"1.2 billion opportunities" #Africa

But slow growth, ballooning deficits and #debt that has increased 18x in 7 years, will make the path to prosperity fraught with pitfalls. 

1.2 billion opportunities

THE ECONOMIST
Apr 21

FOR A LOOK at the African boom at its peak, do as a multitude of foreign investors have done and fly into Abidjan, the capital of Ivory Coast. Visitors arrive in an air-conditioned hall where a French-style café sells beers, snacks and magazines. There is advertising everywhere, for mobile-phone companies, first-class airline tickets and a new Burger King. The taxi into the city smoothly crosses over a six-lane toll bridge. On the way to the Plateau, the city's commercial core, cranes, new buildings and billboards jostle for space on the skyline. In the lagoon, red earth piles up where yet another new bridge is under construction. 

Just five years ago, Ivory Coast seemed like a lost cause. Having been defeated in an election at the end of 2010, the then president, Laurent Gbagbo, refused to leave office. The victorious opposition leader and now president, Alassane Ouattara, mounted a military offensive to force Mr Gbagbo out. French troops seized the airport to evacuate their citizens (the country used to be a French colony). Protesters were gunned down by troops, foreign businesses were looted and human-rights activists gave warning about mass graves being dug.

Ivory Coast still has problems, as shown by a terrorist attack in March that killed 22 people. But its economy is the second-fastest-growing in Africa (after Ethiopia, which is much poorer), expanding by almost 9% per year. Foreign investment is pouring in. As well as the Burger King, Abidjan now has a Carrefour supermarket, a new Heineken brewery, a Paul bakery and plenty of new infrastructure. Sharp-suited, French-educated ministers explain in perfect English what they are doing to "open up", "improve the ease of doing business" and "sustainably grow the middle class". Expensive hotels, such as the reopened $300-a-night Ivoire, are booked up; their bars are full of affluent people striking deals. The country's three port terminals, the biggest of which is being expanded by Bolloré, a French industrial firm, are working at full capacity, importing cars and electronics and exporting cocoa, coffee and cashew nuts.

This is the Africa of business magazines and bank ads: a continent that is rising at a prodigious pace and creating profitable new markets for multinational firms. But Abidjan also has plenty of reminders that it has been here before. For all of the new buildings springing up, its impressive skyline is still dominated by crumbling 1960s and 1970s concrete modernism. The roads may be new, but the orange taxis that ply them are still ancient fume-spewing Toyota Corollas, remnants of an earlier boom. For the two decades after independence from France in 1960, Ivory Coast enjoyed an economic miracle. Then, quite suddenly, the price of cocoa and coffee plunged and the boom faded as quickly as it had begun.

Reasons to worry

The deepest fear of today's investors in Africa is that it may be happening again. In Ivory Coast's neighbour, Ghana, thousands of government workers have been marching in the streets in the past few months to protest against their rising cost of living. Ghana relies on oil and gold, both of which have fallen in price, as well as cocoa. That, plus prodigious government borrowing, has caused a crisis. One US dollar now buys 4 cedi, the local currency; in 2012, it bought not quite two. Growth has halved since 2014, and Ghana is running a budget deficit of 9% of GDP and a current-account deficit of 13%.

According to the World Bank, in the year to April last year the terms of trade deteriorated in 36 out of 48 sub-Saharan African countries as the price of their commodity exports fell relative to the cost of their imports, mostly manufactured goods. Those 36 countries account for 80% of the continent's population and 70% of its GDP. Eight countries, including two giants, Angola and Nigeria, derive more than 90% of their export revenues from oil, which has recently plummeted far below the price needed to draw in new investors. Growth across sub-Saharan Africa dropped to 3.7% in 2015, far below East Asia's 6.4% and nowhere near enough to create enough jobs for the continent with the world's youngest and fastest-growing population. The World Bank expects it to tick up again, but only to 4.8% in 2017.

Countries that happily borrowed from international investors over the past few years have now found themselves shut out of the markets. The stock of outstanding sovereign bonds in the region had risen from less than $1 billion in 2009 to over $18 billion in 2014. If growth continues at a decent clip, that should be manageable. But if it stops, interest rates of 10% or more on dollar-denominated bonds will make refinancing difficult.

The continent's two biggest economies, Nigeria and South Africa, are already in deep distress. The reasons are different, but both have suffered from commodity-price falls as well as from atrocious economic management. The IMF, although loathed in much of Africa, is back, providing a $ 1billion loan to Ghana and preparing another for Zambia. Some fear a return to 2000, when this newspaper described Africa as the "hopeless continent".

