Posts of September 2014

So, When Does Russia Exhaust Its Forex Reserves?

♠ Posted by Emmanuel in Currencies,Energy,Russia at 9/30/2014 01:30:00 AM

Sergey Lavrov, bang your shoe on the lectern for emphasis.

Poor, poor Russian Foreign Minister Sergey Lavrov. He spent most of his time lamenting the unfairness of this world during his visit to the UN over the weekend. Regardless of what you think about Russia's actions with regard to Ukraine--I think it's a money drain the Westerners should've been left to sort out if Russia had any sense--there's no doubting that its economy is in bad shape. It was already in recession a few months ago, and the additional sanctions from its largest trading partner, the European Union, will certainly not help.

As much as Russia benefits from the ancien regime of the UN--the Security Council remains composed of the victors of WWII like itself, Russia has yet to break into that even more exclusive club of Western powers. Sure, it used to be part of the security-oriented G-8--the economics-oriented G-7 plus Russia--but those days are gone. Whether rightly or wrongly, Russia has been put in the West's doghouse at an inopportune moment: (1) It was already in recession pre-EU sanctions; (2) the EU-sanctions have estranged it from its main export market for energy; (3) the price of energy is dropping besides; (4) Russia and its firms now have trouble raising money abroad; and (5) Russian banks have substantial foreign borrowings that are coming due over the next few months.

Add up (1)-(4) and it looks pretty bad for Russia all around--especially its international finances with little foreign exchange coming in and much of it going out. Yes, Russia did save up some when energy prices were high over the past few years, but those may not be enough. The Financial Times offers this assessment of how long it will take to deplete Russian reserves:

In an assessment paper on the Russian economy, EU economic officials in Moscow warn that the three big banks alone will need $75bn from the central bank over the next 18 months, draining its reserves.

Combined with the requirement to keep at least $180bn of foreign exchange reserves to cover six months of imports, that would leave the central bank with just $115bn to defend the currency in case of speculative attacks or sudden capital flight. In early March, the bank converted $11.3bn into roubles in a single day. “It therefore cannot be excluded that Russia’s macro-financial situation over time could become one of financial distress,” the paper concludes.

To be honest, I am not sure how the FT came to this assessment. As of July, Russia had $407.8B in currency reserves; $468.7 billion if you include its precious metal holdings. So it's more like $407.8B-($75B+$1805B) = $152.8B that it will have left to defend the ruble against possible currency speculation after setting aside bank financing and enough money to buy exports for six months as per the convention of reserve adequacy. It again sounds pretty substantial, but in this day and age, you have to wonder.

Then again, 18 months' time may even be generous. Reuters reports that a year may be all that's left in the tank:

Russia has considerable reserves to draw on - currently around $469 billion in gold and foreign exchange - and no immediate need to tap the markets for new capital. Many argue the measure would be more symbolic than punitive.

However, the country's dependence on increasingly unstable oil and gas revenue and commitments by Moscow to provide finance to sanctioned companies prevented from raising money abroad could see it backed into a corner. "It's quite difficult to tell how long they have, I'd put it at more than one year. But it's not static," said Viktor Szabo, a portfolio manager at Aberdeen Asset Management. The strain on those reserves is growing, Szabo said. Economic growth is ebbing fast, with gross domestic product expected to grow by 0.3 percent at most this year and energy export revenues are falling. A run on the currency would also shorten the time Russia can continue in isolation, Szabo said.

And here's another take after considering falling energy export revenues' effects on state finances:

A particular headache is the falling price of oil. Oil and gas account for around two-thirds of Russia's exports and close to half its federal budget revenues. Over the course of a year, each $1 fall in the oil price wipes around $1.4 billion off federal tax revenue. The state budget is based on an oil price of $104 for 2015, and Deputy Finance Minister Alexei Moiseev has warned recently those projections may be optimistic, with prices below $100 now a possibility.

Craig Botham, an economist at UK fund manager Schroders, also calculates Russia's foreign exchange reserves would take little more than one year to be depleted. "If we assume the full $80 billion of external debt maturing this year is financed by the central bank ... and the same amount of financing is needed each year, the average monthly rate of decline in the reserves so far this year - $6.7 billion - continues indefinitely as the central bank continues to defend the currency, then FX reserves are exhausted some time in 2016," he said.

For all its posturing, I honestly believe Russia has bitten off more than it can chew and overplayed its hand. But hey, whoever said it's a fair world? Go ask Sergey Lavrov.

Drill Baby Drill! In the Philippines' Disputed Waters

♠ Posted by Emmanuel in China,Energy,Security,Southeast Asia at 9/29/2014 01:30:00 AM

For a profit, would you dare to fight the Chinese?

The mother of all "political risk"-laden investments is probably this one: Say a country embroiled in territorial disputes over potentially oil- and gas-rich waters auctions blocks for exploration. If you were an energy firm, would you dare bid and, more bravely, invest in disputed waters? Let's also add this complication: exploring these areas may anger the region's strongest power with its largest military. It's just asking for trouble, right? Better safe than sorry, eh?

This situation is exactly what faces the Filipino-British concern Forum Energy PLC, whose chairman is one of the Philippines' savviest businesspersons, Manuel Pangilinan. After putting in a winning bid during auctions that most international energy majors stayed away from for reasons given above--offending China may not be a path to success in the 21st century world economy--Philex is being pressured by the Philippine government to commence with drilling. Earlier on, Pangilinan made a "conciliatory" gesture by offering joint exploration to China's CNOOC. Commercial prospects aside, the latter state-owned firm did not realistically consider this offer for the obvious reason that it would have lent legitimacy to the Philippines' ownership of these disputed areas in auctioning exploration rights:

The 11-point proposal includes a Framework Agreement between Philex and CNOOC “relating to an area of mutual interest which will be defined as the area covered by SC 72.”

“Other disputed areas (such as the Spratlys) could be included by agreement,” wrote Pangilinan. SC 72 refers to Service Contract 72, signed in 2010, in which the Philippine government awarded Forum Energy Plc. (FEP) exploration rights to a basin within Reed Bank. Philex owns 64.45 percent of FEP, a London-based listed oil and gas exploration firm focused on the Philippines. FEP in turn owns 70 percent of SC 72.

SC 72 is a seven-year exploration contract that can be extended y three years. Its 25-year production period can be extended by another 15 years.

The Chinese have not played along with this PR stunt, obviously:

Manuel Pangilinan said that Filipino-British company Forum Energy PLC communicated the offer to China National Offshore Oil Corp. to explore Reed Bank, northwest of the Philippine island of Palawan. Philippine and Chinese vessels had a confrontation there three years ago. Pangilinan said the Chinese company, also known as CNOOC, has not responded but Forum is continuing its attempts to engage with the Chinese company. He said the project has not attracted other investors because it is in an area of conflicting territorial claims and other investors did not want to offend China.

It seems Pangilinan's group has been getting cold feet since it's been four years and they haven't really done anything. Do they lack the capabilities, do they fear China...or both? Being ever so gung-ho, it appears the Philippine government is pressuring him to commence with the drilling:

Pangilinan said Forum still intends to drill two wells in first half of 2016."We will do it on our own if we have to ... as long as we are not disturbed," he said. The Department of Energy has extended Forum's delayed drilling program by a year, giving it up to Aug. 15, 2016 to fulfil its contractual obligations. Pangilinan said weather would permit drilling only from March to May.

