08 September 2007

I have moved.  The unbelievable pain of finishing Gas - Hot and Otherwise means I have given up on Blogger and moved to WordPress.

This version of Ruminations will stay here for a while, but all the posts are duplicated over at the new Ruminations.  If you go to the old site you should be re-directed to the new Ruminations.

And here is the new RSS feed.

See you there.

07 September 2007

Untitled

So much to write about, too much time spent in SVO and the route therefrom to home. SVO is a shithole, so bad that it makes Heathrow Terminal 2 look like a paragon of virtue. Oh and the "otherwise" of hot air is the start of Duma election season, but I guess that deserves its own derision.


The gas wars are on the boil again (way too many mixed metaphors going on here). China has figured out that it does not have enough gas and has not bought enough or built enough pipelines and so is rationing gas and building a pipeline to China from Turkmenistan. Although Jerome a Paris is generally skeptical about pipelines, and not without reason, construction has started (or so a small bird tells me.) Oh and then there is the one about the delay in Karachaganak gas to 2012.








If you are interested in gas, and like being warm in winter and cool in summer then you will have seen a take on these graphs below at some time. The first shows GAZP's own production. The bits you should worry about are above the yellow line. Not that they don't exist its just that they may take some time to arrive (see previous thoughts on Shtockman).





The graph below shows the total supply of gas required to meet forecast demand. If you can get over the fact that by 2015 the gap between known GAZP supply and expected GAZP supply is 100bcm p.a. out of a total of 550bcm p.a. and why not, people continued to buy pools of AAA rated worthless mortgages way after they knew that they were worthless. So with that intellectual honesty established; the next concern is whether Central Asian (shitty nomenclature) is actually a. going to produce all the gas forecast (Kazakhstan and Turkmenistan) and b, whether they are going to actually send it via Russia to feed Russia and Europe (once the gas enters the pipeline its fungible whathever fiction RosUkrEnergo maintains.)






Everyone wants a piece of Trashcanistan's gas and ever since the great Turkmenbashi shuffled off to wherever Turkmenbashi's shuffle, the Russians, Chinese and Americans have all been telling the President with the unfeasibly long name to send his gas their way. Logically it should go through Russia - as a pipeline exists, but the Chinese are quite keen on it and are therefore building one. None of JaP's thinking about thinking about for them - the logic is easy; lots of people need lots of energy. Secure it early and don't worry about reversions to the mean (you measily analysts know what I mean).







The Americans, as a proxy for Europe (that worked well last time), want to send it under the Caspian and thence along the Freedom Corridor i.e. not Russia or Iran in to Europe or Turkey. This option is currently coming 6th of the available three.











The last of my pretty pictures shows how much gas has to come from independents. I chose this particular description because it highlights the supply sum; Gazprom production plus expected Central Asian supply + a known/expected independent production (after price liberlization) plus another number (the source of which is not known) equal demand. Magic - here's my personal version of this equation; amount spent = amount earnt plus the amount I would like to earn.







Some of these numbers are getting a little dated (2005 actuals) but nothing has changed to make me worry that that my bets will be wrong, including the likelihood of a very nasty earnings season for banks.


China has enacted a new industry policy on natural gas use to address the supply shortage and optimize usage, the nation's planning agency said yesterday. The guideline says residential gas use is a top priority, while usage in petrochemical plants is discouraged, the National Development and Reform Commission said on its Website. The policy, described by the NDRC as of "strategic importance," became effective on Aug. 30 after approval by the State Council. New methanol projects that use gas as a base will be barred. Methanol, which can also be derived from coal or crude oil, is an industrial chemical and a fuel that can be mixed with gasoline and diesel to cut pollution. The use of natural gas in other petrochemical projects and power-generation plants will also be limited or outlawed. For example, gas-fired power plants will be banned in certain coal-rich regions. The guideline said urban residential gas use is the most favored option. "We have to ensure gas will be first used in the residential sector," the planning body said. "We should consider social benefits, environmental benefits and economic benefits" while deciding where the gas resources should be used first. The NDRC said gas use should be well planned for better conservation and higher usage. Existing gas-based petrochemical projects, especially fertilizers, will remain in operation. Those approved and under-construction projects, which have signed long-term gas-purchase contracts, also won't be affected, the NDRC said. China wants cleaner-burning natural gas to account for 5.3 percent of total primary energy consumption by 2010, up from 2.8 percent in 2005. But supply may not catch up with the strong demand, typically in booming coastal regions. Several major gas-transport projects have lately been announced or launched. Sinopec Corp on Friday started building a 1,702-kilometer pipeline to transmit gas from the Puguang field in Sichuan Province to Shanghai. China National Petroleum Corp announced early last week the route for a mega cross-country gas pipeline, at more than 7,000 kilometers long, to transport Turkmenistan gas via far northwestern Xinjiang Uygur Autonomous Region to Shanghai in the east and Guangzhou in the s [From Новости Neftegaz.RU | Policy on natural gas streamlined in China]










When In Rome

I had failed to spot this little tidbit. Any clues in here as to why RenCap are off to Africa?




Mr Misamore and two other Yukos executives, David Godfrey and Daniel Feldman, told the Financial Times that the group of investors behind the Monte Valle bid included a representative of Moscow investment bank Renaissance Capital and another from US hedge fund VR Capital. They claimed that two members of the group, Renaissance Capital vice-president Bob Foresman and VR Capital president Richard Deitz, had called to ask them to unwind the legal attachments protecting the assets from the bankruptcy sale, saying that in return, state-run Rosneft would drop its creditors’ claims on the Dutch holding. Mr Feldman said Mr Foresman had called him two days before the sale, “to know if there was a way to make a deal that would provide them with comfort”. “He called the day before the auction and said you have to understand if we can work out a compromise you can come back and work in Russia.” Mr Feldman left Russia in February, fearing arrest. The claims could not be fully verified: Mr Foresman declined to comment. Mr Deitz said he did not recall all the details of his conversation with Mr Godfrey. Mr Deitz said he had “never in his life” met with Rosneft, while Monte Valle owner Stephen Lynch also said he had no talks with Rosneft or the authorities prior to the sale. The allegations are the latest twist in a bankruptcy process marred from the outset by claims it has been rigged in favour of Rosneft. [From FT.com / Companies / Energy Utilities Mining - Investors made backdoor Yukos approach]




06 September 2007

Ways to Waste Your Time

1. Fly via the 3rd World Airport otherwise known as Sheremeytevo and then drive in to the center of Moscow - approx 2 hours 30 minutes*


2. Work in a multi-story building with too few lifts and large numbers of (principally) girls who fill in the gaps between smoking with a bit of work


3. Drive in Moscow between the hours of 00.01 and 23.59


* Timing does not include retrieval of bags or passport control queues. Though passport queues are redundant when carrying a small child - oh what a joy walking to the front of a 40 minute queue with small child. Any suggestions as to where I can acquire a lifelike blow-up baby for queue-jumping much appreciated.



30 August 2007

Tips on Investing from the Russian Government

According to the Moscow Times (no link love due to ante-deluvian archiving policy) Oleg "the natural resources beast" Mitvol is off to the US to lecture the likes of Capital International on how to invest in Russian E&P stocks.


Presumably such tips include;



  • Open a short position - launch an enquiry


  • Close short position, open long position, meet with relevant governor. Admit that you were in the wrong, sell long position.


Brilliant investment advice.


Oleg Mitvol, the environmental regulator who threatened to halt a $20 billion Shell project last year, said Wednesday that he planned to advise U.S. fund managers on how to invest in Russia's natural resources.


Mitvol will hold meetings with investors from Capital Research & Management, American Century Investments, Fidelity Investments, UBS, State Street and Wells Capital Management during a trip to the United States next week, the deputy head of Federal Service for the Inspection of Natural Resources Use said in a statement.


Mitvol said he would travel from Sept. 4 to Sept. 7, on an invitation from the investors. He will be accompanied by Igor Maidanov, director of the Natural Resources Ministry's department for international cooperation.




Mitvol to Go on U.S. Lecture TourLast year, Mitvol led a campaign against Shell's Sakhalin-2 project in the Far East, which did not subside until the foreign-owned development ceded control to state-run Gazprom.




Bloomberg




15 August 2007

Russia Cuts Off Gas Via Druzhba - No Really

I have not read Transitions Online, but it gets mentioned reasonably frequently in the english language Russian blogosphere so when this article Europe’s Escape Routes, was linked to via the authoritative The Oil Drum, which found the story on Business Week, it seemed worth a read.

I was close to giving up after reading the first paragraph:

Wary of Moscow's stranglehold on natural gas supplies, the EU hopes several planned pipelines will provide a way out.  Russia's threat in early August to nearly halve the amount of gas it exports to Belarus over unpaid bills must have brought back bad memories for many in Europe.

on the assumption that everyone, bar Edward Lucas, has just about worked out that Russia has to sell its gas to Europe in order to pay for the developments that will allow it to sell its gas to Europe.  But I struggled manfully through to the second paragraph:

Memories, for instance, of earlier this year, when Russia cut off the gas that flowed through its Druzhba pipeline to Belarus in a dispute over price hikes and tariffs. At that time, a wave of disruption surged down the supply chain.

Just imagine the turmoil, if you aren't getting gas through Druzhba then all those cars won't run.  Except that the author was talking about natural gas, not US gas.  No wonder it had knock-on effects in the supply chain.  If you were waiting for gas through the Druzhba pipeline then your supply chain is probably pretty screwed-up.

Within days, the Czech Republic and Slovakia (who rely on Russia for around 65 percent of their natural gas) saw their shipments halved. Poland and Germany began tapping reserves, and other countries looked to increase imports from other suppliers like Norway.

Except that the Druzhba is an oil pipeline as a cursory search would show this as the top hit:

Druzhba pipeline - Wikipedia, the free encyclopedia
The Druzhba pipeline (Russian: нефтепровод «Дружба») is the world's longest oil pipeline, it carries oil some 2500 miles from southeast Russia to points in ...
en.wikipedia.org/wiki/Druzhba_pipeline - 24k - Cached - Similar pages
At which point I gave up - moron.

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Volga Views

Big sky in the Saratov Oblast, right down by the Kazakh border.
Crossing the Volga, elevation courtesy of GAZP. If I recollect this is facing south so Saratov is on your right and Engels (the city, not the person) is on your left.



14 August 2007

Ecto3 Blogging

After some considerable, but worthwhile wait, Ecto3 has been released; albeit in Alpha version.


Has not crashed my struggling laptop yet.


02 August 2007

Government

Writing in today's (01/08/2007) FT Quentin Peel once again manages to put
the western side of the Russian debate, whilst acknowledging Russian
concerns and western policy mistakes and missteps. It is a difficult line
to tread, and in this case done with some nuance.

What confounds many of us who try to convey a balanced view is the utter
cynicism with which the Fifth Directorate Thugs conduct business. a
mirror to the same cynicism displayed in the UK and US without even a
smattering of a critical press to print, and embarrass, just how corrupt
the posturing is.

Reverting to the taxi driver school of foreign reporting, and as a result
of a 2 hour journey to DME in the middle of July: if the vlast had to
experience this, how different it would be. The ability to drive would
help - some 40-50 per cent of licences are bought.

Neil Buckley, the very antithesis of a competent foreign reporter, has over
the last few days reported that we await VVP's glorious return in 4 years
for another 7 years.

God forbid (as if he/it/she had anything to do with it): damn this
certainty, can' t we have some hope that things might get better.

01 August 2007

Watching Your Own

Returning to London to get SWMBO and CC#1 via Domodedovo. Firstly huge
kudos to East Line for DME, it is really a first class airport these days
(well compared to everywhere else), once you have checked in (albeit avoid
Sector B if you can). Time between checking in and having a beer in my
hand must have been at least 7 minutes. Of which, 3 minutes was waiting
for a beer and 2 minutes in passport control. Not sure if the whizzy
security machine is of any use (in my previous incarnation I looked at a
number of these technologies - let's just say there is probably a reason
that they are not used in London or New York).

None of which is pertinent to the subject of this story. The coffee shop
at DME gives an excellent view of the businessmen leaving the BA lounge,
which given the time of year are all British (or American) as the
biznessmen are now safely ensconsed with the tall and beautiful who have
been topping up their tans for a month already.

And what a strange lot we are. Guys, it was 25 degrees in Moscow today - a
worsted wool suit with tie in a shirt whose neck size might have been
appropriate when you were 18. Pasty and with an unhealthy addiction to
crackberries.

They actually made Russian youth look healthy.

31 July 2007

A Rare Insight

It's not often that anyone being quoted in a newspaper adds any value to the reader (as opposed to the journalist).

However, Yury Korgunyuk from the Indem think tank hits more than one nail on the head here, or the same nail multiple times - unimportant really.

The underlying story is that the narod are becoming increasingly restless over corruption.  The corruption that matters to them is the day-to-day stuff; breathing, living and eating (and driving).  Using the bread and circuses approach, Sergei Naryshkin (another maybe for President) has been given the task of addressing corruption (The Kremlin, Russia should get there if the pochta works.)

His not entirely stupid plan is to increase salaries and then fire anyone caught practicing bribery.  Which is where the plan then falls apart as Korgynyuk explains.

