Marketing the Unmarketable: Israel's Soft Power

♠ Posted by Emmanuel in ,,, at 7/31/2014 01:30:00 AM
Not your grandfather's idea of "nation branding."
Regardless of the party in power, one thing you can count on is that the United States will be more pro-Israel than nearly everyone else, John Kerry's alleged ham-fistedness notwithstanding. While the rest of the world is rather appalled by Israel's military attacking (a) nominally their own people in (b) a hemmed-in area, American politicians of all stripes try to outcompete each other in showing support for the embattled nation. In the rest of the world, however,  I do not need to tell you that its reputation is rather lower. Especially when these gruesome conflicts occur, for instance, I have personally received messages time and again to participate in an academic boycott our Israeli colleagues.

So while Americans may not need as much convincing to go along with Israel, the rest of the world needs to be prodded along from the thinking of Israel's powers-that-be. Uriel Heilman has an excellent piece on Israel's actions when it last mounted a campaign of this magnitude in 2008:
"Speed is the top priority," said Yigal Palmor, spokesman for Israel's Foreign Ministry. "The goal is to bring your message as fast as possible to the widest possible audience." When Operation Cast Lead was actually launched on the night of Dec. 27, 2008, taking many Palestinian fighters in Gaza by surprise, the [media] group sprang into action. Diplomats from the foreign minister on down took to the airwaves, explaining to reporters from New York to New Delhi why Israel had launched the operation to curb Hamas' rocket fire into Israel. The IDF set up a press center where reporters could get quick and accurate information about the fighting, including videos of forces in combat...

Israel stepped up its PR effort as the war unfolded. The morning after the operation began, Foreign Minister Tzipi Livni went on NBC's "Meet the Press" to make Israel's case for the war and clarify its objectives. "The situation is a situation in which Israeli citizens are targeted from Gaza Strip, a place that we left few years ago in order to create a new horizon for peace. But we got Hamas in return," Livni told NBC's David Gregory. "Our goal is not to reoccupy Gaza Strip. We left Gaza Strip," she said. "We dismantled all the settlements. But since Gaza Strip has been controlled by the extremists, and since Gaza Strip has been controlled by Hamas, and since Hamas is using Gaza Strip in order to target us, we need to give an answer to this."
Another platform for its media campaign involves the use of social media. Israel, after all, is a hotbed of technology research (Silicon Wadi):
The effort was not limited to traditional media. On the third day of the war, the IDF launched a channel on the popular online video sharing website YouTube, where viewers around the world could access video clips supporting Israel's case for war. The IDF posted footage of Hamas weapons storehouses in Gaza, booby-trapped schools in Gaza City, rocket crews firing from Palestinian civilian areas and Israeli medical teams treating Palestinian wounded. The videos included footage taken from cameras aboard IDF unmanned aerial vehicles flying above the fighting. 

By the fourth day of the conflict, Israel's Consulate in New York had opened an account on the social messaging website Twitter and held a virtual press conference to answer questions from the public on the conflict in Gaza. In keeping with Twitter's format, the questions and answers were limited to 140 characters each. "the sole purpose of this opt. is 2 protect Isr's s.border & 2 allow ISR 2 live safely. this opt is indiferrent 2 politics," the consulate wrote in typical Twitter shorthand in response to a question from a user named carrotderek. "we're not at war with the PAL people. we're at war with a group declared by the EU& US a terrorist org," read another answer.
Lastly, there is also, well, titillation. How better to target younger generations than to parade scantily-clad female soldiers in lad's mags? While I was aware of these appearances before, what I didn't catch was that they were sponsored by the Israeli consulate:
In the old days, Palmor said, Israel projected the same message with little thought to audience interest. That strategy, he acknowledged, was not successful. "One strategy is counterproductive," he said. "What is good for the United States is not good for France, and vice versa." The Israeli Consulate in New York has run with this idea. In July 2007, the consulate caused a stir when it helped Maxim, a monthly men's interest magazine, put together a five-page spread of scantily clad IDF women soldiers striking sexy poses against various Israeli backdrops.  
"People perceive Israel through two lenses alone: the conflict and religion," Saranga went on. "What we want to do is add another dimension, which is the human face. People are not familiar with the Israeli face. We want to show that Israel is a normal place, that it's a place of great cultural creation, that it's a hot place in terms of lifestyle."

This is the re-branding of Israel: getting niche audiences to associate Israel with positive, rather than negative, images. By that measure, Israel scored a coup when Sports Illustrated decided to use a shot of Israeli supermodel Bar Refaeli on the cover of its annual swimsuit edition in February. Instead of the image of an armed Israeli soldier firing a tear gas canister at Palestinian teenagers, the image of Israel the world woke up to was of a sizzling-hot Refaeli wearing a tiny bikini, pulling away at the bikini-bottom's strings. 
It is shallow and superficial and I would have wished for equal-opportunity exploitation by having male soldiers strut their stuff in Cosmopolitan or something similar, but consider the target market here. Judging from US opinions of Israel, it seems to be a fairly effective rebranding strategy. There is no Middle Eastern edition of Maxim (can you imagine?), but make no mistake: Whether in spreading information obviously sympathetic to the Israeli cause or, er, giving a new definition to "field strip," the Israelis have done their homework as is usually the case.

Is Russia on Argentina's Credit Highway to Hell?

♠ Posted by Emmanuel in , at 7/30/2014 01:30:00 AM
One financial goner meets another?
This commentary by Mohamed El-Erian struck me as wildly speculative at first: Russia is the next Argentina...yeah right! Are we talking about the same Russia that supposedly has a cool $475 billion in foreign exchange reserves? It isn't pipsqueak Argentina with less than $29 billion in reserves that looks like it may default tomorrow (more on this later after my earlier commentary). El-Erian isn't convinced that Russia's troubles are to be as lightly taken as the markets suggest:
That said, Argentina is not entirely unique. Russia is on a similar path, though the details and the timetable differ. Russia's government, companies and banks neither need nor want to default on their debts. If, however, Ukraine-related geopolitical tensions get worse and pressures mount on Western governments to impose legal limitations on banks’ ability to transact on behalf of Russian entities, they may find themselves unable to make payments despite ample international reserves and manageable debt loads. 
The point isn't that Russia has sufficient reserves to make payments for its energy companies and other state-owned firms' obligations. Rather, like Argentina, it may not be allowed to make these payments due to legal machinations--i.e., sanctions:
After last week’s intensification of U.S. sanctions, Europe is preparing to detail its own set of additional sanctions this week. Absent a change of strategy by Russia -- an unlikely outcome given how President Vladimir Putin readily sanctions could materialize soon.

The market has yet to fully absorb this possibility. Many investors believe that the Russian geopolitical issues will somehow resolve themselves, because it is in nobody’s interest to stumble into a lose-lose situation. Yet, as with Argentina, rationality is not necessarily a good guide to what could happen. Absent a course correction, the conflict is proceeding on a path that limits the flexibility of the parties, along with the control they have on outcomes. Most investors' credit models do a pretty good job of capturing the many factors that impact debtors’ willingness and ability to pay. They have greater difficulty, however, dealing with the one-off exogenous shocks that politics can deliver. Argentina is today’s example, with all the suspense that it entails. If Russia does not change course, it could be tomorrow’s.
World politics are messy and risk models can't predict them; what else is new? It's something to think about as Russia's fate hangs in the balance: economics will not (yet) doom Russia's economy but rather politics. Welcome, friends, to the International Political Economy Zone. 

In Memoriam: Japan's Export Champion Days

♠ Posted by Emmanuel in ,, at 7/29/2014 01:30:00 AM

 In times past, there was an entire economic school of thought essentially based on "being like Japan." We called it export-led industrialization. Through a combination of government subsidies for championed industries, high import tariffs in these industries, export incentives and foreign exchange reserve accumulation to keep one's currency artificially weak, the hope in emulating these practices was, of course, to be like Japan someday. Exports=good, imports=bad. Books like Chalmers Johnson's MITI and the Japanese Miracle extolled the virtues of industrial policy. Through the looking glass we have arrived at "Japan someday," and the view is not necessarily pretty.