Exploration rights have been extended, but you have to begin to wonder if Pangilinan and company are really willing to tempt fate by commencing on drilling anytime soon. Comically, the Philippine "military" (it is lame-to-non-existent especially in terms of naval capabilities) has even guaranteed the safe operations of Forum Energy:

I really hoped the reporter had misquoted [Philippine President] Aquino or merely hyped his statements. But I checked the speech posted on the government’s website and there it was (translated from Pilipino): “We have a clear message to the world: The Philippines is for Filipinos, and we have the capability to resist bullies entering our backyard,” he said.

Either we have a president who is a liar or one who deludes himself into believing he heads a country with enormous naval power. Didn’t he even ask his Defense Secretary what exactly is the Navy’s “capability” to fight bullies in the disputed seas? He would have been told, it consisted essentially two frigates—the World War II vintage BRP Rajah Humabon and the 48-year old US Coast Guard hand-me-down BRP Gregorio del Pilar.

It's like a nightclub owner making the imp Justin Beiber his bouncer, but therein lies the rub.

Hong Kong Phooey: Rebel Yell vs Tycoon Pushback

♠ Posted by Emmanuel in China at 9/28/2014 01:30:00 AM

Armagideon time has come to the capital of capitalism--Hong Kong.

[NOTE: Younger readers who don't get the post title's cartoon reference, head here.] Protester vs. cop action seems to be a growth area in Hong Kong and Singapore, capitalist shrines which normally care more about making money than about corny things like Western-style "freedom." But alas, order has been upended as the PRC has--surprise!--provided a rather conservative interpretation of "one country, two systems" that keeps the Communist Party's say in vetting Hong Kong's leader intact. I could have seen this coming as early as, oh, 1984. (RIP, Baroness Thatcher.)

It is here where we most clearly see authoritarianism in action. First, the so-called disorder:

Police used pepper spray and protesters threw plastic bottles in Hong Kong late Friday, as pro-democracy demonstrators stormed a public square attached to the government’s headquarters. More than a dozen people, mainly students, were arrested.

At about 10:30 p.m. local time, several students managed to scale the three-meter high barricades around Hong Kong’s “Civic Square,” a time-honored focal point of peaceful protest in the Chinese Special Administrative region, but which had been shuttered since July. Some 50 people then rushed in but were quickly surrounded by police [see picture above]. Around half this number remained at lunchtime on Saturday, but were quickly running out of supplies.

I kind of feel sorry for these students in their youthful naivete. Didn't their folks tell them about what happens to pro-democracy protesters going against Beijing? Expecting electoral freedom was a delusion to begin with despite the charade. OTOH, the Chinese leadership hasn't exactly made the situation better by adopting the hardline. Just to show you how out of touch they are, they did not consult with students or protest leaders to understand their grievances. Instead, they convened a High Council composed of pro-Beijing billionaires (who have undoubtedly profited handsomely from toeing the Party line):

As trouble brews in Hong Kong, who’s Beijing going to call? The billionaires. With political tension in the southern Chinese financial hub at its highest in years, China’s leaders summoned dozens of the city’s tycoons earlier this week for talks...

“I see most of my old friends,” Xi said with a light chuckle as he sat down for the meeting with 70 of Hong Kong’s richest and most powerful people. Seated next to him in the Great Hall of the People was billionaire businessman Li Ka-shing, Asia’s wealthiest person, who Xi greeted with a hearty double-handed handshake. Between them was Tung Chee-hwa, son of a shipping magnate who China anointed as Hong Kong’s first leader after taking back control of the former British colony in 1997. Other Hong Kong billionaires with interests in property, media, banking and finance and casinos filled out the ranks.

Therein lies the rub: the tycoons are being told to pacify restless Hong Kong natives or face both a worsening law and order situation in the city as well as less favorable treatment in the mainland:

Discontent, especially among the young, is fuelled by a widening wealth gap that many blame on the billionaires, a large number of whom made their fortunes in property development and also sit on a panel that selects Hong Kong’s leader. Once revered for their business acumen, they’re now reviled for cozy ties with the government, which tightly controls the supply of land for development, making home ownership unaffordable for many.

Monday’s meeting was the first time that such a big delegation has travelled to the Chinese capital since 2003. That year, a similar group made the journey after more than half a million took to the streets to protest a deeply unpopular plan to introduce anti-subversion legislation.

All I can say is, if Communist Party leaders are serious about quelling disorder in Hong Kong over the medium- to long-term, they won't likely accomplish this task just talking to those who've sworn fealty to Beijing already. After 1989, the Communist Party actually made strides understanding the demands of young people who sought economic security just as much if not more than political discretion. Party operatives need to do the same in Hong Kong since it is a preview of China's future in a number of respects.

Next Stop ¥120: Pol Eco of Weak Japanese Yen

♠ Posted by Emmanuel in China,Currencies,Japan at 9/26/2014 01:30:00 AM

Albert Edwards of SocGen, ever on the lookout for trouble in the world economy, is pointing us in the direction of a weakening yen. What's so bad about improving the competitiveness of Japan, a country that's been mired in a quarter of a decade-long slump? As with other international political economy matters, you need to understand the effects of Japan's devaluation alongside other countries in the region and, indeed, the rest of the world. Being Albert Edwards, he's foreseeing (surprise!) dire consequences for the world economy:

China’s economy will see a further rise in its already strong real exchange rate, especially if other Asian currencies get pulled down with the sliding yen. That will hurt China’s economy, which, judging by data from August, shows it’s on the wane again. And a strengthening renminbi will also worsen deflationary pressures.
A weak yen spells trouble for the west as a wave of deflation will wash in from the rapidly devaluing east, reversing a decade-long trend. Given that profits growth is so anemic in the west, monetary tightening via strengthening exchange rates could be enough to “send U.S. and European profits into outright decline and subsequently their economies into recession.” (Edwards isn’t the first analyst to warn about what a stronger dollar will do to corporate earnings).

China is stuck between a rock and a hard place. It is no longer the lowest-cost production site as the likes of Bangladesh and even Laos muscle in on that front. On the other hand, it cannot begin devaluing the renminbi anew to maintain competitive parity with Japan lest it draw further ire from protectionist Americans and Europeans who are quick to criticize "competitive devaluation" and hit China with all sorts of retaliatory measures.

Edwards' forecasts for Europe are more intriguing, actually. Devaluation emanating from the Asia-Pacific will further hurt measures in the West to escape its grasp. What's more, a stronger greenback will negatively impact earnings when reported in dollar terms. Add weak profit growth in home (read: developed) markets to strong exchange rates and it adds up to potential trouble.

Interesting stuff. In particular, the chart above which shows how then yen breaking the 15-year trendline opens up a decline to the longer-term 25-30 year trendline is worrisome as it might be the trigger for an Edwards-esque scenario. Next stop 120 yen to the dollar? You'd be naive to rule it out.

Unionizing & Daytimizing Philippine Outsourcing [?]

♠ Posted by Emmanuel in Labor,Outsourcing,Southeast Asia at 9/25/2014 01:30:00 AM

They work the early morning hours...for good reason.

There's an interesting article over at Bloomberg talking about the Philippines' emergence as a global hub for business process outsourcing (BPO) industries. At the same time, it points out disturbing proposed legislation that may kill the goose that lays the golden egg. As Daniel Pink explains, these BPO industries do mostly routine tasks, not the more creative ones that cannot (yet) be performed outside Western metropoles. Still, they have made significant contributions to the Philippine economy. Let us begin with some figures:

During the past decade, business process outsourcing -- which encompasses call centers, health-care information management and computer animation, among others -- has emerged as one of the fastest-growing segments of the country’s $272 billion economy.
In 2013, the BPO industry generated $15.5 billion in revenue and employed 900,000 people, up from $3.2 billion and 240,000 people in 2006, according to the IT and Business Process Association of the Philippines, or IBPAP.

