UK, EU leaders set to clash over financial regulation

The extent to which British regulators can write their own banking rules remains a stumbling block ahead of a summit of European Union leaders on Thursday that will try to thrash out a deal to keep Britain in the bloc.

The latest draft seen by Reuters of Britain's "new settlement" with the EU shows disagreement over the conditions for granting leeway to national regulators whose currencies are outside the euro zone.

Where negotiators had hoped to settle issues of economic governance before the summit, the final draft leaves a key section on financial regulation in square brackets, indicating it will be thrashed out at the top political level.

Britain plans to hold a referendum, probably in June, on whether to stay a member of the EU and the draft, which maps out a new deal with the EU, is aimed at persuading Britons to stay in the 28-country bloc.

ADVERTISING

 

The draft says regulators outside the euro zone, such as the Bank of England in London, are responsible for supervision of their own banks and markets when it comes to preserving financial stability.

But this is subject to two conditions which lawmakers in Britain have said negates the freedom being offered.

The latest draft still says that a regulator such as the BoE must take into account the "requirements of group supervision" - a reference to the European Central Bank, which is the group supervisor for the euro zone's top lenders which have operations in London.

Secondly, "this is without prejudice to the development of the single rulebook" and to "the existing powers of the Union institutions and relevant Union bodies to take action that is necessary to respond to threats to financial stability," the draft text says.

The ECB would be included in a list of relevant union bodies, adding to concerns over the scope for the BoE to regulate its own markets.

Ukrainian pilot to tell Russian court: Free me or watch me starve to death

A Ukrainian woman pilot on trial in Russia over the killing of two Russian journalists plans to tell a court to release her within 10 days of pronouncing its verdict or she will starve herself to death.

Nadezhda Savchenko, 34, was captured by pro-Moscow rebels in eastern Ukraine in June 2014 and denies any wrongdoing.

The helicopter pilot, who faces up to 25 years in jail if found guilty, has become a national hero for many in Ukraine who see her as a symbol of anti-Kremlin defiance.

ADVERTISING

 

Savchenko said on Thursday she was going on hunger strike to protest the length of what she said was an unjust legal process after the judge in her trial adjourned proceedings just as she was about to deliver a final speech.

On Friday her sister published on social media the text of what she had planned to say in court.

Peppered with excoriating criticism of modern Russia and President Vladimir Putin, it makes clear Savchenko plans to try to use her hunger strike to force Moscow to do a deal with Ukraine to release her.

Once the verdict is pronounced the text of her speech shows she plans to deliver the court an ultimatum.

"Russia will have no more than 10 days to return me to Ukraine from where they snatched me," she wrote.

"TOTALITARIAN REGIME"

Referring to a possible deal for her release that might involve Russia, Ukraine and the West, she wrote: "While this trading over me continues, life will be leaving me, and Russia all the same will return me to Ukraine dead or alive."

It is unclear whether the court will allow her to read out the speech. Her defense lawyers have accused Moscow of conducting a "show trial" and Western politicians and rights groups have called for her release.

"I want the entire civilized and democratic world to understand that Russia is a third-world country with a totalitarian regime and a despotic dictator, in which they spit on human rights and international law," Savchenko wrote in the text released by her sister.

Putin, she wrote, was a "tyrant with imperial ambitions suffering from a Hitler/Napoleon complex."

Ukrainian President Petro Poroshenko said on Friday Kiev would redouble its efforts to bring Savchenko home.

"This farce absolutely cannot continue," his press service quoted him as saying.

State prosecutors' allegations center on Savchenko's conduct during the separatist conflict in eastern Ukraine, which pits pro-Kremlin rebels against the Ukrainian army.

Prosecutors say that in June 2014 Savchenko had helped to direct artillery fire in the Luhansk region where a shell killed two Russian television reporters.

Her lawyers say the time and location of calls made from her mobile phone disproves the allegations.

A verdict is expected in the case soon.

Russia could cut defense procurement spending: sources

The Russian government is considering a 5 percent cut in defense procurement spending this year, sources say, showing not even Vladimir Putin's plan to restore Moscow's military might is immune to the pain of a slowing economy.