I have previously written about how Japan has had trade deficits for umpteen months straight. Partially, this is due to its energy bill surging from fuel imports as it mothballed nuclear power plants in the wake of the Fukushima incident. However, there is more to this story: I have also written about how Japanese firms have moved overseas since the 1985 Plaza Accord that involved the US pressuring Japan to strengthen its currency. For one thing, this movement has led to the creation of "Factory Asia" in which Japanese multinationals have their production facilities spread throughout Asia. Even in the wake of recent yen weakness, Japan's exporting volumes have not really returned home:
[T]he value of Japan’s exports is 23 percent below a March 2008 peak, even as those of South Korea, the U.S. and Germany have grown. The yen has lost 16 percent in value against the dollar since Prime Minister Shinzo Abe took office in December 2012. That hasn’t been enough to spur growth in outbound shipments.  
In other words, while Japan's trade balance is negative, the value of exports has not really rebounded fro its 2008 high. The government's excuse is that the demand for goods overseas is weak--especially in emerging markets:
Japan’s government and central bank have blamed weak overseas demand, especially in emerging markets, for export sluggishness. This weakness is negative for an economy that suffered a blow to domestic demand from an April sales-tax increase. 
However, the real story of Japanese exports not increasing in spite of a weaker currency during PM Shinzo Abe's second spell in office is precisely because most manufacturers had already relocated--especially during years when the yen was strong:
“Japan is being left behind in the export recovery mainly because Japanese companies accelerated the shift of production abroad when the yen appreciated after the Lehman shock,” said Toru Suehiro, a market economist at Mizuho Securities Co. in Tokyo. “The loss of global market presence by Japan’s companies, especially electronic appliance makers, is also a factor.”

The impact of the move overseas by Japanese companies is striking in the U.S. automobile market, said Suehiro. U.S. sales for Japanese automakers in the six months through June rose 6.2 percent from a year earlier to 3.04 million, according to researcher Autodata Corp. Auto exports from Japan to the U.S. for the same period were down 8.5 percent, according to finance ministry data. Honda Motor Co. became a net exporter from the U.S. last year, shipping more vehicles out of that country than it imported from Japan, and both Honda and Toyota Motor Corp. set production records at their North American assembly plants in 2013.

Japan’s motor-vehicle exports to the U.S. declined 17 percent from 2008 through 2013, with total automobile output in Japan dropping 17 percent, according to the Japan Automobile Manufacturers Association.
I guess they'll have to rewrite those textbooks pretty soon when they get to the part about citing Japan as the archetypal example of export-led industrialization. Alas, those days are gone.

'Libertarian Hacking' is Not an Oxymoron

♠ Posted by Emmanuel in , at 7/28/2014 01:30:00 AM
Every hacker has his price--and the Koch brothers are paying for talent.
Owing to the dominance of Northern California--Silicon Valley, to be exact--in the American technology sphere, it is unsurprising that we think of tech culture as predominantly liberal in orientation. It's Nancy Pelosi Land. However, if you examine the premises of what these technologies supposedly do--promote economic and political freedoms--it gets you thinking: Shouldn't conservative causes in general and libertarian ones in particular welcome advances in the global use of ICT worldwide? A recent Yahoo! News original feature--they apparently have journalists of their own now writing features instead of relying purely on news agencies--brings up this possibility:
The internal outcry at StumbleUpon last year underscores Silicon Valley’s image as a place that can feel hostile to the right. Democratic politicians dominate districts in Northern California, and a majority of donations that come from the wealthy region find their way into Democratic pockets.
George W. Bush famously changed his attitude from annoyance over leftists annoying hum at every turn while president to becoming an unlikely champion of the Internet later on. The George W. Bush Institute, for instance, has hosted gatherings of of international cyber-dissidents. So, if one of the most disliked conservatives in America has become an avid ICT-phile, what's stopping, say, the Tea Party architects the Koch brothers from backing Internet concerns? After all, many of the apps that are now emerging work to undermine licensing regimes, bust unions, fight special interests and overturn entrenched market participants (presumably for as long as they aren't the Koch brothers-linked interests):
That’s enough of an opening for enterprising Republican lawmakers, who are beginning to notice that there’s an opportunity to finally make inroads here. For example, they see how state and local union-backed taxi commissions try to choke ride-sharing apps such as Uber and how special interests that represent the hospitality industry work to undermine businesses like Airbnb, which connects private homeowners with potential renters. At the conference, Washington Rep. Cathy McMorris Rodgers and Kentucky Sen. Rand Paul delivered speeches and joined panel discussions, while Jeb Bush and Wisconsin Gov. Scott Walker piped in their own comments through video presentations. The Republican National Committee and the National Republican Senatorial Committee flew in their top tech brass from Washington, D.C.
Unusually for the strident Tea Party set, they're actually using a soft sell approach to woo hacking talent to libertarian causes by not overtly politicizing their digital causes. Rather, the emphasis is on emphasizing similarities in causes--and how gobs of money can be used to forward them:
This is where Lincoln Labs — with an assist from the Koch network — comes in. Many of the hackers, programmers and designers who participated in the Lincoln Labs hackathon aren’t Republicans, or even conservatives. But by holding the events with the promise of cash prizes, Lincoln Labs has found a way to connect issues raised by D.C. political operatives who don’t know the first thing about coding with solutions from technologists eager to solve problems (and maybe earn a bit of cash on the side).

Finding a broad swath of conservatives and libertarians among the community of California technologists, though, is still a challenge, Lincoln Labs attendees and organizers said.
The larger point is not to turn hackers into Republican backers, Tea Partyers or Koch acolytes. They are not, well, on a proselytizing mission here. Rather, the real point of the exercise is to get these hackers to develop applications that help conservative causes:
To supplement the occasional brick-and-mortar hackathon gathering Generation Opportunity has built an online hub for libertarian technologists to connect year-round with politicos and entrepreneurs. The group has built a portal called Liberty.IO as an online space where activists can submit problems they would like to solve or ideas for better apps and connect with designers and developers who know how to build them.

The upside for the Koch-backed groups? By serving as the home for the libertarian tech community, they get first crack at top tech talent that’s potentially sympathetic to the “conservatarian” cause — and help with everything from smarter data collection to better campaign practices.

And of course, there’s the added benefit of funding projects that they see as helping put a million little tears into the fabric of the state. As many of the activists here see it, the tech revolution is one of their most effective ways to make the services provided by the government less relevant.
It's interesting stuff, and the only question from a value-neutral position is to ask why it took them so long.

Diversification, or Macau Can't Live on Gambling Alone

♠ Posted by Emmanuel in , at 7/27/2014 01:30:00 AM
Can Manny help Macau diversify from gambling?
Let's get ready to ruuuuumble: To be sure, if you compare Macau to Las Vegas in terms of gaming revenues, it's a first-round TKO for the Chinese gaming town. Since the turn of the millennium, Macau has left the former home of gambling in the dust as revenues have increased at a rapid clip. However, all good things must come to an end. Given Macau's reliance on punters (Brit-speak for gamblers) from the mainland, the growth slowdown there was bound to have knock-on effects for the Asian betting mecca. For the first time since the PRC bean counters have kept monthly tallies of Macau gaming revenues (in 2010), they fell in June 2014 year-on-year:
Gambling revenue in Macau fell 3.7 percent in June on an annual basis, the first decline in more than four years, with analysts saying the soccer World Cup had diverted gamblers and their hefty bets away from the world's largest casino hub...

