednesday whether to give a $17.5 billion bailout package to Ukraine. The Ukrainian parliament has already passed a series of austerity reforms to cut pensions and increase taxes in order to meet the creditors’ conditions, but more changes are going to be needed to gain this financial aid.
RT: About $4.6 billion in credit was extended to Ukraine in 2014, but its economic performance has scarcely improved. Does that mean the aid had no effect?
Martin Sieff: Pretty much yes, it does. It had the effect on keeping Ukraine afloat in the short-term. But this is an unconstitutional government in Ukraine which was really established by a violent coup in Kiev last year which has waged an aggressive war of repression against two secessionist provinces of its own country, which doesn’t have any real social contract with its own people. Its efforts to conscript large numbers of forces for the regular army have been met with peaceful but very clear resistance. This is a very weak disorganized government, it’s a black hole. The more money you pour in, the less effect you will have. You can keep it stable for a year or two but no longer than that.
RT: The IMF has agreed on a new $17.5 billion lifeline to Ukraine. Do you think that will be enough to stabilize the country’s economy even if fully implemented?
MS: The aid went at least in theory to what it was supposed to, but no doubt there was a great deal of corruption. It’s ironic that the government of President Yanukovich was accused of corruption and incompetence. This government is far more corrupt than the previous government was and it’s infinitely more incompetent. So simply money leaches away, but the real problem is the lack of credibility of governance. This government is even purging its civil service of anyone remotely accused or suspected of being efficient and loyal to President Yanukovich and his predecessors. You cannot have an efficient and credible government under these circumstances.
RT: The IMF is requesting a package of economic and political reforms to be carried out when providing financial assistance to any country. Are we seeing it carried out in Ukraine at least judging by its economic performance?
MS: No, no way. First of all, there is still unrest and violence in the two eastern provinces and spreading into other parts of the country. The security conflict and the conflict with Russia have to be settled first by this government. And they are not yet ready to settle it on terms that would be acceptable and reassuring to Moscow, but that has to be resolved first. Secondly, we saw even last year President Yanukovich broke off his negotiations with the EU, but he recognized that the terms under which the EU was ready to grant association to Ukraine would be disastrous and ruinous for the Ukrainian economy and the Ukrainian people. A year ago, the EU didn’t have the resources by itself to lift up even a peaceful Ukraine under democratically elected governance. The prospects of doing that now under President Poroshenko and his war-government, his war junta are very much less. So this would be $17 billion down the drain. You know they are all saying from Washington DC, I’m paraphrasing a little “$17 billion here, $17 billion there and soon you are talking about real money”.
RT: When signing the IMF program Ukraine makes certain financial obligations, do you think they could be committed at all in the current state of its economy or is it going to be a black hole of international aid?
MS: There is no question about that. This is very unwise economic policy that has a political motivation. The EU itself and the US government both plunged in recklessly to topple the Yanukovich government last year and to support President Poroshenko. And now we have the dominant mythology, the dominant narrative in Washington, and in Brussels, and in London is that this is “a stable democratic government which is being under threat from evil totalitarian forces to the East.” That is not the truth even remotely, but that is almost universally believed by policymakers in London and Washington and many of them in Brussels and therefore there is a political motivation to try and prop up Ukraine. But you can’t fix what’s already broken. You are pouring good money after bad. Ukraine’s problems first of all have to be solved in the security sphere then they have to be solved in the political sphere restoring the political amity and credibility and the incompetent but nevertheless stable civil service that existed until February 2014 a year ago. It was the EU and the US that broke Ukraine and they cannot fix it now by simply pouring money into a black hole.
Ukraine has agreed to increase the cost of gas to consumer by 280 percent, and 66 percent for heating, as part of the IMF terms for getting extra financial aid, says Valery Gontareva the head of the National Bank of Ukraine.
“From now on, in accordance with our joint program with the IMF, the tariffs will see rather a sharp increase of 280 percent for gas and about 66 percent for heat,” said Gontareva Wednesday during the 11th Dragon Capital investment conference in Kiev. She added that as a result inflation will be 25-26 percent by the end of 2015.
The tariff rises are part of the amendments to the 2015 budget the government has had to introduce in order to receive an $8.5 billion loan from the IMF by the end of the year.
The changes will also see Ukraine’s budget deficit growing to 4.1 percent of GDP and forecasts a 5.5 percent decline in the Ukrainian economy.
