The Rome wasn't built in a day. all hidden problems that most economies have been encountering with within many years have surfaced Today the threats facing the global economy are graver than they were a decade ago. It would be hard to prevent economic catastrophe.

Last year the US housing market bubble burst. In recent years names of two giants Fannie Mae and Fredie Mac made headlines of most influential printed media. Practically all analysts mentioned two companies in the context of financial crisis. The notoriously known companies failed to set aside adequate capital to guarantee their $5 trillion debt. The securities issued by two companies were the symbol of stability; sovereign funds, banks and individuals willingly bought them on the market. Russia put $150 billion into the Fanny Mae and Fredie Mac shares. Unfortunately both American icons of the housing markets couldn't stand the crisis when it turned out that they amassed bad loans. Then they had to step back even from the basic banking services and eventually collapsed.

It was just a tip of the iceberg called "derivative financial instruments" or derivatives. Banks reaped billion profits, by stimulating money supply. They earned money by issuing currency and boosting demand for new money injections, encouraging their clients to borrow more. Result: virtual money in the world turnover amounts $65 trillion.

If only this trend could continue! Enough is enough. Virtual money supply has its limits such as: payment of taxes, wages etc lack of reliable clients . Derivatives sometimes sat in the books of the banks as assets. It was totally inacceptable and reckless. Main Western banks launched campaigns to fuel the demand for money in the emerging markets. The abundance of credits begot flippancy. Banks operating in the largest emerging economies continued to raise money abroad, without making a single effort to hold enough currency in reserve to secure their risks. Pressure was building beneath because of the virtual money that was pumped into economy.

Some analysts reckon that the decision of the financial regulators of the US taken in the mid 70s added to current crisis. In the 70s group of financiers decided to abandon the policy which was common in the times of Great depression and few decades later. In the late 20s and early 30s all businesses run by the banks were divided into retail and investment ones. In the 70s financial structures were given carte blanche to emit virtual money and thus prop up the economy. Investments banks replaced the state ones.

Then the USSR crumbled, the countries of the socialist bloc split from the metropolis. The GATT members founded the WTO. Demand for services and commodities was enormous in the area and this boosted world trade. New markets were opening,. Cash strapped emerging economies were awash with virtual money. Eventually, prices for basic services and commodities as well as prices for raw materials went up, gradually and slowly at first and then they hit record highs. Virtual money had to find the way to materialize. . Today world economy is facing stormy times. It is more critical than ever to solve the problem of the virtual money supply and find the way to balance supply and demand ratio. Financiers have to ensure a soft landing for main world markets of shares and commodities. They have to write down a part of virtual money and back the assets by issuing strong tangible currencies. Crisis has already done billions of damage. Major reliable US banks went bust and were put up to auction. Governments are battling to bail out their favorites. They are being nationalized. Examples are Bradford & Bingley in Britain and Fortis in Benelux. German government has recently poured $35 billion in Hypo Estate. The US government pushes for harsh measures in a desperate attempt to save the banking system from crash. The congress is to approve an injection of $700 million into the financial system. All states hope to restructure banks' debts via write offs and get rid of the weakest links in the financial chain, thus acting as the saviors for the system.

Governments are eager to restore stability of the financial system. That is why they are raising inconvenient question about adequacy of the bank management. On October 1 st Nelly Cruise, the EU commissioner for anti-monopoly policies noted that liquidity injections are just a part of the program designed to clean up the financial system. She said that it is salutary to increase government powers in managing banking activities overseas. The failure of the system lies with the banking policies, since many banks build shaky financial pyramids which shattered, when turmoil erupted.

The Western economies should claw their way out of the crisis. Governments will try to sort out the mess. Recession will mark new epoch in the history of the world financial market. There will be a considerable fall in supply and availability of cash, countries will be forced to live within their means. Households and businesses will cut back their expenditures. Hosing , petroleum prices which are excessive now will inevitably plummet. As one of the leading experts from the Wall Street put it we will return back into the 70s.

The Western governments are likely to set up relief programs that will alleviate pressure on their main market players. They know the rules of the game. Crisis is likely to have far more devastating effect on the major emerging economies. We are witnessing the crash of the financial system that was constructed 15 years ago. Russia, Kazakhstan China and other CIS states are particularly at risk during periods of financial turmoil. Their governments are unlikely to be able to muster the financial firepower now being deployed in the big economies of the West. Nevertheless they have to test their skills and ability to survive under new circumstances: tightened monetary policy scarce cash supply and account- deficit.

Russian teeter- totter

At first sight Russia positions in the scope of the world economy look strong. With the world's third-largest foreign-currency reserves, the depths of the Kremlin's pockets are not in doubt. In July Moscow appeared to be immune to any turmoil. It could even afford to be embroiled in a scandal with Mechel company. For instance, Mr. Putin was quoted as saying that he would personally send a doctor to the head of the company Zyuganov who claimed to be sick. That very day index of Mechel's shares shed two thirds of its value. Russian stock market also slumped..