Along the way, the industry eclipsed tourism as one of the biggest sources of foreign revenue, behind remittances sent home by Filipinos working abroad -- payments that reached a record $23 billion in 2013. It’s grown so fast that Philippine Senator Miriam Defensor Santiago last year proposed legislation to safeguard the welfare of BPO workers and ensure their rights to unionize.

Then the article goes more into legislation with provisions on work hours and unionization:

Citing International Labour Organization studies, Santiago said 42.6 percent of BPO employees worked night shifts, and many suffered from insomnia and fatigue. As of mid-September, her bill was pending before the Senate Committee on Labor, Employment and Human Resources. IBPAP Chief Executive Officer Jose Mari Mercado says the industry upholds high standards. “Our assets are our people,” he says. “We take extra effort to ensure that we compensate them properly and provide them with health and wellness packages.”

Mercado says that by 2016, outsourcing may generate $25 billion in revenue and employ 1.3 million people, matching cash remittances for the first time. And BPO workers offer a plus that the Filipino diaspora doesn’t, he says. “The difference is that our 1.3 million are here with their families, and they spend all of their money here,” he says, adding that each outsourcing job generates as many as 2.5 jobs in retail, public transportation and other service businesses.

I have two problems with this proposed bill: First, and this is the obvious point, you will need to work during the late evening and early morning hours in the BPO industry to match the hours of your export market. For instance, (US) Pacific time is 15 hours behind that in the Philippines. Obviously, customers in California will be calling to ask for support during hours when they are awake. Or, doctors will ask for medical transcriptions to be made during work hours when they see patients. This is obvious and industry-specific. While sleep-related problems may occur for some BPO workers, it's in the nature of the job for the same reason that it is laughable if fitness trainers complain about physical exertion or emergency medical responders complain about the need to be on alert nearly all the time. Deal with it or find another line of work.

Second, encouraging unionization is equally dubious. One of the Philippines' known advantages over other call centers like those in India is having a more "neutral" accent (read: sound more like a Midwesterner). Another one is that, until now at least, the Philippines has had less labor unrest than India--a political risk factor routinely cited by those investing or considering investing in India. Would American firms used to ever-declining union participation at home and union non-involvement abroad welcome efforts to organize workers in the Philippines? I strongly doubt it. Mark my word: labor militancy is an FDI killer up there with the Ebola virus with a side helping of MERS.

Funny how people think of all sorts of ways to shoot themselves in the foot. From where I come from, they usually run for office.

G-77, Vulture Funds and a Default Workout Mechanism

♠ Posted by Emmanuel in IMF,United Nations at 9/24/2014 01:30:00 AM

Vulture Man: NML Capital's Paul Singer v. Argentinian President Cristina Fernandez.

File this under: dream on, buddy. A few weeks ago I discussed the quandary faced by Argentina as a US court prohibited it from paying off restructured loans until it had compensated holdouts. To Argentina and the latter's critics, these are "vulture funds" who picked up defaulted debt for a few cents on the dollar, refused to participate in debt restructuring, and succeeded in using American courts to wangle a huge payday. Martin Khor of the South Centre, which my country and most other developing countries contribute to, offers this recap:

The vulture funds want their pound of flesh. The main fund, NML Capital, would make an estimated 1,600% profit. Argentina’s President Cristina Kirchner refused to bow to these funds. If she did, the country might have to also repay all the creditors the full value, which is US$120 billion, and that is impossible to do.

This incredible turn of events has caused outrage among many public interest groups and anger among developing countries’ governments. The South Summit of the G77 in June in Bolivia criticized the vulture funds and called for a proper global debt restructuring mechanism. Finance Ministries of developed countries have been concerned as well.

After all, developed countries like Greece also went through debt restructuring, in which private creditors agreed to take a loss, a few years ago. Accepting the court decision as the new template would make it quite impossible for any country to restructure their debts, since the now emboldened vulture funds would pounce, and of course even more investors would imitate the behavior of such funds, since there is big and easy money to be made.

The disorder caused by the American court has set into motion measures aimed at ensuring orderly debt workouts for sovereign defaults:

Influential Financial Times commentator Martin Wolf has supported Argentina in its battle with the vulture funds, even saying that it is unfair to the real vultures to name the holdouts such since at least the real vultures perform a valuable task! At the end of August, the Swiss-based International Capital Market Association, a group of bankers and investors, issued new standards aimed at reducing the ability of holdout investors to undermine debt restructuring.

Which brings us to the logical solution: why not create a restructuring mechanism for sovereign defaults? It makes sense, but the problems are manifold. First, LDCs want to house this mechanism at the UN which countries like the US, its ostensible host nation, deplores. Second, LDCs being the ones likely to experience financial distress lack the political-economy clout to push for the creation of such an organization unlike, say, the US promoting the G-20. So, we remain stuck in no-man's land:

On 9 September, the Group of 77, representing developing countries, succeeded in promoting a resolution at the United Nations General Assembly which recognized that a state’s efforts to restructure debt should not be impeded by hedge funds that seek to profit from distressed debt. The General Assembly, by a vote of 124 in favour, 11 against and 41 abstentions, also decided to set up a multilateral legal framework for sovereign debt restructuring by the end of 2014, to increase the stability of the international financial system.

A global system for debt restructuring will be a systemic solution, since countries with debt crises can have recourse to an international court or system and would not need to do debt restructuring on its own. Although the developing countries as a whole championed the resolution, there will now be an uphill battle to get it implemented, since the United States, Germany and the United Kingdom (which are key countries in global finance) were among those which objected.

Another resolution, initiated by Argentina and others, is now being considered by the UN Human Rights Council, aimed at setting up legal frameworks to curtail vulture funds’ activities and for sovereign debt restructuring. One good thing is that the UN, which is a universal body in which developing countries have a greater say in decision-making, is now at the center of the debt discussion. The negotiations ahead to set up a global system will be tough but well worth it since preventing and managing a debt crisis is now a priority for a growing number of countries.

IMHO the developing countries are well-intentioned and their proposal generally makes sense. However, the reality remains that the UN General Assembly is a totally lame body in comparison to the Security Council. Ditto for the Human Rights Council. It is here where LDCs' lack of clout in global economic governance becomes obvious. The US, for instance, is hindering quota (voting rights) reform at the IMF. Things are not that much better at the World Bank where the US still gets to choose its president.

As it was at the G-77's creation, the UN General Assembly is a pretty useless venue to clamor for global economic governance reform that is LDC-friendly, and I am afraid things are not much different this time around. The rich countries will not play ball, and the poor countries are not strong enough to take it away from them after all these years.

Jeff Koons & Hokum as America's Defining Characteristic

♠ Posted by Emmanuel in Americana,Entertainment,Hegemony at 9/23/2014 01:30:00 AM

To understand America, explain why "Orange Balloon Dog" is worth $58.4 million.

At best, Americanism is a good-natured kind of hucksterism that does not take itself too seriously and invites us to be part of an inside joke of grand proportions. ("Can you believe our largest media conglomerate was built on the image of a common household pest?") At worst, Americanism is an ill-natured kind of hypocrisy that takes itself too seriously in attempting to tell the rest of us how superior the United States is despite its patently obvious contradictions.