Prime Minister Arseny Yatsenyuk had warned of future price rises for gas and heating, and stressed the IMF saved Ukraine from default, and now it’s time to make moves which should eventually result in Ukraine’s complete independence from Russian gas.
The tariff increase was among the subjects Ukraine and the IMF touched upon during negotiations in January. Deputy Chairman of the Ukraine parliament’s budget committee Viktor Krivenko said the IMF had requested a sevenfold increase in prices.
The head of IMF Christine Lagarde said on February 12 that the preliminary agreement reached between Kiev and Western creditors envisages increasing the aid package to $40 billion over the next four years.
The program will help Ukraine receive an additional $25 billion in financial aid, of which $17.5 billion will be provided to stabilize the financial situation in the country.
The latest IMF program will replace the $17 billion package agreed in April 2014. Ukraine has already received $4.5 billion under that agreement, thus the total IMF loans to Ukraine since the beginning of the crisis amount to $22 billion.
The International Monetary Fund announced a new $17.5 billion lifeline for Ukraine, which would bring the total bailout package to $40 billion. The new sum would be a four-year program.
Lagarde will propose the $17.5 billion expansion program to the IMF by the end of the month.
“The program is not yet approved by the governing council. I hope to offer it for approval by the end of February,” she said Thursday.
“This new four-year arrangement would support immediate economic stabilization in Ukraine as well as a set of bold policy reforms aimed at restoring robust growth over the medium term and improving living standards for the Ukrainian people,” Lagarde said in a statement.
In return Ukraine will have to present a “program of deep economic reforms,” which includes the whole economy and a plan to transform Naftogaz, Ukraine’s state oil and gas company.
“It’s a large program, it’s a longer-term program than the previous one, which was a traditional SBA [Stand-By Arrangement] for two years,” the IMF chief said.
“It’s ambitious, it’s not without risk, but we believe it is a realistic set of macroeconomic framework, ambitious reforms, but reforms the authorities feel confident they can deliver,” Lagarde said.
IMF head Christine Lagarde didn’t answer the question as to whether the four-year international bailout program for Ukraine included credits from Russia.
“The sum includes funds from the IMF and the EU, and also bilateral and multilateral loans.”
Earlier this month, the US promised Ukraine as much as $2 billion in loan guarantees, while the EU said it would disburse €1.8 billion ($2.1 billion).
Boon to Ukraine’s economy
Ukraine’s Prime Minister Arseny Yatsenyuk stressed that the new bailout program would open sources for Ukraine to get help from other international organizations and partners, making the total sum thus $25 billion.
He confirmed the commitment to reforms that will stabilize Ukraine’s economy and finance. The country’s game plan includes fighting corruption, settling the energy sector, as well as cutting and optimizing state expenditure and increasing investment to 3 percent of the GDP, Yatsenyuk explained.
“Stabilization of the banking system and the exchange rate are also the goals of the program,” Yatsenyuk said.
“Recovery in confidence in Ukraine through the adoption of the 4–year program will be a major factor in the stabilization of the exchange rate, and an objective and strong banking system of Ukraine that will give the opportunity for Ukraine’s economy to develop,” he added.
Yatsenyuk said the government is also going to provide extensive assistance to low-income households. By the end of the year he expects it to include income indexation linked to the level of price rises. He also said the IMF program will provide $500 million for low-income families to help pay for increased energy bills.
Natives of the US, Georgia and Lithuania were hastily granted Ukrainian citizenship in order to become key ministers in the new government of Ukraine, which was approved by the country’s parliament on Tuesday.
President Poroshenko has also announced he will sign a decree to grant citizenship to foreigners fighting on Kiev’s side in the east of the country.
Natalie Jaresko of the US, who currently heads the Kiev-based Horizon Capital investment fund, will take reigns at the Ukrainian Finance Ministry.
In 1992-1995, Jaresko served as the first Chief of the Economic Section of the US Embassy in Ukraine.
Before that she occupied several economic positions in the US State Department, according to Horizon Capital’s website.
The position of health minister went to Aleksandr Kvitashvili, who occupied a similar post in the Georgian government in 2009-2012.
“Ukraine spends 8 per cent of its GDP on healthcare, but half of this money is being plundered. Aleksandr Kvitashvili must implement radical reforms as he has no ties with the Ukrainian pharmaceutical mafia,” Ukrainian PM, Arseny Yatsenuk, said as he presented the new minister to the deputies.