Actually the first quotation comes from someone else:

"Yuzhakov, head of the Center for Strategic Development, said the compensation package under the pilot program would be comparable to a "performance-related bonus."

It is unclear whether the compensation package would be comparable to the money bureaucrats can make through unofficial business channels."
and then Korgynyuk:

"and so are their bosses, which is the real problem, said Yury Korgunyuk, a political analyst at the Indem anti-corruption think tank.

"It's just rubbish," Korgunyuk said. "The corrupt will check up on the corrupt. And anyway, what's the point of such a program when a bribed judge will decide whether the official has been dabbling in corruption?"

Laws currently on the books are sufficient to deal with corruption, but no one adheres to them, Korgunyuk said."

Nothing more to be said on this subject.

Plan Aims at Making Bribes Unattractive (warning due to an anti-deluvian approach to archives this link will expire only shortly after I post.)

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30 July 2007

Reiman vs Alfa - An Ending?

The end of an era approacheth?  It looks as though Friedman has been finally convinced to back off.  That's what happens when everything goes silent.

What is not addressed is Bermuda's monetary authority's suit to have IPOC dissolved - not much fun for Usmanov to buy IPOC and then find that they don't own exist.  In short, Alfa got their stock and Reiman lost his reputation.

FT.com / Companies / Telecoms - Russian phone feud peace deal:
Russian phone feud peace deal
By Neil Buckley in Moscow
Published: July 30 2007 03:43 | Last updated: July 30 2007 03:43
One of Russia’s longest-running and most bitter corporate feuds has been settled in what could clear the way for an ownership shake-up in the booming Russian mobile telecoms sector.

The telecoms arm of the Alfa Group conglomerate, controlled by the oligarch Mikhail Fridman, and Ipoc, a Bermuda-based investment fund, have signed a “peace agreement” ending their battle over a 25.1 per cent stake in MegaFon, Russia’s number three mobile telecoms operator.

The groups agreed late last week after several months of talks to end all court actions and renounce legal claims against each other.

Alfa’s telecoms arm, now known as Altimo, bought the MegaFon stake in 2003 from entrepreneur Leonid Rozhetskin.

But Ipoc challenged the deal, saying it had earlier options agreements with Mr Rozhetskin to buy the stake. The conflict generated legal and arbitration proceedings in Switzerland, Bermuda, Russia, Sweden and New York, several of which in the past year had found in Altimo’s favour.

The two companies refused to comment, but people familiar with the negotiations said the peace deal left Altimo in control of the 25.1 per cent MegaFon stake. Ipoc directly and via an intermediary company, Telecominvest, controls another 39.3 per cent of MegaFon.

The deal clears the way for Ipoc to negotiate the possible sale of its MegaFon stake to Alisher Usmanov, another billionaire Russian businessman.

With analysts estimating MegaFon’s market value at about $15bn, 39.3 per cent would be worth about $5.9bn.

People familiar with the situation said Mr Usmanov had contacted Ipoc about a sale but made it a condition that the dispute with Altimo be resolved.

The peace deal could also clear the way for a long-awaited initial public offering of MegaFon.

The Alfa-Ipoc battle generated particular controversy, as Alfa repeatedly alleged in legal action that Leonid Reiman, Russia’s telecommunications minister, was Ipoc’s owner, and not its ostensible owner, Jeffrey Galmond, a Danish lawyer. Mr Reiman and Mr Galmond have denied the claims.

But a Zurich arbitration panel said in May 2006 it believed Ipoc’s beneficial owner was an unnamed individual who “served as a high-ranking officer in the Russian Federation with the function of co-ordination and regulation” of communications in Russia.

26 July 2007

Wing Mirrors

Have you any idea how much they cost? A lot in any language.

And I have had two pairs stolen this week from the road outside work.
Random or what? Try driving around Sadovaya Koltso with no wing mirrors -
price ceases to be a factor.

Which took me down the backroads just outside the 3rd ring (of Uranus?) in
to Moscow's netherworld where you can buy wing mirrors (and their motors)
for 60 per cent of the official dealer price (you have to love drivers even
if you wish they weren't yours once you have learnt what Rumsfeld would
have called the unknowable knowns).

Shitty mud and concrete tracks in what in any other 20 million person city
would be high-to-mid-end housing.

Who said you needed to travel to regions to find life - which is where I am
headed as I write this. Sunshine on the Volga for me.

(Sent from my handheld)

Quotations Entirely Relevant to Russia

"The only thing that saves us from the bureaucracy is inefficiency. An efficient bureaucracy is the greatest threat to liberty."

Eugene McCarthy, Time magazine, Feb. 12, 1979
US politician (1916 - 2005)

25 July 2007

You Know You Have Been in Russia Too Long When.....

On waking on an overcast 25th July your first thought is;

oh well that's the end of summer.

24 July 2007

How to Deal with Corruption?

I enjoyed this piece from bne.  The government should do something about corruption however, it is worried that getting rid of corrupt chinovniki would undermine the work of government.

If my personal dealings have anything to do with anything firing the most corrupt chinovniki would have no impact on their ability to do their work as they don't - work that is.  Their job is to return the investment which bought them their post, not to do the job they are officially paid to do.  Added to which the likelihood of them being fired is close to zero as they are, almost without exception, former employees of the three letter power agencies.  They can be spotted a mile off by their complete lack of knowledge of the industry in which they work, $2,000 suits and shoes, well what more can be said.

BUSINESS NEW EUROPE - bne Page:
Poll: Russians want a clamp down on corruption
bne
July 24, 2007

Corruption is top of Russians wish list as the country swings into election cycle, according to a poll released this week.

The Kremlin has already launched a low key anti-corruption drive this year that has seen the arrest of several senior bureaucrats from various ministries.

The Kremlin is trying to strike a delicate balanced between warning apparachiki against putting their hands in the till and starting a pogrom against the universal corruption that would wreck the operation of government.

Forty-five percent of Russian citizens surveyed in July want the government to concentrate on the fight against corruption, compared with 41% in 2006 and 38% in 2005, according to a poll by the Yury Levada Analytical Center.

Corruption is top of citizens' wish list. Those that are most concerned by wages, pensions and benefits for neutralizing inflation has grown by 6% to 39% from 33% a year earlier.

The percentage of citizens who want prices for commodities and services to be lowered has shrunk from 47% to 40% over the past three years, and of those who want prices to remain under state control has remained almost unchanged - 36% and 39%, respectively.

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Equity Financing in Russia Asks: Why Do They Hate Us?

I successfully managed not to post a quick response to Kuznetsov's comment on my post where I somewhat sharply described the stuff he writes as crap peddled, or his subsequent post "Why do they hate us?"  This was partially because the Russia Blog would not let me/was having a technical bad hair day for the second day in a row and partially because there is enough unhelpful inflammatory rubbish going on between Russia and the UK as it is.

Silence however, would be a little too much to ask.  I will endeavour to be balanced, as anyone who can determine that I hate Russians from suggesting that he writes crap is clearly a little sensitive.

Criticism is hardly alien to Russian culture; it gets ladled out with big stolovaya spoons at pretty much any opportunity.  The first Volgotanker post-shareholder meeting dinner I attended way-back-when still wins the award for most destructive toasting.  However, in Moscow circles criticism is again a little taboo at the margins.  And criticism does not indicate anything other than a view that things could be done a. better or b. better not done at all. 

Constructive criticism would be more useful than describing a blog as peddled crap; and the response from Kuznetsov that I am a crap writer - whilst closer to the mark than he imagines - is equally useless as piece of criticism.  Suggesting that because I am aware that the garden does not universally smell of roses, and write about it, that I should return to the UK shows a level of sensitivity which is bordering on the paranoid.  I have lived in Russia longer than I have lived anywhere, and am way more qualified to be critical than I am of the UK.  If I hated the place I would not still be here, and I came to do nothing other than participate in the boom, bust and boom again.  I don't need to write that the garden is rosy - I invest in the garden; real money in primary issues which grow young companies. 

Oh and if anyone thinks that I am hiding I would suggest that 30 seconds with google will provide you with my identity.  I am partially anonymous for a very good reason.  This likelihood of this blog impacting my business negatively is a very non-trivial greater than 100%.  I don't use it for publicity - I use it to write what I see, what I think and to work out what I am thinking. 

Russia Blog: Equity Financing in Russia Asks:  Why Do They Hate Us?:
Equity Financing in Russia Asks:
Why Do They Hate Us?
Vladimir Kuznetsov
Director of Equity Financing, FINAM Investment Company, Moscow

Aeroflot Comes in from the Cold

Before I get to more serious discussions, a small diversion.  The online magazine, The First Post, has an Aeroflot ad embedded in this article

I have used their delightful services quite a lot recently, easier to exceed weight restrictions, and have to say that once on the plane their service is pretty good.  The problem is that for a flight to/from the UK it means passing through Heathrow Terminal 2 - though it would be easier to commit suicide first - and Sheremeytevo, which includes a 1-2 hour inspection of the flourishing retail parks lining the side of Leningradsky Prospect (except at 5.00 a.m. when it takes exactly 22 minutes from the centre).

A very simple hint to the airlines.  Worry less about the onboard experience and a whole bunch more on the getting on to and away from the plane.  For example in Heathrow it now seems to catch the ground handlers by surprise every time an airplane arrives.

Anyway on a price performance basis Aeroflot is blowing BA away - not that either of  them care - the planes are full and they are making money hand over fist.

23 July 2007

The Right Step

There was remarkably little about the Litvinenko/Lugovoi affair in the
British press at the weekend (back admiring cc#1's gurgling). Lavrov, as
reported in Monday's FT, set the tone: we expect relations to return to
normal soon. Which I am sure was not the line being peddled in MK and the
Daily Mail/The Sun.

However, in a couple of longer pieces there has been some discussion of how
best to do business in Russia. Inevitably the 'good business partner'
solution is prevalent.

It has been my universal experience that this is an oxymoron. Whilst there
are plenty of not bad JV's, albeit not in my direct experience, when the
going gets tough it's usually because the local partner cannot solve the
problem. At which point it's cheaper toblearn how to bribe yourself rather
than via a consultant. Even if it's harder to find the correct entry under
IAS.

16 July 2007

Total and Shtockman

For those who care - a politer version of my own analysis from Ben's bne.  It looks as though I have some of the details of the contract wrong - but then as there really is not one to talk of we are all guessing.

Furthermore, Jonathan Stern of the Oxford Institute of Energy Studies and the writer of "The Future of Russian Gas and Gazprom", one of the most informed commentators on GAZP, and trusted by them, says that Total thinks that it has signed up for is a study based on some principals.  As I wrote earlier, a political not a professional deal. 

The final comment with which I agree entirely is from the author's final paragraph:

"And it could be an expensive model for the Russian company -- and ultimately the state."
In short, Shtockman will push the developers of it to the limit, what is needed is a coalition of the willing, not a cobbled together political deal which will come to pass for political, not business reasons.

BUSINESS NEW EUROPE - bne Page:
Total finds itself in the deep end with Shtokman deal

Derek Brower in London
2007-07-16


Oil major Total signed an agreement with Russian gas monopoly Gazprom on Thursday, July 12 to take a stake in the Shtokman gas field, in the Barents Sea. But the deal, which will should see the French company take 25% of the company that will develop the field, one of the world's largest, leaves many questions unanswered.

According to Gazprom, the two companies will establish a special-purpose company to manage engineering, financing, construction and exploitation of installations at the first phase of Shtokman field development. The company will be the owner of this infrastructure for 25 years, starting from the moment the field comes on stream.



When the first phase of the field's exploitation phase is complete, Total will return the stake in Sevmorneftegaz, the development company, to Gazprom. The Russian company says that in the meantime other firms will be able to take up to 24% of that company, leaving 51% in Gazprom's hands. 100% of the licence, as well as all the rights for marketing of the commodities, will be retained by Gazprom.

The company says the field will produce 23.7bn cubic metres a year (cm/y) of gas, with piped deliveries -- probably to the Nord Stream pipeline that will run under the Baltic Sea from Russia to Germany -- coming on stream in 2013 and liquefied natural gas (LNG) deliveries beginning a year later.

So much for the initial details. The rest remains hazy. The first question is why Total, and not as expected the Norwegian companies Hydro and Statoil (which are in the process of merging), was Gazprom's choice to partner it on Shtokman. Unlike the Norwegian firms, Total has no experience of bringing on stream an LNG project in the harsh Arctic environment. Furthermore, its recent record in Iran, where an LNG plant that Total is developing is running into severe cost overruns, is not good.

Sarkozy suffers Shtokman syndrome?

The likeliest explanation is political. Presidents Nicolas Sarkozy of France and Vladimir Putin of Russia are understood to have agreed the deal by telephone last week. Sarkozy has promised his European partners that he will take a tougher line with Russia than that of his predecessor, Jacques Chirac. The Shtokman deal, suggest analysts, is a pre-emptive strike by the Kremlin to stop that happening. Sarkozy could find his rhetoric on Russia mysteriously softening in the wake of Total's deal.