Yet despite that, Nairobi's thriving malls and Abidjan's humming ports show that there are plenty of reasons to stay optimistic. The economic conditions have got worse, but this is a very different continent from two decades ago, when troops from eight African countries were fighting in Congo alone. Wars still rage in South Sudan, Somalia, Mali and northern Nigeria, and violence bubbles in places like eastern Congo, the Central African Republic and Burundi. But broadly speaking, most of sub-Saharan Africa is now peaceful. Elections seem increasingly less likely to result in strife, even if they still generally return incumbents, and more and more often for unconstitutional third terms. The governments that come to power are still often corrupt and inefficient, but far less brazenly so than those of cold war despots such as Mobutu Sese Seko of Congo or Jean-Bedel Bokassa of the Central African Republic.

Africa's 1.2 billion people also hold plenty of promise. They are young: south of the Sahara, their median age is below 25 everywhere except in South Africa. They are better educated than ever before: literacy rates among the young now exceed 70% everywhere other than in a band of desert countries across the Sahara. They are richer: in sub-Saharan Africa, the proportion of people living on less than $1.90 a day fell from 56% in 1990 to 35% in 2015, according to the World Bank. And diseases that have ravaged life expectancy and productivity are being defeated—gradually for HIV and AIDS, but spectacularly for malaria. Some of the gains may seem modest, but given that living standards across Africa declined during the 30 years after independence they are sufficiently established to prove lasting.

And for all that oil and metals have come to dominate economies such as Nigeria's and Congo's, the boom broadened beyond natural resources. Mobile telephones have transformed commerce across Africa, and now smartphones and feature phones (which are halfway between dumb and smart) are taking hold. In 2014, the latest year for which figures are available, 27% of Nigerians owned a smartphone. In many African countries 4G mobile-phone infrastructure is the only thing that works well, but it works at least as well as in much richer countries, and a lot can be built on it. What began with mobile-money systems such as Kenya's M-Pesa is now branching into bank accounts, savings accounts, loans and insurance. That in turn is helping people rise out of poverty and invest in their future.

This special report will argue that despite some deep and entrenched problems, African businesses offer hope too. It is clearly risky to make sweeping judgments about an entire continent with 54 countries and 2,000 languages. This report draws on visits to various countries in sub-Saharan Africa, but four in particular: South Africa, Nigeria, Kenya and Ivory Coast, all coastal, urbanised and relatively rich. They certainly do not represent the whole of Africa, but your correspondent picked them because they each illustrate a different aspect of business across Africa as a whole. The businesses covered have not yet transformed the continent, but they show that African firms are capable of extraordinary innovation—if only they can be set free.

See the article on The Economist here:

1.2 billion opportunities Economist – Apr 14, 09:00

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The Economic Aftershocks of the Japanese Earthquake

The Economic Aftershocks of the Japanese Earthquake
Seeking Alpha

By David Zeiler

The 8.9 magnitude earthquake and resulting tsunami that hit northeastern Japan Friday had an immediate impact on financial markets all over the world. However, the effects of the damage and rebuilding will reverberate through the Japanese economy for months, if not years.

In the immediate aftermath of the earthquake, which struck in midafternoon, factories shut down, railways stopped running and roads, ports and airports closed. Markets remained open, but a lack of power and a disruption of the mobile networks curtailed trading after the temblor struck.

Some of Japan's biggest companies were affected:

• Nissan Motor Co., Ltd. (NSANY.PK) halted production at four factories in the area hit.
• Toyota Motor Corporation (NYSE: TM) closed two assembly plants and a parts factory.
• And Sony Corporation (NYSE: SNE) closed six factories.

"This is certainly the worst thing that can happen in Japan at the worst time," economist Nouriel Roubini told BloombergTelevision, noting that Japan's deficit is 10% of its gross domestic product (GDP) and repairing the damage from the quake will cost the country tens of billions, if not hundreds of billions of dollars.

Because Japan is the world's third-largest economy (as measured by gross domestic product), economic turmoil there soon ripples out to the global economy.

One immediate international consequence to the quake was a drop in oil prices, with oil dipping 3.6% to $99.01 a barrel in New York on Friday. In London, Brent crude dropped 2.8%.

The quake forced the closing of several refineries, including three operated by JX Nippon Oil & Energy Corporation (NPOIY.PK) that process 600,000 barrels a day. Japan normally uses a total of 4.42 million barrels a day, compared to U.S. consumption of 19.25 million.

"With Japan's economy decimated, it will constrict oil demand from Japan," Mike Fitzpatrick, editor of Energy Overview newsletter, told ABC News. "For the moment, the tsunami problem seems to have trumped Libya concerns apparently."

Concerns over the cost of the disaster slammed foreign insurance and reinsurance companies, with the stocks of several big reinsurers taking hits of 5% or more. Nevertheless, officials at major insurance companies don't expect huge losses.

