to create a regulatory body to oversee recreational drugs that is their opening pandora's box it have at least temporarily given approval to fifty substances for sale at special stores which are banned in most other countries the body is trying to take a more scientific approach and determine which substances are actually harmful to the user you know i've heard the argument that the war on drugs just wastes massive sums of money effort and lives and you need turn a futile battle which is true it does but the only option people give is just legalize all drugs there are a few problems with this when something is legal that tends to make it ok is it really ok for you to spend your whole life in a trance to avoid reality is it really ok for everyone in town on friday night after work to go on an ice crystal meth rampage the other problem is that the war on drugs fails because it is fighting the drugs not the reason why people take them which is to escape reality why do people want to escape reality because in modern times or post modern times we live a soulless pointless isolated consumeristic existence of working in a pointless office job just to get poor so we can scrape by and get some cheap

plastic junk at walmart when people's lives are empty they will fill them with something through a needle but that's just my. beliefs about lateralus part i'm a geisha on the show before that and that particular article read are trying to monetize their flatulence that's the that's the economic growth in the u.k. they talk about g.d.p. annualizing at three percent growth but that's annualizing at nine percent growth and higher if you put the beds that are off the balance sheet like on the bank of england back into the mix the debts compound a good twenty percent a year so three percent a year in g.d.p. growth even though it doesn't even discount for the actual inflation number the fact is you can i mean in negative territory they're living on party farms they're living according markets here that's their entire economic so-called growth.

speak your language. programs and documentaries in arabic it's all here. in the world talks of the interview intriguing story for you. visit. and welcome to the money where the business of russia is business i'm peter lavelle in the aftermath of washington's fiscal showdown where does the global economy stand particularly russia's all the more so since russia's poor third quarter results almost completely across the board have disappointed even the most conservative forecasts what does the government need to do to return the economy to grow. you

discuss this and more i'm joined by simon phantom fletcher he is the portfolio manager and chief of front office staff at renaissance asset managers and we also have ben eris he's the editor in chief of business new europe ok ben let me go to you first enter the first quarter we have one point three percent growth in the economy. account for that it is going to get worse as we're going to get better because five months ago even four months ago we were looking at a much higher forecast and then we had what i guess by russian standards austerity kicked in yeah i've been disappointed when we started this year with the consensus looking at three three and a half percent growth and then the economy basically stalled i mean the economics minister was saying we had zero growth over the first nine months and it's a combination of things i mean firstly the really terrible external environment

which is dragging russia down particularly europe. internally we've had a combination of the governments cut spending for the first time in a decade so we have a russian version of austerity and given that half the economy is directly or indirectly dependent on the state that's had a big drag effect second to that is the high cost of borrowing and inflation remains persistently high in the central bank has made a choice to stick with high interest rates rather than do the rate cuts that everyone else is doing to stimulate growth because they feel that fighting inflation is more important then finally there's just a general lack of confidence and that showing up particularly in the investment figures and investment is flat or negative and no one's building new factories despite the fact that i'll wait and see i think there's a big element of wait and see people are uncomfortable and given the external environment so terrible they're waiting for the upswing before they commit themselves to you know building new production or or investing into a new facility so new and when when the government

a few months ago decided to go are well used to austerity budget cuts instead of stimuli they knew this was going to happen to the economy it shouldn't surprise anyone that the economy would slow down in and industrial production is zero right now absolutely i mean already talked about industrial production cap ex over the last year is down four percent which is significant so the government throwing on austerity on top of it's no surprise. is that the economy is it is it take the pain now for. growth later i mean is this the strategy i think i think external factors of being brutal this has been indicating europe in europe and the recession for many many quarters are just just coming starting to come out fifty percent of russia's exports are related to europe so i mean that external factors being significant i think russia decided that it would while the rest of the world was taking pain it may as well join in ok but they have the the opportunity to do so well the company space i mean if you it seems perverse to put into place