The next question is what, exactly, Total will get from the deal. The company's chief executive, Christophe de Margerie, told journalists after the signing ceremony that Total would be able to book reserves from the field. But given that the asset will remain entirely in Gazprom's hands, Total's shareholders will wonder about the legality of that. Gazprom's statement clearly states that Total's stake relates to infrastructure, not gas.

More likely is that Total will act as a glorified service contractor, providing capital and investment for a fee. Gazprom has indicated that it considers such a model to be the preferred mode of partnership with Western oil majors. But sources told bne that the French company has resisted such a notion up to now.

Meanwhile, given Total's inexperience in the Arctic, the likeliest contenders for the remaining 24% of Sevmorneftegaz remain the Norwegian firms. They will watch with interest as the details of Total's contract emerge. Jonathan Stern, of Oxford's Institute for Energy Studies, told bne that all Total had signed up for at present was a study into a potential partnership -- a far cry from the deal that much of the media presented last week.

The other question is the destination of Shtokman's gas. Gazprom's decision last year was that the field would not, as planned, be used for LNG, but to fill Nord Stream. That suggested that the company was worried about finding the gas to fill its prized export project to Europe. The re-commitment to LNG fits with the company's eagerness to develop a position in that market, but it still leaves the issue of filling Nord Stream, which has planned total capacity of some 55bn cm/y.

Then there are the questions of cost and timing. Stern suggests the 2013-14 targets will be difficult to meet. And Gazprom's cost estimate of $15bn could be conservative. And who will pay? With a share of the asset, Gazprom's international partners would be expected to cough up their proportion of the investment. Whether they can be expected to do so if they don't own any of the gas is another detail that remains to be revealed.

Gazprom seems to be inching to a new model of partnership with the majors: a form of service contract that nakedly shows the balance of power between Gazprom and the once-mighty oil majors. Shtokman will test the new model's viability. It isn't the kind of arrangement oil majors like. And it could be an expensive model for the Russian company -- and ultimately the state.


Send comments to The Editor

Total Shock - Total Wins Shtockman

Anywhere you care to look somebody is reporting that GAZP has brought Total in to Shtockman.  Some mild legal back flips allows GAZP to maintain the fiction that it owns 100% of the license whilst Total is allowed to book reserves.  GAZP is not lying, they have 100% of the legal ownership but less than 100% of the legal right to the economic effect.  Though whether Total has 25% of the economic benefit is also, as yet unclear - as is most of the agreement.

And for very good reason.  The whole thing was cooked up by the potential future chairman of GAZP, in his current guise, and the President of France over a quick phone call.  The big idea being that Angela Merkel does not like the future Chairman, Gordon is a Scottish son of the manse, and does not like anyone (and in any case would rather kick up a storm of Lugovoi), Belusconi is currently politically unemployed and the terrible Polish twins and just plain nasty.  So Sarkozy is Russia's new best friend, along with Hugo Chavez, and divide and rule says give favours to friends when they are friends.

All of which is fine and dandy, except that there was a reason why the technical people at GAZP were looking for a partner.  Shtockman is a long, long way from land and even further from people who will actually pay for gas.  So it's expensive and technically difficult.  Which is why the Norweigans were in negotiations.  Total brings nothing to the party except cash - and GAZP is not short of cash (ask all the people who steal from it).  So yet again the Fifth Directorate Thugs have cooked up a political deal which makes them feel as if they are kings of the universe with absolutely no understanding of what it will actually take to make the real event happen.

Anyone willing to bet on production starting in 2018 - that's a whole 5 years after the official start date?

Here's a link if you are interested.

Total Wins Share in Shtokman - Kommersant Moscow:

The Russia Blog

The Russia Blog, see link below, is some form of propaganda tool designed to paint a contrasting picture of Russia from the propaganda written by the western MSM.  As such, I have no particular problem with it.  However, where it falls apart in its role as purveyor of good news where little exists is that it knows as much about business as my now dead grandfather.  The business stuff peddled by Charles Ganske is plain laughable, which is OK because he has been hired to pump out stories not to understand them, more entertaining is the crap peddled by Kuznetsov from FINAM.  As convincing a sell signal on FINAM as you would ever need.  I knew more about investing at kindergarten.

Which brings me slowly to the point of this post.  I have been trying to discover the logic of bringing Total in to Shtockman (so naiive; logic and the Russian government in the same sentence) so amongst other trusted sources I went to The Russia Blog to see if it would peddle me an insight.  Instead, is this heap of intellectual dog shit .  I cannot even bring myself to copy all of it below.  (More on Total / GAZP in another post.)

Two of the more egregious sentences are quoted below, but its pretty difficult differentiating between the rubbish:

Last week France's Total S.A. agreed to a 25% stake in a major Russian oil and gas project, while the state-owned firm OAO Rosneft forged a new partnership with Royal Dutch Shell.

In an attempt to head off any future supply crunch, the Russian government is now allowing Gazprom to raise rates across the board, while encouraging the development of coal and nuclear power plants to diversify fuel sources for the power grid.
I attempted to comment on the post but I was told that it did not exist.  So below is my comment in full and without editing:

If you have even the slightest pretense at intellectual honesty you will re-write this entry somewhat along the following lines;
1. BP, Shell and Total sign long-term meaningless agreements to develop russian reserves after having had to sell down their holdings in major opportunities after pressure was exerted for them to do just that - the new owner being allowed to continue to do what the previous owner was not allowed to.
2. Oil production at post-soviet peak, but declines now forecast by everyone as the easy post-soviet workovers are now done and no one has invested in exploration for almost 2 decades.
3. Total, a company with no arctic experience brought in to Shtockman to....increase arctic experience.
4.Gazprom, despite having a monopoly on export cannot meet current domestic demand, ask Luzhkov, and is getting Russian local prices up to export netback whilst keeping its export and pipeline monopoly.  To hide the fact that it has not invested in upstream for 2 decades is buying in to coal and electricity, it being easier to engineer a purchase in the kremlin that find gas in the arctic - see total.

we all know that you write propaganda, sometimes its ok, this however flies in the face of all established facts.  the trouble with hiring liberal arts students to write is that they know nothing about business and cannot be bothered to research it and don't understand it when they do.

06 July 2007

Early Morning Roadkill

I love a good road accident before 07.30 in the morning. On my way to
Sheremeytevo for an early flight to London. Traffic lights fail at
Belorusskaya: GAI leave because that would involve them doing some work, so
we are left to our own devices getting on to Leningradsky from Belorusskaya.

For those less familiar with the road layout at Belorusskaya, the traffic
lights which stop the traffic on Leningardsky also stops the traffic on
Tverskaya. A fact which escaped the blue-lighted driver who got the into
town traffic to stop and then caught a driver heading out of town a good
blow on the side causing a 720 degree barrel roll. He did though land the
right way up and as he was wearing a seatbelt looked pretty much alive, if
a little shocked.

05 July 2007

Cabbages and Inflation

I scribble from time-to-time on inflation, and here, and indeed here (I am sure that I have written more, but that's all I could find with the limited time I was willing to spend), but never before have I blamed inflation on cabbages and carrots, useless wankers - yes, carrots and cabbages no.

If you were to take the predominant theme of my conversations over this week it is all inflation-based; oilfield services, Moscow and Podmoskovaya real estate (rental and acquisition), semi-skilled labour costs (see useless wankers), secretarial costs (and what the ugly coefficient is*).  Whilst some might suggest that I should get out more a very rapid deceleration of my bicycle (to zero) on Sunday means getting out is painful and so inflation takes central place.

If cabbages and carrots, sale of Yukos assets are the central cause of inflation then I would suggest that practioners of the dismal science get out more and witness what is going on around them.  Any suggestion that real inflation (you know the one that you and I pay) would be less than 12% this year is laughable.

* No way you could talk to headhunters about price differentials for beauty in anywhere else other than Russia - without getting fired that is.

Cabbage Cripples Central Bank’s Plans - Kommersant Moscow:
Cabbage Cripples Central Bank’s Plans
// Inflation in June is three times higher than a year ago
The unprecedented growth of prices on cabbage and carrot forced Russia’s Central Bank (CB) head Sergei Ignatiev to admit on Wednesday the tactic defeat in the struggle against inflation. Consumer prices index made up 1 percent in June 2007. In the annual estimation, it exceeded 8.5 percent, beating the CB’s and the government’s planned indexes of 7.5-8 percent. Analysts no longer believe in the deflation expected by the CB in August.
Inflation is speeding up again. It reached 1 percent in June 2007. Last time, summer inflation was so high in 2001, while in June 2006 consumer prices growth made up 0.3 percent, which is over three times less than now. In the first half of 2007, consumer prices grew by 5.7 percent. From June 2006 to June 2007, inflation reached 8.5 percent, exceeding the Central Ban’s and the government’s planned upper limit of 8 percent, for the first time in several months. The Federal Statistics Service publishes the data on Thursday. Yet, Central Bank head Sergei Ignatiev spoke to the State Duma on Wednesday, announcing the data on inflation, and using expressions “unexpectedly”, “unfortunately”, “I cannot explain yet”, while presenting “The main directions of the monetary policy for 2008”.

Ignatiev said the inflation speed-up is mainly due to the growth of prices on fruit and vegetables. The prices grew by 12.2 percent in a month, by 38.6 percent since the year’s beginning, and by 16.2 percent since June 2006. The reason why vegetables affected the inflation index so much is their large share (40.2 percent) in the consumer goods basket, according to which the Statistics Service estimates the index. It reflects much better the consumption pattern of low-income citizens. Consequently, the inflation indexes are becoming more politically important several months before the elections. Prices on cabbage and carrot grew most, while prices on bread and sugar grew least of all.

Economists also say the situation with cabbage price is unexpected. Yaroslav Lissovolik of Deutsche UFG and Rory Macfarquhar of Goldman Sachs said the main reason of vegetable prices growth is the ban on using foreign labor, which came into force on April 1, 2007. However, Macfarquhar calls it an “isolated shock”, while Lissovolik is not sure this decision will not lead to a long-term speed-up in food prices growth.

The second reason of inflation growth, also mentioned by Ignatiev in the Duma, and to be discussed by all investment banks on Thursday, is the extremely high speed of money stock growth. It is close to 60 percent in annual estimation.

The Central Bank hopes that the money stock growth will slow down to 37-39 percent in the second half of 2007. Lissovolik does not believe in this prognosis, but confirms the trend: “Money stock growth was due to the influx of capital, caused by the sale of YUKOS assets and the IPOs of VTB and Sberbank. No large events like that are expected in the year’s second half.” Ignatiev gave a preliminary estimation on Wednesday: the private capital net flow made up $67 billion in the first semester of 2007, while the level of $70 billion is expected for the entire 2007 (after the prognosis had been reconsidered several times). It is possible only if the capital outflows by the year’s end.

Anton Struchenevsky of Troika Dialog named the same reasons, and said the “monetary factor played the main role” in the inflation upsurge. However, he believes the CB is counteracting inflation in a wrong way: “Strengthening the currency is a grave macroeconomic mistake. It only provokes the influx of capital. Monetary stock increases, inflation grows, creating a vicious circle.”

Yet, some economists are inclined to look for the reasons outside the monetary sphere. Dmitry Belousov of the Macroeconomic Analysis and Short-Term Prognosis Center acknowledges that “the situation is very strange”. However, he thinks “there are no reasons for inflation growth in the monetary sphere”. He said the price shock is “partially due to good weather and the arrival of newly grown vegetables to the market, partially – to the market reform, and partially – to the growth of vegetable prices in the world”.

Experts have different opinions on whether inflation will keep growing, and on how the Russian authorities will act if the deflation expected in July-August fails to take place. Goldman Sachs altered on Wednesday the inflation prognosis for 2007 from 8 percent to 8.3 percent. The bank’s report says that “Ignatiev’s intonation has changed”: now there is no confidence in his words that the 8-percent level will be reached. Deutsche UFG has not yet altered its 8.3-percent prognosis. However, Lissovolik said “it might be raised”. Troika Dialog is more optimistic, expecting a 7.5-8-percent inflation. Experts are not sure the CB’s hopes for August deflation are feasible.

The CB’s main tool for counteracting inflation is strengthening the ruble. The CB has already strengthened the ruble against the two-currency basket ($0.55+€0.45) twice in 2007, by 0.5 percent each time. Lissovolik expects it will strengthen the ruble by 1.5 percent more before the year’s end. Macfarquhar, referring to Ignatiev’s speech, said the ruble strengthening helps the inflation decrease with a six-month lag. “It has become more likely that the ruble will keep being strengthened further, especially if the inflation pressure is longer-term and more stable than it follows from Sergei Ignatiev’s statements,” the expert said.

So, the fate of Russia’s nationa currency directly depends on the further behavior of fruit and vegetables, and on the success of Russian IPOs before the end of 2007.

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04 July 2007

Over-paid, Useless Wankers

Ben's online bne gets better and better.  This article is way too polite, useless, overpaid wankers with no idea what their job is or how to do it.

