Russian Official Says Recession Has Already Started in Country
MOSCOW — Russia is entering a period of recession, a senior government official said, confirming that the robust economic growth of the past few years has come to an abrupt end.
The comments, the government’s most somber yet on the subject, came at the end of a particularly painful week for the country. Gross-domestic-product growth slowed to a three-year low in the third quarter, the country’s massive oil wealth showed further hemorrhaging, and severe downward pressure on the ruble — which the Kremlin only months ago touted as a symbol of economic might — continued.
“Recession in Russia has already started, and I’m afraid it won’t last just two quarters,” Deputy Economy Minister Andrei Klepach said, according to Russian news agencies.
Prime Minister Vladimir Putin, who for months had boasted that Russia had enough financial buffers to remain resilient, has only recently begun preparing the nation for a prolonged and painful slowdown.
On Friday, Mr. Putin said GDP growth this year will be “about 6%,” which is below earlier estimates of between 6.8% and 7% growth.
Third-quarter data showed the economy expanding at a still-robust rate of 6.2% due to strong growth from recent periods.
Many economists fear the economy already stagnated by year’s end and that next year’s 3% GDP growth forecast, frequently cited by international banks and organizations, is overly optimistic.
“The question is not so much how far growth could slow to next year, but whether the economy will grow at all,” said Neil Shearing, an emerging Europe economist at Capital Economics in London.
Russians have increasingly joined investors in their mistrust toward the ruble, contributing to the massive capital flight that saw more than $83 billion leaving the country since August.
Mr. Putin reiterated his pledge to prevent a collapse of the ruble. The central bank has allowed for a gradual weakening of the currency by 5% since early November, but many observers say that tumbling oil prices and continuing capital flight have left the currency 15% to 20% overvalued.
Ecuador’s President Rafael Correa said his nation is defaulting on its foreign debt, in a hardball move prompted as much by leftist ideology as economic distress.
Mr. Correa said Ecuador will skip a $30.6 million payment to bondholders due Monday, asserting that there are irregularities in how the debt had been contracted by an earlier administration. Mr. Correa, an economist who is close to Venezuelan president Hugo Chávez, lashed out at foreign creditors as “real monsters.”
Oil-rich Ecuador’s move marks the first sovereign default since the onset of the global financial crisis in September. While Ecuador had put markets on notice last month that it was threatening such action, the announcement still left some investors agape, as Ecuador has $2 billion in cash on hand to pay.
“Correa is really, really convinced foreign debt is like the devil and he doesn’t have to pay,” says Alberto Bernal, head of emerging-market macroeconomic strategy at Bulltick Capital Markets in Miami. “There’s a strong ideological component here.”
Investors said the main impact of Ecuador’s move would be to make money managers even more pessimistic than they already are about the prospects of countries like Argentina and Venezuela. Together with Ecuador, these countries are considered exceptional cases within the broader group of emerging-market borrowers because of their unorthodox economic policies. All three are also heavily dependent on commodities, whose prices have fallen sharply since September. Argentina has been taking increasingly desperate measures, such as nationalizing private pension funds, to come up with resources to stay afloat.
More broadly, Ecuador’s move could be a sign of what’s to come as borrowers world-wide contend with a much more difficult environment. “Companies or countries that are heavily reliant on capital flows are going to struggle, some more than others,” says Mike Conelius, who manages $2 billion in emerging-market debt at T. Rowe Price in Baltimore. “We should get used to defaults.” He adds that across emerging markets, companies are more vulnerable than governments, which are in better shape.
Claudio Loser, president of Centennial Group Latin America consultants and formerly the International Monetary Fund’s chief for Latin America, said he didn’t think there would be too much contagion, outside of Argentina and Venezuela. “Markets have already discriminated between Ecuador and other countries,” he said. With less than $4 billion in global bonds outstanding, Ecuador isn’t a major player in global markets.
The Andean country of 14 million is volatile even by Latin American standards. It previously defaulted on its debt in 1999. Ecuador went through seven presidents in the decade prior to Mr. Correa’s ascension in January 2007. One of the presidents, Abdala Bucaram, recorded an album called “The Madman Who Loves” while in office. He was deposed by congress for “mental incapacity.”
Mr. Correa, who was educated at the University of Illinois, has frequently played games of brinksmanship with creditors since taking office. But this time he went a step further, convening a special committee to investigate how the debt was contracted before his presidency began.
The committee said last month that it found “serious indications of illegality” and that Ecuador was availing itself of a 30-day grace period to decide whether or not to pay. While Ecuador has cash on hand, analysts say the likelihood of future budget restrictions caused by lower oil prices probably also influenced his decision.
“I think President Correa thinks the country should default pre-emptively, not when it’s in fiscal distress, because it maximizes their bargaining power,” says Alberto Ramos, an economist at Goldman Sachs.