now when the growth is so low but the slowdown hasn't actually affected the people in so much is people are cutting rates in the west because they've got twenty thirty in youth fifty percent unemployment in russia we've got twenty year lows there's full employment more of a people's incomes have continued to rise and so for the most of the older a number of what this quarter that is is positive is disposable income continues to be on the increase so very small so the rest of europe is suffering and you know seeing these riots and protests because the people are hurting and in russia the kremlin has made the decision the people are actually doing fine for now and so we should get on with the business of doing that you know these these reforms and changes to the financial system getting inflation down because what they're doing is they're betting on an organic recovery starting next year rather than trying to fishley engineer a growth recovery now and you can debate whether that's wise but it's quite

a break i mean this is this is what the big debate was during the summer and i think this is what confused a lot of people if you want to know in the state sector and for investors and just for businesses in general i mean the we had first six months we had a government policy of stimulating the economy through spending and all of a sudden it came to a screeching halt and then you got to reverse and i think this is one of the things that of wait and see because we're going to see how this plays out as ben was saying. i mean the. g.d.p. growth is about one point three one point four percent over the year it's significantly the vast majority still from the consumer you know complex is down it is still being the consumer spending which has come from real wage growth which has been significant within within the russian economy in contrast that with across western europe where you know wages are still often below two thousand and eight levels our lives in real life are russia's coming to the point. where they're kind of running out of time in so much as even the consumption is starting to slow down and retail turnover is slowing although it's still a driver but it means that the model for growth going forward is changing and it

has been you know people say russia is a petro commie it's not it's a consumer story because these hundred forty three million people who buying things they never had they do like to shop and they still have lots of shopping left to do . going forward the for the economic growth story it's now going to be about investment and encouraging investment and putting the things in place which is lower interest rates which is confidence which is less bureaucracy these are all the things and these are big tough issues to deal with and you know things are being done about that but we'll have to see how it goes i mean you know over the last couple of years the world austerity is a dirty word in europe in a lot of people have come to conclusion that the kind of austerity that we saw play out in greece and some of the other big countries was really the wrong strategy that you have to find the balance between stimulus and cutting budgets but russia is in a peculiar situation to go down the austerity path is because it virtually has no

debt absolutely i mean it is that the rationale behind it to go through the pain now and get real quality growth not financial growth not financial markets but i mean real economic growth effects the real economy the interest of the everybody became caged for a very short period of time. in russia it's not really in a keynesian situation we need there's significant cap ex needed this. significant investment but this really is structural reform the if that if that was adopted now that would really significantly improve refused to go down the path of structural reform during times of austerity i mean you know people would make the argument you know it's not a good idea to change the wheels of your tire and the muffler and every else everything else in your part while you're going seventy miles an hour i mean you did it in one thousand eight. hundred signatures social and economic problems when it zaps exact kind of rates to a very great degree any problems that exist with

a quarterly but at the same time if you are going to do it is it is much better to sort of go to the doctor and get everything done and that's right so i guess there's no there's no real good time or bad time you just have to do it well put it this way typically countries if they don't need to do the reform they won't and for most of the last ten years russia didn't need to because they had buckets of money suddenly they need to do the reform and you could argue with you know it's a bad time to do it but the thing is they're being forced to do it because now there's no way out of this paper bag unless you do the structural reform and like i said before rush is in this great position because they can effectively experiment with doing all of this reform and if it doesn't work they can simply turn on the spendings because they're unique in the world with that because they can spend their reserves and they can borrow they have massive borrowing capacity which they haven't tapped and so they can just spend their way out of anything which is the result we have also we have the double whammy here for russia because i and i think both of us remember the one nine hundred ninety s. when russia was broke it was very much