The above paragraph sounds pretty good as a summation of America to those not drinking USA#1 Kool-Aid, doesn't it? Once again reinforcing my idea that nobody has a monopoly on insight or understanding of American preponderance at the beginning of the 21st century, I simply paraphrased critic Howard Halle discussing a retrospective exhibition by artist Jeff Koons. (I came across this article while thinking about buying an accompanying book on his work before ultimately deciding against doing so. It was, alas, overpriced and undersized IMHO.) Unless you've been hiding under a rock, Koons is among the most famous pop artists of recent years, sort of a son-of-Warhol if the backlash wasn't so great.

In many ways, Koons embodies the contradiction which is the United States as it attempts to balance culture and commerce, art and artifice:

If I had to sum up American history in a word, I wouldn’t use racism, though obviously that’s a biggie. I’d pick hokum. I put it right up there with liberty, as in “life, liberty and the pursuit of happiness,” a passage which itself could be taken for hokum, written as it was by a man who owned slaves [Thomas Jefferson].

However, I don’t mean the term as it’s generally construed, i.e. bullshit. I refer to this definition: “A device used (as by showmen) to evoke a desired audience response.” As embodied by the oratorical sleight of hand that has sold Americans on everything from snake oil to unprovoked war in Iraq, hokum provides the filling for our proverbial apple pie, baked into such rhetoric as “manifest destiny,” “the lost cause” and “morning in America.” Hokum is also why I think Jeff Koons is the quintessential American artist: His work is a concrete expression of the idea.

But wait, it gets better...

Koons in now the subject of an exercise in overkill that trots out nearly his entire career: The vacuum cleaners entombed in fluorescently lit Plexiglas cases; the basketballs eerily submerged in fish tanks; the inflatable toys, tchotchkes, Hummel-style figurines and copies of antiquities, minted in bright reflective steel or carved in wood and granite; the insipid pop-mélange paintings; and most oddly of all, the depictions of himself in flagrante with his former wife, Ilona Staller, the adult film star known as Ciccolina.

The pieces display an undeniable genius for grabbing your attention (and given the narcissistic appeal of so many mirrored surfaces, how could they not?) but never for very long. Especially with the more recent stuff, your gaze flits from one piece of eye candy to another without much sinking in. Seeing the work en masse only exposes the void at the center of his enterprise, as well as his pretense to populism.

His larger point is that Americans aren't really trying tp put one over you as many (like myself) routinely suspect. Rather, they have literally drunk the Kool-Aid in buying into the very same shtick they want to sell to the rest of us:

But the exhibit does reveal something much more interesting: Koons isn’t a charlatan as some would have it; rather, he transforms charlatanism into high art. [What a fantastic point if you apply the same idea to America itself.]

Collapsing the distance between innocence and guile, Koons is both the grifter and the mark, the stage illusionist and the person in the front row. His output could be read as an unpacking of how conviction is fabricated—a process best summed up by George’s Talmudic advice to Jerry for foiling the polygraph in Seinfeld: “Just remember, it’s not a lie if you believe it.”

Ultimately Halle gives Koons' exhibit 2/5 stars. When Pax Americana has well and truly bitten the dust, I suspect future civilizations will give it a mark somewhere in the same ballpark as far as its contributions to humanity are concerned. You take the good with the bad; be thankful for the former and try to minimize the latter:

I describe Koons above as the quintessential American artist, but it should be noted that American in his case pertains to a particular version of the country, one on which the sun is clearly setting, yet one also struggling—violently at times—to stay in charge. Koons’s aesthetic dovetails neatly with this reactionary climate, much like the 19th-century academic painters before modernism swept their reputations out to sea. It would require a revolution on the same order to consign Koons and his art to a similar fate. But that change seems a long way off.

Lose Money Quick Scheme: EU Airlines in, er, Europe

♠ Posted by Emmanuel in Europe,Labor,Travel at 9/22/2014 01:30:00 AM

Those were the days, my friend: aboard Lufthansa in the Fifties.

My grandparents belonged to a generation when there was still novelty and romance associated with commercial flight. They would dress in their finest as they jetted off to American or European capitals for work or leisure. "Put on your finest suit, dear; we're flying to Vienna tonight." I am sure this memory was not something I made up: until the early Seventies, it really was like this. Since air travel was oh so very costly. you might as well live it up while airborne. For better or worse, deregulation and the accompanying democratization of flight has made air travel mundane. So much so that the shirtless, lardy American bloke you would rather avoid in public ends up next to you on the plane...snoring rather loudly...drooling on your shoulder. Yuck.

For many a flag carrier, glamour and now passenger civility are not the only things which have been jettisoned. Profitability is another thing as national carriers have found it hard to deal with legacy costs, unprofitable routes, and competition from low-cost carriers. Ask Malaysia Airlines. All things considered, things are even worse for European carriers that now find the most unprofitable routes to be those at home:

The biggest airlines across Europe are finding it tricky to make money in their own backyards. Air France-KLM said on Thursday it will transfer a major portion of its European flights to Transavia, a low-cost airline acquired by KLM 11 years ago, as part of a major restructuring aimed at reversing losses on short flights. The same strategy has been adopted in Germany with Lufthansa’s steady shift since 2012 of its European flying from Frankfurt and Munich to its lower-cost Germanwings unit.

The shunning of European routes by the global flag carriers reflects the cutthroat nature of fare competition in the continent, where airlines such as EasyJet, Ryanair, and Wizz Air dominate the short-flight market. Those carriers’ labor costs are substantially lower than at Lufthansa, Air France, and British Airways, which also have routes that don’t touch their hubs. Flying routes off their hubs offers very little revenue upside, says Seth Kaplan, managing partner of industry journal Airline Weekly, and this is one reason U.S. airlines have virtually eliminated flights that don’t involve one of their hubs. “Non-hub, short-haul flying is all a cost game, and that’s a game the true low-cost carriers like Ryanair and EasyJet will always win,” Kaplan says.

It appears unionized workers are still hanging on to a bygone age when cutthroat competition did not exist:

These flight-shifting and cost-cutting tactics have infuriated airline employees in Europe, with three pilot strikes against Lufthansa in the past two weeks. Air France, meanwhile, is now bracing for a weeklong pilot strike tentatively set to start on Sept. 15; the airline has urged customers to reschedule their trips. Air France-KLM pilots contend that Transavia cockpit crews should be paid the same as their peers across the company.

All I can say to these unionist-dreamers is this: Wake up, those days are gone and they will never come back. Ours is such an unglamorous age in so many ways. I am of two minds about this. Sure you can go to all sorts of places for much lower fares nowadays, but getting there is now such a chore that sometimes you'd rather wish you'd have stayed home.

Way back when, you actually looked forward to traveling to the destination.

The Fate of French-Made Warships Ordered by Russia

♠ Posted by Emmanuel in Russia,Sanctions,Security at 9/19/2014 01:30:00 AM

Like giving matches to a pyromaniac? French-built warships ordered by Russia.

It is no secret that the French economy is not doing so well. Its President Francois Hollande faced a no-confidence vote just this week, largely due to discontent over the state of the economy. After famously applying top taxes rates over 50%, his administration is backing down somewhat on the more socialist elements of his economic plan. A pro-business Hollande; who'd have though of it? I guess approval ratings south of, oh, 15% concentrates the mind.