Gambling revenue from Macau's 35 casinos fell to 27.2 billion patacas in June ($3.4 billion) from 28.3 billion patacas a year earlier, according to data released by the Macau government on Tuesday. Analysts were expecting a drop of between 4-6 percent. Chinese punters have instead been wagering on the football competition in Brazil. Authorities arrested 22 people on June 18 for their involvement in an illicit soccer betting ring according to Macau police. Betting slips the ring received in one week reached as much as HK$5 billion ($645.19 million) and the average daily amount of betting was more than HK$700 million.
Aside from Chinese bettors preferring to wager on the World Cup, PRC authorities have further cracked down on the amounts that can be taken out of the mainland to gamble in Macau. Why limit the stakes? Simple: officials (read: Communist Party members) have been--embarrassingly if unsurprisingly--among the high rollers in Macau, using public monies to gamble there. While there was previously a loophole allowing patrons to abuse payment systems to transfer money from the mainland above imposed limits, stricter monitoring is closing it:
Over the past two months, global investors have pared bets on stocks geared to Macau after a raft of regulatory curbs sparked concerns about slowing revenue growth. Among the measures are restrictions on the use of state bank card UnionPay, which Chinese nationals use to get out millions of yuan. Legally they are only allowed to take 20,000 yuan ($3,200) out of China per day. To get around this, they pretend to purchase expensive items from stores using their UnionPay cards and instead of actually receiving the items, they get cash.
There are a boatload of other reasons offered dealing with either nannyism or harder times in the PRC:
While restrictions on UnionPay are unlikely to significantly impinge on revenue growth, analysts remain cautious on the sector in the near term, citing weighing economic factors like constrained liquidity, softening housing prices and concerns over the integrity of debt collateral, all of which are likely to add pressure on Macau's high-roller VIP segment. A smoking ban, set to come into effect by October, and restrictions on transit visas, are also issues that may impact the number of visitors in the coming months.
As the post title implies, the authorities are now looking to broaden the reasons why tourists would visit Macau outside of gambling. To be fair, it is in this respect that Macau falls well short of Las Vegas. Think of music--Celine Dion and Elton John aren't playing in Macau, are they? Shows are also in short supply such as elaborate circuses and the like. Macau is trying to bring in more sporting events too such as with the Manny Pacquiao vs. Brandon Rios fight help late last year and Pacquiao's forthcoming match against undefeated Chris Algieri scheduled for 22 November.
Local authorities and top officials in Beijing are pushing to diversify Macau away from its reliance on gaming. The expansion of shows like Melco Crown's House of Dancing Water and Sands China's boxing events are intended to attract a wider visitor base who come to Macau for leisure and tourism rather than to play at the felted baccarat tables.
Is it just me or does "House of Dancing Water" sound stereotypically Asian? Anyway, the first thing they teach you in business school is "portfolio diversification," or that you should not put all your eggs in one basket. Whether it concerns commodity-based economies like Zambia or service-based economies like Macau, the advice is generally sound. To some extent Las Vegas has been "Disneyfied" in not being the seedy, dark gambling den it used to be. Rather, Las Vegas and Macau aim to be more business-friendly (think conventions) and family-friendly (think theme parks) destinations. Las Vegas has almost completed this transition; whether Macau can follow suit is an open question.

Russia Fun: Ruling on $100B Yukos Expropriation Claim

♠ Posted by Emmanuel in ,, at 7/25/2014 01:30:00 AM
Those were the days--and some hope to bring them back.
Five years later, we are about to hear the decision on Russia's liabilities from expropriating Yukos. Readers will remember Mikhail Khodorkovsky, formerly a favored oligarch who then irked Vladimir Putin by entering politics. Shortly thereafter Khodorkovsky was thrown in jail, the firm he controlled was dismembered, and its assets were subsumed by the state-owned giant oil concern Rosneft. In post-USSR Russia, the unspoken arrangement among the beneficiaries of the fire-sale of state-owned commodities firms was that they could enjoy their, er, unusually acquired fortunes for as long as they did not criticize the men who made it possible. This guy had other bright ideas in biting the hand that fed.

While Khodorkovsky has become the poster boy for Putin's arbitrariness and venality, there were other shareholders adversely affected by the expropriation. The case they made to recoup lost investment--they claim over a whopping $100 billion--is about to be ruled on by the Permanent Court of Arbitration which handles these sorts of cases:
Russia will discover next week how much it may be asked to pay for the confiscation a decade ago of Mikhail Khodorkovsky’s Yukos Oil Co., then the country’s biggest oil producer. The Permanent Court of Arbitration in The Hague will rule on July 28 on a $103 billion damages claim the company’s former owners filed against Russia in 2007, Tim Osborne, head of GML Ltd., former holding company of Yukos, said by e-mail. Court official Willemijn van Banning said by phone she couldn’t comment on the date for the ruling.
As you know, Putin and Co. play hardball. They are not going to fork over whatever compensation is determined gladly. What most observers expect to occur is for Russia to balk at payment of an amount rather less than $100 billion. This intransigence will result in a fight to freeze Rosneft assets waged the world over to provide compensation:
GML has a good chance of winning partial damages, according to Gus Van Harten, a professor specializing in arbitration at York University’s Osgoode Hall Law School in Canada. There’s “very limited room” for appeal and Russia will resist paying, so any amount awarded would trigger a global legal battle to seize state property, including assets of OAO Rosneft (ROSN), which acquired most of Yukos in a series of forced auctions, Van Harten said.
The largest shareholder that brought the case, former Yukos holding company GML, is composed largely of other Russians who benefited greatly from the fire-sale of Soviet era energy assets. Ironically, Russia is being taken to task by those who it enriched prior to the state reincorporating what it previously owned. Russian politics are weird. Given its rich human capital, you would have hoped that the country moved past extractive industries and diversified into others from those that make it reliant on commodity-based industries.

Rather, the back-and-forth between the state and those it (questionably) enriched goes on and on. The resource curse lives on in Russia, then, as the emphasis of its political economy centers on nasty quarrels over redistributing existing wealth as opposed to generating more wealth from other industries. The rents may have increased since the Soviet era, but the assets generating those rents--hydrocarbons--are continuously dwindling.

7/28 UPDATE: The ruling has now been issued amounting to a fairly stunning $50 billion. I am absolutely certain the Russians will not be handing this money over easily. Expect legal machinations aplenty--appeals, stays, and so forth. While those are going on, energy assets which can be frozen to help recoup this expropriation award like those of Rosneft worldwide will be contested tooth and nail. A great game of cat and mouse has just begun.

Sisi's No Sissy: Ending Egypt's Unsustainable Subsidies

♠ Posted by Emmanuel in ,, at 7/24/2014 01:30:00 AM
His sartorial choices may have been Oppa Moammar Style, but Sisi has made a good start.
For the record, let us recall how Egyptian President Abdul Fattah El-Sisi came into power. First, he overthrew the popularly-elected Muslim Brotherhood President Mohamad Morsi over the declining security situation in the country. Next, he successfully ran for the post of the person he mounted a coup d'etat against--there is no other appropriate term--and threw Morsi and his Muslim Brotherhood flunkies in jail to boot. Zero tolerance for intolerance, right? After the disorder of the post-Mubarak period, the part of the electorate that bothered to show up for the most recent elections wanted some (surprise!) Mubarak-style law-and-order by electing another military man.

Yet Sisi may be the leader with the clout to finally kill of financially unsustainable energy and food subsidies that had bedeviled Mubarak and Morsi before him. Both his predecessors vowed to undertake these reforms, but ultimately crumbled in the face of sustained domestic pressure. You can even say with a great deal of accuracy that Sisi out-Mubaraks Mubarak: he is even more vicious in suppressing the Muslim Brotherhood by branding it a terrorist organization in pursuing a secular path. More pointedly, he has finally begun implementing much-delayed reforms. Things have begun with removing fuel subsidies:
So it was a surprise when, as one of his first major policy initiatives, President Abdel Fattah el-Sisi sharply raised fuel prices two weeks ago [by 70%], cutting deeply into energy subsidies, the most expensive single part of the government’s sprawling and expensive subsidy system. Even more surprising, perhaps, has been the absence of widespread civil unrest...