Mr. Correa indicated he would propose a restructuring plan to investors. Investors rejected Ecuador’s rationale for the default, which was that the debt was illegal. “That’s like Obama coming in and saying that Bush issued Treasurys that were not legitimate,” says Arthur Byrnes of Deltec Asset Management in New York. “It’s almost embarrassing for them.”
The default sets the stage for what’s likely to be a fierce legal battle between Ecuador and its creditors. “There’s going to be a barrage of litigation against the country,” says Mr. Ramos of Goldman Sachs. He says Ecuador doesn’t have many foreign assets that creditors could lay hold of. Nevertheless, Ecuador will have to be careful of how payments for its oil exports are transmitted, as creditors will be keen to pounce on any funds they can get, he says.
Argentina’s default on more than $100 billion in foreign debt in 2001 was the largest sovereign default ever and the last major one in Latin America. In 2005, Argentina restructured most of the debt, offering creditors around 30 cents on the dollar.
EU Backs Emissions Proposal After Concessions to Industry
BRUSSELS — European Union leaders on Friday backed landmark proposals to cut the bloc’s greenhouse-gas emissions by 20% in coming years, but gave substantial concessions to industry and to coal-burning countries in Eastern Europe.
The tension over how much to pay to fight climate change reflects the strains the global downturn is putting on the EU’s agenda, as Germany and the United Kingdom square off over the wisdom of running up debt to boost growth.
Leaders from the EU’s 27 nations approved on Friday a coordinated call for fiscal-stimulus packages of around 1.5% of the bloc’s gross-domestic product, or about €200 billion ($267 billion). The language they used, however, was vague enough to permit countries to do more or less.
Germany has proposed a stimulus package that would pump around €4 billion ($5.3 billion) into the economy over the next year. Meanwhile the U.K. plans about £20 billion ($30 billion) in stimulus by 2010, including short-term tax cuts.
“All this will do is raise Britain’s debt to a level that will take a whole generation to work off,” German Finance Minister Peer Steinbrück said in an interview with Newsweek. U.K. Prime Minister Gordon Brown dismissed the comments, saying they reflected internal German politics.
Friday’s EU agreement won’t force Germany to expand its stimulus package. However, Chancellor Angela Merkel said she will discuss possible new stimulus measures in January.
The steel industry and other business lobbies welcomed Friday’s climate-change deal, while it drew criticism from environmental groups. “Millions of poor people have been left in danger because EU leaders bowed to business-lobby pressure,” said Elise Ford, head of the Brussels office of the Oxfam charity.
French President Nicolas Sarkozy hailed the agreement as historic. It would require the EU to cut emissions by at least 20% and raise use of renewable energy to 20% of the bloc’s energy mix by 2020. The package must still be approved by the European Parliament.
The European Commission had proposed that polluting power plants pay in auctions for permits to emit greenhouse gases. Under Friday’s agreement, poorer EU countries that rely heavily on coal — a description tailored to Poland and others in Central and Eastern Europe — will be allowed to give a large number of permits to power plants for free.
In a concession to industry backed by Germany, polluters that might otherwise relocate their plants to avoid EU rules would get some free emissions permits. In addition, polluters would be able to buy a large share of their permits from a United Nations system that operates in developing countries, freeing them from the expensive task of cutting gas output at their own plants.
Polish consumers could face a doubling or more of their electricity bills, Mr. Sarkozy said, defending the compromises. “It’s not a matter of environmental protection,” he said. “It’s simply not socially acceptable.”
On another contentious issue, EU leaders agreed to concessions that open the way for Ireland to hold a new referendum on an EU institutional reform. Known as the Lisbon treaty, it would hand Brussels more authority, strengthen the bloc’s foreign policy tools and give it a permanent president.
Irish voters rejected the treaty in June. The other 26 nations approved the treaty by parliamentary vote.
Ireland got assurances it would keep a seat on the commission, the EU’s executive arm. The bloc had planned to cut the number of commissioners — now one per country — by a third. The other leaders also agreed to write guarantees protecting Ireland’s low corporate-tax rates and its restrictions on abortion.
As long as the “detail work” is approved, Ireland will hold a referendum before the end of October 2009, Irish Prime Minister Brian Cowen said.
Bush Makes Surprise Trip to Iraq
BAGHDAD — On a farewell trip to Iraq, President George W. Bush said Sunday the war has been hard but was necessary to protect the U.S. and give Iraqis hope for a peaceful future.
Mr. Bush visited the Iraqi capital just 37 days before he hands the war off to President-elect Barack Obama, who has pledged to end it. At the end of nearly two hours of meetings at an ornate, marble-floored palace along the shores of the Tigris River, Mr. Bush defended the war, now in its sixth year.