Aside from class warfare taking a backseat to economic reality, another concerns the recent controversy on what to do with French-built Mistral-class amphibious assault ships ordered by Russia. (Just the ticket for showing up unannounced on certain neighbors' shores.) After applying sanctions on Russia as part of NATO, France selling sophisticated weapons systems that can aid Russia's territorial ambitions undoubtedly goes against the spirit of punishing Russia for military adventurism. The Putin-friendly Russia Today reports on the surreal scene of Russian sailors testing one of two vessels. Of course, we are not even sure if these will be delivered:

A 400-strong Russian crew is manning a French-built Mistral-class warship as it conducts sea trials. It comes after Paris announced the possible cancellation of the contract due to the conflict in Ukraine. The Vladivostok left the harbor of Saint-Nazaire in western France on Saturday for the ship’s fifth training and trial trip. The warship is manned by some 400 Russian officers and sailors, who had arrived in France to learn how to helm this kind of vessel.

The number of crew far exceeds the 170 necessary for Mistral-class ships, but the Russians are preparing to have at least two ships eventually and are therefore preparing more sailors to man them. The trial was meant to start Wednesday, but was postponed by several days for technical reasons. The Vladivostok is scheduled to have a total of six trials, before it is handed over by the French shipbuilders to Russia later in November.

The deal is far from being assured, however, after French President Francois Hollande announced a suspension of this part of the contract following a NATO summit in Wales. He said he would decide on whether to respect French obligations or breach the contract [gotta love these loaded terms] with Russia in October. Russia signed a $1.6 billion contract to build two Mistral-class warships in 2011. The second one is scheduled to be completed next year.

So, will France breach its contract by non-delivery of the warships? Also note that there are technology transfer stipulations which may help Russia's currently decrepit shipyards to build their capacity:

The Mistral contract also includes a technology transfer program, which would see French expertise and technology applied to the modernization of Russian shipyards, ostensibly for the construction of a third and fourth Mistral carrier by Russian shipbuilders.

[Head of Rosoboronexport (Russia's arms export/import concern) Anatoly] Isaikin said the technologies in question are related to hull construction, command and control systems and communications. "The idea is that all these technologies can be used in Russia for the construction of warships for the Russian navy," Isaikin said. The technology transfer is not contingent on the construction of a third and fourth Mistral carrier, he added, an option that no longer appeals to a defense establishment set on replacing foreign defense imports with Russian production.

From a geopolitical standpoint, it's a no-win situation:. If France does not deliver, it loses $1.66 billion in revenues from the sale of these ships and gains the ire of the shipbuilders. If France does deliver, its allies will chastise it for giving the aggressors the tools for aggression. (Also see this running commentary by Defense Industry Daily.) Russian propaganda is focused on showing how French shipbuilders want these warships delivered lest shipbuilders lose their jobs.Their concern for the French workingman is so....touching.

Ruble in Trouble; Russia Raids SWF Soon?

♠ Posted by Emmanuel in Currencies,Russia,Sanctions at 9/18/2014 01:30:00 AM

Sorry, Vlad, but your currency is more worthless than the dollar right about now.

No, no, it's not what you may think--Russia may raid its sovereign wealth fund, AKA stabilization fund or rainy day fund, soon. To be precise, it's the "Russia Direct Investment Fund." But first, a little bit of background from current events: new and recent EU sanctions have sent the Russian ruble tumbling to all-time lows. Whereas US sanctions had limited direct effect on Russian trade, EU sanctions have hit it squarely in the gut since the grouping is Russia's largest trading partner:

Russia's currency dropped to an all-time low against the dollar on Tuesday as investors fret about long-term economic damage from Western sanctions...The Russian currency fell more than 1 percent to 38.80 rubles against the U.S. dollar by noon Moscow time Tuesday. The ruble has lost over 2.7 percent in just two days...

Economist Alexei Kudrin, who served as finance minister under President Vladimir Putin for 11 years until 2011, said Tuesday that the sanctions could send Russia into a long recession. "The sanctions that have been imposed are going to have an effect (on the economy) for the next one or two years because they have limited opportunities for investment in this uncertain environment," Russian news agency Interfax quoted him as saying...

Capital flight is taking off anew amidst all this economic uncertainty. Certain Russian geniuses even manage to cut off their nose to spite their face by banning EU agricultural imports which the country does not produce in significant amounts:

Market jitters were further fueled by reports that the Russian government is preparing more retaliatory import bans, which could ultimately hurt Russian consumer spending. Russia in August banned imports of dairy products, meat and vegetables from the EU and the U.S., causing price hikes for some items.

Amid the uncertainty, investors continue to pull money out of the country at an accelerating pace. Experts like Kudrin predict some $110 billion could be withdrawn this year, almost twice as much as last year's $61 billion.

What's a developing country to do? First, Russia is reportedly protecting the SWF against Western sanctions by reincorporating the fund into the central bank. Ironically, some of the investors in Russia's SWF are the very same countries applying sanctions against Russia. Strange but true:

Russia is preparing to transfer the ownership of a $10 billion sovereign wealth fund to the central bank from a sanctioned [Western sanctions] state-development lender, according to two people with knowledge of the plan. Russian Direct Investment Fund’s co-investors, which include sovereign funds in Europe and Asia, are concerned that sanctions may affect their investments in Russia if the state lender controls the assets, according to one of the people, who asked not to be identified because the information is private.

The fund, created in 2011 to stimulate investments in privately held businesses and wean the state off its dependence on commodities, has secured the backing of funds including France’s Caisse des Depots et Consignations and Japan Bank for International Cooperation and last year hired Goldman Sachs Group Inc. as an adviser. Penalties over Ukraine have led Russia to invest in state-owned lenders VTB Group and Russian Agricultural Bank, whose access to international funds has been curbed, and the measures may also impede co-investors from dealing with RDIF.

Next, having secured access to RDIF away from Western sanctions and possibly freezing, I suppose there's no "rainy day" for Russia like today. With oil prices falling besides, "stabilization" is certainly on the cards. Net result? Don't bet against Russia raiding RDIF soon:

[T]he Finance Ministry is allowing, if the need arises, for the possibility of taking funds from the sovereign wealth fund next year for the first time since the aftermath of the global crisis. The Reserve Fund, which collects windfall oil revenue and was set up to cover budget shortfalls, stood at $91.7 billion as of Sept. 1.

"To ensure the unconditional fulfillment of all of the obligations in 2015, in a situation if federal budget revenues come short … the government will have the right to direct the resources to fill the shortfall of up to 500 billion rubles from the Reserve Fund," the Finance Ministry said in the budget.

Economists have warned that once the government starts digging into the stash, it can be depleted within around a year if Moscow is hit with more punitive measures by the West and if oil prices drop significantly.

Let's just say Russia will be in for a fairly severe test over its actions in Ukraine soon. While Putin's macho man act against Western sanctions may win plaudits at home in the meantime, we'll see whether the same holds in a few months' time when the combined force of sanctions--devaluation, recession, etc. hits.