The president has made beefing up the military a national priority, and the fact it is up for discussion is a sign that no area is safe from budget cuts as Russia begins a second year of recession following a fall in oil prices and Western sanctions.

The proposal is backed by the finance ministry and has the support of several other ministries and state institutions, enough for it to be put forward for discussion at a cabinet meeting, four official sources said.

A 5 percent cut in defense procurement spending would save the government no more than 100 billion roubles ($1.29 billion), according to an estimate by one official who spoke to Reuters.

But this is not about money, it is about a political precedent," the official said".

If approved, the 5 percent cut would be the biggest in defense spending under Putin, who has been Russia's dominant leader since 2000. In 2011, while prime minister, he announced plans to revitalize the Russian army and its aging equipment by spending 23 trillion roubles by 2020.

The cut would represent a small but symbolic victory for the finance ministry which has said Russia can no longer afford a multi-billion-dollar revamp of the armed forces and called for a 10 percent spending across ministries.

Defense spending is budgeted at 4 percent of gross domestic product this year, or about a fifth of all government spending, and Russia has military engagements in Syria and Ukraine.

Moscow spent 2 trillion roubles on defense procurement in 2015, Deputy Defense Minister Tatiana Shevtsova said last year. That represented over 60 percent of total budget spending on national defense.

IMPOSSIBLE BURDEN

One of the sources, who all spoke to Reuters on condition of anonymity, said there had been talk of proposing a 7 percent cut but there was "mighty opposition" from the defense ministry to that plan and the reduction would probably be 5 percent.

There is no final decision and it is yet to be approved by the prime minister or the president, two senior officials said.

"But we are trying to persuade our bosses that it is impossible for the budget to bear such spending today," a source in the finance ministry said.

A finance ministry spokeswoman declined to comment. The defense ministry did not immediately reply to a request for comment.

Asked whether Russia was considering cutting military spending, Kremlin spokesman Dmitry Peskov said various options are being considered and a final decision had not been taken.

Budget amendments, which would include the cut in spending on defense orders, are to be submitted in April.

The 2016 budget adopted last October allowed for a rise in military spending even though the economy was in recession, hit by the slump in the price of oil and Western sanctions imposed over Russia's actions in Ukraine.

Already the world's third biggest spender on defense, after doubling expenditures in the past decade, Russia has allocated 3.14 trillion roubles to the military this year, up from 3.12 trillion roubles in 2015.

That increase was approved despite finance ministry opposition and followed a battle among government factions over whether Russia should prioritize national defense or fiscal stability.

When Putin announced his defense revamp in 2011, the government expected GDP growth of 6 percent throughout the decade. This year the economy is facing its second year in row of falling GDP, its longest recession in two decades.

Oil, which together with a small basket of other commodities makes up half of state revenues, is now selling at slightly above $30 per barrel, just over half the level the Russian government had expected for this year in late 2015.

Russia has not said how much it is spending on military operations in Syria that began on Sept. 30. But Finance Minister Anton Siluanov said last year there were no plans to provide additional financing in 2016 to cover the cost of the operation.

Ever so slowly, the euro zone economy awakes

Moribund. Decrepit. Sclerotic. Popular words to describe the economy shared by the 19 countries of the euro zone - but perhaps no longer apt.

Very slowly - and primarily because of massive stimulus from the European Central Bank - the euro zone is showing signs of recovery. It is a dawn that policymakers are struggling to nurture into broad daylight.

It also may not be felt equally across the board, viz Spain and Greece's unemployed versus Germany's busy builders.

But putting aside for the moment that the euro zone's nascent recovery is happening just as China is wobbling and financial markets are unhinged, the numbers look generally positive.

Economic growth was running at an annual rate of 1.6 percent in the third quarter. While this may not seem robust, it is roughly twice the average annual growth rate between 2003 and 2014 (itself dragged down by the sharp contraction of 2009), and the equal highest rate since 2010.

So, for the euro zone, reasonably good. ECB forecasters and economists polled by Reuters expect it to grow at a slightly faster pace this year at around 1.7 percent.