a debtor nation and then we saw the financial crisis of two thousand and eight two thousand and nine that's still with us now and the man in the kremlin lot of mere putin remembers both very very well he's very skittish about going to international markets for credits right now because he sees it as a national security issue in the deficits in general anathema to the government and they're going to avoid it and consequently we've seen all these sort of. short term budget as you know the duct tape economic duct tape which is things like freezing tariffs and freezing state employees wage growth because they want to avoid that so they're trying to you know we've between on the one hand doing the reforms and the austerity and on the other hand creating some money in the budget in order to avoid a deficit to avoid borrowing to see if they can get to the point where the rest of the world picks up and leaves russia with it and as i say the consensus amongst the consumer the economists and the i.m.f. from next year that there will be

a recovery that we're through the pits at the root of the crisis completist or we at the bottom of the trough. i think why it's very very difficult to pick bottoms to read it is another one further down but i think overall everybody i mean the u.s. he's on stall speed but it's recovering and i call it the most viral recovery so it's it's not phosphorous but it got delayed i agree with ben but i mean but i don't i don't see i maybe that's the consensus among economists but i mean the consensus among economists this time last year was that things were going to be better and it hasn't been proven true what is it the economists predicted nine after the last two recessions. i mean who's to say i mean the bets is that there's going to be a general recovery you know that really is visible from next year and russia will be able to benefit there in an organic way which means they can do the austerity things now without having to do this official stimulus i think it's a good bet i mean this is what you know people are looking at and that's what you plan for and as i say they've got all these reserve options that they're not using

that they can put into place if there's another crisis meltdown problems if it was lower than expected and it's already starting to look like it is going to go slower than expected some to russia miscalculated or underestimated its impact it's how it's impacted by the rest of the world because we do see this aversion to going to the international credit markets here but still as you pointed out the first thing she said on this program is that you know the crisis in europe continues to really sap the energies of this economy i think i think all governments around the world like to think of themselves as truly independent and able to influence their own affairs but the state of the financial markets and the global globalization of the world as it is countries are completely intertwined i think it's becoming less and less one sovereign even if you wanted to reverse absolutely i mean you know each sovereign nation would like to believe they can plot their own little court path and their own spending measures or certain measures will see them through in their

own way but it's too intertwined it's just impossible if the u.s. . thanks for bring it we'll have to. talk about that when we come back after a short break we'll continue our discussion on russia's economy stay with our team . most of the missions that soldiers are sent to. prevention are in many ways targeting civilians that have nothing to do. with actual attacks against israeli targets.

well into the future. show thirty four countries spend over fifteen billion euros she says should each one to keep a million degrees with the. north to sell from st petersburg to france we travel in search of the song. we've got the future of coverage. they're doing whatever they want in syria these days and even the obama administration can do nothing to rein in the saudis and i think the sad answer is that the united states doesn't want. it doesn't have the leverage that it wants tries to work through allies through international organizations and occasionally on a. deal with the court of public opinion. the best america can but there are there is a lot in the toolbox right now they're not many tools they are. welcome

back to on the money with the business of russia's business i'm peter lavelle to remind you we're talking about russia in the global economy all right some and you ended the first half of the program talking about what was going on in washington well it's spread this out a little bit here ok i think we all the consensus was they're going to get through it in washington they have to raise the debt levels and they have to go and get a budget for the country but there was a lot of political scrambling for that a lot of political theater as well. but aren't isn't the world getting old more and more tired of this circus because of the dollar and how were governments like russia china bric countries the emerging world i mean looking at this because my last question to you in the first half of the program is trying to insulate yourself from these problems but as always you have indecision in the united states

and how it's going to deal with its economy and we don't know what how damaged obama politically will be moving forward when it comes to economic issues and what countries like russia think about that well i mean for us politics politics of the last month has been like an episode of the west wing and i think they quite enjoy it. china. coming out in public and saying you know look make sure you look after our investments even if that is it wasn't a senior official said to the world it's time for the world to be americanized itself yeah china china for a long time actually for a while now has been trying to switch into non-dollar assets so it's been seen a significant increase in its euro euro euro assets whenever it can go into things it's been going to euro shack losses and things like that being significantly a rise of gold has been significantly impacted by many bric countries significantly increasing their purchases so when governments across the world have been trying to de gaulle arise issues but when it is the global global currency it's rather hard.