While today's event is unique, it is worth noting that in the most recent major earthquake in Japan, the 1995 Great Hanshin-Awaji Earthquake in Kobe, the economic loss was estimated to be in the region of 2.5% of Japan's [gross domestic product] at the time and the insured loss was only in the region of $3 billion, which was mostly retained domestically,

James Vickers, Chairman of Willis Re International & Specialty, part of Willis Group Holdings PLC (WSH), told the Wall Street Journal.

In fact, investors already may be factoring recollections of the Kobe earthquake into their calculations.

The Japanese yen, which fell initially, quickly reversed its slide and closed stronger against the dollar as traders remembered that capital came flowing back into the country after the 1995 quake, boosting the yen to an all-time high.

Investors should also take heed of what happened to Japanese equities following the Kobe earthquake. Within six months of that January temblor, the Nikkei 225 index lost 25% of its value. But by the end of 1995, it had fully recovered.

Stocks will probably fall on Monday, especially of those companies that have factories in the affected areas. But on the whole the sell-off will likely be short-lived,

Mitsuhsige Akino, a fund manager at Ichiyoshi Investment Management,told Reuters.

One sector that stands to benefit is large construction companies, which outperformed the market in 1995. Sure enough, Kajima Corporation, a major Japanese contractor, was up 11% on the Tokyo Stock Exchange on Friday.

The Kobe experience also demonstrated how Japan, as a developed nation, has the resources to rebound from disasters relatively quickly.

Six months after that quake almost all of Kobe's factories had reopened and the city's infrastructure repaired. All the trains were running within nine months, and the port was 80% functional within a year.

Japan's biggest economic headache will be paying the bill.

"The government would have to sell more bonds, but this is an emergency, so this can't be avoided," Yasuo Yamamoto, senior economist at Mizuho Research Institute in Tokyo Yamamoto, told Reuters.

Israel leverages stance in global economy

Israel leverages stance in global economy
By DAVID ROSENBERG / THE MEDIA LINE 28/01/2011

By acting as a technology mentor to countries like China, India, Brazil, Israel hopes to enhance its global economic role.

Israel is weighing steps to leverage its place in the global economy by acting as technology mentor to the rising powers like China, India and Brazil, according to Eugene Kandel, chief economic adviser to Prime Minster Binyamin Netanyahu. “We are a small country and can’t offer trade benefits. But we can offer technology benefits. A small idea implemented in a big country becomes a big idea,” Kandel said in a briefing to financial reporters on Wednesday, saying that policymakers are only in the early stages of developing a strategy. Israel is an acknowledged technology power, ranking among the world’s leaders in research and development spending and patents. But with just over seven million people, its total gross domestic product is about $200 billion, about the size of Louisiana’s. Israel’s two-way trade with China amounted to just $4.55 billion in 2009, or 0.2% of China’s Kandel said Israel's technology companies will have to shift some of their focus from the developed markets of the US and Europe to developing economies. That will involve more than simply adjusting existing products but also developing technology that is cheaper and meets the other needs of less-advanced economies, he said. In the past, Israel has used innovative capabilities to win friends, most notably in agro-technology and in defense electronics. Its drip-irrigation systems are used around the world and bilateral ties with India and China have involved large arms deals. But more recently, the technology Israel contributed to the Internet revolution and in biotechnology has been largely directed toward developed economies. Israel and China have already begun cooperation in technology. Beijing wants to use Israeli innovations to help it to move up the value chain, Yiyi Chen, a professor at the Shanghai Jiaotong University and an adviser on Middle East affairs to the Beijing government, told The Media Line last week during a visit to Israel. China National Chemical Corporation (ChemChina) two weeks ago completed its purchase of a majority stake in Israel’s Makhteshim Agan Industries, the world’s biggest maker of generic agro-chemicals. The purchase will give Chinachem access to Makhteshim’s research and development and licensing expertise. Nearly a year ago, China made its first foray into Israel’s start-up sector when Yifang Digital Technology acquired Pegasus Technologies. Huawei, China’s biggest maker of telephone equipment, has quietly opened an R&D center in Israel. “We need to create an atmosphere and environment that when Israeli entrepreneurs decide what to work on next look not only on their familiar environment of the US and Europe but also look how to scale to China and India -- large counties that are growing fast,” Kandel said. While he is counting on Israel’s private sector to lead the way, Kandel said Israel’s government will have to play a role because in China, at least, government-to-government ties are important even in business. Israel has been struggling to adjust to changing world trade patterns. About three quarters of its exports, led by technology, pharmaceuticals and chemicals, go to the US and Europe. The so-called BRIC countries (Brazil, Russia, India and China) account for only about 13%. “This isn’t enough,” he said. Meanwhile, Israel is starting to raise the bar on foreign direct investment (FDI), as the economy’s need for foreign capital has diminished, Kandel said. Israel has been running a surplus in its current account since 2003 while a shake-up of the pension fund sector has redirected more domestic capital to industry. The discoveries of massive reserves of natural gas off Israel’s Mediterranean coast will improve Israel’s balance of payments situation as its need for oil and coal imports declines, he added. “We have to change our policies to say we don’t want foreign investment just for the sake of foreign investment; but if it will benefit us, that will build industrial clusters,” Kandel said, citing technology multinationals like Intel and Motorola as the kind of business Israel wants to attract. “Companies like these that bring a lot of cutting-edge technology and create cutting-edge companies around them amplify our competitive advantage,” he said. Earlier this month, Israel formally moved to what Kandel called an “agnostic” stance on FDI when it ended the practice of giving preferential tax rates to government-approved overseas investment. Although Kandel said Israel hadn’t taken any steps to discourage it, FDI has in fact been on the decline since 2006 when it peaked at $15.3 billion. In 2009, it plunged to $3.9 billion as the global financial crisis weighed down on cross-border investing, but last year as the world economy revived, FDI into Israel continued to decline, reaching just $456 million in the first nine months of the year. http://www.jpost.com/Business/BusinessNews/Article.aspx?id=205617

