Georgia and Russia
Russia has the upper hand
Russia has extended the conflict to a war inside Georgia. The West will have a hard time responding
GEORGIAN troops would withdraw from South Ossetia and would cease firing on the advancing Russians, said Georgia’s president, Mikheil Saakashvili, on Sunday August 10th. But the war rages on. Russia has not only tightened its hold on the breakaway region. It has hit the Georgian city of Gori, in Georgia proper, with airstrikes and is reportedly sending ground forces that way. Russia has also moved on Abkhazia, a separate breakaway region in western Georgia. Russia also says that it has lost four aircraft, shot down over Georgia.
Georgia began shelling South Ossetia—a tiny territory run by Russia’s security forces and a clique of local thugs who live off smuggling goods and pocketing Russian aid money—on August 7th and 8th. At first Russia sent in tanks, but its response escalated quickly to a full-scale invasion. A host of factors give Russia the upper hand. One is, of course, Russia’s military preponderance over its small neighbour. Another is geography: Georgia is not so near other American or NATO interests that the feelings of these latter need to be taken overmuch into account.
To much of the Western world, the Russian-Georgian war is a straightforward case of a powerful, autocratic nation bullying a weak democracy nearby. But many complications make a meaningful response hard. One is that Georgia has not been lily-white itself. The government, led by the pro-western Mr Saakashvili, tarnished its image last year with a crackdown on protesters. And in response to nationalist pressures, he has begun in the past year to try to tighten Georgian control over South Ossetia and Abkhazia, a separatist region on the Black Sea coast in which Russia has much more strategic interest. It appears that Georgian forces erred badly by shelling South Ossetia last week, but in any case it seemed only a matter of time before Russia responded.
Georgia has called on the outside world to intervene. But it is not clear how effective any response would be. Russia would veto any action at the UN Security Council. Neither NATO nor the European Union have put Georgia on the fast track to membership; if they had, Russia may not have felt so bold. Leading European countries have called for a ceasefire, but have been somewhat even handed in their language. A group of states formerly dominated by Russia—the Baltic republics and Poland—issued a statement more strongly decrying Russian bullying. But some of the bigger EU countries see Georgia’s provocation of Russia as irresponsible. Georgian leaders, in response, ruefully note Europe’s dependence on Russian energy supplies.
The American reaction has been not much clearer. On Sunday America’s vice-president, Dick Cheney, said that Russia’s military action “must not go unanswered”. George Bush, visiting the Olympics, has called for an immediate end to the fighting. So have the two presidential candidates, John McCain and Barack Obama. All put the blame on Russia. But America, besides helping to bring Georgia’s troops home from Iraq quickly, does not have many obvious tools to hand. There is no talk of any military response; America will join mediating efforts with the Organisation for Security and Co-operation in Europe and the EU.
Russia sees it actions as having a parallel in Kosovo. In 1999, NATO fought a war to protect the Albanian-majority province of Yugoslavia from a Serbian crackdown, despite Russian opposition. This year, many western countries recognised Kosovo’s declaration of independence, while somehow suggesting that Kosovo should not set any precedent. Russia claims to see in South Ossetia a friendly and oppressed region seeking independence from a larger country. But the disproportionate Russian response signals far more than concern for hard-pressed South Ossetians (and Russia’s “citizens”, South Ossetians recently given Russian passports). It may be a naked challenge to the West: Russia expects the response to be no more than diplomatic manoeuvres. Russia may also be seeking the removal from power of Mr Saakashvili, sending a signal to other countries on its periphery that, in breaking from Russia and moving westwards, they are playing a dangerous game. That signal is coming through loud and clear.
Russia Reportedly Seeks NATO Meeting Over Georgia Crisis
DEVELOPING STORY: Russia is seeking an emergency meeting with NATO to discuss the growing crisis with Georgia over the breakaway province of South Ossetia, Reuters reports.
Meanwhile, Georgian President Mikheil Saakashvili said on Monday he backed a plan proposed in talks with a European envoy calling for a return to pre-conflict positions in South Ossetia, a joint peacekeeping force and monitoring by Europe's largest security body.
"We signed a plan saying that the status quo ante is to be restored," Saakashvili told reporters after holding talks with French Foreign Minister Bernard Kouchner.
In Tbilisi, Georgia, a Defense Ministry spokeswoman says Russian armored vehicles have rolled into a Georgian military base in western Georgia.