BUSINESS NEW EUROPE
BANKER'S BLOG: Russian investment bankers - poached or boiled?
bne
July 4, 2007

Word went down from JP Morgan's head office: get into Russia. But what to do? Buy an existing player? Tried that, but the most attractive candidate, Troika Dialog, is under Kremlin pressure (so the rumour goes) to remain Russian. Who else? Aton Capital, Brunswick and UFG have already been sold. Jennings is making too much money with his newly re-branded Renaissance Group. And no one else is available or sufficiently interesting. What to do?

Then: A smooth-talking banker from a bit-Russian brokerage comes a-knocking, offering up his team at a hefty premium, but still at a fraction of the cost of acquiring another bank. So it was an easy trade for JP Morgan to take out most of MDM Bank's equities team a few weeks ago in what is unlikely to be the last large-scale poaching this hiring season.

The poached people will likely enjoy a premium payday. If it's any indication, equity analysts boasting 1-1/2 years of experience, covering a small handful of second tiers, garnered contracts for upwards of $250K: Nice work if you can get it. A multiple of at least two times the (already ridiculously high) going market rate at more senior levels was probably the premium assigned to lifting the team as one. Even in Moscow's overheated banking environment, that kind of cash for an untried and less-than-seasoned team sets a new standard, and is proof - as if more were needed - of the dire shortage of quality talent.

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03 July 2007

Most Russians against smoking in public places

Somewhat dumfounded by this piece in RIA Novosti.  Apparently the margin of error is 3.5% - personally I think it is closer to being completely wrong.

RIA Novosti

Most Russians against smoking in public places
MOSCOW, July 2 (RIA Novosti) - Most Russians, 72%, favor prohibiting smoking in public places, while 24% are against such restrictions, an opinion research center said Monday.

Every second respondent in a survey conducted by the All-Russian Center for Public Opinion Study proposed prohibiting smoking in universities, movies, shopping malls and other public places.

The poll also showed that 61% of Russians do not smoke, and that there are more male than female smokers - 56% to 12%.

The poll was conducted June 16-17 and involved 1,599 people in 46 regions, territories and republics across Russia. The margin of error did not exceed 3.4%.

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29 June 2007

Goodbye, Tony Blair

Nothing to do with Russia. But way more fun than struggling through a Friday.

Corruption - An Update

The joy of corruption is that it is a double-edged sword; one side cuts you, the other others (as it were.)

Sometime between 20.30 last night and 11.00 this morning (opening time for any respectable Russian businessman) the Chinovnik holdout in our building had been convinced by the guys who bought the top floor, and are funding the remont, that he was in favour of the remont.

But the Investors (as we shall call them) were being a little shy about living up to the contractual promises they had made about the work they intend to do on the building in which I live.  So a quick call later and the threat of calling out the "administrative resources" to prevent work starting Monday and all the documents will arrive in my office later today :-)

Which may, or may not, lead to a longer conversation about lines between acceptable and unacceptable business behaviour.  To be honest I have been here too long to differentiate.  Did I ever tell you the story about the factory, the famous investors and the judge - no.  Buy me more than 8 beers and we will see where we get to. 

I'll tell you Tuesday (maybe) what it is like having 5 tonnes of cement pored in to your foundations.


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27 June 2007

Corruption

Who knew that when Putin dragged Khordhokovsky out of his plane that it would have an impact on my apartment block in Moscow.

I've written about this before but here's a rehash.  Just before MBK's fall from grace corruption was decreasing.  When it became clear that the law was a tool to achieve an end then corruption reared its ugly head again, and is getting worse and worse and worse as we await a change of power at the top.

Which has what to do with my apartment?  It starts with the initial poster-children of corruption; Beresovsky and his friend Patarkashvilli, the latter of whom bought the top floor of my apartment block just before he left Russia, never (so far anyway) to return.  Which means that for the best part of 8 years nothing has happened to the roof which was already then in need of renovation.  Finally it was bought (it gets complicated here so stick with me); all the owners in a building have a proportionate right to  the attic (cherdak), as one of the larger apartments in the building our proportionate right is to 6% of the 400m2 that constitutes the cherdak or 24m2 (good for a broom cupboard).  However, by assigning our rights to the buyers of the top floor they will undertake to repair the roof and the facade, the bill for which comes to a non-measly $2mn.  Without boring you with the maths, assigning my rights is just about equal to paying for the repairs on the roof and facade.  But then I did not want a 24m2 broom cupboard on the 7th floor.

If you are still with me, and still care, Russian law may or may not (no one's quite sure, but if you are about to invest $3mn+ err on the side of caution) require approval of 100% of the residents.  And now, thanks to Mr. Putin we have a resident (a chinovnik if you must know) who won't pay his portion of the roof repairs ("I don't live on the top floor") and expects $20k in cash to agree.

I think he may have an unfortunate accident in his podezd coming his way.


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The Anglo Disease

The much read, if not always agreed with, Jerome a Paris, writing in The Oil Drum has begun to develop a new theme; that Britain's (over)-reliance on capital markets is as to the 21st Century what gas was to Holland in the 1970's - which we otherwise know as the Dutch disease.

Polemics don't help his point but the essence is worth debating.  It is also a remarkable article for the first time that the eminently respected Alan Greenspan has been called "Bubbles" (to the best of my knowledge).

I know its off topic but globalisation does that to you.

The Oil Drum | The Anglo Disease - an introduction:
The Anglo Disease - an introduction

Posted by Jerome a Paris on June 26, 2007 - 2:02am
Topic: Economics
Tags: bubble, finance, ideology

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I've been developing in a couple of recent diaries over at the European Tribune (The Anglo Disease - Financiers worried about end of great bull run and Anglo Disease (2) - Martin Wolf's take, with afew adding input of his own in Anglo-Disease Sidelights (1): UK = Tax Haven) a concept which I think can usefully describe our current economic system, that of the Anglo Disease, mirrorring the "Dutch disease", a term coined in the 70s to describe the economic effects of the rapid development of one sector (in that case, natural gas, today, the financial industry) on the rest of the economy.

This text is meant as an attempt to explain what this 'disease' might be, trying to be as pedagogic as possible. You are my guinea pigs, so all comments and questions are welcome - indeed, they are hoped for - so that this text can be improved upon and refined.

In the Netherlands, the discovery of the large Groningen gas field which brought about a boom in that resource sector, with a lot of - highly profitable - investment concentrating in that sector. The reason that something which sounds like good news is called a disease is that the investment in that profitable sector tends to cause a drop in investment in other industrial sectors, because it is so much more profitable; at the same time, there is a lot of extra revenue from the export of the resource, which generates new demand which cannot be fulfilled by domestic production and gives rise to increased imports. The fact that resource exports grow strongly also tends to cause the domestic currency to get stronger, thus further penalising other sectors of activity on international markets. The result is a weakening of the rest of the economy, and increased reliance on the resource sector.

This then becomes a problem when the new sector is based on finite resources, and eventually goes into decline. At that point, exports dry up, but the rest of the economy, having become uncompetitive and fallen behind, can no longer pick up the slack and has become too small to carry the economy over. Thus the overall economy suffers.

In effect, the displacement of existing activity by the new sector is, to some extent, irreversible, and thus, when the resource dries up, the overall economy is permanently weakened. It's also part of the "resource curse", which usually includes additional symptoms like corruption and weakening of democratic rules as a lot of money gets concentrated in relatively few hands (those that own and those that regulate the resource industry). In the worst cases, it can include militarisation of society (weapons being an easy way to spend a lot of foreign currency and being occasionally useful against those that might want to take your sweet spot overseeing the cash cow).

:: ::

I think that the above is increasingly relevant to describe the economy of the UK and, to a lesser extent, that of the US, which are increasingly dominated by the financial services industry.

That prevalence of the financial world is no longer a matter of dispute. In fact, it is celebrated with increasingly euphoric words in most business publications and current affairs books. There is an air of hegelian (or marxist) inevitability about the triumph of markets and Anglo-Saxon capitalism, led by the powerhouses (banks, hedge funds and assorted accomplices) in the City of London and on Wall Street.

But just as Britain led the world into industrialisation, so now Britain is leading it out. Today you can still find a few British engineers and scientists making jet engines and pharmaceuticals—and doing rather well at it. But many more are cooking up algorithms for hedge funds and investment banks—where in many cases they add more value. The economy has boomed these past 15 years, as manufacturing has been left behind and London has become the world's leading international financial centre. Britain's deficit in manufactured goods is hitting record highs. But so are the capital inflows.

The Economist (editorial, this week)

The collapse of the trade balance, linked to the long term (relative) decline of the manufacturing sector is indeed one of the most noteworthy commonalities between the US and UK economies, along with the reliance on the sale of services, in particular financial services:

(from this text, which deserves a diary of its own)

Unfettered finance is fast reshaping the global economy (by Martin Wolf, senior editor, Financial Times, 19 June 2007)

It is capitalism, not communism, that generates what the communist Leon Trotsky once called “permanent revolution”. It is the only economic system of which that is true. Joseph Schumpeter called it “creative destruction”. Now, after the fall of its adversary, has come another revolutionary period. Capitalism is mutating once again.

Much of the institutional scenery of two decades ago – distinct national business elites, stable managerial control over companies and long-term relationships with financial institutions – is disappearing into economic history. We have, instead the triumph of the global over the local, of the speculator over the manager and of the financier over the producer. We are witnessing the transformation of mid-20th century managerial capitalism into global financial capitalism.

Above all, the financial sector, which was placed in chains after the Depression of the 1930s, is once again unbound. Many of the new developments emanated from the US. But they are ever more global. With them come not just new economic activities and new wealth but also a new social and political landscape.

The ability of the financial world to generate high returns on capital has fuelled the massive financial boom we've been in for most of our lives and which has so transformed our economic landscape. By demonstrating regular high returns possible, it has generalised the requirement for such returns in all economic activities, and thus the need for constant restructuring of businesses, for cost-cutting, offshoring and, often, for the wholesale dismantlement of whole sectors of activity that could not generate the required profitability.

Sectors like manufacturing have seen their share of economic activity shrink , as many activities were outsourced, offshored or eliminated altogether. The trade balance has gone south, and jobs have disappeared under relentless pressure for higher competitivity.

This might not be so bad if the jobs created in the service sector, and in finance in particular, were as numerous and high paying - and durable as those in the industry. All statistics on median wages suggest that this is not the case: median wages have been stagnant over the past couple of decades, with a stark increase in inequality. Increased wealth (as measured by GDP or average income) has been captured by a small number of people at the top, something strikingly similar to the remuneration structure of big investment banks and the rest of the financial industry.

The inequality might be acceptable if there was a prospect of reversing it as increasing prosperity is created (this is essentially the argument of Martin Wolf and other proponents of globalisation), but is in fact a structural and necessary feature of the system. Globalisation has spawned a whole ideology about efficient allocation of resources, optimisation of investment decisions, and the invisible, but natural, and morally neutral hand that allow markets to reveal the best price at any given moment for any item. It brings along a vicious hate for taxation, and sees government, and its core functions, redistribution and regulation, as something to be avoided and eliminated as much as possible, being fundamentally anti-efficient. It also brings the core idea that only things that have a price have a value, that everything can be measured in dollars, and that what isn't so measured has no worth nor legitimacy. It fosters a culture of individualism ("freedom") and consumerism ("success"). Social policies (which require distribution), common goods (which need to be defined and managed) and non-economic measures of well-being are spurned and actively fought. Growth is paramount.

While I think that this is more than enough to disqualify neoliberalism (as I have mande abundantly clear in many earlier diaries), there is actually worse. and that's where the concept of the 'Dutch disease' comes in.

:: ::

One of the core triggers of the Dutch disease is that the resource sector which has unbalanced the economy eventually shrinks as the underlying resource is depleted. In our case, the industry that causes activity-substitution (finance) can appear to be able to grow ad infinitum, without any limitation to actual resources. Just borrow more money to do bigger deals and enjoy the very real income taken along the way. Find another lender to refinance or another buyer to re-purchase, and you're home and dry. Or just do deals where the actual burden to repay is pushed back into the future (and you won't be around anymore if and when they falter). Thus the City and Wall Street can appear to generate more jobs than the industries they kill off destroy. In addition, with New York and (even moreso) London dominating finance worldwide and not just domestically, they can create jobs and capture wealth locally while imposing their requirements on companies and activities in other countries, thus creating little or no pain at home (see the graph below on how the UK as a whole can be defined as an offshore financial center, just like any Caribbean Island...)

So, while to some extent parasitic on other economies, it might at least make sense for the UK and the US - as nimbler, faster, smarter economies, they reap the benefits of globalisation and are understandably promoting their interests by defending globalisation. And hey, they are providing real services to investors around the world, who are "free to seek out the best returns around" and "voting with their feet/money."

But in fact, this is but a transitory phenomenon, underpinned by a single underlying factor: the long decline of inflation, and thus of interest rates, over the past 25 years.

We've been living in a long, massive bull market for bonds, born off the inflation of the 70s, and the grand ride which was made possible by the new financial tools offered by the IT revolution and by Reagan/Thatcher inspired deregulation is about to come to an end. The returns we've grown used to were just a long but temporary phase in a natural long term economic cycle, and, despite the final boost provided by 'Bubbles' Greenspan in the last few years, not something that can be sustained on a permanent basis. Put simply, it is not possible to generate 15% per annum returns on capital forever when the underlying economy is growing only by 3%.