Other data - though sometimes mixed - also points to a stronger-than-advertised economic performance.

Unemployment has been falling fairly steadily. It was at 10.5 percent in November, which is high, but the lowest in more than four years and well below the 12 percent of 2013.

Consumer confidence is on the rise and economic sentiment is at a more than four-year high. Manufacturing, as measured by purchasing managers' indexes, rose firmly into expansion in 2015, albeit still shy of its 2013 peak.

RELATIVELY SPEAKING

Finding positives in such data risks comparison with a polite visitor complimenting a dreary industrial city on its surprisingly good orchestra.

But given where the euro zone has been - and the many prophets of its political and economic doom - its relative improvement is being noticed.

"The world’s third largest economic bloc is actually doing rather well," said Andrew Milligan, head of global strategy at Standard Life Investments, which is favoring European equities, bonds and property in its portfolios as a result.

"A number of drivers are supportive," he said, listing "monetary and fiscal policy, a somewhat healthier banking system, better real wages growth helped by lower energy costs, and pent up demand as consumer confidence improves in those countries that have had a hard few years."

The danger is that it could all be knocked down in a second by what the finance minister of non-euro zone Britain, George Osborne, has dubbed a "dangerous cocktail" of threats to the world economy.

Chief of these is the economic slowdown in China, which is the broader European Union's second-biggest trading partner behind the United States. China and the EU trade around 1 billion euros between them a day, according to the European Commission.

UBS calculates that a one percentage point slowdown in Chinese growth would slice 0.1 to 0.3 percentage points off EU growth, which it says "should be manageable".

A similar slowdown in emerging markets would lop 0.2 to 0.4 percentage points off growth.

A case can be made, however, that in Europe - and the euro zone in particular - the economy has been growing even while China and emerging markets have slowed.

In the first half of 2015, for example, big gun Germany's export growth to China fell to just 0.8 percent and engineering exports shrank by 4.9 percent. Yet German gross domestic product (GDP) growth was running at 1.8 percent at last count even with the slide.

The overriding issue, though, is that the ECB's 60 billion euro ($66 billion) a month stimulus package is in no danger of ending and can offset much of the impact of trouble overseas.

Lower commodity prices will help too, whatever the concerns about deflation.

Of course, were the United States and the world economy as a whole to have a serious wobble, the euro zone would too.

But for now, the negative adjectives about the euro zone may be overdone.

Sanctions impact on Russia to be longer term, U.S. says BRUSSELS | BY ROBIN EMMOTT

Western sanctions on Moscow are intended to exert long-term pressure on Russia and not to push it "over the economic cliff," a U.S. State Department official said on Tuesday.

EU and U.S. restrictions imposed on Moscow in 2014 over the Ukraine conflict shaved about 1.5 percent off Russian economic output in 2015, the official said, citing data from the International Monetary Fund.

The effect of falling world oil prices was far greater, said the official, who requested anonymity, meaning that Russia's economy shrank 3.8 percent in 2015.

"The direct effect is pretty small ... at about 1 to 1.5 percent. It's the indirect effect that's larger," the official said, adding that international companies previously considering 20-year investments in Russia were scaling back to five years.

"The sanctions are designed not to push Russia over the economic cliff," the official, who was on a visit to Brussels, said. "That would be bad for the Russian people."

Sanctions on Russia's banking, energy and defense sectors, imposed from July 2014, are part of the West's efforts to pressure Russia to help end the crisis in eastern Ukraine, which has killed more than 9,000 people since April 2014.

Russian President Vladimir Putin was quoted on Monday as telling Germany's Bild newspaper that sanctions "are severely harming Russia", although he also noted a bigger impact from global oil oversupply that is weakening energy prices.

With neither the West nor Russia able to resolve the Ukraine crisis so far, the European Union and the United States will keep economic sanctions on Russia until the end of July 2016.

That means Russian companies cannot borrow from the EU and the U.S. banks and on markets for more than 30 days, limiting oil producers such as Rosneft from raising funds for investment.