“The work hasn’t been easy, but it has been necessary for American security, Iraqi hope and world peace,” the president said. “I’m just so grateful I had the chance to come back to Iraq before my presidency ends.”
But in many ways, the unannounced trip was a victory lap without a victory. Nearly 150,000 U.S. troops remain in Iraq fighting a war that is remarkably unpopular in the United States and across the globe. More than 4,209 members of the U.S. military have died and the war has cost U.S. taxpayers $576 billion since it began five years and nine months ago.
After an arrival ceremony, Mr. Bush began a rapid-fire series of meetings with top Iraqi leaders. The president wanted to highlight a drop in violence in a nation still riven by ethnic strife and to celebrate a recent U.S.-Iraq security agreement, which calls for U.S. troops to withdraw by the end of 2011.
Air Force One landed at Baghdad International Airport in the afternoon local time after a secretive Saturday night departure from Washington. In a sign of security gains in this war zone, Mr. Bush received a formal arrival ceremony — a flourish absent in his three earlier trips.
Referring to Iraqi President Jalal Talabani, seated beside him, and the country’s two vice presidents, mr. Bush said: “I’ve known these men for a long time, and I’ve come to admire them for their courage and their determination to succeed.”
Mr. Bush’s meetings at the palace were held as the sun set outside and darkness fell over Baghdad. Mr. Talabani called Mr. Bush “our great friend,” who “helped to liberate” Iraq. “Thanks to him and his courageous leadership, we are here,” Mr. Talabani said.
Mr. Bush and Iraqi Prime Minister Nouri al-Maliki planned a ceremonial signing of the security agreement — a “remarkable document,” according to Mr. Bush’s national security adviser, Stephen Hadley. He said the pact was unique in the Arab world because it was publicly debated, discussed and adopted by an elected parliament.
Mr. Hadley said the trip proved that the U.S.-Iraq relationship was changing “with Iraqis rightfully exercising greater sovereignty” and the U.S. “in an increasingly subordinate role.”
The Bush administration and even White House critics credit last year’s military buildup with the security gains in Iraq. Last month, attacks fell to the lowest monthly level since the war began in 2003. Still, it’s unclear what will happen when the U.S. troops leave. While violence has slowed in Iraq, attacks continue, especially in the north. At least 55 people were killed Thursday in a suicide bombing in a restaurant near Kirkuk.
For Mr. Bush, the war is the issue around which both he and the country defined his two terms in office. He saw the invasion and continuing fight — even after weapons of mass destruction, the initial justification for invading Iraq, were not found — as a necessary action to protect Americans and fight terrorism. Though his decision won support at first, the public now has largely decided that the U.S. needs to get out of Iraq.
It was Mr. Bush’s last trip to the war zone before Mr. Obama takes office Jan. 20. Mr. Obama won an election largely viewed as a referendum on Mr. Bush, who has endured low approval ratings because of the war and more recently, the U.S. recession.
Mr. Obama has promised he will bring all U.S. combat troops back home from Iraq a little over a year into his term, as long as commanders agree a withdrawal would not endanger American personnel or Iraq’s security. Mr. Obama has said that on his first day as president, he will summon the Joint Chiefs of Staff to the White House and give them a new mission: responsibly ending the war.
Mr. Obama has said the drawdown in Iraq would allow him to shift troops and bolster the U.S. presence in Afghanistan. Commanders there want at least 20,000 more forces, but cannot get them unless some leave Iraq.
After a 10 1/2 hour fight, Mr. Bush was met at the airport by U.S. Ambassador Ryan Crocker and the top U.S. commander Gen. Raymond Odierno. The president then climbed aboard a helicopter for a five-minute flight to the presidential palace.
The trip was conducted under heavy security and a strict cloak of secrecy. People traveling with the president agreed to tell almost no one about the plans, and the White House released false schedules detailing activities planned for Bush in Washington on Sunday.
Mr. Bush’s visit came after Defense Secretary Robert Gates’ unannounced stop in Iraq on Saturday, at a sprawling military base in the central part of the country. Mr. Gates will be the lone Republican holdover from the Bush Cabinet in the Obama administration.
The new U.S.-Iraqi security pact goes into effect next month. It replaces a U.N. mandate that gives the U.S.-led coalition broad powers to conduct military operations and detain people without charge if they were believed to pose a security threat. The bilateral agreement changes some of those terms and calls for all American troops to be withdrawn by the end of 2011, in two stages.
The first stage begins next year, when U.S. troops pull back from Baghdad and other Iraqi cities by the end of June.
Gen. Odierno said Saturday that even after that summer deadline, some U.S. troops will remain in Iraqi cities. They will serve in local security stations as training and mentoring teams, and so will not violate the mandate for American combat forces to leave urban areas, he said.
Iraq’s Defense Ministry said Sunday that U.S. commanders would have to get Baghdad’s permission for keep the troops there.