As the interest rates go up again, and liquidity tightens again, the financial industry is going to run out of the underlying resource that sustained it - easy and plentiful access to money. As that constraint imposes its implacable discipline, and the financial industry finds out that it no longer has anything to offer to its clients (trading stuff, or trading imaginary products remotely backed by stuff, will no longer be so much more profitable than making stuff), it is going to shrink and withdraw. And the countries and cities that have bet on that industry for their prosperity will face the resource curse, as their core activity loses steam and alternative activities, having being neglected for so long, no longer exist or are too small or uncompetitive to make a difference, and cannot pick up the slack. This is what I propose should be called the Anglo Disease.

As this reversal has not yet taken place, and as this prediction threatens the livelihoods of many of my readers, I expect to be mocked and dismissed, but bear with me and help me work on the concept.

I hope to expand on the idea in further diaries, and I hope to get your feedback (including questions if you're not sure you understand what I wrote - maybe I am actually talking nonsense, for all my apparent trust in my assertions). The topic ties in neatly with the critique of neoliberalism I've been trying to write about in the past, to our unsustainable focus on growth as a sign of success, to worries about resource availability, and to the "inevitability" of the Western model - or rather of its financial brat, the Anglo-Saxon capitalist market economy, so there is a lot of matter to write about, and I hope you'll join in the fun.

08 September 2007

I have moved.  The unbelievable pain of finishing Gas - Hot and Otherwise means I have given up on Blogger and moved to WordPress.


This version of Ruminations will stay here for a while, but all the posts are duplicated over at the new Ruminations.  If you go to the old site you should be re-directed to the new Ruminations.

And here is the new RSS feed.

See you there.

07 September 2007

Untitled

So much to write about, too much time spent in SVO and the route therefrom to home. SVO is a shithole, so bad that it makes Heathrow Terminal 2 look like a paragon of virtue. Oh and the "otherwise" of hot air is the start of Duma election season, but I guess that deserves its own derision.


The gas wars are on the boil again (way too many mixed metaphors going on here). China has figured out that it does not have enough gas and has not bought enough or built enough pipelines and so is rationing gas and building a pipeline to China from Turkmenistan. Although Jerome a Paris is generally skeptical about pipelines, and not without reason, construction has started (or so a small bird tells me.) Oh and then there is the one about the delay in Karachaganak gas to 2012.








If you are interested in gas, and like being warm in winter and cool in summer then you will have seen a take on these graphs below at some time. The first shows GAZP's own production. The bits you should worry about are above the yellow line. Not that they don't exist its just that they may take some time to arrive (see previous thoughts on Shtockman).





The graph below shows the total supply of gas required to meet forecast demand. If you can get over the fact that by 2015 the gap between known GAZP supply and expected GAZP supply is 100bcm p.a. out of a total of 550bcm p.a. and why not, people continued to buy pools of AAA rated worthless mortgages way after they knew that they were worthless. So with that intellectual honesty established; the next concern is whether Central Asian (shitty nomenclature) is actually a. going to produce all the gas forecast (Kazakhstan and Turkmenistan) and b, whether they are going to actually send it via Russia to feed Russia and Europe (once the gas enters the pipeline its fungible whathever fiction RosUkrEnergo maintains.)






Everyone wants a piece of Trashcanistan's gas and ever since the great Turkmenbashi shuffled off to wherever Turkmenbashi's shuffle, the Russians, Chinese and Americans have all been telling the President with the unfeasibly long name to send his gas their way. Logically it should go through Russia - as a pipeline exists, but the Chinese are quite keen on it and are therefore building one. None of JaP's thinking about thinking about for them - the logic is easy; lots of people need lots of energy. Secure it early and don't worry about reversions to the mean (you measily analysts know what I mean).







The Americans, as a proxy for Europe (that worked well last time), want to send it under the Caspian and thence along the Freedom Corridor i.e. not Russia or Iran in to Europe or Turkey. This option is currently coming 6th of the available three.











The last of my pretty pictures shows how much gas has to come from independents. I chose this particular description because it highlights the supply sum; Gazprom production plus expected Central Asian supply + a known/expected independent production (after price liberlization) plus another number (the source of which is not known) equal demand. Magic - here's my personal version of this equation; amount spent = amount earnt plus the amount I would like to earn.







Some of these numbers are getting a little dated (2005 actuals) but nothing has changed to make me worry that that my bets will be wrong, including the likelihood of a very nasty earnings season for banks.


China has enacted a new industry policy on natural gas use to address the supply shortage and optimize usage, the nation's planning agency said yesterday. The guideline says residential gas use is a top priority, while usage in petrochemical plants is discouraged, the National Development and Reform Commission said on its Website. The policy, described by the NDRC as of "strategic importance," became effective on Aug. 30 after approval by the State Council. New methanol projects that use gas as a base will be barred. Methanol, which can also be derived from coal or crude oil, is an industrial chemical and a fuel that can be mixed with gasoline and diesel to cut pollution. The use of natural gas in other petrochemical projects and power-generation plants will also be limited or outlawed. For example, gas-fired power plants will be banned in certain coal-rich regions. The guideline said urban residential gas use is the most favored option. "We have to ensure gas will be first used in the residential sector," the planning body said. "We should consider social benefits, environmental benefits and economic benefits" while deciding where the gas resources should be used first. The NDRC said gas use should be well planned for better conservation and higher usage. Existing gas-based petrochemical projects, especially fertilizers, will remain in operation. Those approved and under-construction projects, which have signed long-term gas-purchase contracts, also won't be affected, the NDRC said. China wants cleaner-burning natural gas to account for 5.3 percent of total primary energy consumption by 2010, up from 2.8 percent in 2005. But supply may not catch up with the strong demand, typically in booming coastal regions. Several major gas-transport projects have lately been announced or launched. Sinopec Corp on Friday started building a 1,702-kilometer pipeline to transmit gas from the Puguang field in Sichuan Province to Shanghai. China National Petroleum Corp announced early last week the route for a mega cross-country gas pipeline, at more than 7,000 kilometers long, to transport Turkmenistan gas via far northwestern Xinjiang Uygur Autonomous Region to Shanghai in the east and Guangzhou in the s [From Новости Neftegaz.RU | Policy on natural gas streamlined in China]










When In Rome

I had failed to spot this little tidbit. Any clues in here as to why RenCap are off to Africa?




Mr Misamore and two other Yukos executives, David Godfrey and Daniel Feldman, told the Financial Times that the group of investors behind the Monte Valle bid included a representative of Moscow investment bank Renaissance Capital and another from US hedge fund VR Capital. They claimed that two members of the group, Renaissance Capital vice-president Bob Foresman and VR Capital president Richard Deitz, had called to ask them to unwind the legal attachments protecting the assets from the bankruptcy sale, saying that in return, state-run Rosneft would drop its creditors’ claims on the Dutch holding. Mr Feldman said Mr Foresman had called him two days before the sale, “to know if there was a way to make a deal that would provide them with comfort”. “He called the day before the auction and said you have to understand if we can work out a compromise you can come back and work in Russia.” Mr Feldman left Russia in February, fearing arrest. The claims could not be fully verified: Mr Foresman declined to comment. Mr Deitz said he did not recall all the details of his conversation with Mr Godfrey. Mr Deitz said he had “never in his life” met with Rosneft, while Monte Valle owner Stephen Lynch also said he had no talks with Rosneft or the authorities prior to the sale. The allegations are the latest twist in a bankruptcy process marred from the outset by claims it has been rigged in favour of Rosneft. [From FT.com / Companies / Energy Utilities Mining - Investors made backdoor Yukos approach]




06 September 2007

Ways to Waste Your Time

1. Fly via the 3rd World Airport otherwise known as Sheremeytevo and then drive in to the center of Moscow - approx 2 hours 30 minutes*


2. Work in a multi-story building with too few lifts and large numbers of (principally) girls who fill in the gaps between smoking with a bit of work


3. Drive in Moscow between the hours of 00.01 and 23.59


* Timing does not include retrieval of bags or passport control queues. Though passport queues are redundant when carrying a small child - oh what a joy walking to the front of a 40 minute queue with small child. Any suggestions as to where I can acquire a lifelike blow-up baby for queue-jumping much appreciated.



30 August 2007

Tips on Investing from the Russian Government

According to the Moscow Times (no link love due to ante-deluvian archiving policy) Oleg "the natural resources beast" Mitvol is off to the US to lecture the likes of Capital International on how to invest in Russian E&P stocks.


Presumably such tips include;



  • Open a short position - launch an enquiry


  • Close short position, open long position, meet with relevant governor. Admit that you were in the wrong, sell long position.


Brilliant investment advice.


Oleg Mitvol, the environmental regulator who threatened to halt a $20 billion Shell project last year, said Wednesday that he planned to advise U.S. fund managers on how to invest in Russia's natural resources.


Mitvol will hold meetings with investors from Capital Research & Management, American Century Investments, Fidelity Investments, UBS, State Street and Wells Capital Management during a trip to the United States next week, the deputy head of Federal Service for the Inspection of Natural Resources Use said in a statement.


Mitvol said he would travel from Sept. 4 to Sept. 7, on an invitation from the investors. He will be accompanied by Igor Maidanov, director of the Natural Resources Ministry's department for international cooperation.




Mitvol to Go on U.S. Lecture TourLast year, Mitvol led a campaign against Shell's Sakhalin-2 project in the Far East, which did not subside until the foreign-owned development ceded control to state-run Gazprom.




Bloomberg




15 August 2007

Russia Cuts Off Gas Via Druzhba - No Really

I have not read Transitions Online, but it gets mentioned reasonably frequently in the english language Russian blogosphere so when this article Europe’s Escape Routes, was linked to via the authoritative The Oil Drum, which found the story on Business Week, it seemed worth a read.

I was close to giving up after reading the first paragraph:

Wary of Moscow's stranglehold on natural gas supplies, the EU hopes several planned pipelines will provide a way out.  Russia's threat in early August to nearly halve the amount of gas it exports to Belarus over unpaid bills must have brought back bad memories for many in Europe.

on the assumption that everyone, bar Edward Lucas, has just about worked out that Russia has to sell its gas to Europe in order to pay for the developments that will allow it to sell its gas to Europe.  But I struggled manfully through to the second paragraph:

Memories, for instance, of earlier this year, when Russia cut off the gas that flowed through its Druzhba pipeline to Belarus in a dispute over price hikes and tariffs. At that time, a wave of disruption surged down the supply chain.

Just imagine the turmoil, if you aren't getting gas through Druzhba then all those cars won't run.  Except that the author was talking about natural gas, not US gas.  No wonder it had knock-on effects in the supply chain.  If you were waiting for gas through the Druzhba pipeline then your supply chain is probably pretty screwed-up.

Within days, the Czech Republic and Slovakia (who rely on Russia for around 65 percent of their natural gas) saw their shipments halved. Poland and Germany began tapping reserves, and other countries looked to increase imports from other suppliers like Norway.

Except that the Druzhba is an oil pipeline as a cursory search would show this as the top hit:

Druzhba pipeline - Wikipedia, the free encyclopedia
The Druzhba pipeline (Russian: нефтепровод «Дружба») is the world's longest oil pipeline, it carries oil some 2500 miles from southeast Russia to points in ...
en.wikipedia.org/wiki/Druzhba_pipeline - 24k - Cached - Similar pages
At which point I gave up - moron.

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Volga Views

Big sky in the Saratov Oblast, right down by the Kazakh border.
Crossing the Volga, elevation courtesy of GAZP. If I recollect this is facing south so Saratov is on your right and Engels (the city, not the person) is on your left.



14 August 2007

Ecto3 Blogging

After some considerable, but worthwhile wait, Ecto3 has been released; albeit in Alpha version.


Has not crashed my struggling laptop yet.


02 August 2007

Government

Writing in today's (01/08/2007) FT Quentin Peel once again manages to put
the western side of the Russian debate, whilst acknowledging Russian
concerns and western policy mistakes and missteps. It is a difficult line
to tread, and in this case done with some nuance.

What confounds many of us who try to convey a balanced view is the utter
cynicism with which the Fifth Directorate Thugs conduct business. a
mirror to the same cynicism displayed in the UK and US without even a
smattering of a critical press to print, and embarrass, just how corrupt
the posturing is.

Reverting to the taxi driver school of foreign reporting, and as a result
of a 2 hour journey to DME in the middle of July: if the vlast had to
experience this, how different it would be. The ability to drive would
help - some 40-50 per cent of licences are bought.

Neil Buckley, the very antithesis of a competent foreign reporter, has over
the last few days reported that we await VVP's glorious return in 4 years
for another 7 years.

God forbid (as if he/it/she had anything to do with it): damn this
certainty, can' t we have some hope that things might get better.

01 August 2007

Watching Your Own

Returning to London to get SWMBO and CC#1 via Domodedovo. Firstly huge
kudos to East Line for DME, it is really a first class airport these days
(well compared to everywhere else), once you have checked in (albeit avoid
Sector B if you can). Time between checking in and having a beer in my
hand must have been at least 7 minutes. Of which, 3 minutes was waiting
for a beer and 2 minutes in passport control. Not sure if the whizzy
security machine is of any use (in my previous incarnation I looked at a
number of these technologies - let's just say there is probably a reason
that they are not used in London or New York).