"From what we know and from my conversations with market participants, other countries are not bridging the gap," the official said, although he added that China has offered some financing at higher rates and with shorter maturities.

Any lifting of sanctions on Russia is tied to the implementation of a peace deal on Ukraine which was negotiated by the leaders of France, Germany, Ukraine and Russia almost a year ago.

Russia warns Turkey over Aegean warship incident MOSCOW | BY KATYA GOLUBKOVA

Russia on Sunday warned Turkey to stop staging what it called provocations against its forces in or near Syria after one of its warships fired warning shots at a Turkish vessel in the Aegean to avoid a collision.

The Russian Defence Ministry said one of its warships, the destroyer Smetlivy, had been forced to fire the warning shots on Sunday morning and that it had summoned the Turkish military attache over the incident.

"The Turkish military diplomat was given a tough explanation about the potentially disastrous consequences from Ankara's reckless actions towards Russia's military contingent fighting against international terrorism in Syria," the Defence Ministry said in a statement.

"In particular, our deep concerns about more Turkish provocations towards the Russian destroyer Smetlivy were conveyed."

Earlier on Sunday, the ministry said that the Turkish fishing vessel failed to respond to Smetlivy's warnings and changed course sharply only after shots were fired before passing within just over 500 meters of the warship.

"Only by luck was tragedy avoided," the ministry said.

Turkish Foreign Minister Mevlut Cavusoglu, who was in Rome for talks on Libya, said Ankara was investigating the matter and would make a statement once it had more information.

He also reiterated Turkey's position that it wanted to resolve its difficulties with Russia. "We want to solve the tension with dialogue," he said, in comments broadcast by TRT Turk.

The incident is likely to heighten tensions between the two nations who are seriously at odds over Syria and the Turkish shooting down of a Russian military jet last month.

Russian President Vladimir Putin, who called the downing of the plane a "stab in the back", has since imposed economic sanctions on Turkey as a retaliatory measure.

How the world learned its lesson and got a climate deal PARIS | BY RICHARD VALDMANIS AND EMMANUEL JARRY

It was an agreement born from a fear of failure, delivered by the smoothness of French diplomacy.

Six years earlier, countries had bitterly walked away from global climate talks in Copenhagen without a deal. The decision to reassemble in Paris to try again at getting almost 200 countries to sign a pact on cutting carbon emissions was a gamble: another collapse could the end world’s ability to forge a common approach to dealing with climate change.

And no political leader wanted his reputation stained by a repeat of the debacle in Copenhagen.

So there was no detail of hospitality too small for the French hosts this time, no country negotiator who would go unflattered by Laurent Fabius, the French foreign minister who presided over the conference.

Fabius had been the youngest French prime minister in history in the 1980s; now he was an elder statesman looking to carve a bigger place in it. Over two weeks under the global spotlight, his sonorous voice and relentless optimism would come to define the public tone of the proceedings.

But behind the scenes, the talks witnessed the confrontations and five-past-midnight compromises to be expected when sleep-deprived negotiators from almost every country in the world are supposed to come to a consensus.

They ultimately found it, remarkably only one day later than planned. But the path to the standing ovations at the end was strewn with disputes over money, the emergence of an effective new climate coalition of states, and hours of wrangling over what “should” or “shall” be done.

FRENCH WAYS

For the survivors of Copenhagen, the key to success in Paris would be preparation.

UN Secretary General Ban Ki-moon complained that the political leaders had not been well-prepared for the Copenhagen meeting, and this time he and the French conducted extensive advance work to get other leaders personally engaged.

They also decided that, if leaders were to come to Paris, they would do so at the beginning to lend the talks some political oxygen, rather than arriving for a scramble at the end.

So on Nov. 30, the sprawling conference hall near the Le Bourget airfield on the outskirts of Paris hosted world leaders, who were supposed to deliver three minutes of encouragement. Fabius wandered the conference center before they arrived, tapping microphones and checking the video monitors under a podium made of recycled wood.

“Ah, we have Prince Charles,” he said to an aide, consulting the speakers’ list.