Financial Times: China’s cycle turns the world around

World economy: The China cycle

By Geoff Dyer - FT.com
Published: September 12 2010 20:03 | Last updated: September 12 2010 20:03

Allied by alloys: a steel market in the Chinese privince of Hubei. As well as investing in fellow emerging nations' commodities, such as Brazilian iron ore, Beijing is increasingly investing in their infrastructure

Deep in the Amazon jungle, huge chunks of red earth are torn out of the ground at Carajás, the biggest iron ore mine in the world, to be transported halfway round the globe to the steel mills on China’s eastern seaboard. There they are turned into the backbone for millions of tower blocks in hundreds of booming Chinese cities.

Last year, China overtook the US to become Brazil’s biggest trading partner. The two large developing countries may be on opposite sides of the planet but their growing economic ties over the past decade have become among the enduring symbols of shifts in the global economy.

The duo could also be forging a path for one of the potential biggest realignments in the global economy over the next decade. With little fanfare, China is likely to emerge as the biggest direct investor in Brazil this year, following a string of deals announced in mining, steel, construction equipment and electricity transmission.

Such investments are part of a slow-burning but hugely important trend. Newly crowned the second-largest economy, eclipsing Japan, China is becoming the anchor for a new cycle of self-sustaining economic development between Asia and the rest of the developing world – one that is bypassing the economies of Europe and the US.

China is not only sucking in raw materials from other developing economies, just as it has during the past decade. It has also begun making investments in infrastructure and industry in those countries, some of which are made possible by its cut-price and increasingly sophisticated manufacturing companies or by the attractive financing terms it can offer. Beijing has for some years been investing in this way in parts of Africa: now such deals are being rolled out around the world. For many developing countries, the impact of the China boom is coming full circle.

“It is the start of a new cycle,” says Ben Simpfendorfer, an economist at RBS and author of The New Silk Road, a book on the surging economic ties between China and the Middle East, central Asia and south Asia. “China has companies that are willing to invest, they have products that are good enough, and they are backed by abundant liquidity in the country’s financial system.”

BEIJING MEETS BRAZIL
●Direct investment overseas by Chinese companies has increased from just $5.5bn in 2004 to $56.5bn last year. Chinese officials predicted last week that it would reach $100bn by 2013.

●About 70 per cent of the money invested last year went to other parts of Asia. Latin America came in second place with 15 per cent.

●Chinese companies have so far invested only very modestly in Brazil but Brazilian officials estimate that investment will exceed $10bn this year.

●Chinese banks have lent $10bn to Petrobras, the Brazilian oil company, and $1.23bn to Vale, the iron ore miner.

Ian Bremmer, president of the Eurasia consultancy and author of the recent book, The End of The Free Market, says there is no accident to this China-led process of decoupling from the west. It is, he says, a strategy to reduce economic – and to some extent political – dependence on the US.

“It is a very conscious policy, on the top of the agenda for the entire Chinese leadership,” he says. “They are looking for a hedging strategy because they feel uncertain about the long-term economic prospects of the developed world.”

Promoting innovation and stimulating domestic consumption are also part of that strategy, he argues, but pushing stronger economic integration with the rest of the developing world is the “one strategy that can be done quite quickly”.

Nowhere is the impact of this process being felt more keenly than in Brazil.
As trade has boomed with China during the past decade, Brazilians have sometimes complained of being relegated once again to their 20th-century role of providing commodities to the industrial powers. In the past year, however, the long-awaited wave of Chinese investment in the country appears finally to have reached Brazil’s shores. While it reached only $92m in 2009, the country’s officials estimate that it will exceed $10bn this year.