so yeah they can they can talk about wanting to don't arise and reduce their. holdings of dollar assets but it's it's almost impossible you know i mean you could start by especially when you talk about the chinese reserves you can still bring up entire countries are. going to say the chinese in the process of buying up a great deal of africa but that's not what t. bills is that it it's with other assets i mean they're not turning these into the united states and going into africa they're stuck with these things that they want for the other part of the nation because that is i mean even before this. recent brouhaha in washington there was a trend of wanting to detail the rise and to. dresses and russia china's been on acquisitions spree investing money not just in africa where i think they actually cover every single country no one i want my blackberry apparently but more recently in central asia i mean the president was just down there last month and a whole string of you know he was called the chinese father christmas handing out

money and deals to everyone which is sensible but the crisis in washington over the ceiling highlights the world's attitude is changing to the dollar because you bought those cheap bills because they were the safest bets in the world and even though the scene has been raised and a virtue if you start messing around with that reputation because when you buy when you buy you bill you're buying confidence aren't you not it's not necessarily the you know it's how you it's confidence in the future and this is what's really been damaged i don't think anyone holding in to you bill worried that the u.s. government wasn't going to honor it ok but i think what people are beginning to worry through time is the level of competence that one day might not be able to not that he doesn't want to because in this in this case it was wanting to they could raise the debt ceiling if they want but in the future the near future mid-term maybe they won't be able to you know i mean it's a very expensive insurance policy it's very negative real right so i am not but

that the confidence level in the greenback is. historically i would say dropping and dropping and bends right countries like china just by buying real effects of a hedge against a hedge against the dollar is to go to go off and like i don't want to say in russia you typically buy a car washing machine apartment because you're sure at the end of the crisis no matter where the currency is those things have real value and whatever the new valuation is you can swap it back for money at whatever it's going to wristwatches and two thousand eight thousand i mean let's talk about the euro crisis here it was keep it short because it's the same story over and over and over again merkel has been reelected in. and it really inserted herself again i mean what's the direction of the euro here because again you started out with the program russia has to keep an eye on it it has no choice but well i mean europe is europe sort of mass for a while merkel being reelected is very positive news for europe you know obviously to form a coalition gap but that'll do that'll get done i still worry for certain southern

european states which has been indicated earlier you know have significant levels of youth unemployment there's a generation of voice to talent that so europe's got a lot of healing to do i think oh no gentlemen i mean healing yes but ben is it just another big bubble. which is a big bubble with quantitative easing i mean when you see this really all too easy credit out in the world right there in the united states it's a bubble it's a misguided policy i mean the whole point of easing and stuff loans is basically throwing money at a problem supposedly down the road so that you don't have to deal with it and the basic problem is to deal with the debts and have it because you know during the crisis the governments took a lot of that bad bank and just put it all on the national balance sheets and countries don't you know go bankrupt i mean they can default there but they don't go bankrupt and now the issue is how to get rid of it and unfortunately that is continuing to climb across all of europe i think and germany was the only country

in the last six months that actually reduced its debt and even that was by point three percent everybody else has seen it climb and it's up around ninety percent of g.d.p. which is unsustainable or at least that's the red line america is one hundred four and accelerates here but the dollar is the dollar and the euro is the euro so it needs to be dealt with and nobody's dealing with it and unfortunately you've got this political problem where the politicians are in for four years and need to get reelected and the significant thing with merkel is that the elections have done so now they can actually turn to dealing with the problems and as i said before germany is actually one of the only countries major countries in europe that actually is dealing with the problem whereas the others are still struggling and losing the fight which means that this whole european soccer is going to continue for the foreseeable with the religion of merkel merkel is she going to go help in the southern tier. i seriously doubt whether she'll be sure what do you do if and what do you do then look at island i mean island was one of the first countries to