Unpaid Advert: IMF's Lagarde Plugs IPE

♠ Posted by Emmanuel in IMF at 9/17/2014 01:30:00 AM

Christine Lagarde is famously the first non-economist to head the International Monetary Fund. Aside from being in charge during a time of transition when more developing countries want greater representation at the lender of last resort--see the cartoon above and an earlier post on this matter--the economics profession is coming under fire post-global financial crisis. Do economists really know how to run an economy, let alone a world economy? Nowadays, of course, "everything else" is beginning to gain more consideration in global economic governance. Not only do we need to bring political, social and technological factors back into consideration, but also a gendered focus:

In truth, some IMF staff also fear that gender issues are a distraction from the more pressing problems of financial stability, say, or monetary policy. But to Lagarde these naysayers miss the vital point: she thinks the IMF, like the rest of the policy world, urgently needs to overhaul how it does “economics”. “When I got here I found silo-thinkers,” she explains. “They thought that things like women’s contribution to the economy, or climate change, or income inequality, didn’t matter. But it does.”

In many ways, then, she wants to consider all the other things economists neglect and have marginalized at the IMF for most of its history. She wants to practice IPE, in other words:

This partly reflects her own background: unlike most of her predecessors, Lagarde has not had economic training. Some critics consider this a handicap. She disagrees. “There are three things,” she says, ticking the points off her fingers, her spinach pushed aside. “Firstly, I am a quick learner. Secondly, I know when I am out of my depth. But thirdly, my management style is all about bringing people together. So I ask people to explain. And that is very important, because economics has too much jargon, so many models, that ordinary people just cannot understand it. And that is dangerous.”

She is particularly concerned about what she sees as a structural disconnect between economic and political structures. On the one hand, she notes, the global economic system is becoming increasingly integrated; on the other hand, the global political system is fragmented and becoming more so because of a backlash against the way that globalisation is hurting some people. “What we are seeing with all this regionalism, with the Scottish people wanting to go their own way, is going in the direction of less globalisation,” she says.

To be sure, this sort of stuff is old hat to IPE specialists. Dani Rodrik, for instance, questioned whether globalization has gone too far back in 1997. Given the copious amount that's been written about the IMF by IPE scholars of all stripes, for example, I think that Lagarde would do well to engage with our field since many of these areas have already been covered by political economists instead of mainstream economists.

Bitcoin Crashed, But Will Apple Pay Take Off?

♠ Posted by Emmanuel in Currencies,Innovation at 9/16/2014 01:30:00 AM

You're showing your age if you remember "master charge" (all small caps).

I'm kind of surprised Apple didn't name its payments service "iPay." It could have eased the terminological transition to lending, "iOwe," and the unfortunately common American phenomenon of being unable to pay debt on time, "iDefault"--which, in direr circumstances, leads to the state of being "i(M)Bankrupt." All kidding aside, "Apple Pay" is an expected development that nevertheless holds much promise, the first emanating from it being an Apple service and the expectations people have that it will have a higher chance of success in the company's Reality Distortion Field.

Apple's fearsome reputation aside, Apple Pay also deals with many of the obstacles which render Bitcoin a non-starter. To wit, I enumerated the following not so long ago:

Has this payments service addressed legal impediments to payments handling such as (a) occupying a grey area questionable by monetary authorities, and (b) meeting anti-money laundering / counter-terrorist financing legislation worldwide or AML-CTF?
Would mainstream banks course their transactions through this payments service?
Would mainstream retailers accept its payments?
Would consumers use this currency secure in the knowledge that (1)-(3) are met?

Apple is usually quite comprehensive in ticking the boxes, and its relatively late entry into the payments arena is largely attributable to performing due diligence on these four factors in a way the upstart outsider Bitcoin hasn't. In other words, it meets the three necessary characteristics of money as a store of value, medium of exchange, and unit of account--especially the first two. Given how Apple's fashionably late entries into the music and mobile telephony spaces have revolutionized those categories, the FT is predicting the same for payments. At the outset, all the major players all already lined up:

But such is the sway of the tech company that JPMorgan, Visa and the other banks and payments networks sent senior executives to Mr Cook’s presentation on Tuesday to pay homage. Bank chief executives fawned about the “exceptional customer experience” and the “exciting move”.

They are also paying hard cash for the privilege of being involved: 15 cents of a $100 purchase will go to the iPhone maker, according to two people familiar with the terms of the agreement, which are not public. That is an unprecedented deal, giving Apple a share of the payments’ economics that rivals such as Google do not get for their services.

How about this for a star-studded lineup of the Who's Who of American finance:

The list of early Apple Pay partners is impressive, including the 11 biggest US card issuers, representing 83 per cent of the market, and retailers such as McDonald’s and Walgreens which together have 220,000 US stores ready to receive iPhone payments. While it lacks retailers such as Walmart and Best Buy, which in 2012 teamed up to develop a mobile wallet of their own, Apple’s ability to wrangle representatives from three big groups of the payments world – banks, credit card companies and merchants – is no mean feat.

Part of the reason the 50-year-old credit card system remains “antiquated” is because it relies on a complex ecosystem of players that rarely agree on how best to change their industry. However the chief executive of one payment technology company, who asked not to be named, said he was surprised that the banks were so willing to concede to Apple after what happened to the record labels.

Actually, the FT article is useful in understanding how this situation will unfold if Apple Pay is successful, which is by no means guaranteed. There have been, after all, several Apple flops over the years. Let's begin with the head of the credit chain: Banks, strictly speaking, are not endangered unless Apple decides to go into the business of providing credit, which I doubt. Ditto for mass and specialist retail. So, they are relatively safe since Apple has little reason to go into their lines of business.

However, there is a case to be made that the existing payments handling services--Visa and MasterCard--are likely to feel the squeeze. What they do is facilitate payments--on credit or debit--from existing bank accounts. In effect, Apple Pay fulfills the very same service as Visa and MasterCard do. Since terms are undisclosed, what will determine whether Apple Pay supplants Visa & MC are the following:

1. Swipe fees per transaction being lower for retailers via Apple Pay than Visa/MC;
2. Royalties per transaction paid by banks to Apple Pay being lower than Visa/MC; and the hard part:
3. Apple Pay handling transactions outside of Apple-branded consumer devices.

Mind you, (3) has already happened with iTunes for Microsoft Windows being a notable example, so I'd be very uncomfortable if I were Visa/MC right about now. Sure Apple is playing nice, but cutting Visa/MC out will become a more realistic proposition as more payments are coursed through Apple Pay and reach critical mass. If Apple is already the middleman, there is certainly no need for another to pile on more fees for banks and consumers alike.

At present Apple will not charge retailers anything, only banks:

Apple declined to talk with Digital Transactions News about Apple Pay’s pricing or operational aspects. But clues can be found in the Web site it created for software developers working on applications for Apple Pay. The “Getting Started” section poses some common questions, including, “How much does it cost to accept Apple Pay?”

Here is how Apple answered its own question: “Apple does not charge users, merchants or developers to use Apple Pay for payments. Your credit and debit transactions will continue to be handled by the payment networks.”

Translation: Apple will not upset the Visa/MC gravy train just yet, but in time, what's there to stop it from approaching retailers offering to do (1) and banks offering to do (2) and cutting the existing payments services altogether? What they currently enjoy is brand recognition: both Visa and MasterCard are global top 100 brands. But guess what? Apple eclipses them both by a huge margin in valuation. Remember Nokia? It too used to appear on this list with regularity--until iPhone came around.

MasterCard, in other words, may soon be joining "master charge" in the Great Cash Register in the Sky.

Can German-Style Apprenticeships Save America?

♠ Posted by Emmanuel in Education,Europe,Labor at 9/15/2014 01:30:00 AM

Stamping out ignorance and providing work is the German way.

