if you. see from some stupid. stunts on t.v. don't. go time on sunday you're watching on t.v. come to the week's top stories the casualties mount as the battle rages on between a regime a rebel by those in syria's. accusations flying between the opposing sides. reports that saudi arabian forces are fired live rounds tear gas at anti-government protesters to keep them escalates its clampdown on decide. on the first medals are handed out in london but the lympics already been mobbed by the arrests of over one

hundred cyclists critics also say the corporate advertising is overshadowing the sport. right now as promised to get the latest in the world of economics and business with he's on the. hello and welcome to on the money where the business of russia is business i'm peter lavelle russia is about to enter the month of august historically the russian obvious has been unpredictable for markets and investors alike and add to this the uncertainty of the euro zone talk of another global financial crisis and russia's official ascension into the world trade organization lots of knowns and known

unknowns. to discuss this i'm joined by timothy crouse he is the head of the russia bank opportunity found at i.f.c. asset management company and jacob now chief economist for russia morgan stanley all right gentlemen we're going to start with our new segment here it's called cover your marker where you have a few seconds to give me a yes or no thumbs up thumbs down shake up first double dip for russia by the end of the year no i think growth will continue strong winners all this coming from this negativity i think is coming from fears about the oil price falling ok but it hasn't happened yet you could judge they had to be oil price when we going with that oil price i don't think is going to amount to much more i think all price will stay around one hundred nineteen hundred what's right what's driving that i think is. limited supplies production costs are getting higher and higher. and i mean who knows what's going to happen with syria and with iraq that's a worry that continues to hang over the markets and that's an external threat china

what's going on i don't think i think we're getting policy action from the government it's going to support an acceleration in growth in china in the second half. i'm not so optimistic maybe for the second half yes but for twenty thirteen let's see what the new administration does i think the room for maneuver is much more limited too much investment in things that may not be productive so let's see china is a concern for me ok. august traditionally is kind of a jittery month for rush right ok and we go through all the years that you know many of them but you know a lot of people are saying you know is the government prepared enough if there is an external shock we'll talk about the eurozone in a second i think they're more prepared than last time they learnt a lot through the crisis last time around i think we know if there's a big shock they're going to i think basically take a bet on saudi they're going to use the oil fund to support budget spending to let the ruble move and they hope that the saudis will cut production enough to support oil prices back to a level that russia can live with i agree with that i think they did actually

a very good job last time of it was very expensive so i think the question for russia is how expensive is it going to be this time and how deep could the shock be . and it's the euro zone interestingly enough when we're thinking about crisis in areas but we're also talking about reform agenda in russia can president putin do both at the same time is he looking at both simultaneously how do you do well it's interesting isn't it but he is doing it i mean session is going ahead we are going back to fiscal rule to some big decisions in the autumn will we get pension reform will it be support the development of loan money in russia will we get real progress on the investment climate but he's done two big things already i think in returning to a fiscal rule and in joining the so i think the prospects are good for more reform if you hear winners winner losers winners i think winners for everybody to be honest but it's a matter of time and it's not going to happen overnight i think russia's not going to see huge impact certainly not this year and not next year i think the impact is

over let's say five years and then i think it could be a very nice win for russia it's a good rule. consumers benefit the most i think consumers benefit the most and then in time i think that industry will benefit when you get the f.b.i. coming in the technology capital associated with that i agree i think w t o is a win for russia. when the when the when it actually happens in the month of august here with the first sign for wu ascension but we can look for. or it is going to creep up on us i think it will creep up on us i think it is not going to be a way sort of thing i mean the duma has approved it i mean it will get signed and it will go forward to be implemented very slowly what sectors feel first is hard for me to say but i hope it's the consumers for. the fans of. jacob utility prices for the tariffs yeah there's a lot you know we heard back in the last few months or you know when that happens they'll be more protests see strong connection between the two no no i think

everybody's was expecting the tariff pricing hikes delayed from january a little bit lower than in previous years. and i think it's always difficult when you raise prices from being below market levels to market levels but you've got to do that to finance the investment and russia is sort of two thirds of the way through raising prices on gas electricity other utilities to levels which will sustain the investment they need for those networks in the future so i think it so we can see the end of the hikes in about a year two years three years depending on the sector. so far so good you know the middle class is one of things you know we've been here for a long time in russia the middle class likes the perks for the past the soviet past cheap energy here how is this going to thank you disposable income. well i think way you want to i mean it's going to affect it in some but when i ask my russian front friends are you you know you're till the price is going up the answer is no not yet you know we live in a co-op we have this we have that so i think that the price impact will be