None of which is pertinent to the subject of this story. The coffee shop
at DME gives an excellent view of the businessmen leaving the BA lounge,
which given the time of year are all British (or American) as the
biznessmen are now safely ensconsed with the tall and beautiful who have
been topping up their tans for a month already.

And what a strange lot we are. Guys, it was 25 degrees in Moscow today - a
worsted wool suit with tie in a shirt whose neck size might have been
appropriate when you were 18. Pasty and with an unhealthy addiction to
crackberries.

They actually made Russian youth look healthy.

31 July 2007

A Rare Insight

It's not often that anyone being quoted in a newspaper adds any value to the reader (as opposed to the journalist).

However, Yury Korgunyuk from the Indem think tank hits more than one nail on the head here, or the same nail multiple times - unimportant really.

The underlying story is that the narod are becoming increasingly restless over corruption.  The corruption that matters to them is the day-to-day stuff; breathing, living and eating (and driving).  Using the bread and circuses approach, Sergei Naryshkin (another maybe for President) has been given the task of addressing corruption (The Kremlin, Russia should get there if the pochta works.)

His not entirely stupid plan is to increase salaries and then fire anyone caught practicing bribery.  Which is where the plan then falls apart as Korgynyuk explains.

Actually the first quotation comes from someone else:

"Yuzhakov, head of the Center for Strategic Development, said the compensation package under the pilot program would be comparable to a "performance-related bonus."

It is unclear whether the compensation package would be comparable to the money bureaucrats can make through unofficial business channels."
and then Korgynyuk:

"and so are their bosses, which is the real problem, said Yury Korgunyuk, a political analyst at the Indem anti-corruption think tank.

"It's just rubbish," Korgunyuk said. "The corrupt will check up on the corrupt. And anyway, what's the point of such a program when a bribed judge will decide whether the official has been dabbling in corruption?"

Laws currently on the books are sufficient to deal with corruption, but no one adheres to them, Korgunyuk said."

Nothing more to be said on this subject.

Plan Aims at Making Bribes Unattractive (warning due to an anti-deluvian approach to archives this link will expire only shortly after I post.)

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30 July 2007

Reiman vs Alfa - An Ending?

The end of an era approacheth?  It looks as though Friedman has been finally convinced to back off.  That's what happens when everything goes silent.

What is not addressed is Bermuda's monetary authority's suit to have IPOC dissolved - not much fun for Usmanov to buy IPOC and then find that they don't own exist.  In short, Alfa got their stock and Reiman lost his reputation.

FT.com / Companies / Telecoms - Russian phone feud peace deal:
Russian phone feud peace deal
By Neil Buckley in Moscow
Published: July 30 2007 03:43 | Last updated: July 30 2007 03:43
One of Russia’s longest-running and most bitter corporate feuds has been settled in what could clear the way for an ownership shake-up in the booming Russian mobile telecoms sector.

The telecoms arm of the Alfa Group conglomerate, controlled by the oligarch Mikhail Fridman, and Ipoc, a Bermuda-based investment fund, have signed a “peace agreement” ending their battle over a 25.1 per cent stake in MegaFon, Russia’s number three mobile telecoms operator.

The groups agreed late last week after several months of talks to end all court actions and renounce legal claims against each other.

Alfa’s telecoms arm, now known as Altimo, bought the MegaFon stake in 2003 from entrepreneur Leonid Rozhetskin.

But Ipoc challenged the deal, saying it had earlier options agreements with Mr Rozhetskin to buy the stake. The conflict generated legal and arbitration proceedings in Switzerland, Bermuda, Russia, Sweden and New York, several of which in the past year had found in Altimo’s favour.

The two companies refused to comment, but people familiar with the negotiations said the peace deal left Altimo in control of the 25.1 per cent MegaFon stake. Ipoc directly and via an intermediary company, Telecominvest, controls another 39.3 per cent of MegaFon.

The deal clears the way for Ipoc to negotiate the possible sale of its MegaFon stake to Alisher Usmanov, another billionaire Russian businessman.

With analysts estimating MegaFon’s market value at about $15bn, 39.3 per cent would be worth about $5.9bn.

People familiar with the situation said Mr Usmanov had contacted Ipoc about a sale but made it a condition that the dispute with Altimo be resolved.

The peace deal could also clear the way for a long-awaited initial public offering of MegaFon.

The Alfa-Ipoc battle generated particular controversy, as Alfa repeatedly alleged in legal action that Leonid Reiman, Russia’s telecommunications minister, was Ipoc’s owner, and not its ostensible owner, Jeffrey Galmond, a Danish lawyer. Mr Reiman and Mr Galmond have denied the claims.

But a Zurich arbitration panel said in May 2006 it believed Ipoc’s beneficial owner was an unnamed individual who “served as a high-ranking officer in the Russian Federation with the function of co-ordination and regulation” of communications in Russia.

26 July 2007

Wing Mirrors

Have you any idea how much they cost? A lot in any language.

And I have had two pairs stolen this week from the road outside work.
Random or what? Try driving around Sadovaya Koltso with no wing mirrors -
price ceases to be a factor.

Which took me down the backroads just outside the 3rd ring (of Uranus?) in
to Moscow's netherworld where you can buy wing mirrors (and their motors)
for 60 per cent of the official dealer price (you have to love drivers even
if you wish they weren't yours once you have learnt what Rumsfeld would
have called the unknowable knowns).

Shitty mud and concrete tracks in what in any other 20 million person city
would be high-to-mid-end housing.

Who said you needed to travel to regions to find life - which is where I am
headed as I write this. Sunshine on the Volga for me.

(Sent from my handheld)

Quotations Entirely Relevant to Russia

"The only thing that saves us from the bureaucracy is inefficiency. An efficient bureaucracy is the greatest threat to liberty."

Eugene McCarthy, Time magazine, Feb. 12, 1979
US politician (1916 - 2005)

25 July 2007

You Know You Have Been in Russia Too Long When.....

On waking on an overcast 25th July your first thought is;

oh well that's the end of summer.

24 July 2007

How to Deal with Corruption?

I enjoyed this piece from bne.  The government should do something about corruption however, it is worried that getting rid of corrupt chinovniki would undermine the work of government.

If my personal dealings have anything to do with anything firing the most corrupt chinovniki would have no impact on their ability to do their work as they don't - work that is.  Their job is to return the investment which bought them their post, not to do the job they are officially paid to do.  Added to which the likelihood of them being fired is close to zero as they are, almost without exception, former employees of the three letter power agencies.  They can be spotted a mile off by their complete lack of knowledge of the industry in which they work, $2,000 suits and shoes, well what more can be said.

BUSINESS NEW EUROPE - bne Page:
Poll: Russians want a clamp down on corruption
bne
July 24, 2007

Corruption is top of Russians wish list as the country swings into election cycle, according to a poll released this week.

The Kremlin has already launched a low key anti-corruption drive this year that has seen the arrest of several senior bureaucrats from various ministries.

The Kremlin is trying to strike a delicate balanced between warning apparachiki against putting their hands in the till and starting a pogrom against the universal corruption that would wreck the operation of government.

Forty-five percent of Russian citizens surveyed in July want the government to concentrate on the fight against corruption, compared with 41% in 2006 and 38% in 2005, according to a poll by the Yury Levada Analytical Center.

Corruption is top of citizens' wish list. Those that are most concerned by wages, pensions and benefits for neutralizing inflation has grown by 6% to 39% from 33% a year earlier.

The percentage of citizens who want prices for commodities and services to be lowered has shrunk from 47% to 40% over the past three years, and of those who want prices to remain under state control has remained almost unchanged - 36% and 39%, respectively.

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Equity Financing in Russia Asks: Why Do They Hate Us?

I successfully managed not to post a quick response to Kuznetsov's comment on my post where I somewhat sharply described the stuff he writes as crap peddled, or his subsequent post "Why do they hate us?"  This was partially because the Russia Blog would not let me/was having a technical bad hair day for the second day in a row and partially because there is enough unhelpful inflammatory rubbish going on between Russia and the UK as it is.

Silence however, would be a little too much to ask.  I will endeavour to be balanced, as anyone who can determine that I hate Russians from suggesting that he writes crap is clearly a little sensitive.

Criticism is hardly alien to Russian culture; it gets ladled out with big stolovaya spoons at pretty much any opportunity.  The first Volgotanker post-shareholder meeting dinner I attended way-back-when still wins the award for most destructive toasting.  However, in Moscow circles criticism is again a little taboo at the margins.  And criticism does not indicate anything other than a view that things could be done a. better or b. better not done at all. 

Constructive criticism would be more useful than describing a blog as peddled crap; and the response from Kuznetsov that I am a crap writer - whilst closer to the mark than he imagines - is equally useless as piece of criticism.  Suggesting that because I am aware that the garden does not universally smell of roses, and write about it, that I should return to the UK shows a level of sensitivity which is bordering on the paranoid.  I have lived in Russia longer than I have lived anywhere, and am way more qualified to be critical than I am of the UK.  If I hated the place I would not still be here, and I came to do nothing other than participate in the boom, bust and boom again.  I don't need to write that the garden is rosy - I invest in the garden; real money in primary issues which grow young companies. 

Oh and if anyone thinks that I am hiding I would suggest that 30 seconds with google will provide you with my identity.  I am partially anonymous for a very good reason.  This likelihood of this blog impacting my business negatively is a very non-trivial greater than 100%.  I don't use it for publicity - I use it to write what I see, what I think and to work out what I am thinking. 

Russia Blog: Equity Financing in Russia Asks:  Why Do They Hate Us?:
Equity Financing in Russia Asks:
Why Do They Hate Us?
Vladimir Kuznetsov
Director of Equity Financing, FINAM Investment Company, Moscow

Aeroflot Comes in from the Cold

Before I get to more serious discussions, a small diversion.  The online magazine, The First Post, has an Aeroflot ad embedded in this article

I have used their delightful services quite a lot recently, easier to exceed weight restrictions, and have to say that once on the plane their service is pretty good.  The problem is that for a flight to/from the UK it means passing through Heathrow Terminal 2 - though it would be easier to commit suicide first - and Sheremeytevo, which includes a 1-2 hour inspection of the flourishing retail parks lining the side of Leningradsky Prospect (except at 5.00 a.m. when it takes exactly 22 minutes from the centre).

A very simple hint to the airlines.  Worry less about the onboard experience and a whole bunch more on the getting on to and away from the plane.  For example in Heathrow it now seems to catch the ground handlers by surprise every time an airplane arrives.

Anyway on a price performance basis Aeroflot is blowing BA away - not that either of  them care - the planes are full and they are making money hand over fist.

23 July 2007

The Right Step

There was remarkably little about the Litvinenko/Lugovoi affair in the
British press at the weekend (back admiring cc#1's gurgling). Lavrov, as
reported in Monday's FT, set the tone: we expect relations to return to
normal soon. Which I am sure was not the line being peddled in MK and the
Daily Mail/The Sun.

However, in a couple of longer pieces there has been some discussion of how
best to do business in Russia. Inevitably the 'good business partner'
solution is prevalent.

It has been my universal experience that this is an oxymoron. Whilst there
are plenty of not bad JV's, albeit not in my direct experience, when the
going gets tough it's usually because the local partner cannot solve the
problem. At which point it's cheaper toblearn how to bribe yourself rather
than via a consultant. Even if it's harder to find the correct entry under
IAS.

16 July 2007

Total and Shtockman

For those who care - a politer version of my own analysis from Ben's bne.  It looks as though I have some of the details of the contract wrong - but then as there really is not one to talk of we are all guessing.

Furthermore, Jonathan Stern of the Oxford Institute of Energy Studies and the writer of "The Future of Russian Gas and Gazprom", one of the most informed commentators on GAZP, and trusted by them, says that Total thinks that it has signed up for is a study based on some principals.  As I wrote earlier, a political not a professional deal. 

The final comment with which I agree entirely is from the author's final paragraph:

"And it could be an expensive model for the Russian company -- and ultimately the state."
In short, Shtockman will push the developers of it to the limit, what is needed is a coalition of the willing, not a cobbled together political deal which will come to pass for political, not business reasons.

BUSINESS NEW EUROPE - bne Page:
Total finds itself in the deep end with Shtokman deal

Derek Brower in London
2007-07-16


Oil major Total signed an agreement with Russian gas monopoly Gazprom on Thursday, July 12 to take a stake in the Shtokman gas field, in the Barents Sea. But the deal, which will should see the French company take 25% of the company that will develop the field, one of the world's largest, leaves many questions unanswered.

According to Gazprom, the two companies will establish a special-purpose company to manage engineering, financing, construction and exploitation of installations at the first phase of Shtokman field development. The company will be the owner of this infrastructure for 25 years, starting from the moment the field comes on stream.



When the first phase of the field's exploitation phase is complete, Total will return the stake in Sevmorneftegaz, the development company, to Gazprom. The Russian company says that in the meantime other firms will be able to take up to 24% of that company, leaving 51% in Gazprom's hands. 100% of the licence, as well as all the rights for marketing of the commodities, will be retained by Gazprom.