Alexander Kvitashvili, a candidate for head of the Ukrainian health ministry, at a session of Verkhovna Rada in Kiev (RIA Novosti / Mikhail Polinchak)
Lithuanian Aivaras Abromavicius has been approved as the economy minister by the new parliament, the Verkhovna Rada.
Abromavicius, who is a partner at the $3.6 billion-worth East Capital asset management group, conducts his operations from Kiev after marrying a Ukrainian.
“There’s hard work ahead of us because Ukraine is a very poor and corrupt country and we’ll have to use radical measures,” he told MPs from the Rada Tribune.
288 out of 450 deputies supported the cabinet proposed by Ukrainian president Petro Poroshenko, with the new ministers sworn in right after the vote.
“I congratulate the Ukrainians with the formation of the pro-European government,” Poroshenko wrote on his Twitter page.
He told the Rada that he views the foreigners as some kind of anti-crisis management need due to the difficult situation in economy, the fighting in Donbas, the necessity of radical reforms and large-scale corruption.
Earlier on the Tuesday, the president has signed special a decree granting Ukrainian citizenship to Jaresko, Kvitashvili and Abromavicius.
Aivars Abramovicus (Aivaras Abromavicius), a candidate for head of the Ukrainian economy ministry, at a session of Verkhovna Rada in Kiev (RIA Novosti / Mikhail Polinchak)
Dual nationality is forbidden in Ukraine and the trio has already written applications to give up the citizenship of foreign states, Yury Lutsenko, the head of the Petro Poroshenko Block (PPB), said.
Poroshenko said that there’ll be even more foreigners on administrative positions in Ukraine as the country “must attract the best international experience, which includes assigning positions in the government to representative of states friendly to Ukraine.”
Also on Tuesday, the MPs from Poroshenko’s ruling bloc have registered a draft law in the Rada on amending the Ukrainian legislation for it to allow citizens of other states in the government.
It had been announced by Poroshenko a week ago. This move has been dubbed “unprecedented” and attracted criticism from experts with some calling it “allegiance to the so-called European choice,” and others expressing concern that it can be a sign of Ukraine losing its sovereignty.
Poroshenko also promised to grant the citizenship of Ukraine to all foreigners fighting for Kiev against the militias in the country’s eastern Donetsk and Lugansk regions.
“I’m going to sign a decree conferring Ukrainian citizenship to those, who defended Ukraine with arms in their hands,” he wrote on Twitter.
However, not everybody in the parliament supported the inclusion of foreigners into the Ukrainian government.
Earlier, the MP from the Opposition Block said Aleksandr Vilkul suggested that by inviting people from abroad the Ukrainian authorities are trying to absolve themselves of responsibility for the state of things in the country.
Vilkul colleague, Yury Boyko, said he can’t understand how it wasn’t possible to find 10 candidates for the cabinet among Ukraine’s 40-million population.
Sigurjon Arnason, the ex- CEO of Landsbanki, one of the three Icelandic banks that crashed and ruined the economy in 2008, has been sentenced to 12 month in prison for manipulating the bank’s share price and deceiving investors in the bank’s dying days.
A court of Reykjavik found Arnason guilty, but nine months of his term will be suspended and served on probation.
Glitnir, Kaupthing and Landsbanki – the three largest Icelandic banks – spectacularly crashed in the autumn of 2008 after gaining assets equivalent to 10 times the size of Iceland’s economy as they funded operations by local businessmen abroad. The former chief executives of the other major banks have already received jail sentences.
Ivar Gudjonsson, Landsbanki’s former director of proprietary trading, and Julius Heidarsson, a former broker, were sentenced to 9 months of which 6 months will be suspended. They were accused of manipulating the bank’s share price by lending funds to investors provided they buy shares.
All the accused pleaded not guilty.
“This sentence is a big surprise to me as I did nothing wrong,” Sigurjon Arnason told Reuters after the hearing. His attorney said he would appeal the verdict, according to Icelandic media.
Unlike other western countries Iceland is actively targeting the former top management of its banks as it investigates alleged financial crimes committed in the lead up to the crisis of 2008.
Russia intends to have its own international inter-bank system up and running by May 2015. The Central Bank of Russia says it needs to speed up preparations for its version of SWIFT in case of possible ”challenges” from the West.
“Given the challenges, Bank of Russia is creating its own system for transmitting financial messaging… It’s time to hurry up, so in the next few months we will have certain work done. The entire project for transmitting financial messages will be completed in May 2015,” said Ramilya Kanafina, deputy head of the national payment system department at the Central Bank of Russia (CBR).