Spokeswoman Nana Intskerveli told the Associated Press that Russian armored vehicles seized the Georgian military base in the town of Senaki.
The statement indicates Russian troops have entered Georgia beyond the disputed territories and that they arrived from separatist province of Abkhazia.
Most of Georgia's military forces are locked up in fighting around another breakaway region of South Ossetia. Refresh for latest developments. The latest complete report can be found below: WASHINGTON, D.C. — The world's seven largest economic powers on Monday urged Russia to accept an immediate cease-fire with Georgia and agree to international mediation over the growing crisis in Georgia's separatist areas that is verging on all-out war. Secretary of State Condoleezza Rice and her colleagues from the Group of Seven leading industrialized nations spoke by telephone and pledged their support for a negotiated solution to the conflict that has been raging since Friday between the former Soviet state and Russia, a State Department official said. Rice and the foreign ministers of Britain, Canada, France, Germany, Italy and Japan called on Russia to respect Georgia's borders and expressed deep concern for civilian casualties that have occurred, the official said. Georgia had already signed a cease-fire agreement and "called on Russia to accept an immediate cease-fire," according to the official, who spoke on condition of anonymity because the call had not yet been formally announced. The ministers gave their backing to mediation efforts led by French Foreign Minister Bernard Kouchner, whose country currently holds the rotating presidency of the European Union, and Finnish Foreign Minister Alexander Stubb, whose country now holds the chair of the Organization for Security and Cooperation in Europe. The call came as swarms of Russian jets launched new raids on Georgian territory and Georgia faced the threat of a second front of fighting as Russia demanded that Georgia disarm troops near the breakaway province of Abkhazia. The Group of Seven, or G7, is often expanded into what is known as the G8, a grouping that includes Russia, but Russia's Foreign Minister Sergei Lavrov was notably not included in the call. The State Department said over the weekend that families of diplomats in Georgia could leave but that diplomats would remain. The United States is widening its rhetorical campaign to get Russia to halt its retaliation against Georgia for trying to take control of the breakaway province of South Ossetia. The conflict began there on Thursday when Georgia tried to regain control of the breakaway region. The United States recognizes it as part of Georgia but it has been under de facto Russian control for years. In an interview with NBC Sports, Bush criticized the violence, calling it unacceptable and Russia's response disproportionate. "I've expressed my grave concern about the disproportionate response of Russia and that we strongly condemn the bombing outside of South Ossetia," Bush said in Beijing, where he is attending the Olympic Games. Bush said he made the point directly to Prime Minister Vladimir Putin before the opening ceremonies Friday — Putin left China the next day — and by phone to Russian President Dmitri Medvedev. "I was very firm with Vladimir Putin," Bush said. "Hopefully this will get resolved peacefully." Vice President Dick Cheney told Georgia's pro-American president that "Russian aggression must not go unanswered, and that its continuation would have serious consequences for its relations with the United States," Cheney's office reported Sunday. "The vice president expressed the United States' solidarity with the Georgian people and their democratically elected government in the face of this threat to Georgia's sovereignty and territorial integrity," Cheney press secretary Lee Ann McBride said. Asked to explain Cheney's phrase "must not go unanswered," White House spokesman Gordon Johndroe said, "It means it must not stand." White House officials refused to indicate what recourse the United States might have if the attacks continue.
Aug. 11 (Bloomberg) -- Just as the Bush administration prepares to take a bow for persuading China to let the yuan strengthen 18 percent against the dollar over the past three years, the gains are grinding to a halt.
The yuan retreated in the last two weeks after government officials said supporting growth is as important as fighting inflation. That raised speculation that currency policy will be adjusted to bolster exports as the trade surplus shrinks. Legg Mason Inc.'s Western Asset Management Co. is trimming bets on the yuan after it rose in July by the smallest amount in a year.
``Exporters are crying,'' said Rajeev De Mello, head of Asian bonds in the Singapore office of Western Asset, which manages $600 billion. ``There's a slowing in the economy. There will be less and less appreciation in the currency.''
The yuan fell 0.24 percent to 6.8588 per dollar in the five days ended Aug. 8, near a six-week low. It dropped 0.34 percent the week before, the most since China scrapped the currency's peg to the dollar in July 2005. The People's Bank of China has kept the yuan little changed since June, after gains of 4.1 percent in the first quarter and 2.3 percent in the second.