While experts on Egypt’s economy praised the boldness of the move, there was also criticism of how it was put into effect, and of a lack of a clear plan to ease the burden on the country’s most vulnerable citizens. There was no easy way to fix the subsidy program in a country where half the population lives around or below the poverty line and relies on government support. Any mistakes carried considerable risks for the government, which faces a more impatient nation since President Hosni Mubarak was thrown out of office by protesters demanding “bread, freedom and social justice...”
Make no mistake: the causes of Egypt's repeat visits to the IMF largely lie with these subsidies:
The decades-old system, which provides subsidies for energy and food, including sugar, flour and tea, had eaten up more than 26 percent of the national budget annually. It also was criticized for inefficiency, benefiting companies, for instance, rather than Egypt’s poorest citizens. Reforming the system was seen as an attempt by the Egyptian government not just to plug a budget deficit that reached more than 12 percent of G.D.P., but also to impress international lenders, like the International Monetary Fund, as the country searched for new financing beyond the generous sums provided over the last year by wealthy Persian Gulf states.
After initially taking a holier-than-thou attitude towards the Morsi coup, the US now recognizes that Sisi is a far more useful character than his hapless predecessor. Aside from restarting military aid (coup, what "coup"?), the Yanks are probably glad that someone has gotten around to tackling the subsidies issue so that Egypt may finally stop resorting to emergency lending from the Washington-based lender.

Next up given a newly pliant Egyptian public after years of being battered by civil disorder is to remove food subsidies. This may be slightly trickier to pull off technically and politically:
Egypt spends more than $4 billion a year on food subsidies, on which millions of poverty-stricken Egyptians depend. One cash-strapped government after another has resisted tackling problems in the system, fearful of a backlash from the public...
President Abdel Fattah al-Sisi and Prime Minister Ibrahim Mehleb have not announced similar drastic cuts to the food subsidy system but reforms to the way the government hands out the subsidy have been in the making since April in an attempt to decrease waste and corruption.

Under the new system Egyptians use electronic smart cards for bread purchases and around 20 different subsidised goods at grocery stores across the country. The cards follow a points system which raises incentives for Egyptians to buy only as much subsidised bread as they need, helping reduce spending on wheat by as much as five billion Egyptian pounds ($699 million), Hanafi said.
Sisi is likely feeling out the terrain here. Test the waters and all that. Obviously, fuel is less crucial to survival than food. So, he is starting off with smaller reforms to first limit the supply of subsidized foodstuffs made available. In a few months, though, do not be surprised if these subsidies are removed just as the fuel subsidies were.

The white people will come around as they usually do for people who can get things done in a manner that they cannot such as stabilize the law and order situation and wean these countries off the IMF dole. You may have reservations about his anti-democratic methods, but hey, there is something to be said about respecting authoritarian regimes like Sisi's that achieved office through the ballot box no matter what else.

When McDonalds China Can't Serve Burgers...

♠ Posted by Emmanuel in ,, at 7/23/2014 01:30:00 AM's like Amazon without books to sell. A colleague in China posted the picture above to his social media account in the wake of Chinese food supplier Shanghai Husi being found to have relabeled the expiration date of its meat products. Upping the visibility and impact of its food safety violations, it sold these products to several major Western food chains. We usually believe that tampering with food products is common among PRC firms and not Western ones who would think more carefully about tarnishing their reputations for a bit more profit, but this instance depicts the opposite: Shanghai Husi is a subsidiary of the OSI Group of America, a private meat processing concern headquartered in Aurora, Illinois of Wayne's World fame. You can't get more American than that.

With an already lengthy history of food scares, there was no other option for the Chinese authorities other than to disrupt the food supply chain to these chains:
Authorities suspended operations at Shanghai Husi, a unit of Aurora, Illinois-based OSI Group, after the local Dragon TV channel reported on July 20 its workers repackaged and sold chicken and beef past the sell-by date. The probe may affect chains such as McDonald’s, Yum’s KFC and Pizza Hut, Papa John’s International Inc. (PZZA) and Burger King Worldwide Inc. (BKW), which said they had bought and have since removed items from the supplier.
Unfortunately, the Chinese government doesn't go scot-free here. As it turns out, they had already been looking into the firm's practices prior to the investigative show on Dragon TV running its feature on Shanghai Husi. How do we know this? Part of the show contained the interrogation of a Shangai Husi employee stating that these practices have been going on for years now:
An unnamed quality manager at Shanghai Husi’s factory said company executives approved the use of expired ingredients, a practice he said had been going on for a few years, according to Dragon TV’s taping of his interrogation by authorities. Two calls to OSI China’s main office in Shanghai weren’t answered. The Shanghai city government’s media office didn’t immediately respond to a request for comment.

Shanghai Husi’s case would be handed to police if crimes were suspected, according to the regulator. It also ordered probes into all other China food-production operations invested by the OSI Group, including in Shandong, Guangdong and Yunnan. 
Instead of taking action only after the show was aired, the authorities ought to have cracked down as soon as they confirmed these irregularities not only to bolster their reputations but also to ensure public safety. When I travel abroad, I usually think of McDonald's as a haven for clean and safe (if not necessarily healthy) food. After all these years, I guess I should rethink that.Apologies won't work now, unfortunately.

UPDATE: For what it's worth, TIME speculates that finding against this firm may be part of Chinese efforts to undermine foreign companies operating in the PRC:
We can speculate why that might be happening. The government could be trying to reel in a few “big fish” to try to scare smaller fry into better behavior. Officials might be attempting to win points with the public by appearing to address issues of great public concern like food safety without roiling any Chinese interests. And in the process, the Chinese government might believe it can aid Chinese companies in their competition with foreign firms by undercutting the reputation of international brands...

The Chinese government has a long history of attempting to tilt the local playing field in favor of its own firms. Foreign carmakers, though very successful in China, are still forced to manufacture in the country only through joint ventures with Chinese firms — a restriction most other emerging economies don’t impose. Reports from chambers of commerce accuse Chinese bureaucrats of routinely hampering the expansion of foreign business by taking a “go-slow” approach when issuing mandatory permits and licenses. 

Adios Sochi Grand Prix 2014, Russia World Cup 2018?

♠ Posted by Emmanuel in ,,, at 7/22/2014 01:30:00 AM
Geography is against Russia retaining these events without scrutiny.
This is not exactly a pleasant post to write given the circumstances, but it's something that will be the subject of discussion anyway in the coming months and perhaps years. First, as I wrote a few weeks ago, the first Russian Grand Prix is scheduled on the Formula One calendar for October 12. Even as its business elites are preparing for the worst as the full weight of Western sanctions passed (and yet to pass_ disrupt their abilities to conduct business abroad, Russian race organizers are adamant that show must go on:
Organizers insist Russia's first Formula One Grand Prix will go ahead as planned despite an airliner being shot down in the conflict zone in eastern Ukraine.

Malaysian Airlines Flight 17 from Amsterdam to Kuala Lumpur crashed Thursday in eastern Ukraine. All 298 people on board are believed to have been killed. Ukraine accused pro-Russian separatists of shooting the plane down, something the rebels deny.

The promoters of the Oct. 12 Russian Grand Prix in Sochi told The Associated Press in a statement Friday that "all the preparations are on track and run according to the schedule," and that "organisers are confident that the inaugural Russian Grand Prix will be comfortable for all."
All I can say is that the organizers of the Bahrain Grand Prix were making similar noises prior to the 2011 race being canceled against the backdrop of anti-monarchy protests during the Arab Spring. Self-evidently, the disorder in Sochi's case emanates not from internal turmoil--Chechnya is far away--but from the weight of disapproval from foreign powers-that-be. In motorsports, they reside in Great Britain.. As the graphic above indicates, 7 out of 11 Formula One constructors are headquartered in the UK (never mind that the car brands themselves are "foreign"; their F1 facilities are mainly in the Blighty. 

I am obviously not clairvoyant as to what the culpability of Russia is in the downing of Malaysia Airlines MH17. Nor do I know what Russia's response will be if and when an international body finds the weight of evidence implicates Russia. However, I do know this: if Russia is designated a "state sponsor of terrorism" or something similar that results in severed trade ties as UK Defence Minister Michael Fallon suggests, there is no chance whatsoever that the race will proceed as planned. It will be curtains for the race and much else that is Russian-invested in Europe. Aside from most of the teams being UK-headquartered, commercial sponsors scare easily.
* * * 
Tis sad talking about real generals instead of the Oranje Generaal, but we are where we are.
Next, consider the 2018 World Cup. Unlike the IOC with its Olympic events behind the Iron Curtain--the most memorable being the 1980 Summer Games in Moscow, USSR and the 1984 Winter in Sarajevo, Yugoslavia--there were never any FIFA World Cup events held behind the Iron Curtain. (See this interesting story behind IOC politics during the Cold War.) Obviously, large-scale disapproval of Russian involvement will also torpedo Russia hosting the next World Cup even if it's only 4 years away. Being designated a state sponsor of terror or being taken to the International Criminal Court and the like will scare any sensible commercial sponsor away. 