Calls not to use the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system in Russian banks began to grow as relations between Russia and the West deteriorated over sanctions. So far, SWIFT says despite pressure from some Western countries to join the anti-Russian sanctions, it has no intention of doing so.
Ramilya Kanafina says the system will meet all the market requirements due to its security. A center for processing messages in SWIFT format is in the process of development. It is expected that all messaging options will be operating by December 2014, she added.
The National Payments Council, a non-profit partnership comprising members of the Russian national payment system, proposed establishing a Russian version of SWIFT 100 percent owned by Bank of Russia in September.
SWIFT, is currently one of Russia’s main connections to the international banking system, and if turned off, could hurt the Russian economy, in the short-term. Globally it transmits orders for transactions worth more than $6 trillion, and involves more than 10,000 financial institutions in 210 countries. According to SWIFT’s statute, the system has national groups of members and users in each country. In Russia it’s ROSSWIFT – the second biggest worldwide SWIFT association after the US.
A record level of $158.8 trillion in global debt, together with low economic growth is creating a serious threat of a new financial crisis, says the sixteenth annual Geneva Report.
Total world debt, excluding the financial sector, has risen from 180 percent of global output in 2008 to 212 percent last year, according to the report written by a panel of senior economists including three former senior central bankers.
“Contrary to widely held beliefs, the world has not yet begun to deliver, and the global debt to GDP ratio is still growing, breaking new highs,” the report said.
The World Bank data showed that in 2013 global GDP was $74.909 trillion.
At a world level, there was acceleration in real growth from the mid-1990s until the mid-2000s, largely driven by the impressive performance of emerging markets over this period.
However, output growth in advanced economies has been declining for decades, which accelerated after the crisis. The developed economies enjoyed only a temporary improvement in real output growth in the late 1990s which had already started gradually eroding by the mid-2000s.
A “poisonous combination of high and rising global debt and slowing gross domestic product, driven by both slowing real growth and falling inflation,” may cause a crisis, warns the report.
Despite the modest decrease in household debt in the UK and the rest of Europe, the credit binge in Asia has offset the improvements, pushing the global private and public debt to a new high in 2013.
Until 2008, the leveraging up was being led by developed markets, but since then emerging economies led by China have been the driving force in the process, thus becoming the most vulnerable to the next crisis.
“Although the level of leverage is higher in developed markets, the speed of the recent leverage process in emerging economies, and especially in Asia, is indeed an increasing concern,” says the report.
Forget Visa and MasterCard. After the two American credit system payment companies froze accounts without notice in March, Russia has been looking for an alternative in China UnionPay.
China UnionPay plans to have 2 million cards in Russia in the next three years.
Instead of seeing the small Visa and MasterCard logo on credits cards, ATMs, and retail outlets, Russians will start to see the three words “China. Union. Pay.”
China UnionPay first emerged in 2002 on the domestic Chinese market as an alternative to Visa and MasterCard, but quickly expanded internationally, and now is already number one in terms of quantity of cards in the world.
Russia’s biggest banks – VTB- Gazprombank, Promsvyazbank, Alfa Bank, MTS, and Rosbank- are already making technical preparations, running tests on Union Bank cards.
“VTB24 already serves China UnionPay cards in its ATM network and now the bank is in negotiations with this payment system to start acquiring retail merchants,” VTB24’s press office said in a statement.
Most banks just began their relationship with China by offering clients corresponding services- none of the bankers imagined that they would be issuing Chinese credit cards.
In March, both Visa and MasterCard blocked the accounts of cardholders at BankRossiya and SMF Bank, both which were sanctioned by the US over Russia’s involvement in Crimea.
Russian financiers who used to keep their assets in dollars and euros were shocked by the event, and moved their capital back to Russia out of fear one day all their assets would be blocked by politicians in Washington DC.
“Visa and MasterCard have 100 percent trust, but right now, there is no trust in the system, and many, even our clients, have shifted their transactions from American dollar and Euro to Yuan. They are eager to receive this card- we already have a big list of people waiting to get this card instead of MasterCard and Visa,” Denis Fonov, Deputy Chairman at LightBank, a small Moscow-based bank, told RT.
LightBank was working with UnionPay long before it knew the cards would be coming to the Russian market – and ordered 10,000 cards pre-emptively as a side service for clients.