relatively slow and gradual but it will also have an impact on inflation here there's no question in my mind about that inflation rate that could end this year right now it's extremely low yeah it's going to go a little bit above the target six and a half percent seven percent that sort of range i think but still quite low historically and i think the central bank is going to tighten policy because they want to hit their twenty thirteen target which is half a percentage point down from the six percent twenty twelve target so i think they mean business about low inflation or a gentleman they w t o extension has been mentioned and utility hikes let's look at this report. the change in cost of living exception to the w t o means domestic crisis should start to merge with global price levels vast housing and utility bills would advance as will the price of gasoline for example on the july first moscow household bill yes jim fifteen percent electricity and heat in six and five percent respectively but that's not

all utilitarians other search even more is of september and eleven percent increase on the year all this was pressure on the coalition's disposable income which in turn could dampen economic growth since the beginning of the global financial crisis washington was well staffed and any further rationale from a cash will have an awful drag on spending at the same time does heal itself and will make important more affordable well challenges such as rate hikes i will never get well and with a w. you know all the off my wages and g.d.p. are expected to drop the cumulative gains we believe are roughly three point three percent of russian g.d.p. in the early years after accession and after more like ten years we think russia would gain about eleven percent of g.d.p. deeper integration into the global economy is one of the people of latino putin's

reform agenda it presents you decree all an economic policy which unsigned on the day he wasn't greeted includes your own city major reform measures intended to make russia more attractive for foreign investors that is your national are on the money r t. all right gentlemen now we're also joined by a keim he's director of strategic development for a.b.b. in russia and eventually cut off he's chief economist for russia and c.i.s. at renaissance capital even if i go to you first i mean you've heard our. first. the program what are your thoughts about where the russian economy will be by the end of this this year well actually i think that will see some moderation in the pace of economic activity for for a couple of reasons the russian consumers have been borrowing at the seasoning base from the banks around forty four percent year on year in june i think it's it's a little bit too high and this doesn't want to be any concern i think i'm going to stick with the slowdown in that area so the combination of the hard inflation and

the moderation in the pace of borrowing from the by the russian consumer will need to do two or two kind of a soft landing in the russian economy so i think by the end of the year economy will slow down to around two and a half two percent ok ok given you covered a lot of ground right there what do you think of where russia's economy is going to end up for this year the second half. look at some of the thrill company we're looking more a longer term perspective for us applying to the industry and we're looking at what couple projects capital projects usually plan or far in advance and all vista for all industry it's continued to grow into especially with initiative from companies like ross now through all joint venture was just. think it's very positive science for the market for gas industry which is another major industry in russia it's important for shell gas the impact of other think in the economy including energy

efficiency and gas prices would drive also the coal prices which is a coal is an alternative we believe that mining communities would be and that's a big industry that's continued to grow in the direction but overall the productivity would be a very big important part for growth for the russian economy of course total cost of ownership competitiveness of russia income town of russia and think double duty or i think ok take up a thing about you here in the studio i mean there i see a disconnect here i have for a guest on this program everyone saying we're in russia's situation is more or less ok if not good where is the disconnect in media well i think globally there is big worries out there about your about the u.s. fiscal cliff about a slowdown in china and people look at those global risks and i think how could that impact russia through the u.s. russia and insulated itself enough for these external shocks what in the second part of that i want to talk about the euro crisis yeah well i think i mean i think

that the channel of contagion for russia would be the oil price i think that if you look at on the funding side for instance russia has a reserves of five hundred million billion dollars and foreign debt of four hundred four hundred little bit billion dollars it's got less short term debt you've got households and and banks. parts of a much stronger position so the economy is much more resilient to financing shock to a funding shock that it was in two thousand and eight and you got a more balanced economy in general you've got. capital outflows and current account surplus rather than twin surpluses which led to the overheating it was already going to be made you know this may sound really cynical and stupid but my view is actually that international investors don't even look at russia these days it's not on the map i mean we don't why is that because there's just too many other things going on no it's because people have written russia off because of the problems with the legal system because the problems that they've seen in the past with foreign direct investment and they just don't see it as

a risk we were profile i can get twenty percent returns investing in the u.s. where i have a good legal system today about how this is what investors are not after this is what investors are coming we're going to go to a break and after that short break we'll continue our discussion on russia's economy stay with our team. anything. to teach me. why you should care only. the british.