Russia has also rubbed one of football's powers the wrong way--the Netherlands. With a majority of the passengers aboard MH17 coming from the Netherlands [193/298], it has been deeply affected by current events. That said, the Netherlands also has significant commercial ties with Russia alike many other Western European countries. What to do, then? If Russian involvement is found, then trade ties will probably not be enough to quell Dutch frustrations. For obvious reasons, Dutch input will be crucial in forming the international response to Russia.
And while the disaster has touched so many here, the government is also mindful that Russia is the country’s third-largest trade partner and that business is growing, especially natural gas.
“We are a small country, dependent on our exports, and unlike the United States, we cannot always react from our moral high grounds,” [opposition leader Alexander] Pechtold said. “Still, if it is proven that the Russians have their fingerprints on this horrible event, we cannot look in the other direction.”
Also consider that the Dutch national team is one of football's most famous draws. In Yank-speak, the World Cup without the Netherlands participating is like the Lone Ranger without Tonto. (Sorry Dutch readers; if your team had won at least one World Cup final in three tries, I'd say the World Cup without the Netherlands is like the Simpsons without Bart.) As the worst-affected country, the Netherlands is not a pushover being a NATO member and fielding one of football's most recognizable squads in sporting terms. End result? You can safely conclude that the Dutch will play a significant role in determining the fate of the 2018 Russia World Cup.

UPDATE: The highly reliable Christian Science Monitor explains why EU sanctions will likely be shaped by the Dutch. Also notice how the Russia-aligned rebels are now providing passenger remains to the Dutch.

Bhagwati: PRC's Corruption 'Developmental', India's Isn't

♠ Posted by Emmanuel in , at 7/21/2014 01:30:00 AM
Corruption is one of the most studied phenomena given its ubiquity in developing countries. If corruption did not occur on a significant scale in these countries, then they would probably be classified as developed. That said, there are many debates about corruption. At one extreme, there is a "zero tolerance" approach that suggests all forms of using public office for private gain are unwelcome and should be discouraged. On the other hand, others would say that there are different forms of corruption--some of which are potentially beneficial such as "speed money" which hastens the processing of documentation in slow-moving and unwieldy bureaucracies.

It is a perhaps unfortunate sign of its developmental status that India features large as a setting for debates on corruption. In a recent "Lunch with the FT" feature, economist Jagdish Bhagwati explains how Chinese-style corruption is preferable to Indian-style corruption. In effect, the former is efficiency-promoting whereas the latter is not":
I ask [Bhagwati] if he thinks the country can get back on track after several mediocre years. Once there was an idea, now mostly forgotten, that the “tortoise” India could eventually overtake the “hare” – China. “That’s an exaggeration, I think,” [Bhagwati] says. A crucial difference between the two countries is the type of corruption they have. India’s is classic “rent-seeking”, where people jostle to grab a cut of existing wealth. “The Chinese have what I call profit-sharing corruption”: the Communist party puts a straw into the milkshake so “they have an interest in having the milkshake grow larger”.
You can certainly have a debate about whether "developmental corruption" is an oxymoron or otherwise. Those who espouse a "zero tolerance" approach--typically Americans and their acolytes at development banks and other international organizations--would agree. However, a more pragmatic view looks at how corruption relates to how conflicting interests are resolved. If corruption does not engender additional economic activity in a zero-sum sort of setting, then it is not beneficial in the sense most understand it. This is the Indian scenario according to Bhagwati: little growth and much fighting over what resources already exist. However, there is a possibility--admittedly rarer--in which corruption occurs after economic growth has been generated in the absence of significant spoils to quarrel over beforehand. This is the Chinese scenario.

MNCs and Setting Cambodia's Minimum Wage

♠ Posted by Emmanuel in , at 7/20/2014 01:30:00 AM
Textile workers of Cambodia unite to mixed consequences.
Economics textbooks will tell you that the cost of labor is determined when the downward-sloping demand curve for labor meets the upward-sloping supply curve of workers. Their intersection is called the "market-clearing" wage. Governments may introduce "distortions" however in the form of minimum wages when the market-clearing wage is deemed insufficient to meet the needs of the workers or are otherwise below what is normatively acceptable.

In Cambodia, however, the cost of labor may be determined more by external forces. Namely, pressure from multinational corporations that subcontract textile manufacturing to the country. At present, 80% of Cambodia's exports revenues supposedly come from garments. Hence, Cambodia is yet another country in our region that sees manufacturing garments as a stepping stone to development. Fair enough, but it seems the workers are discontent with the wages:
Textile workers in Cambodia have been demonstrating for weeks demanding a monthly minimum wage of around 115 euros. Violent clashes broke out during protests that took place last December and in January. According to human rights organizations, five protesters were shot dead by the police and many more were seriously injured. Twenty-three people were arrested. David Welsh of "Solidarity Center," a labor rights organization in Phnom Penh, is concerned about the recent developments. "This is a gross violation of trade union rights in the largest and most important economic sector of the country. This has nothing to do with the rule of law," said Welsh.
The crux of their complaint is that the government is failing to enforce the minimum wage suggested by a commission that it convened regarding the matter:
Last autumn, the Cambodian government set up a commission to stipulate a statutory minimum wage for the textile sector. The commission's report concluded that, depending on the location of the factory, the living wage should range between 111 and 127 euros. But the minimum wage for workers at the beginning of this year was set at only 73 euros. "The government has ignored the findings of its own commission. Because of this, the unions called for protests. Although political parties took the topic on board, the demonstrations were controlled solely by workers," said activist Welsh.
Even in Cambodia, the loudest labor activist is some white guy. It figures. More importantly, though, some other white guys--namely foreign firms subcontracting work--may be the ultimate arbiters of the wage level. Their fear, of course, is that foreign NGOs will fault them for running "sweatshops." Add the political violence into the mix and there is considerable reputation risk for these Western retailers:
“We can see frequent industrial conflicts coming here,” an H&M representative told the Cambodia Daily in February. “We need a sourcing country that is predictable [and] stable.” During the spring, Levi Strauss cut back on its orders to Cambodia because of the risk of more trouble and more disruption...

H&M, Levi, Gap (GPS), and other companies met with government officials in Phnom Penh this week to discuss their concerns about political unrest. Afterward, Levi spokeswoman Amber McCasland said the company supports the government’s efforts, which “should lead to the announcement of a new minimum wage as soon as possible.” On Friday the Cambodian high court convicted the workers and activists—and then gave them suspended sentences and freed them. “The verdict today is clearly connected to the political situation and pressure from the big brands,” said Am Sam Sath of the rights group Licadho.
Not for the first time, the wage levels of a labor-intensive manufacturing industry in a poor country will in no small part be set by the corporate social responsibility debates in rich countries. 

A Bad Idea: Flying Passenger Jets Over Ukraine

♠ Posted by Emmanuel in ,, at 7/18/2014 12:45:00 PM
I am greatly saddened by the loss of Malaysia Airlines MH17 over the airspace of Ukraine. I have been following the disaster since it was reported several hours ago and remain none the wiser about where responsibility lies, and I am afraid that the circumstances may never be fully known. A colleague working on global health also pointed out that several European experts on AIDS en route to a major conference in Australia also lost their lives. It is thus an additional tragedy that a number of the world's top AIDS researchers have met such a fate.