The company says the field will produce 23.7bn cubic metres a year (cm/y) of gas, with piped deliveries -- probably to the Nord Stream pipeline that will run under the Baltic Sea from Russia to Germany -- coming on stream in 2013 and liquefied natural gas (LNG) deliveries beginning a year later.

So much for the initial details. The rest remains hazy. The first question is why Total, and not as expected the Norwegian companies Hydro and Statoil (which are in the process of merging), was Gazprom's choice to partner it on Shtokman. Unlike the Norwegian firms, Total has no experience of bringing on stream an LNG project in the harsh Arctic environment. Furthermore, its recent record in Iran, where an LNG plant that Total is developing is running into severe cost overruns, is not good.

Sarkozy suffers Shtokman syndrome?

The likeliest explanation is political. Presidents Nicolas Sarkozy of France and Vladimir Putin of Russia are understood to have agreed the deal by telephone last week. Sarkozy has promised his European partners that he will take a tougher line with Russia than that of his predecessor, Jacques Chirac. The Shtokman deal, suggest analysts, is a pre-emptive strike by the Kremlin to stop that happening. Sarkozy could find his rhetoric on Russia mysteriously softening in the wake of Total's deal.

The next question is what, exactly, Total will get from the deal. The company's chief executive, Christophe de Margerie, told journalists after the signing ceremony that Total would be able to book reserves from the field. But given that the asset will remain entirely in Gazprom's hands, Total's shareholders will wonder about the legality of that. Gazprom's statement clearly states that Total's stake relates to infrastructure, not gas.

More likely is that Total will act as a glorified service contractor, providing capital and investment for a fee. Gazprom has indicated that it considers such a model to be the preferred mode of partnership with Western oil majors. But sources told bne that the French company has resisted such a notion up to now.

Meanwhile, given Total's inexperience in the Arctic, the likeliest contenders for the remaining 24% of Sevmorneftegaz remain the Norwegian firms. They will watch with interest as the details of Total's contract emerge. Jonathan Stern, of Oxford's Institute for Energy Studies, told bne that all Total had signed up for at present was a study into a potential partnership -- a far cry from the deal that much of the media presented last week.

The other question is the destination of Shtokman's gas. Gazprom's decision last year was that the field would not, as planned, be used for LNG, but to fill Nord Stream. That suggested that the company was worried about finding the gas to fill its prized export project to Europe. The re-commitment to LNG fits with the company's eagerness to develop a position in that market, but it still leaves the issue of filling Nord Stream, which has planned total capacity of some 55bn cm/y.

Then there are the questions of cost and timing. Stern suggests the 2013-14 targets will be difficult to meet. And Gazprom's cost estimate of $15bn could be conservative. And who will pay? With a share of the asset, Gazprom's international partners would be expected to cough up their proportion of the investment. Whether they can be expected to do so if they don't own any of the gas is another detail that remains to be revealed.

Gazprom seems to be inching to a new model of partnership with the majors: a form of service contract that nakedly shows the balance of power between Gazprom and the once-mighty oil majors. Shtokman will test the new model's viability. It isn't the kind of arrangement oil majors like. And it could be an expensive model for the Russian company -- and ultimately the state.


Send comments to The Editor

Total Shock - Total Wins Shtockman

Anywhere you care to look somebody is reporting that GAZP has brought Total in to Shtockman.  Some mild legal back flips allows GAZP to maintain the fiction that it owns 100% of the license whilst Total is allowed to book reserves.  GAZP is not lying, they have 100% of the legal ownership but less than 100% of the legal right to the economic effect.  Though whether Total has 25% of the economic benefit is also, as yet unclear - as is most of the agreement.

And for very good reason.  The whole thing was cooked up by the potential future chairman of GAZP, in his current guise, and the President of France over a quick phone call.  The big idea being that Angela Merkel does not like the future Chairman, Gordon is a Scottish son of the manse, and does not like anyone (and in any case would rather kick up a storm of Lugovoi), Belusconi is currently politically unemployed and the terrible Polish twins and just plain nasty.  So Sarkozy is Russia's new best friend, along with Hugo Chavez, and divide and rule says give favours to friends when they are friends.

All of which is fine and dandy, except that there was a reason why the technical people at GAZP were looking for a partner.  Shtockman is a long, long way from land and even further from people who will actually pay for gas.  So it's expensive and technically difficult.  Which is why the Norweigans were in negotiations.  Total brings nothing to the party except cash - and GAZP is not short of cash (ask all the people who steal from it).  So yet again the Fifth Directorate Thugs have cooked up a political deal which makes them feel as if they are kings of the universe with absolutely no understanding of what it will actually take to make the real event happen.

Anyone willing to bet on production starting in 2018 - that's a whole 5 years after the official start date?

Here's a link if you are interested.

Total Wins Share in Shtokman - Kommersant Moscow:

The Russia Blog

The Russia Blog, see link below, is some form of propaganda tool designed to paint a contrasting picture of Russia from the propaganda written by the western MSM.  As such, I have no particular problem with it.  However, where it falls apart in its role as purveyor of good news where little exists is that it knows as much about business as my now dead grandfather.  The business stuff peddled by Charles Ganske is plain laughable, which is OK because he has been hired to pump out stories not to understand them, more entertaining is the crap peddled by Kuznetsov from FINAM.  As convincing a sell signal on FINAM as you would ever need.  I knew more about investing at kindergarten.

Which brings me slowly to the point of this post.  I have been trying to discover the logic of bringing Total in to Shtockman (so naiive; logic and the Russian government in the same sentence) so amongst other trusted sources I went to The Russia Blog to see if it would peddle me an insight.  Instead, is this heap of intellectual dog shit .  I cannot even bring myself to copy all of it below.  (More on Total / GAZP in another post.)

Two of the more egregious sentences are quoted below, but its pretty difficult differentiating between the rubbish:

Last week France's Total S.A. agreed to a 25% stake in a major Russian oil and gas project, while the state-owned firm OAO Rosneft forged a new partnership with Royal Dutch Shell.

In an attempt to head off any future supply crunch, the Russian government is now allowing Gazprom to raise rates across the board, while encouraging the development of coal and nuclear power plants to diversify fuel sources for the power grid.
I attempted to comment on the post but I was told that it did not exist.  So below is my comment in full and without editing:

If you have even the slightest pretense at intellectual honesty you will re-write this entry somewhat along the following lines;
1. BP, Shell and Total sign long-term meaningless agreements to develop russian reserves after having had to sell down their holdings in major opportunities after pressure was exerted for them to do just that - the new owner being allowed to continue to do what the previous owner was not allowed to.
2. Oil production at post-soviet peak, but declines now forecast by everyone as the easy post-soviet workovers are now done and no one has invested in exploration for almost 2 decades.
3. Total, a company with no arctic experience brought in to Shtockman to....increase arctic experience.
4.Gazprom, despite having a monopoly on export cannot meet current domestic demand, ask Luzhkov, and is getting Russian local prices up to export netback whilst keeping its export and pipeline monopoly.  To hide the fact that it has not invested in upstream for 2 decades is buying in to coal and electricity, it being easier to engineer a purchase in the kremlin that find gas in the arctic - see total.

we all know that you write propaganda, sometimes its ok, this however flies in the face of all established facts.  the trouble with hiring liberal arts students to write is that they know nothing about business and cannot be bothered to research it and don't understand it when they do.

06 July 2007

Early Morning Roadkill

I love a good road accident before 07.30 in the morning. On my way to
Sheremeytevo for an early flight to London. Traffic lights fail at
Belorusskaya: GAI leave because that would involve them doing some work, so
we are left to our own devices getting on to Leningradsky from Belorusskaya.

For those less familiar with the road layout at Belorusskaya, the traffic
lights which stop the traffic on Leningardsky also stops the traffic on
Tverskaya. A fact which escaped the blue-lighted driver who got the into
town traffic to stop and then caught a driver heading out of town a good
blow on the side causing a 720 degree barrel roll. He did though land the
right way up and as he was wearing a seatbelt looked pretty much alive, if
a little shocked.

05 July 2007

Cabbages and Inflation

I scribble from time-to-time on inflation, and here, and indeed here (I am sure that I have written more, but that's all I could find with the limited time I was willing to spend), but never before have I blamed inflation on cabbages and carrots, useless wankers - yes, carrots and cabbages no.

If you were to take the predominant theme of my conversations over this week it is all inflation-based; oilfield services, Moscow and Podmoskovaya real estate (rental and acquisition), semi-skilled labour costs (see useless wankers), secretarial costs (and what the ugly coefficient is*).  Whilst some might suggest that I should get out more a very rapid deceleration of my bicycle (to zero) on Sunday means getting out is painful and so inflation takes central place.

If cabbages and carrots, sale of Yukos assets are the central cause of inflation then I would suggest that practioners of the dismal science get out more and witness what is going on around them.  Any suggestion that real inflation (you know the one that you and I pay) would be less than 12% this year is laughable.

* No way you could talk to headhunters about price differentials for beauty in anywhere else other than Russia - without getting fired that is.

Cabbage Cripples Central Bank’s Plans - Kommersant Moscow:
Cabbage Cripples Central Bank’s Plans
// Inflation in June is three times higher than a year ago
The unprecedented growth of prices on cabbage and carrot forced Russia’s Central Bank (CB) head Sergei Ignatiev to admit on Wednesday the tactic defeat in the struggle against inflation. Consumer prices index made up 1 percent in June 2007. In the annual estimation, it exceeded 8.5 percent, beating the CB’s and the government’s planned indexes of 7.5-8 percent. Analysts no longer believe in the deflation expected by the CB in August.
Inflation is speeding up again. It reached 1 percent in June 2007. Last time, summer inflation was so high in 2001, while in June 2006 consumer prices growth made up 0.3 percent, which is over three times less than now. In the first half of 2007, consumer prices grew by 5.7 percent. From June 2006 to June 2007, inflation reached 8.5 percent, exceeding the Central Ban’s and the government’s planned upper limit of 8 percent, for the first time in several months. The Federal Statistics Service publishes the data on Thursday. Yet, Central Bank head Sergei Ignatiev spoke to the State Duma on Wednesday, announcing the data on inflation, and using expressions “unexpectedly”, “unfortunately”, “I cannot explain yet”, while presenting “The main directions of the monetary policy for 2008”.

Ignatiev said the inflation speed-up is mainly due to the growth of prices on fruit and vegetables. The prices grew by 12.2 percent in a month, by 38.6 percent since the year’s beginning, and by 16.2 percent since June 2006. The reason why vegetables affected the inflation index so much is their large share (40.2 percent) in the consumer goods basket, according to which the Statistics Service estimates the index. It reflects much better the consumption pattern of low-income citizens. Consequently, the inflation indexes are becoming more politically important several months before the elections. Prices on cabbage and carrot grew most, while prices on bread and sugar grew least of all.

Economists also say the situation with cabbage price is unexpected. Yaroslav Lissovolik of Deutsche UFG and Rory Macfarquhar of Goldman Sachs said the main reason of vegetable prices growth is the ban on using foreign labor, which came into force on April 1, 2007. However, Macfarquhar calls it an “isolated shock”, while Lissovolik is not sure this decision will not lead to a long-term speed-up in food prices growth.

The second reason of inflation growth, also mentioned by Ignatiev in the Duma, and to be discussed by all investment banks on Thursday, is the extremely high speed of money stock growth. It is close to 60 percent in annual estimation.

The Central Bank hopes that the money stock growth will slow down to 37-39 percent in the second half of 2007. Lissovolik does not believe in this prognosis, but confirms the trend: “Money stock growth was due to the influx of capital, caused by the sale of YUKOS assets and the IPOs of VTB and Sberbank. No large events like that are expected in the year’s second half.” Ignatiev gave a preliminary estimation on Wednesday: the private capital net flow made up $67 billion in the first semester of 2007, while the level of $70 billion is expected for the entire 2007 (after the prognosis had been reconsidered several times). It is possible only if the capital outflows by the year’s end.

Anton Struchenevsky of Troika Dialog named the same reasons, and said the “monetary factor played the main role” in the inflation upsurge. However, he believes the CB is counteracting inflation in a wrong way: “Strengthening the currency is a grave macroeconomic mistake. It only provokes the influx of capital. Monetary stock increases, inflation grows, creating a vicious circle.”

Yet, some economists are inclined to look for the reasons outside the monetary sphere. Dmitry Belousov of the Macroeconomic Analysis and Short-Term Prognosis Center acknowledges that “the situation is very strange”. However, he thinks “there are no reasons for inflation growth in the monetary sphere”. He said the price shock is “partially due to good weather and the arrival of newly grown vegetables to the market, partially – to the market reform, and partially – to the growth of vegetable prices in the world”.

Experts have different opinions on whether inflation will keep growing, and on how the Russian authorities will act if the deflation expected in July-August fails to take place. Goldman Sachs altered on Wednesday the inflation prognosis for 2007 from 8 percent to 8.3 percent. The bank’s report says that “Ignatiev’s intonation has changed”: now there is no confidence in his words that the 8-percent level will be reached. Deutsche UFG has not yet altered its 8.3-percent prognosis. However, Lissovolik said “it might be raised”. Troika Dialog is more optimistic, expecting a 7.5-8-percent inflation. Experts are not sure the CB’s hopes for August deflation are feasible.