U.S. Treasury Secretary Henry Paulson, writing this month on the Web site of Foreign Affairs magazine, said yuan strengthening still has ``much further to go.'' Of the advance since the peg ended, Paulson said 70 percent has come about since he initiated semiannual economic talks with China in 2006.
Global Slowdown
China is reining in yuan appreciation to help exporters weather a global slowdown and deter so-called hot money, speculative funds attracted by anticipated gains in the currency. The yuan recovered from earlier losses today after a government report showed export growth unexpectedly gathered pace in July and the trade surplus widened for the first time in four months.
Overseas sales rose 26.9 percent from a year earlier, after climbing 17.2 percent in June, and the surplus totaled $25.3 billion. Economists forecast a 16.8 percent gain and a gap of $20.25 billion, Bloomberg surveys showed. China's currency ended up 0.02 percent at 6.8577 per dollar as of 5:30 p.m. in Shanghai, having earlier fallen as much as 0.11 percent.
``For the next three to six months we could see a weaker yuan,'' said Phillip Blackwood, head of the emerging-markets division of Sydbank A/S, Denmark's third-largest bank by market value. ``The slowdown is spreading to China.''
The currency may fall as much as 2 percent, Blackwood said. He oversees $5 billion of emerging-market bonds for the bank in Aabenraa, 25 kilometers (15.5 miles) north of the Danish-German border. Blackwood would consider buying if the currency falls ``a couple'' of percentage points, he said.
More Gains Coming
It's too soon to start betting on the dollar rising against the yuan, Goldman, Sachs & Co. told clients last week.
``It would be the wrong decision to close long yuan exposure at these levels,'' Thomas Stolper, a London-based strategist at the world's biggest securities firm by market value, wrote in an Aug. 5 research note. China's yuan is likely to appreciate versus the dollar ``almost three times as fast'' as traders predict because money flowing into the country is still increasing, Stolper said.
China's economy, the world's fourth largest, expanded 10.1 percent in the second quarter from a year earlier. While that is the slowest pace since 2005, it's still the fastest among the world's 20 biggest economies.
The yuan is likely to strengthen 3.4 percent to 6.63 in the second half of the year, according to the median estimate of 25 analysts surveyed by Bloomberg.
Less Appreciation
So-called non-deliverable forward contracts indicate investors have been scaling back bets on currency gains. They suggest the yuan will reach 6.6060 per dollar in the next 12 months, an advance of 3.8 percent from the current exchange rate.
Two weeks ago the contracts, which allow traders to bet on the future value of China's currency, predicted an advance of 5.3 percent. At the start of last month, they priced in a 6 percent rise.
Forwards are agreements to buy and sell assets at current prices for delivery at a specified time and date. Non- deliverable contracts are used for currencies that can't be freely converted and are settled in dollars.
China let the yuan strengthen against the dollar for the first time in a decade after mounting criticism from the U.S. and Europe that the nation had an unfair trade advantage. The U.S. trade deficit with China ballooned to a record $256 billion last year, equivalent to about a 10th of the Asian nation's gross domestic product.
Sliding Reference Rate
The central bank manages the yuan against a basket of currencies by setting a daily reference rate versus the dollar. China's currency can fluctuate 0.5 percent on either side. The bank today lowered the rate for the ninth time in a row, the longest run of reductions since the peg ended.
Chinese President Hu Jintao cautioned this month against overestimating the benefits to the economy of the Beijing Olympic Games. He also said maintaining steady and fast expansion, while controlling inflation, is a priority.
New York-based JPMorgan Chase & Co., the world's sixth- biggest currency trader, on Aug. 1 advised investors to close bets that the yuan will be higher in three months. It cited ``increasing growth headwinds'' for the economy. Singapore-based currency strategists Claudio Piron and Yen Ping Ho had recommended the position just 12 weeks earlier.
``There's no opportunity to make money on the yuan revaluation,'' said V. Anantha-Nageswaran, head of investment research for Asia and the Middle East at Bank Julius Baer (Singapore) Ltd., part of Switzerland's biggest independent money manager.
Paulson's Visits
A retreat in the Chinese currency may take the shine off Paulson's successes in the run-up to the November election, after which President George W. Bush and his cabinet will step down.
The Treasury chief, who says he has visited China more than 70 times, will leave behind the worst housing slump since the Great Depression and an economy that may be shrinking.