There's an excellent feature in the WSJ on German firm Festo, a supplier to German firms like VW and Mercedes-Benz, following these MNCs Stateside. Not only is it bringing manufacturing know-how to the US but also vocational knowledge in the form of the German apprenticeship model. The latter has proven to be more successful in avoiding the job-skill mismatches prevalent in US higher education. Festo even has a specialized unit dedicated to training. After all, what is the point of having an ever-increasingly expensive college degree in the face of ever-decreasing job opportunities?

Unfortunately, most Anglophone universities haven't bothered answering this question, staffed as they are by inveterate rent-seekers with a vested interest in propagating the College Myth. So, it's up to prospective employers from more enlightened parts of the world to pick up the slack. Just in time, the Germans are here to help the Yanks:

German robotics company Festo AG wants to make American factory workers more tech-savvy. As robotics take an ever more prominent role on factory floors, training workers and keeping their skills up-to-date has grown in importance. The German company sees in the U.S. "a mismatch in the labor market between what businesses need and the kind of education young people are getting," said Nader Imani, chief executive of Festo Didactic, the company's stand-alone education division.

Labor economists see things the German way. Instead of all this guff about the knowledge economy and other vapid American happy talk only nitwits buy into, the truth is that many jobs of the future will require skills somewhere between a high school and a college degree. It is, quite frankly, financially insensible to pay for a college degree without any idea of what sorts of jobs they will help you get afterwards. Consider the US labor market going forward:

Anthony Carnevale, a labor economist who runs Georgetown University's Center on Education and the Workforce, says roughly two million U.S. jobs go unfilled because of shortfalls in skills, training or education. Of those, roughly 600,000 are jobs that require more than a high-school diploma but less than a bachelor's degree. Mr. Carnevale predicts roughly one-third of U.S. job openings through 2020 will require such middle skills, with a vocational certificate, industry-based certification, some college credits or an associate degree—but not a classic four-year college degree.

American training in these areas has deteriorated since the early 1980s, he said. German companies with operations in the U.S. have complained for years that factory workers lack specific skills they require to get the job done. Executives and American policy makers have said the U.S. could benefit from Germany's approach to apprenticeships and on-the-job training. "The German system coordinates employees need with what employers want pretty well," said Joseph Parilla of the Brookings Institution, an expert on competitiveness.

Americans have a deservedly bad rap for the quality of their education. Spend a lot and get little and return is the operative principle. Instead of copying the American uni-jobless model, there is a much better case for the rest of the world to copy the German apprenticeship model. The world's young people deserve so much better since the honest truth is that not everybody is going to be the next Silicon Valley billionaire. Rather, most would be quite happy to receive the appropriate training for jobs that actually exist instead of going on a wild goose chase with an uncertain ending.

Unfortunately, the latter represents the state of US higher education as far as employment opportunities are concerned replicated the world over. Let Germany show us the way.

BRICS Fight, Brazil v PRC: 'Valemax' Cargo Ships

♠ Posted by Emmanuel in China,Latin America,Trade at 9/13/2014 01:30:00 AM

Frank, it's the big hit...the mothership! [Captain Beefheart]

The height of the pre-global financial crisis frenzy was manic not just in financial markets but also in others. Most notably, there was this great expectation that China was the be-all and end-all of global commerce as commodity prices surged globally. After all, who would feed materials to this giant workshop to the world? Post-global financial crisis, we are learning that even the great China growth story has its limits. With many of the markets for its finished goods in less-than-fighting condition, Chinese growth has slowed down too.

Unfortunately, one of those who bought into the great China growth story circa 2008 was fellow BRICS nation Brazil. Seeing the PRC as the primary growth market for steel exports, Brazil gambled large in reducing its cost disadvantage with Australian-sourced iron ore by building the largest bulk carriers ever made, Valemax-class vessels:

It is now almost three years since a ship the width of a football pitch and longer than the Eiffel Tower set off from Brazil bound for China. The world’s biggest bulker — the Vale Brasil and its sisterships of 400,000 dwt — were expected to herald a new era of cheaper freight. But the ultimate success of a bold $8bn plan to construct 35 vessels by their Brazilian mining group owner, Vale, remains an unproven gamble. The ships are still mired in controversy because of the unwillingness of the Chinese government to give them a clear green light to operate in the local ports for which they were constructed.

Contrary to plan, Vale instead encountered resistance from Chinese shipping concerns who sought to have the vessels prohibited from delivering to China by declaring them unsafe:

Brazil needs a kickstart and the Valemax superships were meant to provide it when they were ordered in 2008 at the height of the China commodity boom. Vale, the world’s biggest single provider of iron ore, was concerned that shipping rates from Brazil to China had soared to over $100 per tonne. This was double the cost to BHP Billiton and Rio Tinto of carrying rival cargoes to Chinese steel mills from Australia.
But as we subsequently found out, the Chinese shipping lobby was unhappy about seeing Vale damage its own lucrative dry bulk maritime business. The Chinese owners convinced the Ministry of Transport that there were safety fears and a ban was imposed on the discharge of all bulkers over 250,000 dwt. The Vale Brasil found itself unable to dock at its planned discharge point of Dalian and had to reroute to Italy.

Hence, while Vale is inordinately proud of its hulking vessels, even its own route charts show they are not calling at Chinese ports they were intended to serve. More recently, however, the Chinese have themselves begun considering costs savings from using these vessels. There is news that Chinese logistics firm COSCO will even help Vale construct Valemax ships for serving the PRC market on a leaseback deal:

Vale signed an accord with China Ocean Shipping Co. to transport iron-ore with giant vessels known as Valemax as the world’s largest producer seeks to curb costs amid slumping prices of the steel-making ingredient. Vale will transfer four of its 400,000-metric ton vessels to Cosco, as China’s largest shipper is known, and charter them for 25 years, the Rio de Janeiro-based miner said in a statement today. Cosco will also build 10 vessels of similar size to ship Vale’s iron ore. No financial terms were given.

With global iron ore prices slumping to a five-year low post-global financial crisis, the explanation for state-owned COSCO's volte face is simple: it eked out a bit more profit banning Valemax from ships delivering to China when steel prices were high and customers did not mind paying a premium. Now that they are low, steel customers are squeezing logistics firms for lower prices that less efficient (read: smaller) vessels cannot deliver on. Hence the sudden shift to accepting Valemax ships.

You can't fight progress forever, and these seafaring leviathans are the future.

Poland's Turn to Experience Russian Gas Pains

♠ Posted by Emmanuel in Energy,Europe,Russia,Security at 9/12/2014 01:30:00 AM

Where'd all the gas go? Nobody may really know...except the Russians.

Energy geopolitics between Russia and its European "customers" are fascinating to watch. On one hand, Russia has no marketing concept whatsoever about "fulfilling the contract" and other niceties in dealing with Western and Central Europeans it treats with utter contempt. Take that, NATO members! On the other hand, those Europeans are not exactly spoiled for choice when it comes to other sources of energy, so they must grin and bear Russia using energy as a weapon. Those Germans couldn't have picked a worse time to discontinue nuclear power, for instance.

Today's case in point is Poland. With 60% of its natural gas supplies coming from Russia, its energy profile is no different from many other dependent European "customers." A few days ago, it declared wholehearted support for beefing up NATO forces in Eastern Europe in the wake of the Ukraine crisis:

Speaking to journalists at the end of the first day of the NATO summit in Newport, Wales, Bronislaw Komorowski told journalists that alliance leaders will announce on Friday plans to beef up defences in eastern Europe following the crisis in Ukraine.