In the fog of war--and there is no doubt that's what's going on in Ukraine--details remain iffy. That said, Malaysian authorities have reasoned that the flight path traversing Ukraine was not listed as restricted airspace by the International Civil Aviation Organization (ICAO), the UN body tasked with overseeing the industry worldwide:
Malaysia's prime minister Najib Razak says the aircraft's flight route was declared safe by the ICAO. Mr Razak says the International Air Transportation Association had stated that the airspace the aircraft was traversing was not subject to restrictions. The Malaysia Airlines European chief executive says crossing eastern Ukraine was not unusual since the area had not been classified as a war zone for aviation purposes.
To be exact, there are five flight information regions in Ukraine (which provide air traffic advisories in their respective portions of the country's airspace):
Ukrainian upper airspace is divided into five flight information regions: Kiev, Lviv, Dnipropetrovsk, Odessa and Simferopol. Flight MH17 had been transiting the Dnipropetrovsk FIR eastbound, approaching the Russian border, when it lost contact.
On April 2, ICAO issued advice against flying over Simferopol, not Dnipropetrovsk over which it crashed. However, this advice was not due to the risk of being shot down in a conflict zone, but to conflicting flight information region being provided by Ukraine and Russia:
ICAO issued a letter to its member states on April 2 advising of a potentially unsafe situation because of the presence of more than one air traffic services provider in the Simferopol area. Both Russia and Ukraine are apparently offering services in the region and there was concern the situation could lead to safety issues because it could mean two sets of instructions being sent to an aircraft. ICAO issued a statement Thursday stressing that the loss of Malaysia Airlines Flight MH17 occurred outside of the Simferopol region [my emphasis].
ICAO's statement is here. So the incident occurred in Simferopol where a warning was not raised by ICAO, but I believe that few families of the victims will be comforted by this technicality. Instead, the key points IMHO are as follows:
  1. Regardless of aviation authorities not labeling it a "warzone," Ukraine--more specifically Eastern Ukraine--has been the site of armed hostilities for several months now.
  2. Reports of Ukrainian military aircraft being shot down have been prominent in international news media for over a month
  3. Still, several airlines--especially Asian carriers--nonetheless continued flying over Ukraine.
The UN organization ICAO cannot primarily be blamed for this result, nor the International Air Transport Authority (IATA). Like other international organizations, they are bureaucracies that take a while to respond to current events. If you rely on them to make decisions for you about passenger safety when common sense suggests you should not fly over conflict areas where belligerents possess and use surface-to-air missiles, then I am afraid it was only a matter of time before civilians got hurt.

The time and fuel savings traveling through Ukraine cannot possibly offset what has now happened.

UPDATE: Ukraine has now closed its airspace to commercial traffic.

Diversifying Zambia's Copper-Based Economy

♠ Posted by Emmanuel in , at 7/18/2014 09:42:00 AM
Welcome to Zambia's Copperbelt.
Commodity-based economies are often Johnny-One-Note economies: their fortunes rise and fall based on those of a single commodity (or at best, a handful of them). In Africa, Zambia has had boom and bust cycles based on copper. During the Cold War, its preeminence was such that it once ranked as the world's third-largest producer after the US and the USSR during the late 60s. As copper prices have waxed and waned, Zambia's economic well-being has largely followed a similar path.

So many decades later on, Zambia is emblematic of the challenges these commodity-based economies face of moving towards more diversified sources of economic output: 
The country’s economic development over the past decade has not attracted as much attention as some other African states, such as the oil economies of Angola, Nigeria and Equatorial Guinea, yet Zambia’s success has been almost as dependent on the export of a single commodity – in this case, copper. The government has pledged to reduce its dependence on copper exports, but there is no doubt that Zambia has benefited from its mineral wealth. China’s economic explosion and the long boom in the global telecoms industry has pushed up demand for Zambian copper, so the country now exports more and generates increased income per tonne of production. Annual copper production increased from 257,000 tonnes in 2000 to more than 900,000 tonnes last year, with the government setting a target of 1.5 million tonnes for 2015.
To be sure, there have been some moves towards diversification:
Some progress was made on rebalancing the economy last year. The strongest performing sectors during the year were transport, storage and communications, with a 27.1 per cent rise in GDP; construction (24 per cent); community, social and personal services (17.4 per cent); financial institutions and insurance (13.7 per cent); manufacturing (8.2 per cent); and mining (five per cent). In common with the rest of the continent, most people are employed in agriculture and it is here that stronger growth had most effect on living standards.
However, the noteworthy thing about African nations' efforts to diversify is that, well, there is not much diversity to them in emphasizing infrastructure:
Following a continent-wide trend, the government is banking on infrastructural improvements to help drive private sector development. The country’s road network is being upgraded, in urban and rural areas, to enable farmers to transport their crops to market – even during the rainy season. A total of 8,000 km of road is to be surfaced and sealed by 2017, taking the total to 16,000 km. Much of the work is being carried out by Chinese companies and funded by Beijing or Lusaka itself. The country’s first Eurobond issue in 2012 was 15 times oversubscribed and raised $750 million, but yields on the bond have increased as government spending has risen and another issue may be required later this year. In addition, Lusaka has taken out a wide range of loans with various Chinese state-owned organisations, probably on attractive terms, but whose details have not been published. 
I am of two minds on infrastructure as a development tool. On one hand, it may simply expedite the extractive (copper) trade by making it easier to get ores out of the country. OTOH, other industries should also benefit, but the details of what industries benefit and how infrastructure is geared to meet their needs in scant As any number of other countries also demonstrate, diversification is difficult.

New World Order? BRICS "New Development Bank"

♠ Posted by Emmanuel in ,, at 7/17/2014 01:30:00 AM
We've heard all that before, unfortunately, BRICS.
Grand plans to supplant the (American-designed) postwar global financial architecture lie thick on the ground. As I noted in 2007, poor countries have championed the G-77, Non-Aligned Movement (NAM), New International Economic Order (NIEO), and UN Conference on Trade and Development (UNCTAD) as alternatives giving poor countries a larger voice in global economic governance. Interestingly enough, the BRICs grouping which was formed out of Goldman Sachs' Jim O'Neill acronyms has had regular meetings discussing reform of the world's financial architecture. (South Africa has been included in these discussions, hence BRICS instead of BRICs.) Wouldn't it be nice if poor countries could look out for one another instead of having to bow to Western-led interests as prescribed by the World Bank and IMF?

In the most recent BRICS meeting in Fortoleza, Brazil, participants have upped the (rhetorical) ante in proposing alternatives to not one but both Bretton Woods institutions the World Bank and the IMF. In place of the World Bank, consider this description of the supposedly forthcoming, Shanghai-based New Development Bank:
The New Development Bank, as it will be called, is intended to finance infrastructure projects in the founding members of Brazil, Russia, India, China and South Africa, and in other emerging-market countries as well. The NDB still needs approval from each Brics countries' lawmakers, which could take years.

But when it is finally set up, the bank will provide an alternative source of financing for the Brics and other emerging markets and give them much greater control over funding decisions that affect them directly [read: instead of having Westerners ultimately decide]. 
The stated cause of plans to accelerate the so-called NDB's formation is delayed reform of the Bretton Woods institutions:
The new institution, whose first chief executive will be from India, will start out with capital of $50 billion, to be paid in equally by all five Brics countries. Capital is planned to grow eventually to $100 billion, according to the memorandum released after the meeting in Brazil of the heads of government of the five countries.

The Brics have been trying for years to reform the International Monetary Fund and the World Bank, the backbone of the world's global financial structure, to give emerging markets more influence over those institutions, but with little success. "In the IMF and the World Bank, the U.S. and a handful of allies really do make almost all the decisions, and the vast majority of the world…doesn't really have a voice," said Mark Weisbrot, co-director of the Center for Economic and Policy Research, in Washington, D.C. 
Also consider the mooted IMF alternative, the Contingent Reserve Arrangement:
In addition to the new bank, a new monetary fund was also launched at the Fortaleza summit. The five leaders signed a memorandum establishing a Contingent Reserve Arrangement (CRA) - a $100 billion contingency fund, which member states can draw on in financial emergencies when their foreign exchange reserves become dangerously depleted. The BRICS countries currently have the world's largest foreign currency reserves, and the new institution offers an opportunity to invest those savings at a profit. China contributed $41 billion to the capital stock; India, Brazil and Russia each paid in $18 billion, and South Africa's share is $5 billion.