Yuan gains won't help the U.S., said Zuo Xiaolei, chief economist in Beijing at China Galaxy Securities Co., the nation's biggest brokerage.
``The U.S. has no reason or justification to push for further appreciation,'' he said. ``The U.S. needs money to clean up the collapse of its housing market and that will require a stronger dollar to lure back investors.''
Aug. 11 (Bloomberg) -- The U.S. economic slump will extend into 2009 as the longest expansion in consumer spending on record comes to an end, according to a Bloomberg News survey.
The world's largest economy will grow at an average 0.7 percent annual pace from July through December, half the gain in the first six months of the year, according to the median forecast of 50 economists surveyed from Aug. 1 to Aug. 8.
Household spending, which has grown every quarter since 1992, is projected to stall in the last three months of the year as the impact of tax rebates fades, wages fail to keep up with inflation and property values fall. The jobless rate, now at 5.7 percent, will reach a five-year high of 6 percent in early 2009.
``The consumer is very much squeezed,'' said John Lonski, chief economist at Moody's Investors Service Inc. in New York. ``The downside risks swamp whatever the economy's upside potential would be.''
Spending is likely to grow at a 0.6 percent annual pace from July through September, down from a 1.5 percent pace in the previous three months when the arrival of almost $78 billion in tax rebates helped Americans overcome the surge in fuel and food prices. Most of the remaining rebate checks were sent out by mid July.
Analysts say the impact of the rebates, part of a $168 billion economic stimulus plan President George W. Bush signed in February, will be gone by the fourth quarter.
`Lower Spending'
``What's it going to look like once that stimulus runs out?'' said Jonathan Basile, an economist at Credit Suisse Holdings USA Inc. in New York. ``The profile that we think consumers are going to follow over the remainder of the year is one of lower spending.''
Economists anticipate economic growth will keep slowing next year, with gross domestic product expanding 1.5 percent compared with the 1.6 percent projected for 2008. Last month, economists said the economy would grow 1.7 percent in 2009.
The odds of a recession occurring within the next 12 months are 51 percent, little changed from last month's projection, after climbing as high as 70 percent in the April survey.
Slower growth may ease inflation concerns. Consumer prices will rise 4.3 percent this year, the most since 1990, before drifting down to 2.5 percent by the end of the third quarter of 2009, the survey showed.
``The inflation rate is going to come down,'' said Michael Hanson, a senior economist at Lehman Brothers Holdings Inc. in New York. ``The rapid increases in the oil price that we saw earlier in the year are not likely to continue.''
Less Inflation
A survey out today of 25 bond fund managers controlling $1.41 trillion of assets found that 79 percent expect inflation ``to moderate late this year into 2009,'' according to Jersey City, New Jersey-based Ried, Thunberg & Co.
Household incomes will suffer as salaries fail to keep up with inflation. The Labor Department last month said wages in June decreased 0.9 percent after adjusting for inflation, the biggest drop since September 2005, and were down 2.4 percent over the last 12 months.
The decline in buying power is one reason economists forecast spending will slow.
Retailers are feeling the pinch as consumers spend a greater share of their income on food and fuel. Sales at U.S. stores open more than a year grew 2.6 percent last month, the smallest gain since March, the International Council of Shopping Centers said Aug. 7.
Wal-Mart Stores Inc., the world's largest retailer, last week said August sales won't grow as quickly as July's. The company's stock fell the most since 2002 following the announcement.
Rising Unemployment
A weakening labor market also is weighing on consumers. The survey indicates that after rising to 6 percent in early 2009, the unemployment rate will remain at that level through the first nine months of the year. Economists last month forecast unemployment would peak at 5.8 percent.
Payrolls dropped in July for a seventh month, for a total of 463,000 jobs lost so far this year.
The increase in the jobless rate will not prevent Federal Reserve policy makers from raising the benchmark interest rate, economists said.
``The unemployment rate will probably drift upwards, but if it doesn't accelerate, the Fed will probably feel like it can begin safely raising rates,'' said Tom Fullerton, professor of economics at The University of Texas at El Paso. ``It would be surprising if the Fed did not raise short-term interest rates.''
The Fed will keep its benchmark interest rate at 2 percent through March 2009 and then raise it by three-quarters of a percentage point by the end of September, according to the survey. That forecast is unchanged from last month's survey.