Many Russian companies suffered losses. Their capitalization fell by $70 billion. No Russian politician was bold enough to admit that economy was sending warning signals. It was evident that Russians couldn't watch world financial hurricane from afar any more,. In July Petroleum prices hit record high $147 per barrel. Moscow was called the island of stability, by the scholars as all other countries were affected by the crisis. It was just a delay. Eventually crisis spread to Russia . In the summer major Western markets were deeply in trouble with mortgage loans. Dmitriy Medvedev promised to ensure stability of the system and urged the mass media not to "scare businesses".

Russia had hefty budget surplus that according to data issued by the mid 2008 reached $104 billion. Russia's reserves were estimated at $600 billion. Moscow was full of hubris. When Georgians invaded South Ossetia on August 8 - th Moscow not only drove them out of the rebellious autonomy, but even started to seizure Georgian cities.

Then Moscow had to withdraw its troops after uneasy negotiations with the West. Apparently, the Kremlin officials decided that a right moment to restore the Empire had come. Their main trump was growing economy and considerable sum in reserves. It appears, that the Kremlin was sure that it would be able to withstand pressure from the West , taking into account its might and economic prosperity.

In August the main debate was revolving around relationship of Russia and the West. Russia government emphasized the dependence of Western economies on Russian markets, at the same time pointing to immunity of Russia to all sanctions that might be imposed by European or American governments on it. According to the official survey, Russia imported 80% of all vehicles that ran on its roads, as well as 80% of car parts that were critical for maintenance and repairing. In August Russia slapped the US by banning import of American meat and chicken. These measures could help to protect domestic producers. It is a timely protectionist policy since Russia buys about a half of the food abroad. Moscow officials didn't seem to wobble when the foreign capital flight began. The picture looked dire, but there was a chance that the local crisis would be manageable. According to Russian officials' reckoning, the West withdrew between $15-40 from Russian banks. Still, Russia set aside enough money to compensate for its losses. The figure $15-40 billion didn't look menacing at all if measured against the positive trade surplus and hefty sum of $600 billion in reserves.

The Kremlin displayed a new military assertiveness after its "August war" with Georgia, sending cold-war bombers buzzing close to European and American airspace, holding high-profile naval exercises, announcing ambitious plans to build new aircraft carriers and testing new ballistic missiles. In August the a surge in military spending of 23% was announced. In September, it turned out that Russian seemingly indisputable detachment from the world economic was illusory.

Since late July there was a gradual fall in crude oil prices. They peaked at $147 and fell dipping to at $93.98 per barrel, according to figures tracked by the London Stock Exchange experts. Crude oil of Utal brand is even cheaper than that of Brent. If crude oil price hit new lows and a drop to $60 per barrel occurs the Russian government might fail to meet its obligations taken into account the welfare policies it sticks to. It would be hard for the Kremlin to stave off disaster.

Between 10 - 13 September dollar started to gain in value and Russians tried to get advantage of it letting ruble to slide against the US currency. Russian currency tumbled. In August you could exchange 23 rubles against one greenback. Recently, dollar has risen against rouble again, closing at 25.5 Russian roubles. This monetary policy could have been justified if ruble had declined last year. Now there is a reason for concern, an attempt to loosen monetary policy at the height of the world financial crisis might be called into question. Ruble-denominated shares of Russian companies devaluated. Result: the dollar-denominated RTS index and the rouble-denominated MICEX index have shed around two-thirds of their value.

On 17 th of September Russian stock markets slumped. The Russian government response was immediate, it managed to prevent bankruptcy of its main market players by a huge cash injection. Still many leading companies in Russia admit being in trouble.

It appeared that the overall corporate debt that amounted to $0.5 - 1.5 trillion is secured by the shares and stakes in Russian businesses. If the price of the securities that serve as a collateral falls below a certain threshold the borrower has either to return his debt or compensate the losses of the lender by returning the difference in price of the security. When the margin posted in the margin account is below the minimum margin requirement, the broker or exchange issues a margin call. The investors now either have to increase the margin that they have deposited, or they can close out their position Rossneft deal, that was mentioned in one of the Vedomosti articles vividly illustrates how this technique is being applied in Russia. On September 17 -th , 2008 the company took a short $2.3 billion credit securing the debt by 3.9 % of its shares. Unfortunately , practically all Russian companies raised huge loans on the international markets collateralizing them by their securities , so the sum that is to be returned in case of the margin call might reach double digits. No wonder, Russian officials are worried. Gazprom ran into $70 billion debt. It equals two thirds of its annual profits.