Wuhan Iron and Steel, for instance, paid $400m for a stake in a mining company owned by Brazilian industrialist Eike Batista, and is planning to build a huge steel mill beside the port near Rio de Janeiro that another of Mr Batista’s companies is constructing. Lifan, one of China’s biggest manufacturers of motorcycles and cars, already exports heavily to Brazil. Now the company’s founder, Yin Mingshan, says it is considering opening a plant to build cars in the country. “Brazil is a very promising market, with a vast territory and a big domestic market,” he says. “Some Chinese businessmen are foolish enough to ignore doing business in Brazil but I am not that stupid.”

If investment in Brazil is one symbol of this new stage of economic Chinese engagement with the developing world, another is the flurry of new rail networks taking shape globally. Chinese railway construction companies are some of the most efficient anywhere, and have for several years been operating in neighbouring countries in central and south-east Asia. But in the past year they have also signed contracts in such diverse places as Ukraine, Turkey and Argentina.


Chinese companies in the sector have not restricted their activities to the manual task of laying rail lines. They are hoping to start signing overseas deals to sell high-speed rail equipment, including locomotives and signalling systems. The first customer could be the planned high-speed line between São Paulo and Rio de Janeiro.

There are two factors that have made these new links possible. The first is that China has produced a generation of companies making capital goods that are now internationally competitive. They can offer developing countries new trains, power stations, mining machinery and telecommunications equipment of sufficient quality at prices that are often well below those of their multinational competitors.

GLOBAL RENMINBI USE
‘It’s like a Formula One starting race, everyone jostling for position’
Although China is both the second- largest economy and the biggest exporter in the world, the renminbi is virtually unseen outside the country. For global transactions, China depends on foreign currencies – in particular the US dollar.
The perils of this arrangement became clear during the financial crisis, when China’s mighty export machine was hit by a freeze in dollar-denominated trade credit. So in recent months Beijing has unveiled measures to facilitate the use of the renminbi and reshape the global monetary system. “We’re at the beginning of something huge,” says Dariusz Kowalczyk, a Hong Kong-based strategist at Crédit Agricole. “Intermediation through the dollar will be gradually eliminated.”
In June, Beijing expanded the scope of a year-old pilot scheme for settling cross-border trades in renminbi, opening it up to the world. Global banks such as HSBC, Deutsche Bank and Citigroup have since been encouraging companies from London to Tokyo to use the Chinese currency rather than the dollar. Some even offer discounted transaction fees as an incentive. “It’s like a Formula One starting race – everyone’s jostling for position,” says Philippe Jaccard of Citigroup.
The financial infrastructure is now in place to allow an Argentinian grain producer, for example, to sell goods for renminbi then use the proceeds to buy farm machinery from China. Cross-border trade in renminbi totalled Rmb70.6bn ($10bn) in the first half of the year. But that figure remains tiny compared with the $2,800bn worth of goods and services traded across China’s borders last year, most of which was settled in dollars or euros.
One of the obstacles to greater global use of the renminbi is a lack of ways for foreign companies to invest their renminbi or hedge their exposure to the currency. Strict capital controls place China’s financial markets almost entirely off limits. But that is changing. Last month, China opened its domestic interbank bond market to foreign central banks and commercial banks that have accumulated renminbi through cross-border trade settlement. Curbs on the free flow of renminbi in Hong Kong have also been lifted. Since July, financial groups in the special administrative region have been able to create a range of renminbi-denominated investment products and hedging tools – all open to global companies and investors.
McDonald’s, the US fast-food chain, last month became the first foreign multinational to issue a renminbi-denominated bond in Hong Kong. It plans to use the proceeds to fund its operations on the Chinese mainland. Robert Cookson

The second element is the financial backing from a banking system that has been mobilised to follow behind these businesses. Yi Huiman, a senior executive at Industrial and Commercial Bank of China, told a conference recently that the institution was working with the government to provide “railroads plus finance” around the world. Vale, the Brazilian company that operates the giant iron ore mine in the Amazon, announced on Friday that it had signed a $1.23bn credit with two Chinese banks to finance the purchase of 12 huge cargo ships from a Chinese shipyard, which will transport iron ore between the two countries.

The scale of these transactions is clearly much smaller than Beijing’s holdings of US securities, estimated to be in the order of $1,500bn, but the underlying dynamic is the same: the Chinese financial system is starting to recycle some of its holdings of foreign currency into the economies of its developing country trading partners, in order to stimulate demand for its own goods.

The impact is already apparent in China’s trade statistics, with the biggest increases in exports in the past year coming from developing countries. Trade with the Association of Southeast Asian Nations increased by 54.7 per cent in the first half of the year, and by 60.3 per cent with Brazil.

If Chinese investment does indeed help to kick off a growth cycle in other parts of the developing world, it will be a tonic for a global economy in which the outlook for many leading economies remains subdued, with some even facing the risk of a double-dip recession. The combination of Chinese demand and booming investment is one reason for Brazil’s ability to record China-style growth rates of 8.9 per cent in the first half of the year.