Aug. 11 (Bloomberg) -- U.S. stocks retreated, led by financial shares, after regulators started an investigation into National City Corp.'s lending practices and Standard & Poor's cut some credit ratings on Fannie Mae and Freddie Mac.
National City, Ohio's largest bank, started an informal probe into the company's lending and sale of its subprime home unit. Fannie Mae, the largest U.S. mortgage finance company, dropped as S&P reduced its preferred stock and subordinated debt ratings because of falling home prices and higher credit expenses.
The S&P 500 lost 4.31 points, or 0.3 percent, to 1,292.01 at 9:40 a.m. after capping its best weekly gain since April on Aug. 8. The Dow Jones Industrial Average slipped 52.28, or 0.5 percent, to 11,682.04. The Nasdaq Composite Index retreated 6.67, or 0.3 percent, to 2,407.43. Almost two stocks dropped for each that rose on the New York Stock Exchange.
The S&P 500 trades for 25.9 times the reported profit of its companies, the highest since December 2003, according to data compiled by Bloomberg. Among the 23 developed nations that make up the MSCI World Index, only Switzerland at 29.6 times earnings is more expensive. Ireland is cheapest, with the ISEQ Index trading for 7.1 times earnings.
Fannie Mae lost 2.2 percent to $8.85. The preferred stock and subordinated debt ratings at both Fannie and Freddie were cut three levels to A- from AA-, S&P said. Fannie Mae was also cut to ``market perform'' from ``outperform'' by analysts at Keefe, Bruyette, & Woods Inc.
National City
National City fell 5.5 percent to $4.84. The bank was asked in June to provide the regulator with ``certain documents concerning its loan underwriting experience, dividends, bank regulatory matters and the sale of First Franklin Financial Corp.,'' Cleveland-based National City said.
Among S&P 500 companies, 19 are scheduled to report quarterly results this week, down from at least 74 last week. They include Wal-Mart Stores Inc. and Macy's Inc. Earnings at companies in the S&P 500 will advance 2.3 percent this year, according to analyst estimates compiled by Bloomberg. That compares with forecasts for a 15 percent increase at the end of last year.
Economists predict U.S. retailers will say sales dropped in July for the first time in five months as record gasoline prices siphoned the cash from tax rebates. Purchases fell 0.1 percent after a 0.1 percent gain in June, according to the median estimate in a Bloomberg News survey before the Commerce Department's Aug. 13 report.
Other reports may show food and fuel prices pushed up the cost of living and manufacturing stagnated.
S&P 500 Rebound
After falling to a 2 1/2-year low on July 15, the S&P 500 rebounded 6.7 percent. It's still down 12 percent this year as record fuel costs and bank losses stemming from the U.S. mortgage crisis prompted analysts to lower profit estimates.
Leadership in the market reversed as the S&P 500 rebounded. Financial shares have led the gain among 10 industries since July 15, rising 27 percent as a group. Energy shares have fared the worst, losing 8.4 percent as of the start of trading today. In the previous 12 months, energy shares had posted the only advance among 10 industries, while financial shares slumped 53 percent for the worst performance.
Second-quarter earnings are down 23 percent on average from a year earlier for the S&P 500 companies that released results so far, according to data compiled by Bloomberg. Profits are poised to retreat for a fourth straight quarter, the longest slump since 2001-2002.
Financial company earnings have declined 91 percent after banks and brokerages including Merrill Lynch & Co. and Citigroup Inc. posted losses. Profits at consumer discretionary companies have declined 80 percent following losses at General Motors Corp. and Ford Motor Co.
Earnings Watch
More than 71 percent of S&P 500 companies have beaten analysts' average second-quarter earnings projections, compared with 70 percent in the first quarter, according to the Bloomberg data. Still, the misses have been larger, dragging the index's aggregate earnings almost 8 percent below estimates compared with 2.6 percent below in the first quarter.
A retreat in commodity prices helped send the S&P 500 to its steepest weekly rally since April last week. The U.S. Dollar Index had its best weekly gain since January 2005 as oil dropped for the fourth time in five weeks.
The Federal Open Market Committee voted last week to leave its target rate for overnight lending between banks unchanged and indicated it's not likely to raise it until credit losses subside. Recent declines in raw material prices may support the Fed's prediction for inflation to ease through next year. The statement, released Aug. 5, drove stocks to the biggest daily gain in four months.
Financials in the S&P 500 rose 1 percent last week even as Fannie Mae and Freddie Mac cut their dividends.
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