In the last few days, we have seen many events that will have long-term consequences. The most visible was the cut-off of Russian gas, which travelled via Ukraine, that had an impact on most EU member states.
Many political analysts, and Ukraine, have been trying to portray the crisis as a Russian attempt to make Ukraine submit to its will, and to show the world that Russia is still the superpower it once was.
Russian side had, on the other hand, always emphasised that this was a commercial disagreement, and that politics plays no part in it.
A simple fact is, that Ukraine was paying $179 for gas, while EU customers were paying an average of $450 for the same quantity. Russia was thus greatly subsidising Ukraine. Because Ukraine has started to move towards West and was during the war in Georgia openly hostile to Russia, it is normal to expect that Russia does not want to subsidise Ukraine anymore.
Russia has suggested a price increase to $250, still considerably lower than the $450 that the EU is paying, but Ukraine has rejected the offer.
Moreover, it even did not pay for the gas it received at the price of $179 on time. It only did so when Russia has threatened a cut-off.
Just imagine yourself having a contract with a Utility company, failing to pay for the gas you consume and would reject their price increase. They would turn switch your gas off in the blink of an eye.
But if there would be pipelines crossing your land, and you would be tapping that energy, which was meant for your neighbours, you would quite quickly get a visit from the police.
Because there is no international police, Russia was left with no choice but to switch the gas off, rather than to let Ukraine steal it. They demand EU observers to monitor the flow of gas through pipelines as a condition for restarting gas supplies.
There is also an issue of “technical gas” that is used to operate the pipeline. If Russia keeps on paying Ukraine a transit fee, it is most probably the duty of Ukraine to ensure there is enough technical gas in the pipelines.
In other significant development, General Motors has, less than a month after receiving government subsidy, made a prognosis that the volume of car sales is going to be significantly lower than their projections, which opens up a possibility for another round of subsidy requests.
There were also some events that were not front-page, but will carry long-term consequences.
Most significantly, interest rate spread on ten year government bonds of Germany on one side and Spain, Greece, Italy and Portugal on the other side, has widened considerably, to the highest level since the adoption of Euro. This means that the market participant have started to differentiate between the risk of German bunds and bonds of Italy and Spain. The spread now stands at 115 basis points, up from the lowest level of 13 basis points.
This is a punishment for the countries that have, after joining Eurozone, lost their zeal for reform and, at the same time, encouragement for new reforms. Italy finds itself in the hardest situation, with public debt greater than their GDP, and for which the increased interest payments mean considerable worsening of their macro-economical situation.
On Thursday, ECB has lowered their interest rate to, as expected, 2%, which shows that the crisis is deepening and that not even the EU is immune.
Investors of Madoff have had mixed successes, while he languishes in house-arrest. Those who invested via banks have a chance of reclaiming their money from them, as they did not do proper due diligence.
Those who withdrew the money from him in the past few years might receive a court order to repay their money, so that it can be divided equally among all the investors.
Forex markets have gone haywire as well. Eur/Usd, which traded at 1,42 USD for Euro at the beginning of the year, has fallen to 1,3, and traded at 1,32 on Friday.
Even bigger swing happened with Eur/GBP, from 0,97 to 0,885 pounds per Euro.
All this shows that the crisis is still strong and that we will still see some interventions before the crisis is over.
This is an English translation of an article by Mitja Sadar that was published, in Slovenian, in the leading SlovenianInvestment Magazine KAPITAL, on 19.01.2009. Original article is available at the following URL: http://www.revijakapital.com/kapital/poslovnefinance.php?idclanka=6420
