2015 and all that

December 31, 2014

People watch as confetti falls during the annual "air worthiness" test in preparation for New Year's Eve celebrations in Times Square, New York

The last day of the year and all is quiet – but not for long.

Unless the price of oil bounces markedly or Vladimir Putin walks away from Ukraine thereby loosening western sanctions – both unlikely – Russia could be heading for a serious economic fall. Reserves are being burned defending the currency. They are sufficient for now but without hefty tax increases, public spending cuts and/or a higher pension age the outlook for 2016 and beyond is much gloomier.

By then foreign currency reserves and the country’s rainy day funds could be exhausted and if oil keeps dropping that day will be hastened. Even now, with interest rates at a punitive 17 percent, the government is forecasting a deep recession next year coupled with double-digit inflation – i.e. stagflation.
Ordinary Russians are really going to feel this from the new year.

One bank has already been bailed out and the economic slump and unstable rouble could well push others into strife. Ratings agency Standard & Poor’s says it may cut Russia’s credit rating into junk territory as soon as mid-January.

How will Putin respond to all this? That’s the 64 billion rouble question. The increase in military spending to 35 percent of Russia’s entire budget next year is something to ponder.

Ukraine will have to get money from the IMF and European Union soon or face an even more dismal position.

Greek elections on Jan. 25 exemplify the big political question for western Europe — will the centre hold? Even if anti-bailout Syriza wins it will need coalition partners which may temper its approach, and given it is intent on staying in the euro zone it will have to negotiate with Berlin and Brussels rather than simply walk away from its debts and austerity commitments.

With a banking union now in place in Europe, most Greek debt held by other euro zone governments and the European Central Bank poised to launch into quantitative easing, there are good reasons to think that Greece can no longer threaten the currency bloc as a whole, no matter what happens.

But all the focus has been on financial contagion. There is also the issue of political contagion with parties from outside the establishment and centre ground burgeoning in any number of EU countries.

Syriza leader Alexis Tsipras wasted no time this week swapping supportive tweets with the leader of Spain’s surging left-wing Podemos party. The far right is strengthening in France, Scandinavia and the Netherlands. The Irish government is teetering despite a strong recovery there. Then there is the most unpredictable British general election for generations in May. That could bring the prospect of Britain leaving the EU a step closer.

This time next year, one can only guess at what the European political landscape will look like.

Economically, the glass half full brigade say all will be well if the European Central Bank launches unlimited government bond-buying with new money – possibly at its late January meeting.

ECB President Mario Draghi has made it abundantly clear that he will move with a majority behind him so opponents of QE on the Governing Council will not have the numbers to stop it. The question is whether Draghi can marshall his forces to back an unlimited programme or whether the likes of Bundesbank chief Jens Weidmann will succeed in limiting its scope. If it is the latter it is unlikely to do the trick in reviving a moribund euro zone economy.

A deal on Iran’s nuclear programme is due to be struck in broad outline by the end of March and against Islamic State, Washington and Tehran are at least fighting on the same side. How closely they are operating together is a matter for debate.
A deal with Iran could help unlock a transition out of war in Syria. The Assad regime is ultimately reliant on the support of Iran. Failure, and regional sectarian splits are likely to widen.

Islamic State may have been curbed by U.S. air strikes helping Iraqi and Kurdish forces but the group still controls swathes of Iraq and Syria and the future for both countries looks fractured. IS also appears to be opening new fronts: in the Sinai peninsula, in Libya, possibly Yemen.

As the death toll nears 8,000, the early months of 2015 will be crucial for efforts to get on top of Ebola. The scientist who helped discover the virus in 1976 predicts it will last through 2015.
A major U.S. military deployment to build treatment centres has helped slow new cases there but the virus continues to spread in Guinea and is doing so intensely in Sierra Leone. Authorities are more attuned to the risks and need for immediate contact tracing, suggesting outbreaks will be better contained.

That brings us back full circle to electoral politics. Nigeria, Africa’s biggest economy, top oil producer and most populous nation goes to the polls mid-February with an Islamist insurgency that makes any sort of credible election in the northeast impossible. The collapse of oil prices and lacklustre economy after four years of President Goodluck Jonathan means it could be a close race.

Every country will be affected by the price of oil in 2015. Stay low and it will boost spending power and growth but also quite possibly push inflation in the euro zone deeply negative. For oil producers be they Russia, Nigeria or Iraq, the outlook is more straightforwardly bleak. That may shake the global kaleidoscope more than anything else.

Happy new year to you all!


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