Yet for western economies there are also plenty or risks involved. The investment push is likely to herald an era of intense competition between developed-world multinationals and state-owned Chinese companies. The strong financial backing that such groups receive is also likely to fuel accusations that they are not playing on a level field. It is perhaps no surprise that some of the multinationals that in recent months have publicly voiced criticisms of Beijing’s industrial policies – GE and Siemens – operate in sectors in which China is becoming a fierce competitor, such as power equipment and railways.

China’s new clout is also raising questions about the future of the dollar. Chinese officials have talked about a long-term goal of replacing it as the global reserve currency with a basket of others, potentially including the renminbi.

As trade with the developing world balloons, Beijing has also been taking important steps to expand the international use of the renminbi, including allowing overseas holdings of the currency to be invested in the onshore bond market. Some economists believe it could become the reference currency for Asian trade over the course of the next decade.
Yet the irony is that, while there is strong economic momentum behind the Chinese currency taking on a much larger international role, Beijing is reluctant to let this happen. “China is still very hesitant about whether it really wants the currency to be international,” says Yu Yongding, an influential economist at the Chinese Academy of Social Sciences think-tank.
To become an important trading currency is one thing: but to become a global reserve currency with the power to threaten the role of the dollar, the government would need to lower capital controls and open up its domestic bond market. This would mean giving up its tight control of exchange and interest rates.
Furthermore, if economic integration with other developing countries is really to take off, it will require careful management by Beijing. There is a very real risk that the new-found interest in emerging markets will provoke a backlash, especially if China’s exports of manufactured goods keep up such a rapid pace of growth.
There are already plenty of warning signs. India, for instance, has tried this year to reduce supplies of Chinese power equipment in favour of goods made by local producers. For several months, New Delhi blocked Huawei, the Chinese maker of telecoms equipment, from the Indian market.
In Brazil, there are fears that companies such as carmaker Lifan want to use the country to assemble kits of nearly-completed cars made in China rather than promote a domestic industry. There is also concern about fresh competition for access to markets elsewhere in Latin America. Kevin Gallagher of Boston University calculates that 91 per cent of Brazilian exports of manufactured goods to the region are under threat from lower-priced Chinese products. If that market wilts away, industry is likely to become much more critical of the new China ties.
China’s growing links with the rest of the developing world could provide a huge boost both to the country itself and to the global economy during the course of the next decade. But a wave of protectionism could yet halt the process. Beijing will need to work hard to ensure its new partners in the developing world do not feel steamrollered by the Chinese juggernaut.

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Drought, Fire and Grain in Russia | STRATFOR

Drought, Fire and Grain in Russia

August 10, 2010 | 0856 GMT

By Lauren Goodrich

Three interlocking crises are striking Russia simultaneously: the highest recorded temperatures Russia has seen in 130 years of recordkeeping; the most widespread drought in more than three decades; and massive wildfires that have stretched across seven regions, including Moscow.

RELATED LINKS

• The Global Food Crisis
• Special Series: Russia’s Expanding Influence

The crises threaten the wheat harvest in Russia, which is one of the world’s largest wheat exporters. Russia is no stranger to having drought affect its wheat crop, a commodity of critical importance to Moscow’s domestic tranquility and foreign policy. Despite the severity of the heat, drought and wildfires, Moscow’s wheat output will cover Russia’s domestic needs. Russia will also use the situation to merge its neighbors into a grain cartel.

A History of Drought and Wildfire

Flooding peat bogs appears to be bringing the fires under control. Smoke from the fires has kept Moscow nearly shut down for a week. The larger concern is the effect of the fires — and the continued heat and drought, which has created a state of emergency across 27 regions — on Russia’s ordinarily massive grain harvest and exports.

Russia is one of the largest grain producers and exporters in the world, normally producing around 100 million tons of wheat a year, or 10 percent of total global output. It exports 20 percent of this total to markets in Europe, the Middle East and North Africa.

Cyclical droughts (and wildfires) mean Russian grain production levels fluctuate between 75 and 100 million tons from year to year. The extent of the drought and wildfires this year has prompted Russian officials to revise the country’s 2010 estimated grain production to 65 million tons, though Russia holds 24 million tons of wheat in storage — meaning it has enough to comfortably cover domestic demand (which is 75 million tons) even if the drought gets worse.

The larger challenge Moscow has faced in years of drought and wildfire has been transporting grain across Russia’s immense territory. Russia’s grain belt lies in the southern European part of the country from the Black Sea across the Northern Caucasus to Western Kazakhstan, capped on the north by the Moscow region. This is Russia’s most fertile region, which is supported by the Volga River.