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welcome back to the money i'm peter we're discussing where russia's economy is heading but first let's look at russia's oil patch. down us lay. growth figures and the euro zone cracks altogether send a clear warning to the global economy another crisis can be around the corner the price of brant crude has been teetering about one hundred dollars per barrel in the past two weeks the trashiest minister of finance is already on the market we are stress testing the federal budget to see how to perform and the drastic changes in the global economy we're estimating our revenues of oil prices dropped at eighty dollars or even sixty dollars a barrel and preparing what you may call crisis management budgets these estimates are not figured in as part of the official budget though they just repairing some

response measures in case we face such a situation the russian federal budget currently balances at an oil price of one hundred fifty dollars per barrel the major positive for oil prices so far has been the middle east with iran threatening to shut down the strait of hormuz syria with its arsenal of chemical weaponry has also contributed to keeping all prices of float there are also high expectations that the federal reserve has to really to the economy with a new round of quantitative easing but all of these could be outweighed by the eurozone shivers the day to watch what everybody was looking for is going to be all this twenty when greece is going to pay three point three billion euros in debt payments my feeling that we're going to see negative news coming out of this we have downside risk to oil price so i guess fortunately that we're going to see further pressure and all price in the southern direction opinions differ on whether another crisis could force for sure to use its substantial international reserves

some forecasts tresham will have to resort to them already in the second half of two thousand and twelve well under he said confident the russian budget will weather an anticipated economic storm on its own the central bank has recently shown its commitment to fully trained its currency by awakening the rubles trading band and moved it forward to use pressure on russia's international reserves we should be right as oil price will want all those about hundred but it could go down to ninety. and with quite a significant probability problem of eighteen. the question is again well even if it does how long. those levels though there is no agreement among economists on price trajectory and new crisis scenarios there is certainly a consensus the trash aspersions should been last time to commodities to compensate for oil and gas patricians russia is shifting its attention to track to more

foreign investment however with the current macroeconomic environment undermining global investment around the world it remains to be seen whole long it will dominate the russian budget in s. a bit more on the money aren't i. even if i can go to you if you were advising president putin what would you set the budget price for related to oil would be wise eighty sixty well i think that we all understand that very big increase in the breakeven or prize that we have seen over the last couple of years has certainly contributed to the much larger vulnerability of the russian economy so i think there is an agreement that something needs to be done about it and jacob already mentioned that i think in a very very prudently the government has started to talk about introduction introduction of a new fiscal i think is very positive in terms of the what is the right price i think russia should or should be it should be budgeting it out ninety five ninety ninety five dollars dollar oil i think i think to be very very very prudent

wouldn't way of doing that and by the way the new fiscal rule that the government easing visioning is looking at exactly these prices i think this is the prize that should be should be good for for russia i mean where do you come in on this price. look really again room or woman boss or also through all this were you for all price go or definitely it's a group for the whole economy if all primes go a little bit beyond that it's so the indicative things out of russia or productivity or all three should room prove the productivity oppression all. and there are also true be improved and so that's fun to read a good through for improvement implements the best available technologies and it should be done that some other off hold to harmonize russian standard system russian are coming during our capital project to the same like dong everywhere in the war so i think this two sides of this may have all but probably lived here

almost off and always expect in jacob it's very interesting i mean again you know can we continue the reform project when everyone's so worried about the price of oil well in a way that i think needs to be continued if they can to sustain the kind of growth rates that the government aspires to they need to try and increase investment to improve the efficiency of investment and to do that they need to improve the investment climate not implies a whole bunch of reforms so i think i mean it's not about it will price they have to it's really about how the system works ok that you see here and i think that we've seen a change in the growth model we've gone from seeing a growth model that depends upon rising commodity revenues financing increased government spending to attempt to move to an investment based growth model which is very sensible i think can they deliver it that's the big question can they deliver it that's a different question they're starting i mean they are starting to you know i think is a good is a good step forward i mean there's been lots of reforms in the banking sector which