Though conceding that there will be no permanent NATO deployment in the region – as Poland and the Baltic states had been pushing for – he welcomed the construction of airbases and fuel and ammunition depots which would be used by a rapid reaction force, of around 4,000 troops, which could use the facilities at a moments notice.

Russia being the land of hardball, the Poles had it coming: all of a sudden, gas supplies from Russia are experiencing disruption. Russia claims technical difficulties, but most would suspect otherwise given the timing. Also consider that Poland has been re-exporting gas to Ukraine to make up for that lost through Russian export bans and you can put things together for yourselves. Just in time for the coming winter; fancy that:

A decision by Russia to cut gas exports to Poland without warning has rekindled fears about Europe's reliance on Siberian gas at a time of increasing tension between Moscow and the west. The Polish state energy group, PGNiG, said it was trying to find out why volumes had been slashed by up to 24% when it had been exporting gas itself to Ukraine to make up for Russian shortfalls there.

Its counterpart in Kiev, Ukrtransgaz, accused Kremlin-controlled Gazprom of penalising Poland and undermining onward gas supplies to Kiev. "Today Russia started limiting gas supplies to Poland in order to disrupt the reverse (flows) from Poland that we receive ... Poland stopped reverse supplies to Ukraine in the range of 4m cubic metres," said Ihor Prokopiv, chief executive of Ukrtransgaz, according to the Russian news agency, RIA.

Then again, others would argue that disrupting supplies right now when it's warm makes little sense as a political statement:

Jonathan Stern, a gas expert at the Oxford Institute for Energy Studies and a member of the EU-Russia Gas Advisory Council, believed there was more likely a technical, not a political problem.

"If Gazprom wanted to punish the Poles then it would not do so surely when the weather was warm and in breach of its contractual obligations," said Stern who met the Russians for a gas summit in Vienna this week. "The Russians are acutely aware that any (commercial) moves at this time will be interpreted in the worst possible light (by the west)."

On top of everything, Russia dishonoring gas contracts would eat into revenues. I guess when your economy is tanking, it may not matter much if it takes a bigger hit by annoying the customers. Then again, LNG exports to Asia may be the next big thing in Russia's plans.

Counting Illicit Outflows from Brazil, 1960-2012

♠ Posted by Emmanuel in Latin America,Underground Economy at 9/11/2014 01:30:00 AM

A Reuters news article points us to a new study from Global Financial Integrity (GFI) on the level of illicit outflows from Brazil. GFI has produced reports for several other developing countries, but Brazil is of particular importance as a Latin American bellwether. Given the uncertainties surrounding developing countries in this region, questionable capital flows are of some interest:

The Brazilian economy lost at least US$401.6 billion in illicit financial outflows from 1960 to 2012. These outflows represent the proceeds of crime, corruption, and tax evasion, and have serious negative consequences for Brazil. Outflows were found to drain resources from the Brazilian economy, to drive the underground economy, and to exacerbate inequality.

Furthermore, the report found that illicit outflows are growing. Annual average illicit outflows increased from US$310 million in the 1960s to US$14.7 billion in the first decade of the twenty first century before jumping to US$33.7 billion over the last three years of the study, 2010-2012. On average, Brazil’s illicit outflows are equivalent to 1.5% of the country’s official GDP.

What I find curious with this and other GFI studies is that most outflows are attributed to trade misinvoicing. That is, the value of imports or exports is misreported by under- or over-invoicing their value. Through this channel money flows overseas since it is a way to work around foreign exchange and capital controls:

Trade misinvoicing is the major conduit of illicit financial flows from Brazil. The report reveals that the vast majority of Brazil’s illicit outflows—92.7%, or US$372.3 billion of the US$401.6 billion in total outflows—were channeled through the misinvoicing of trade transactions. The remaining US$29.4 billion in the illicit outflows detected by GFI occurred via hot money outflows, such as unrecorded wire transfers.

What I am more convinced of is that inequality relates to the amount of these capital outflows:

We also examined the link between economic growth, income inequality, and capital flight. While the lack of an unbroken series on the Gini coefficient prevented its inclusion in our model, regression analysis with a shorter time period (1970-2011) showed that worsening income inequality also seems to drive capital flight, although the relationship is only significant at the 90 percent level [marginal significance]. A possible explanation is that rising income inequality implies a larger number of high net worth
individuals (HNWIs). It is the HNWIs rather than the common man that can finance capital flight and take advantage of the world’s shadow financial system to shelter wealth.

As large as these outflows already are, note that others which are not so easy to capture may increase the sums involved:

Economic sources and methods cannot capture illicit financial flows in a comprehensive manner. The difficulty arises from the fact that we are in part trying to capture financial flows generated from purely illegal activities such as drug trafficking, bribery and kickbacks related to corruption, and arms or human smuggling, which are typically designed to evade detection by regulatory authorities and law enforcement. Such activities are often settled in cash, so that the parties to the illegal transaction cannot be traced. Hence, gap analysis of officially recorded data has inherent limitations in capturing illegal transactions.

Reviving Japan: From Abenomics to Womenomics

♠ Posted by Emmanuel in Demography,Gender Equality,Japan at 9/10/2014 01:30:00 AM

While Japan is a country which much to be proud of, its record in promoting gender equality may not be one of them--yet. Among OECD countries, the wage disparity among sexes is third greatest in Japan after South Korea and Estonia. Prime Minister Shinzo Abe recently made a gesture towards rebalancing this disparity by appointing five female cabinet ministers, matching the previous record. Why not more, you may ask? Remember that in a parliamentary system like Japan's, cabinet members are not political appointees but sitting ministers. With admittedly few female Liberal Democratic Party parliamentarians, selection is made more difficult:

Japan's prime minister picked five women for his Cabinet on Wednesday, matching the past record and sending the strongest message yet about his determination to change deep-seated views on gender and revive the economy by getting women on board as workers and leaders.

Japan has a vast pool of talented, well-educated women, but they are far under-represented in positions of power in government and corporations. Women make up 10 percent of parliament and just 3.9 percent of board members of listed Japanese companies, versus 12 percent at U.S. corporations and 18 percent in France. Women here have long complained about the obstacles to getting taken seriously at work, receiving equal pay for equal work and finding child care or helpful spouses.

Equality may be a good in itself, but is there reason for us to believe that females are necessarily better administrators, civil servants, lawmakers or managers? Women may be less prone to groupthink and excessively aggressive behavior, true. Moreover, I do not think that Abe is looking to make the opposite argument that women "outdo" men. Rather, they should have equal opportunities insofar as Japan is wasting a lot of talented people for discriminatory reasons. What's more, they may bring a fresh perspective to issues their country is facing:

Prime Minister Shinzo Abe reiterated Wednesday that a key part of his "Abenomics" growth strategy is making greater use of women and promoting them to leadership posts — a campaign dubbed "womenomics," a term he has embraced. Abe has set a goal of having women in 30 percent of leadership positions in both the private and public sectors by 2020. "Realizing a society where women can shine is a challenge our Cabinet has undertaken," he said during a news conference. "I look forward to the wind of change these women will bring."

Perhaps these women will finally begin to promote migration into Japan to revive its moribund demographics and hence its economy?

UPDATE: SCMP has a profile of Yuko Obuchi, Japan's new industry minister charged with reinvigorating her country's moribund industrial base. Aged 40, she is the youngest minister in the postwar era. Her job # 1 is restarting nuclear power plants closed in the wake of Fukushima: I have discussed the urgency of doing so before.