Russian stocks plunged far more sharply, than observers forecast, dealing a blow to Kremlin claims that Russia is a safe haven from global financial turmoil. Foreign investors flee from Russia, aggravating crisis in this country. In addition, Russia is in confrontation with the West. Russian stock indexes sank, getting leading Russian companies in trouble, preventing them to serve their debt in time. There was another alternative. Russian corporations could have rejected to pay the difference in accordance with margin calls contracts. A margin call occurs when investors are forced to sell holdings, like stock, to raise cash at the demands of brokers There stocks could have been sold on the free market, and acquired by unknown owners. The Kremlin shuddered at such a prospect.

The reason for sharp fall of indexes was evident: many Russian companies were woefully under-capitalized. The growth of stock indexes would be a blessing for Rosneft and the Russian corporate sector.

On September 17- 18, the Kremlin adopted a $120 billion rescue package for banks and companies. The government also came out with the initiative to buy up blue chips shares. On September 19 - th Russian stocks opened and it was marked by a slow growth of indexes. All this happened in response to urgent and drastic government measures to shore up the leading companies.

Unfortunately, the Kremlin managed to rectify wrongs only partly. On September 22t th by the close Russian stock indexes gained only 1300 points, they grew far more slowly in comparison with July. On September 26 the Russian government decided to allocate $10 billion annually to keep the state- owned companies afloat. On September 30 -th the negative answer of the US Congress, which rejected to pump additional $700 into the American economy caused panic on the Russian stock market. The Kremlin had to interfere again and buy more shares of the leading Russian businesses. Russian corporate sector accumulated huge debt. By the end of 2008 Russian companies had to find additional $45 billion to service their loans. There is a wide spread fear that it will be too late. The government can't force indexes to go up, without injecting new sums into ailing businesses or buying up their shares..

On September 29 th Mr. Putin, the Russian PM said that the government would spend only $50 and more on the top of it. The Russian officials are aware that the domestic economy is heading to downturn as it is too dependent on the Western financial markets. Payment of the corporate debt from the government pocket is the part of the relief program aimed at stabilization.

Alexey Kudrin saw things differently. His concept of development was declined by the Russian government when the crisis hit the domestic market. Alexey Kudrin was against the tax cuts and growth in government spending. According to Kudrin, generous government expenditures fueled inflation. He was severely criticized by the opponents for he encouraged the Kremlin to take extra cash from the economic turnover and invest it into the shares of foreign companies such as say Fannie Mae and Fredie Mac. Meanwhile Russian companies had to borrow money from the West not from their own state. The surplus could be used by the state to solve the most urgent economic problems.

Kudrin logic was simple enough. He and his followers still remember the 90s, when the reckless lending and borrowing policies of the state led to the default of 1998. Kudrin ideas were popular with some officials as the crisis of the late 90s etched a deep mark in their psyche. Kudrin opponents opined that there is enough stability and that Russia had to inch forward development. They argued that tax cuts could help much taking into account budget surplus. There was a bid debate surrounding the idea that the tax burden on businesses and individuals had to be eased. As a result, there wasn't any agreement between to rivaling parties on how to manage the public finance at the height of the crisis. Russia wasn't ready to economic slump, it failed to engineer the techniques to withstand it.

In the last three months Kudrin ideas have been losing their attractiveness. There was an increase in the government spending. The central government promised to raise pensions twofold in the coming year. Moscow launched a program aimed at the development of the Far East and announced ambitious economic project. Dmitriy Medvedev also promised bigger wages (up to $5000) to military officers.

On September the Russian PM noted that the government intended to fund Rosatom program and had already allocated $80billion for this purpose. Moscow plans to construct 26 nuclear power plants within 12 years. This program has to replace the old far or less realistic one. Under the previous plan 10 additional reactors had to be built by 2015. The objectives of the project are unlikely to be fully realized. Its very existence is to be questioned. The Kremlin doesn't lack money to invest into the nuclear future. Russia is physically unable to speed up the process as only one Izhorsky factory operates on its vast territory. This production unit can't build more than 1 reactor per year. The company which is ,located in Izhorsk has to meet its obligation under the contracts with foreign clients let alone other problems such as desperate need in a qualified personnel. In addition Russia produces only 3 tons of uranium a year, while it needs 9 tons to prevent a halt of the existent nuclear power plants.

Over the last decade Russian government spending has increased substantially. Spikes in spending carries certain risks however, the major one is inflation rate that tends to grow, when the government is resolved to spend more. Government spending on development of infrastructure may also lead country to catastrophe. In the late 80s the variety of practically completed or at the first stage of construction buildings emerged in the USSR. The similar fate may befall Russia. There is a threat of the drop in crude oil prices. In this case the federal government may fail to fulfill all the programs launched in the days of prosperity.