start putting in austerity significant budget cuts which were obviously the first country bailed out in europe it's come back you know it like that almost the celtic tiger is back germany i mean germany went through structural reforms through the roof with chancellor kohl. germany is always one. step ahead of the rest of your and your needs to follow along and it's one of things that i just wrote at the hartsfield labor reforms they did ahead of this crisis and again we were talking about russia picking a bad time to reform europe's even a worse position because they don't have this buffer of money or borrowing and they need to do the reforms that germany has actually already put in place on the road which is one of the reasons why germany is doing well but it's not just germany the periphery states also needs to tackle these problems and there doesn't seem to be much backbone to do it so you know there you little nickel will exactly they're looking to germany for a hand in the end it's to throw money at the problem that it goes away so you get through the election so i could starts you know that's the big problem here because

merkel was elected not to do such a thing yeah absolutely i like i fundamentally believe that your should stick to what i think we will see still significant problems in the pressure of europe i think that you know the heartland of europe northern europe asia is robust and has been chugging along quite nicely you know its growth its growth rates are a practical thing they're doing at the moment is to put in this is a banking union and that's that's the first step and really the way out of this problem i think is to create a federated union. where you start mixing fiscal pen and money people join the european union is that what they wanted to join maybe not and of course it's going to be incredibly difficult and i'm not saying there's going to be a federation so i think that's i think that's that's obviously the solution to this problem but that's a rational intellectual. i think your solution but it's not it's not a political solution that's tenable not the only you'll have you'll have states

pulling out of the. euro land if that happens i mean obviously the u.k. has already said it hold a referendum and the feeling within my home country is you know they were telling me if we're not going for a good solution as you know a viable solution that would work that we just left with muddle through what i think i mean like all currency you. they haven't historically lasted for a long period of time and i worry i worry that you are still see significant danger but that because there is a two speed you're going so unions work if it's based on economies not just politics right change gears we're almost out of time where is oil going well. the consensus there again is given the instability in the middle east although we have this whole thing with saudi arabia right now and the underlying story right there is petro dollars and i think this is what's giving a lot of jitters to people the predictions i've seen are talking about you know for the foreseeable future five years one hundred twenty up to maybe one hundred fifty driven partly by the instability in the middle east but also the fact that demand

continues to rise and that's a function of the merging markets emerging the i won't i will counter that by saying obviously shuttle is coming much more on stream us becoming energy independent is significant but the use of. hydrocarbons in emerging markets is still rocketing high or rocketing north i mean obviously but up for me i would say that the that the demand will be countered by the shuttle eventually we're going to start getting round to people talking about you know trying to reduce significant use even even in emerging markets but that's a way of weight off there if it hits one seventy that's about another seven percent tax on business one fifth a significant impact on energy prices and then obviously the fact that for russia's reform project but probably not like i said before if they have too much money they wanted the reforms and the beauty of the situation is that they have to and they are making an effort to be saying the right things and they've started various programs so i actually always said that russia would be much better off with.

us because then it would become a normal country you know it wouldn't have all these buckets of money and they would actually have to run their country you know efficiently as a business instead of as a bank the money to have it once it or can get it. capital flight this year not to good. capital flight an issue for russia a lot of the time i remember within the capital flight number is always russian investment overseas companies which is often ignored or you know usually it sits there for the same thing so obviously the u.s. plays a large number of very wealthy russians moving capital abroad but capital flight in nation for russia historically it will continue to be the same way until the reforms and also in the resolution only on account tax and things like this and people feel comfortable with maintaining my thoughts within russia one year from now ben or we're going to be sitting with g.d.p. growth ten seconds. hopefully people think it was like you should be looking at

sort of much stronger three percent growth slowing of capital flight which is the flip side so why don't we have you both on a year from now when to see for prediction without many thanks to our guests today and thanks to our viewers for watching us here on on the money see you next time. or the.

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