The CRA is meant to provide an alternative to International Monetary Fund's emergency lending. In the CRA, emergency loans of up to 30 percent of a member nation's contribution will be decided by a simple majority. Bigger loans will require the consent of all CRA members.
After hearing dozens of these plans being aired without having much to show for in terms of results, my take here is simple: I will believe them when I see the NDB and CRA fully funded by the BRICS. Climate change has probably been exacerbated by so much hot air about South-South groupings (see the institutions mentioned in the first paragraph). Unless these countries really put their money where their mouths are at, it's better to consider these Bretton Woods alternatives with a grain of salt.

JP Morgan: How FIrms Can Profit From Using RMB

♠ Posted by Emmanuel in , at 7/15/2014 01:30:00 AM
It's true that Chinese currency unit the renminbi (RMB) AKA the yuan has been devaluing these past few months in tandem with slowing PRC growth. Aside from the most optimistic of speculators, did anyone really think that the currency would steadily rise forever? Yet, the global adoption of the currency continues apace as China experiments with greater liberalization of its current account. Among the early beneficiaries of this process are multinationals who've already benefited much from China opening up to the world that can now take advantage of PRC currency reforms:
As China's internationalization of the RMB and its associated deregulation continue to advance, a variety of new opportunities for both MNCs and local corporations are emerging. One recent example is the State Administration of Foreign Exchange's (SAFE) April 2014 release of a Circular on supporting MNCs’ centralized foreign exchange management. The circular aims to further simplify MNCs’ trading and investment processes, supports MNCs’ centralized treasury management across domestic and overseas entities, and continues to explore capital account convertibility.

Whilst the new rules are only applicable to eligible MNCs, they allow corporations to convert foreign exchange (FX) freely for Foreign Direct Investments (FDI) and foreign debt funding. This gives corporations important, additional flexibility that will assist them in managing their FX exposure effectively.
JP Morgan adds further implications of these changes for MNCs. First, no longer will payments and transactions handling need to be separated into a "mainland China-only" entity but these can be streamlined into firm-wide (international) backroom operations. Second, and following from the first, operations can thus be centralized for documentation purposes:

Plugging China Into Regional/Global Operations

Previously, China has been somewhat isolated by regulatory hurdles from corporations' regional and global operations. While it has been possible to perform treasury management within the country, linking that to regional or global management has not been easy. However, de-regulation is gradually remedying this situation, so it is now possible to connect China with operations elsewhere in a variety of areas. Whilst some of these are as yet only fully connectible as part of pilot schemes (such as those operating in the Shanghai Free-Trade Zone) and have not yet been rolled out nationwide, they
currently include areas such as liquidity management, netting and payables/receivables on behalf of.

Seizing the Centralization Edge

A considerable number of Chinese treasury-related operations have formerly been decentralized in terms of management. This has often been due to significant physical documentation requirements, as in the case of cross-border flows. The net result was that many financial processes ended up having to be conducted on an entity by entity basis, resulting in appreciable duplication, non-standardization and additional costs.

However, as Chinese regulatory bodies continue to simplify or remove documentary requirements, companies have the opportunity to standardize and centralize their Chinese treasury operations. Ultimately, many activities that were replicated across multiple business units in China can now be standardized in accordance with any regional or global processes which a company may have established. They can then be run from a Shared Service Centre, either within China or elsewhere. Apart from economies of scale, standardization and centralization also serve to reduce the operational risks associated with individual business entities developing and running their own financial processes.
The third and most intriguing possibility is of reducing foreign exchange risks emanating from moving RMB back and forth between onshore and offshore accounts: 

Making China FX Risks History

RMB internationalization and the reduction of regulation in China also give corporations the opportunity to minimize FX risks. In the past, cross-border flows with China were foreign currency-denominated, typically U.S. Dollars (USD). As a result, even though a domestic business would have RMB as its functional currency, any incoming USD investment had to be converted to RMB and vice versa for outgoing flows, such as dividends or trade payments. This resulted in FX risk exposure and associated costs that corporate treasuries had to handle. However, the internationalization of the RMB and the shrinking of associated regulatory hurdles mean that it is now possible to minimize FX exposures while also benefiting from increased currency mobility.

For example, a corporation might opt to include surplus onshore [read: mainland-issued] RMB in its global liquidity pool. Should it subsequently require RMB onshore (perhaps to fund a new onshore business unit or to make an acquisition), the funds can simply be remitted from the global liquidity pool back onshore. These two transactions would previously have incurred two FX dealing spreads (from RMB to USD and back again) plus administrative overheads. It will not take many such transactions under the new regime to accrue a very substantial saving over the previous regulatory requirements.
Make no mistake: the China opening up the West story still has a few more chapters waiting to be written.

Tracing Tax Avoidance, Chicken Chain Style

♠ Posted by Emmanuel in at 7/14/2014 10:45:00 AM
Coming to a theater near you: Chicken Wings of Global Deception.
I used to love spy thrillers set in exotic destinations featuring mysterious characters with their cloak-and-dagger machinations. As vast sums of money moved back and forth, the glamorous implication was that some were definitely better positioned to take advantage of how the world works than others. The world was indeed their oyster as they bent rules to their advantage. Nowadays, however, shuffling large amounts of cash to and fro in order to avoid paying taxes is fairly common practice among multinationals. So much so that what used to be exotic is, well, ordinary nowadays.

Today's Exhibit A is Nando's, the South African spicy chicken chain that has made it big in other parts of the world, notably the United Kingdom where it features on many high streets along with the similarly ubiquitous Marks & Spencer, Pret A Manger, Starbucks, etc. (It also features "Comrade Bob" Mugabe as an ad pitchman.) The Guardian has a neat video clip tracing the money trail among its different shell companies the world over that ultimately benefit Nando's South African owners. Why the complexity? Simple: to avoid taxes:
Nando's is fast becoming Britain's go-to place for spicy chicken. But behind the simplicity of their menu lies a complex offshore network of money that involves the Isle of Man, Ireland, Guernsey, the Netherlands, Ireland, Luxembourg and the British Virgin Islands. But how does it all end up in Jersey? And what is the connection to a grand 16th century estate in Wiltshire? Guardian special projects editor James Ball explains.
The accompanying article is also interesting and adds detail. Isle of Man, Guernsey, BVI...can't fault the locations, mate. It makes me want to play Duran Duran's "Rio" in the background. Anyway, Accountancy Age has more:
[Nando's] is the latest big-name brand accused of operating a complex offshore tax avoidance scheme. A £750m trust held in the Channel Islands sits at the top of the structure, which sees the South African chain's capital flow through Malta, the Isle of Man, Guernsey, the Netherlands, Ireland, Luxembourg, Panama and the British Virgin Islands, the Guardian reported...

Profits then end up in owner Dick Enthoven's Taro III trust in Jersey. The trust, not liable for UK tax, contains no less than £750m and possibly much more, the newspaper claimed. While entirely legal, the structure is opaque significantly reduces the amount of tax the company and the family pay around the world. Nando's owners also legally reduce their UK corporate tax bill by making various permissible payments offshore, before then paying UK corporation tax on the remainder of its profits.
The company claims that the seemingly complex structure is unavoidable given Nando's multinational operations, and that it pays a lot in UK taxes anyway:
Nando's said in a statement:"We want to set the record straight. Last year we paid over £12m in corporation tax, 23% of the operating profit we made. The year before we paid £10.4m. "Serving chicken in so many different places does make our parent group's financial structure complex, but we have always been open and honest about the tax we pay in the UK.
To be fair, Nando's is hardly the only chain store operating in the UK accused of using complex and obscure structures designed to reduce tax obligations there. Forbes' Tim Worstall adds that the Guardian itself uses similar structures for its non-UK operations. (I am skeptical about classifying the UK as a tax haven of the same magnitude, though.) At any rate, it makes me want to pitch a thriller to John le Carre entitled Chicken Wings of Global Deception.  Heck, maybe I should write the novel myself since it sounds like a bestseller. I could certainly use the royalties from the movie...