(click here to enlarge image)

Though drought and wildfires have struck Russia over the past three years, they have not affected its main grain-producing region. Instead, they struck regions in the Ural area that provide grain for Siberia. Those fires tested Russia’s transit infrastructure, one of its fundamental challenges. Russia has no real transportation network uniting its European heartland and its Far East save one railroad, the Trans-Siberian. While its grain belt does have some of the best transportation infrastructure in the country, it is designed for sending grain to the Black Sea or Europe — not to Siberia. The Kremlin began planning for disruptions of grain shipments to Siberia during the droughts and fires of 2007-2009. During that period, Moscow established massive grain storage units in the Urals and in producing regions of Kazakhstan along the Russian border.

This year’s drought and fires do not primarily affect Russia’s transportation network, but rather the grain-producing regions in the European part of Russia that make up the bulk of Russia’s grain exports. These regions lie on the westward distribution network, with the port of Novorossiysk on the Black Sea handling more than 50 percent of Russian exports.

Russia has focused largely on being a major grain exporter, raking in more than $4 billion a year for the past three years off the trade. This year, the Kremlin announced Aug. 5 that it would temporarily ban grain exports from Aug. 15 to Dec 31. Two reasons prompted the move. The first is the desire to prevent domestic grain prices from skyrocketing due to feared shortages. Russia’s grain market is remarkably volatile. Grain prices inside Russia already have risen nearly 10 percent. (Globally, wheat futures on the Chicago Board of Trade have risen nearly 20 percent in the past month, the largest jump since the early 1970s.)

The second reason is that the Kremlin wants to ensure that its supplies and production will hold up should the winter wheat harvest decline as well. Winter wheat, planted beginning at the end of August, typically fully replenishes Russian grain supplies. Further unseasonable heat, drought or fires could damage the winter wheat harvest, meaning the Kremlin will want to curtail exports to ensure its storage silos remain full.

Russia’s conservatism when it comes to ensuring supplies and price stability arises from the reality that adequate grain supplies long have been equated with social stability in Russia. Unlike other commodities, food shortages trigger social and political instability with shocking rapidity in all countries. As do some other countries, Russia relies on grain more than any other foodstuff; other food categories like meat, dairy and vegetables are too perishable for most of Russia to rely on.

Russia’s concentration on food volatility has a long history. Lenin called grain Russia’s “currency of currencies,” and seizing grain stockpiles was one of the Red Army’s first moves during the Russian Revolution. In this tradition, the Kremlin will husband its grain before exporting it for monetary gain. And this falls in line with Russia’s overall economic strategy of using its resources as a tool in domestic and foreign policy.

Exports and Foreign Policy

Russia is a massive producer and exporter of myriad commodities besides grain. It is the largest natural gas producer in the world and one of the largest oil and timber producers. The Russian government and domestic economy are based on the production and export of all these commodities, making Kremlin control — either direct or indirect — of all of these sectors essential to national security.

Domestically, Russians enjoy access to the necessities of life. Kremlin ownership over the majority of the country’s economy and resources gives the government leverage in controlling the country on every level — socially, politically, economically and financially. Thus, a grain crisis is more than just about feeding the people; it strikes at part of Russia’s overall domestic economic security.

Russia’s use of its resources as a tool is also a major part of Kremlin foreign policy. Its massive natural resource wealth and subsequent relative self-sufficiency allows it to project power effectively into the countries around it. Energy has been the main tool in this tactic. Moscow very publicly has used energy supplies as a political weapon, either by raising prices or by cutting supplies. It is also willing to use non-energy trade policy to effect foreign policy ends, and grain exports fall very easily into Moscow’s box of economic tools.

Russia is using the current grain crisis as a foreign policy tool even beyond its own exports, prices and supplies. It has asked both Kazakhstan and Belarus to also temporarily suspend their grain exports. Belarus is a minor grain exporter, with nearly all of its exports going to Russia. But Kazakhstan is one of the top five wheat exporters in the world, traditionally producing 21 million tons of wheat and exporting more than 50 percent of that. The same drought that has struck Russia also has hit Kazakhstan; production there is expected to be slashed by a third, or 7 million tons.

Kazakhstan traditionally exports to southern Siberia, Turkey, Iran and its fellow Central Asian states: Kyrgyzstan, Tajikistan, Uzbekistan and Turkmenistan. For the first time, Kazakhstan had planned to send grain exports to Asia. It had contracted to send approximately 3 million tons of grain east, with 2 million of those supplies heading to South Korea and the remainder to be split between China and Japan. The drought has forced Kazakhstan to reassess whether it can fulfill those contracts along with contracts for its immediate region.

Russia’s request that Belarus and Kazakhstan cease grain shipments does not seem primarily connected to Russia’s concern over supplies, but instead looks to be more political. The three countries formed a customs union in January, something that has caused much political and economic turmoil. Kazakhstan sought to lock in its president’s desire to remain beholden to Russia even after he steps down, while Belarus reluctantly joined as Russia already controlled more than half of the Belarusian economy.