has made it much more resilient if we go back to the two thousand and nine crisis we have the equivalent of a savings protection scheme in place so people were not queuing up taking money out immediately nor were they moving into dollars and in the one nine hundred ninety s. it was a completely different story i think the professionalism of the ministry of finance has gotten much better as well you're starting to see strategic plans introduced but implementing them is not easy so it will take time but i think the direction is a good one ok very much change gears here it's going to the euro crisis the middle of august is coming up and greece is coming up and. spain's coming up no matter what russia does you can get really hit hard when something happens with the euro eurozone and it's beyond russia's control i agree with you that russia is very integrated in the global economy so i definitely am not one of those that would say that the russia iis isolated we have a true done some simulation exercises trying to answer the question if there is

a major economic crisis in europe what will be the economic impact in russia two scenarios in particular i would like to mention we have calculated or estimated that give greece were to exit the european union the maximum impact on the russian economy will be on the russian economy will stop growing in two thousand and thirteen basically the russian economy will be experienced a flood god he ever agrees exit will to be followed this year positive scenario or negative one now i do see this is this is the us this is not a positive scenario for sure because it is a goose exit of the european union but that actually i think i know if i want to hear the negative one now well yeah there is there is the negative one coming up right now we also estimate that if greece were to be followed up by a spain also exiting the european union or another words this is basically the scenario of a complete disintegration of the european union in that case the russian economy would contract next year by around five percent now this will be this will not be

as spain full and not be as dramatic increase of a magnitude as did in two thousand and eight but obviously this is going to be it is going to be bad this is going to be bad so this is actually the very or the negative scenario as far as russia is concerned from from spain and greece exiting the european union ok to just how bad can it get with your. senses that we're headed eventually maybe certainly not in august but possibly before the end of this year to the second scenario that we discussed because i just don't think that there's enough capital to deal with the spanish problem in the spanish problem is coming very fast the fact that you have some point six percent. a sovereign running for spain is just completely unsustainable they should be a two in two and a half percent and there's no way that they can get down there without either having a hard to fault or soft the fault and as soon as that happens it's going to have a huge impact on u.c.b. which is going to have an impact on germany so the whole thing is interlinked meanwhile we've got virtually no interbank lending going on in the euro zone either

so i just don't see how the banking system can sustain this kind of a shock spain is just a much bigger story than greece we muddle through with greece will not muddle through with spain change its policy make or break but i think probably the policymakers will sort out a fiscal backstop to european monetary union and that will but it'll be a bumpy ride before we get there and there is a risk which the previous speakers have alluded to of some kind of major event greek exit spanish exit if there was such an event a greek exit i think you get contagion and you get the bad sonora coming through but i think it's less likely so i'm more constructive than the other speakers i think that we're going to have a bumpy ride but russia will be insulated from it the twinkle ox is getting empty what i mean so many more oh there's loads of tools i'll get you have isn't nearly as well if it is we don't even have to if we don't know why we're going to use them ok because this is this problem is about sovereignty in russia in your opinion

which are very difficult to overcome because for germany for instance to agree to some kind of mutualization of debt they have to they want to see some kind of europeanization of sovereignty for all and so it's really the spain should give up control of aspects of this a political issue that's difficult but i think they're ready to do it and i think the reason we can say that is because of the decision they made at the last european council meeting to stand behind spanish banking debts used to using one of the european i think you know what i'm saying about you i mean i guess the germans bite the bullet i guess that's where we're getting to actually i want to say that. in a possible scenario of a disintegration i think it's actually more of a medium term than a short term each to say i would actually disagree that this might happen at the end of the share maybe even next year for the key reasons number one everybody is now talking about a q e t e s we know the marginal benefit dysthymia around till be much smaller than before but this is going to be taken positively by the markets number two let's not

forget that we have a change in the leadership in china and usually historically have been associated with more stimulative part of his and then what did he we have elections in germany and i think that even the austerity lady might be a little bit more receptive to a more stimulative budget because a den of the day she's a politician so i think two thousand and thirteen could be much better than expected because these these tea global supporting factor security from the u.s. changing the leadership in china germany elections so i think that if we're looking at the certain negative scenarios to my in my opinion it's more likely to dismay that inspire in two thousand and fourteen two thousand and fifteen rather than by the end of d.c. year or next year and the very thing that i hope you've done is right but i actually disagree i'm not so optimistic because all of the things that you mentioned are. short term tools monetary tools or short term tools the elections that are coming up in china and in germany who can predict what effect this goes

going to jump in here gentlemen we've all run out of time many thanks to my guests today and thanks to our viewers for watching see you next time and state of art. i.

scars. and lines.