The opening day speeches were seen as a success. UN officials were relieved at the relatively cooperative tone from Russian President Vladimir Putin who was among several leaders who assured Ban privately before the outset that Russia would not block a deal, UN officials said later.

Fabius pulled together a team of officials and diplomats from across the French civil service to facilitate the talks. “He treated it less like a climate negotiation and more like a trade deal,” said one UN veteran of past climate talks.

He also constantly praised delegates for their hard work and insights, before telling them exactly what schedule of debate they had to follow to finish by their self-imposed deadline of Friday, Dec. 11.

He gave the job of writing the accord’s preamble to Venezuela’s minister Claudia Salerno, whose country had been perhaps the harshest critic of the Copenhagen process that was seen as a collusion of big powers dictating to small countries, making her personally vested in finding compromises.

Not all developing countries were easily won over, however. A central sticking point throughout the talks was the degree to which the agreement would be legally binding on countries, especially the rich ones who are expected to provide the hundreds of billions of dollars in funding to cover the transition to a low carbon future.

The differences were expressed in wrangles over wording. Hard, legally binding commitments were proceeded in the text as items that countries “shall” do.

Those items that were simply good intentions fell into the “should” do category.

HALF A DEGREE CLOSER

Facing unbudging demands to put their financial commitments into legal language, U.S. negotiators knew they had to break the poor vs. rich country divide. Their tactic was to sign up to a loose coalition of countries called the High Ambition Coalition.

The European Union takes credit for starting the group as far back as 2011, when it was a loose alliance between the EU and small island states.

As Paris approached, it expanded to include African, Caribbean and Pacific nations, developing an agenda that included the goal of keeping the global temperature rise to 1.5 degrees Celsius (2.7 Fahrenheit) over pre-industrial levels by the end of the 21st century.

The number had almost been banished from serious discussion ahead of Paris. But the American decision to “join” the High Ambition Coalition brought the 1.5 goal back into play, sweetened with pledges of hundreds of millions of dollars to help island and developing states mitigate the ill-effects of climate change.

Although the promise is only aspirational, the re-emergence of references to 1.5 degrees in the Paris text brought several influential developing countries into the U.S. camp. Soon Canada joined, then Australia and Brazil, a collection of wealthy, heavy-polluting western countries marching into the plenary hall alongside the Marshall Islands.

China’s negotiators dismissed the High Ambition Coalition as a stunt. “This is a kind of performance by some members,” said Liu Zhenmin, deputy head of the China delegation. But the solidarity of the developing nation bloc was broken.

LAST BRIDGES AND HICCUPS

Climate change summits have developed a particular theater of their own. In one moment, it was possible to see actor Alec Baldwin expressing his fears for the planet to journalists, across from an Indonesian pavilion hosting a party to show off its pilot green energy hospitals.

But much of the real work was done by people not even at Le Bourget. After visiting at the start, U.S. President Barack Obama and Chinese President Xi Jinping discussed roadblocks by telephone, and the two countries appeared to be mostly on the same page.

Other housekeeping of the text was taken care of. Negotiators insured that a specific reference to climate effects on “occupied territories” was taken out to keep the politics focused on climate issues.

By Saturday, Fabius the pieces were falling into place. “I think we’re done here,” said a happy Marshall Islands foreign minister Tony de Brum on Saturday morning.

There was to be one last hiccup. The final text had settled on 143 items prefaced by “shall,” 40 with “should.” But in one section, the words appeared to have been flipped.

Suddenly, there was a delay in the hall where delegates had convened amid smiles and air kisses to seal the deal.

Fabius and U.S. Secretary of State John Kerry left the room, replaced by rumors of trouble. But then the French minister was back. A technical glitch, he explained, brought on by the fatigue of a drafter.

The organizers announced corrections to a few typographical errors, and tellingly switched one last “should” for a “shall” before Fabius swiftly brought the gavel down.

(Writing by Richard Valdmanis and Bruce Wallace; Additional reporting by Alister Doyle,Valerie Volcovici, Barbara Lewis, David Stanway and Nina Chestney in Paris; editing by Anna Willard)