Many key Russian industries such as car one may suffer from the lack of liquidity, if the government won't back them up in the days of turmoil. Few of the existent investment projects would be able to weather the storm. Crisis might produce devastating effect on the car industry of Russia (even now parts from which car are being manufactured are imported into Russia.), or ongoing aviation projects like construction of "cool superjets".

Russian banks have grown accustomed to easy foreign lending because of the integration of global finance. The rich world's bank bail-outs may limit the squeeze, but the flow of capital to Russia will slow. Moscow will have to rely on the domestic reserves. The state is not so apt at managing finances properly. It is a bad manager. Before granting a loan the bank usually collects information on the borrower. The state would focus on the big projects and pay little attention to those initiated by small businesses . Moreover Russian government ranks high in the list of the corrupt ones.

In fact, Russia's companies and banks are scrambling to find dollars now. Even the strongest ones are in a dire state. The forecast of many observes for the future is far from being rosy . A punishing economic recession is at hand. Housing market is particularly at risk. Even a relatively brief period of rising debt, falling home values might collapse the system. And when the housing- finance system goes, the rest of the economy goes with it. Companies will start to change hands for prices that would have seemed derisory just months earlier. This will inevitably fuel inflation. The prices for basic commodities including food will surge and the government is to interfere again, issuing additional money to prop up troubled businesses and worried households. "We re heading towards the disaster. We have to enter recession ", said Mr Kudrin on October 1- st, 2008 at the conference Russia and the world financial crisis.

In August and September, 2008 Russia felt so confident that it decided to pick a fight with Georgia and clash with the West. Its declarations that it is able to rely on its economic might solely to stand a crisis should be viewed warily though. World crisis has done great damage to Russia. Russia was more dependent on the Western markets that its leaders dared to admit. The Kremlin still wants to save its face. That is why it adheres to hawkish foreign policies, despite the fact that things have changed dramatically since the day of its triumph.

Crisis of genre

What conclusion can be drawn on the basis of this survey? How can Kazakhstan cope with difficulties, arising from the world grave economic crisis? Despite cultural and economic affinities, differences between Kazakh and Russian models of development are striking. First, Kazakhstan was deeply affected by the crisis, but the hardest stage for our country is over. In contrast, Russia is to encounter all the problems Kazakhstan solved more or less successfully. The gravest period for Russian economy is yet to begin housing prices will plummet. the banks, which are eager to retain their positions will have to to get rid of non-performing loans. Second, the government spending in Kazakhstan is not so considerable as in Russia. Unlike Russia, Kazakhstan is not paternalistic state at all. Russia runs numerous welfare programs. Kazakhstani government doesn't provide generous subsidies to its citizens. The state in Kazakhstan doesn't help those people who live below the living standard to pay for the services rendered by utilities. There are not so many elderly people in Kazakhstan. Only 1.6 million aged persons receive pensions compared to 140 million of those in Russia. Kazakhstani defense spending is a fraction of that in Russia.

Kazakhstan got advantage of growing petroleum prices, slashing its taxes. In 2008 Kazakhstan set 12% VAT compared to 18% VAT in Russia. Our neighbor is unlikely to cut taxes in the foreseeable future. In addition, Kazakhstan introduced tariff on export of petroleum only this year. Russia had to charge the exporters with lighter taxes since August due to the falling oil prices.

Economic growth faltered throughout the world. This summer in Russia the production fell by 0.9 % if compared to July 2007. In Kazakhstan the production of oil is up. Russia has no reserve capacity. To tell the truth it would be harder for Moscow to attract investors. Russia also applies old methods of drilling, and is reluctant to adopt new ones.

Large gas field, located in Astrahan has much in common with Kazakh Karachaganak Tengiz and Kashagan ones. High pressure and excessive content of sulfur requires very specific approach. Only certain technologies can be utilized to extract this gas without damaging the environment and losing a part of the precious natural resource. Gazprom lacks resources and technologies to build the plants that allow to extract gas and pump it back , without damaging the soil layers. These works have been constructed in Karachganak, Tengiz, Kashagan area , however.

Another difficulty Kazakhstan is likely to encounter with in the future stem from the companies , which invested in Russian developers' projects. The words of Neilly Krus, about the control over overseas activities of the banks are worth considering in Kazakhstan. Let's imagine how much money has been poured into the Russian projects. Take frozen assets of TuranAlem Bank for example. If TuranAlem fails to manage bad loans itself the government will be forced to interfere. Financiers would prefer monetary injections. The state would try to save the banks from bankruptcy in exchange for their property , following the pattern of British and Benelux bureaucrats , which bailed out Bradford& Bingley and Fortis in exchange for their shares.

Financial world has changed and Kazakhstan has to devise a plan to steady the ship and adjust to less friendly environment.