For Moscow, however, the union was a key piece of its geopolitical resurgence. The Russian-Kazakh-Belarusian customs union was not set up like a Western free trade zone, where the goal is to encourage two-way trade by reducing trade barriers, but as a Russian plan to expand Moscow’s economic hold over Belarus and Kazakhstan. Thus far, the customs union has undermined Belarus and Kazakhstan’s industrial capacity, welding the two states further into the Russian economy.

Since the customs union has been in effect, Russia has quickly turned the club into a political tool, demanding that its fellow members sign onto politically motivated economic targeting of other states. In late July, Russia asked both Kazakhstan and Belarus to join a ban on wine and mineral water from Moldova and Georgia after continued spats with each of the pro-Western countries. Russia has added another level of demands in light of the grain shortages. As of this writing, neither Astana nor Minsk has accepted or declined the demands from Moscow, with grain exporting season just a month away.

Given current Russian production and storage supplies, Russia doesn’t actually need Belarus or Kazakhstan to curb their exports. Instead, it is seeking to use the drought and fires to create a regional grain cartel with its new customs union partners.

And this leads to the question of the other former Soviet grain heavyweight, Ukraine. Ukraine, which does not belong to the customs union, is the world’s third-largest wheat exporter. In 2009, Ukraine exported 21 million tons of its 46 million-ton production. Also hit by the drought, Ukraine revised its projected production and exports for 2010 down 20 percent, with exports down to 16 million tons. Some fear Ukraine will have to slash its export forecasts even further. Moscow will most likely want to control what its large grain-exporting neighbor does, should it be concerned with supplies or prices. Despite Russia’s recent actions with regard to Belarus and Kazakhstan, however, Ukraine has not publicly announced any bans on grain exports.

If Russia is going to exert its political power over the region via grain, it must have Ukraine on board. If Russia can control all of these states’ wheat exports, then Moscow will control 15 percent of global production and 16 percent of global exports. Kiev has recently turned its political orientation to lock step with Moscow, as seen in matters of politics, military and regional spats. But this most recent crisis hits at a major national economic piece for Ukraine. Whether Kiev bends its own national will to continue its further entwinement with Moscow remains to be seen.

Read more: Drought, Fire and Grain in Russia | STRATFOR

Drought, Fire and Grain in Russia is republished with permission of STRATFOR.

Drought, Fire and Grain in Russia | STRATFOR

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Rogers Says World Needs Higher Interest Rates, Commodities Set to Advance - Bloomberg

Rogers Says World Needs Higher Interest Rates, Commodities Set to Advance

By Bloomberg News - Aug 25, 2010

China and other global economies should increase interest rates to contain a surge in inflation, said investor Jim Rogers, chairman of Rogers Holdings.

“Everyone should be raising interest rates, they are too low worldwide,” Rogers said in a phone interview from Singapore. “If the world economy gets better, that’s good for commodities demand. If the world economy does not get better, stocks are going to lose a lot as governments will print more money.”

China’s central bank hasn’t increased rates since November 2007. In the U.S., the Federal Reserve this month left the overnight interbank lending rate target in a range of zero to 0.25 percent, where it’s been since December 2008, while the European Central Bank has kept its key interest rate at a record low of 1 percent.

Policy makers in Malaysia, South Korea, Taiwan and Thailand have increased the cost of borrowing at least once this year, while India has boosted rates four times in five months.

The global economy is at the risk of prolonging a recession after reports over the past two days showed U.S. home sales plunged by a record and Japan’s export growth slowed for a fifth month in July, he said.

“We never got out of the first recession,” Rogers said. “If the U.S. and Europe continue to slow down, that’s going to affect everyone. The Chinese economy is 1/10 of the U.S. and Europe and India is a quarter of China, they can’t bail us out.”

Rogers, who predicted the start of the global commodities rally in 1999, said he was short emerging markets and stocks and long on commodities.

“Commodities will go above their old high sometime in the next decade even if they only grow 5 to 6 percent annually,” said Rogers, who is a consultant for the Dalian Commodity Exchange.

Rogers said he would resume buying China’s stocks if they were to tumble as they did during the aftermath of the global financial crisis in 2008, when they plunged 65 percent. “I haven’t bought since the fall of 2008,” he said. “It it were to happen again, I hope that I’m smart enough to buy again.”

--Allen Wan. With assistance from Chua Kong Ho. Editors: Richard Frost, Linus Chua

To contact the Bloomberg News staff on this story: Allen Wan in Shanghai at awan3@bloomberg.net

®2010 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Rogers Says World Needs Higher Interest Rates, Commodities Set to Advance - Bloomberg

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