World Cup of Default: Argentina at T-Minus 19

♠ Posted by Emmanuel in , at 7/13/2014 01:30:00 AM
Despite its tremendous natural wealth, Argentina has long been the poster child of underdevelopment. Aside from the sporting conquests of its racing car drivers (think Juan Manuel Fangio) and footballers (Diego Maradona or Lionel Messi), it's better known in economic circles for lurching into crises with some regularity. Off the playing field, the economic fortunes of the World Cup finalists Germany and Argentina could not be more different. The winners of the World Cup will win a cool $35 million in prize money, so now may be a good time to root for Argentina (assuming that its football association gives the money to the rather broke government). Then again, Argentina may need far more than the measly $28 billion or so it has left in its foreign exchange reserves depending on how its impending default is resolved.

To make a long story short, Argentina has nineteen days to sort out how it will make interest payments to its creditors, or it will default when August comes around."Bang on schedule" some say as the country has a crisis of some sort every decade. This time, though, impending default is not entirely its fault. True, retro-socialist policies have sunk it into the mire of recession--what else is new? All that fudging of the books--the IMF wanted to show it a football-esque "red card" for inappropriate conduct--has not concealed its state of penury from anyone.

Chaotic finances aside, Argentina's current situation has been exacerbated by the legal machinations of American hedge funds (characterized as "vulture funds" by the Argentine government). After defaulting on about $95 billion in debt at face value in 2001, Argentina renegotiated $62.3 billion worth of outstanding debt in 2005 down to a value of $35.2 billion with private creditors. In financial lingo, the creditors received a "haircut." In 2010, another $12.4 billion worth of private debt was renegotiated along similar terms.Together they represented 93% of all creditors. That left Argentina with a touch under $10 billion worth of debt to holdouts. (The rest was sovereign debt AKA "Paris Club".)

It is this non-renegotiated amount that is currently causing Argentina trouble. In 2008--well after the first round of renegotiations were held--hedge fund NML Partners speculated on this "distressed debt" by buying bonds that were not renegotiated at a dirt-cheap price:
[H]owever, a handful of hedge funds purchased the bonds after the default when they were at deep discounts. Since then, they have repeatedly demanded to be paid at 100 per cent of their face value. This is considered by many as predatory. For example, NML Capital purchased the majority of their Argentine bonds from June-November 2008, paying an estimated $48.7 million for over $220 million in defaulted bonds, a price of just over 20 cents on the dollar.
NML Capital and company have used legal machinations--forum shopping--to get the result it desires in a lower New York court since the original default is covered by New York law. (The US Supreme Court has since refused to hear the case.) By resorting to the US legal system, the hedge funds obtained a favorable ruling that compels Argentina to pay them at face value before compensating those who had renegotiated their bonds. The difficulty now facing Argentina is that it is was due to pay bondholders of the restructured debt this month. However, it cannot do so since it courses its payments through the Bank of New York-Mellon which is a well-known correspondent bank (that which specializes in handling payments for transactions). Poor BNY-Mellon is being hit by all sides since it obviously cannot make the interest payments due to restructured debt holders due to court order:
It’s been a fun week for Bank of New York Mellon. The bank is getting lawsuit threats left and right from just about everyone involved in the Argentina debt dispute. “Nearly economic stakeholder in this litigation has either sued or threatened to sue,” the bank said in a letter from BNY’s lawyer filed to the U.S. District Court last night.

The reason is because BNY is still holding onto some $539 million deposited by Argentina with the bank on June 26. The deposit was Argentina’s attempt to get around a U.S. court ruling that said the country is not allowed to pay its restructured bondholders, who had an interest payment due June 30, until it pays a small group of holdout creditors. Argentina deposited the interest payment anyway, even though it hadn’t paid the holdouts.
The question occurs: why not pay the $15 billion or so claimed by the holdouts and be done with it once and for all? Argentina still has (an admittedly measly) $28 billion in reserves, right? Doing so would invoke a clause in the contract with the holders of restructured debt that improved terms offered to others would be extended to them. In other words, the face value of Argentina's principal obligations would return to $95 billion (less that owed to sovereign lenders) as if the haircut never took place upon paying the holdout creditors at face value.

The UN Conference on Trade and Development (UNCTAD) summarizes the negative precedents this case sets:
  • First, by removing financial incentives for creditors to participate in orderly debt workouts, the rulings will make future debt restructuring even more difficult, in particular for outstanding bonds without a Collective Action Clause, the actual amount of which is unknown but is likely to be large.
  • Second, obligating third-party financial institutions to provide information about assets of sovereign borrowers will have a significant impact on the international financial system as it forces financial service institutions to provide confidential information on the sovereign borrower's global financial transactions to facilitate the enforcement of debt contracts for the creditors.
  • Third, the ruling will erode sovereign immunity.
I am, remarkably, in agreement with UNCTAD that the world needs a centralized process for handling debt workouts so complications like these wrought by profiteers and opportunists are avoided. In others words, close off the numerous avenues for forum shopping that still exist. This impasse reminds me of movies where all the main characters are antagonists: Save for the innocent bystander BNY-Mellon, the New York lower court, US Supreme Court, the hedge funds, and the government of Argentina are unsavory characters all around.

If this impasse is not resolved by month's end, Argentina will indeed by partying like it's 2001. As the lyric goes, I was dreaming when I wrote this, forgive me if it goes astray...

UPDATE 1: Lest you think football and default are not on Argentine fans' minds, Bloomberg suggests otherwise judging from their chants:
But a less traditional song could also be heard in the streets of Rosario, Argentina’s third-biggest city and the birthplace of team captain Lionel Messi: a profanity-laced taunt of the hedge funds that have battled the government over defaulted debt since 2001. “Vulture funds,” a group chanted amid celebrations at the city’s National Flag Memorial. “Stop messing around and agree to the swap.”

The chants underscore how the country’s decade-old legal dispute with holdout creditors is still capable of stirring up nationalistic passions among Argentines. The U.S. Supreme Court last month left intact a ruling that may cause the nation to default on July 30 unless it can reach a settlement with the funds, which are led by billionaire Paul Singer’s Elliott Management Corp. The investors rejected government exchange offers that imposed 70 percent losses after the record $95 billion default, suing for full repayment instead. 
UPDATE 2: One of the holdouts, fund manager Jay Newman at Elliott Management Corporation, says that some of them purchased Argentine bonds before the 2001 default and that the government has refused to negotiate terms with them ever since, offering the take-it-or-leave-it deal described above. It is the other side of the story:
Our firm began buying Argentine bonds long before its default. We joined thousands of others in declining Argentina’s coercive bond-exchange offers, which imposed steep losses on holders. As the International Monetary Fund noted: “No constructive dialogue was observed and the authorities presented a non-negotiated offer.”

In the contract Argentina signed in 1994, it promised to rank its payment obligations on the original bonds equally with any new external debt, and to submit to the jurisdiction of US courts. Without these promises, a country that had earned a reputation as a serial defaulter could not have borrowed on such attractive terms.
Argentina's Finance Minister Axel Kicillof says Jay Newman is distorting matters, though:
Elliott Management Corporation’s NML Capital purchased Argentine bonds in 2008 and immediately sued Argentina. These bonds, defaulted in 2001, were bought with the sole purpose of obtaining a favourable judgment to make an exorbitant profit.

Mr Newman wants to portray Argentina as a country that does not negotiate. This is outright false. Following lengthy negotiations, Argentina offered two debt exchanges, in 2005 and 2010, which were voluntarily accepted by 92.4 per cent of the country’s bondholders. The vulture funds never negotiated. They never lent money to Argentina. NML purchased bonds at a value close to $50m.
On one hand, I believe that the bulk of the Elliott Management Corporation purchases were made post-default. OTOH, Argentina did not "negotiate" but largely devised terms of the debt restructuring by itself. Both sides dabble in half-truths. As I said, there are no protagonists here.

UPDATE 3: Notice how Argentine President Cristina Fernandez did not attend the World Cup final for the lame reason that it was her grandson's birthday....on Monday. (Contrast her with Angela Merkel who flew halfway around the world just to be there for the finals.) Either (a) she knew the odds were against Argentina or (b) the flak that would accompany her being at a loss would add further pressure on her as Argentina nears another default. It is now T-18 and counting from where I'm writing..