As a result of the freeze, Visa and MasterCard will now have to pay a security deposit to Russia’s Central Bank, which is estimated to be billions for each company. Similarly, once UnionPay begins operating in Russia, it will also put down a security deposit with Russia’s Central Bank, about $3-4 billion, Fonov said.
$5.3 trillion in payments
There are already 20,000 cards in circulation in Russia, and a second order of 100,000 cards is planned for September. In Russia many banks accept UnionPay cards, but not merchants, that’s the next step.
By the beginning of 2014, the payment system had already issued 4.2 billion cards, mostly in China.
In terms of total world trade turnover, China UnionPay is the leader in debt cards, with over $5.3 trillion in payments, or about 47 percent of the market share, whereas Visa has 40.6 percent, and MasterCard only 12.2 percent, according to the Nilson Report.
In overall transactions, Visa is still the leader with $4.6 trillion, and China UnionPay comes in second with $2.5 trillion in transactions in the first half of last year.
UnionPay already successfully operates in Australia and Canada, with their deposits tied to both the local currency and the yuan. In total, UnionPay operates in 142 countries.
China’s UnionPay will be a temporary solution for Russia to detach from the West while it prepares to launch its own payment system, which officially isn’t slated to begin operating for another 16 months, and according to sources in the industry, it could even be 2-3 years out.
For Switzerland to copy and paste EU sanctions against Moscow is unwise, and would jeopardize the country’s role as a mediator, said Swiss Economy Minister Johann Schneider-Ammann.
The Swiss government has no plans to follow in the EU’s footsteps and impose sanctions against Russia, Schneider-Ammann said in an interview with the Swiss newspaper Schweiz am Sonntag.
Schneider-Ammann said that choosing a side would undermine the country’s neutrality in the matter.
“This role [as mediator] will be weakened, if we duplicate EU sanctions,” Schneider-Ammann said, adding that Switzerland holds the chairmanship of the Organization for Security and Co-operation in Europe (OSCE), which is vitally important for peace talks between Russia and Ukraine.
Another main concern for Switzerland, home to many Russian nationals, is any economic blowback from sanctions.
The economy minister warned that shutting out Russia could “result in a domino effect” which will “have a negative impact on our economy.”
Unlike its European neighbors who are dependent on Russia for natural gas, Switzerland is financially tied to Russia. Switzerland is home to an estimated $15.2 billion in Russian assets as of 2012, and oil exchanges in Geneva account for 75 percent of Russian crude exports, Reuters reports. Many Russians live in the country.
In March, after Crimea reunited with Russia and the US unveiled its first round of sanctions, Switzerland said it would take measures if needed.
Switzerland has however frozen assets of ousted Ukrainian President Viktor Yanukovich and other former Kiev government officials.
The minister plans to visit Moscow in October to discuss Swiss-Russian bilateral economic cooperation. Schneider-Ammann is a member of Switzerland’s Free Democratic Party, and was first elected to the Swiss National Council in 1999.
France’s biggest bank has reportedly agreed an $8-9 billion settlement with US prosecutors over hiding $30 billion in money transfers to countries on the US sanctions blacklist. The fine against BNP Paribas could be a record for this type of violation.
In the proposed settlement, BNP Paribas will plead guilty to criminal charges in early July, The Wall Street Journal reports, citing a source close to the matter. After admitting violating the International Economic Powers Act, the bank will temporarily be banned from doing deals in US dollars. France has warned this could have a negative effect on the stability of the euro zone.
The US Department of Justice is negotiating with BNP Paribas over the infractions, and the penalty could be the biggest of its kind. French President Francois Hollande said the fines are ‘unfair’ and ‘disproportionate’.
In 2012, the US fined HSBC $1.9 billion over similar US sanctions violations, and Credit Suisse pled guilty to concealing sanctions data and paid $2.6 billion in fines.
After examining over $100 billion of transactions, US authorities found that $30 billion were illegally conducted with Iran, Cuba, and Sudan as they are countries sanctioned by the US.
The infraction will force the company to reshuffle its US-based management, according to several sources. The Wall Street Journal reports 30 bank employees have already left, or will soon exit, the company.
First set at $3 billion, the penalty later was rumored to have reached $16 billion before the latest $8-9 billion figure. The largest fine on record for a bank is the $13 billion JPMorgan Chase & Co paid out for pre-crisis mortgage frauds. BNP Paribas has only set aside over $1 billion to pay out any potential fines, and a fine between $8-9 billion could nearly wipe out the company’s entire pre-tax earnings of $11.2 billion.