The CB’s main tool for counteracting inflation is strengthening the ruble. The CB has already strengthened the ruble against the two-currency basket ($0.55+€0.45) twice in 2007, by 0.5 percent each time. Lissovolik expects it will strengthen the ruble by 1.5 percent more before the year’s end. Macfarquhar, referring to Ignatiev’s speech, said the ruble strengthening helps the inflation decrease with a six-month lag. “It has become more likely that the ruble will keep being strengthened further, especially if the inflation pressure is longer-term and more stable than it follows from Sergei Ignatiev’s statements,” the expert said.

So, the fate of Russia’s nationa currency directly depends on the further behavior of fruit and vegetables, and on the success of Russian IPOs before the end of 2007.

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04 July 2007

Over-paid, Useless Wankers

Ben's online bne gets better and better.  This article is way too polite, useless, overpaid wankers with no idea what their job is or how to do it.

BUSINESS NEW EUROPE
BANKER'S BLOG: Russian investment bankers - poached or boiled?
bne
July 4, 2007

Word went down from JP Morgan's head office: get into Russia. But what to do? Buy an existing player? Tried that, but the most attractive candidate, Troika Dialog, is under Kremlin pressure (so the rumour goes) to remain Russian. Who else? Aton Capital, Brunswick and UFG have already been sold. Jennings is making too much money with his newly re-branded Renaissance Group. And no one else is available or sufficiently interesting. What to do?

Then: A smooth-talking banker from a bit-Russian brokerage comes a-knocking, offering up his team at a hefty premium, but still at a fraction of the cost of acquiring another bank. So it was an easy trade for JP Morgan to take out most of MDM Bank's equities team a few weeks ago in what is unlikely to be the last large-scale poaching this hiring season.

The poached people will likely enjoy a premium payday. If it's any indication, equity analysts boasting 1-1/2 years of experience, covering a small handful of second tiers, garnered contracts for upwards of $250K: Nice work if you can get it. A multiple of at least two times the (already ridiculously high) going market rate at more senior levels was probably the premium assigned to lifting the team as one. Even in Moscow's overheated banking environment, that kind of cash for an untried and less-than-seasoned team sets a new standard, and is proof - as if more were needed - of the dire shortage of quality talent.

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03 July 2007

Most Russians against smoking in public places

Somewhat dumfounded by this piece in RIA Novosti.  Apparently the margin of error is 3.5% - personally I think it is closer to being completely wrong.

RIA Novosti

Most Russians against smoking in public places
MOSCOW, July 2 (RIA Novosti) - Most Russians, 72%, favor prohibiting smoking in public places, while 24% are against such restrictions, an opinion research center said Monday.

Every second respondent in a survey conducted by the All-Russian Center for Public Opinion Study proposed prohibiting smoking in universities, movies, shopping malls and other public places.

The poll also showed that 61% of Russians do not smoke, and that there are more male than female smokers - 56% to 12%.

The poll was conducted June 16-17 and involved 1,599 people in 46 regions, territories and republics across Russia. The margin of error did not exceed 3.4%.

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29 June 2007

Goodbye, Tony Blair

Nothing to do with Russia. But way more fun than struggling through a Friday.

Corruption - An Update

The joy of corruption is that it is a double-edged sword; one side cuts you, the other others (as it were.)

Sometime between 20.30 last night and 11.00 this morning (opening time for any respectable Russian businessman) the Chinovnik holdout in our building had been convinced by the guys who bought the top floor, and are funding the remont, that he was in favour of the remont.

But the Investors (as we shall call them) were being a little shy about living up to the contractual promises they had made about the work they intend to do on the building in which I live.  So a quick call later and the threat of calling out the "administrative resources" to prevent work starting Monday and all the documents will arrive in my office later today :-)

Which may, or may not, lead to a longer conversation about lines between acceptable and unacceptable business behaviour.  To be honest I have been here too long to differentiate.  Did I ever tell you the story about the factory, the famous investors and the judge - no.  Buy me more than 8 beers and we will see where we get to. 

I'll tell you Tuesday (maybe) what it is like having 5 tonnes of cement pored in to your foundations.


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27 June 2007

Corruption

Who knew that when Putin dragged Khordhokovsky out of his plane that it would have an impact on my apartment block in Moscow.

I've written about this before but here's a rehash.  Just before MBK's fall from grace corruption was decreasing.  When it became clear that the law was a tool to achieve an end then corruption reared its ugly head again, and is getting worse and worse and worse as we await a change of power at the top.

Which has what to do with my apartment?  It starts with the initial poster-children of corruption; Beresovsky and his friend Patarkashvilli, the latter of whom bought the top floor of my apartment block just before he left Russia, never (so far anyway) to return.  Which means that for the best part of 8 years nothing has happened to the roof which was already then in need of renovation.  Finally it was bought (it gets complicated here so stick with me); all the owners in a building have a proportionate right to  the attic (cherdak), as one of the larger apartments in the building our proportionate right is to 6% of the 400m2 that constitutes the cherdak or 24m2 (good for a broom cupboard).  However, by assigning our rights to the buyers of the top floor they will undertake to repair the roof and the facade, the bill for which comes to a non-measly $2mn.  Without boring you with the maths, assigning my rights is just about equal to paying for the repairs on the roof and facade.  But then I did not want a 24m2 broom cupboard on the 7th floor.

If you are still with me, and still care, Russian law may or may not (no one's quite sure, but if you are about to invest $3mn+ err on the side of caution) require approval of 100% of the residents.  And now, thanks to Mr. Putin we have a resident (a chinovnik if you must know) who won't pay his portion of the roof repairs ("I don't live on the top floor") and expects $20k in cash to agree.

I think he may have an unfortunate accident in his podezd coming his way.


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The Anglo Disease

The much read, if not always agreed with, Jerome a Paris, writing in The Oil Drum has begun to develop a new theme; that Britain's (over)-reliance on capital markets is as to the 21st Century what gas was to Holland in the 1970's - which we otherwise know as the Dutch disease.

Polemics don't help his point but the essence is worth debating.  It is also a remarkable article for the first time that the eminently respected Alan Greenspan has been called "Bubbles" (to the best of my knowledge).

I know its off topic but globalisation does that to you.

The Oil Drum | The Anglo Disease - an introduction:

The Anglo Disease - an introduction

Posted by Jerome a Paris on June 26, 2007 - 2:02am
Topic: Economics
Tags: bubble, finance, ideology

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I've been developing in a couple of recent diaries over at the European Tribune (The Anglo Disease - Financiers worried about end of great bull run and Anglo Disease (2) - Martin Wolf's take, with afew adding input of his own in Anglo-Disease Sidelights (1): UK = Tax Haven) a concept which I think can usefully describe our current economic system, that of the Anglo Disease, mirrorring the "Dutch disease", a term coined in the 70s to describe the economic effects of the rapid development of one sector (in that case, natural gas, today, the financial industry) on the rest of the economy.

This text is meant as an attempt to explain what this 'disease' might be, trying to be as pedagogic as possible. You are my guinea pigs, so all comments and questions are welcome - indeed, they are hoped for - so that this text can be improved upon and refined.

In the Netherlands, the discovery of the large Groningen gas field which brought about a boom in that resource sector, with a lot of - highly profitable - investment concentrating in that sector. The reason that something which sounds like good news is called a disease is that the investment in that profitable sector tends to cause a drop in investment in other industrial sectors, because it is so much more profitable; at the same time, there is a lot of extra revenue from the export of the resource, which generates new demand which cannot be fulfilled by domestic production and gives rise to increased imports. The fact that resource exports grow strongly also tends to cause the domestic currency to get stronger, thus further penalising other sectors of activity on international markets. The result is a weakening of the rest of the economy, and increased reliance on the resource sector.

This then becomes a problem when the new sector is based on finite resources, and eventually goes into decline. At that point, exports dry up, but the rest of the economy, having become uncompetitive and fallen behind, can no longer pick up the slack and has become too small to carry the economy over. Thus the overall economy suffers.

In effect, the displacement of existing activity by the new sector is, to some extent, irreversible, and thus, when the resource dries up, the overall economy is permanently weakened. It's also part of the "resource curse", which usually includes additional symptoms like corruption and weakening of democratic rules as a lot of money gets concentrated in relatively few hands (those that own and those that regulate the resource industry). In the worst cases, it can include militarisation of society (weapons being an easy way to spend a lot of foreign currency and being occasionally useful against those that might want to take your sweet spot overseeing the cash cow).

:: ::

I think that the above is increasingly relevant to describe the economy of the UK and, to a lesser extent, that of the US, which are increasingly dominated by the financial services industry.

That prevalence of the financial world is no longer a matter of dispute. In fact, it is celebrated with increasingly euphoric words in most business publications and current affairs books. There is an air of hegelian (or marxist) inevitability about the triumph of markets and Anglo-Saxon capitalism, led by the powerhouses (banks, hedge funds and assorted accomplices) in the City of London and on Wall Street.

But just as Britain led the world into industrialisation, so now Britain is leading it out. Today you can still find a few British engineers and scientists making jet engines and pharmaceuticals—and doing rather well at it. But many more are cooking up algorithms for hedge funds and investment banks—where in many cases they add more value. The economy has boomed these past 15 years, as manufacturing has been left behind and London has become the world's leading international financial centre. Britain's deficit in manufactured goods is hitting record highs. But so are the capital inflows.

The Economist (editorial, this week)

The collapse of the trade balance, linked to the long term (relative) decline of the manufacturing sector is indeed one of the most noteworthy commonalities between the US and UK economies, along with the reliance on the sale of services, in particular financial services:

(from this text, which deserves a diary of its own)

Unfettered finance is fast reshaping the global economy (by Martin Wolf, senior editor, Financial Times, 19 June 2007)

It is capitalism, not communism, that generates what the communist Leon Trotsky once called “permanent revolution”. It is the only economic system of which that is true. Joseph Schumpeter called it “creative destruction”. Now, after the fall of its adversary, has come another revolutionary period. Capitalism is mutating once again.

Much of the institutional scenery of two decades ago – distinct national business elites, stable managerial control over companies and long-term relationships with financial institutions – is disappearing into economic history. We have, instead the triumph of the global over the local, of the speculator over the manager and of the financier over the producer. We are witnessing the transformation of mid-20th century managerial capitalism into global financial capitalism.

Above all, the financial sector, which was placed in chains after the Depression of the 1930s, is once again unbound. Many of the new developments emanated from the US. But they are ever more global. With them come not just new economic activities and new wealth but also a new social and political landscape.

The ability of the financial world to generate high returns on capital has fuelled the massive financial boom we've been in for most of our lives and which has so transformed our economic landscape. By demonstrating regular high returns possible, it has generalised the requirement for such returns in all economic activities, and thus the need for constant restructuring of businesses, for cost-cutting, offshoring and, often, for the wholesale dismantlement of whole sectors of activity that could not generate the required profitability.

Sectors like manufacturing have seen their share of economic activity shrink , as many activities were outsourced, offshored or eliminated altogether. The trade balance has gone south, and jobs have disappeared under relentless pressure for higher competitivity.

This might not be so bad if the jobs created in the service sector, and in finance in particular, were as numerous and high paying - and durable as those in the industry. All statistics on median wages suggest that this is not the case: median wages have been stagnant over the past couple of decades, with a stark increase in inequality. Increased wealth (as measured by GDP or average income) has been captured by a small number of people at the top, something strikingly similar to the remuneration structure of big investment banks and the rest of the financial industry.

The inequality might be acceptable if there was a prospect of reversing it as increasing prosperity is created (this is essentially the argument of Martin Wolf and other proponents of globalisation), but is in fact a structural and necessary feature of the system. Globalisation has spawned a whole ideology about efficient allocation of resources, optimisation of investment decisions, and the invisible, but natural, and morally neutral hand that allow markets to reveal the best price at any given moment for any item. It brings along a vicious hate for taxation, and sees government, and its core functions, redistribution and regulation, as something to be avoided and eliminated as much as possible, being fundamentally anti-efficient. It also brings the core idea that only things that have a price have a value, that everything can be measured in dollars, and that what isn't so measured has no worth nor legitimacy. It fosters a culture of individualism ("freedom") and consumerism ("success"). Social policies (which require distribution), common goods (which need to be defined and managed) and non-economic measures of well-being are spurned and actively fought. Growth is paramount.

While I think that this is more than enough to disqualify neoliberalism (as I have mande abundantly clear in many earlier diaries), there is actually worse. and that's where the concept of the 'Dutch disease' comes in.

:: ::

One of the core triggers of the Dutch disease is that the resource sector which has unbalanced the economy eventually shrinks as the underlying resource is depleted. In our case, the industry that causes activity-substitution (finance) can appear to be able to grow ad infinitum, without any limitation to actual resources. Just borrow more money to do bigger deals and enjoy the very real income taken along the way. Find another lender to refinance or another buyer to re-purchase, and you're home and dry. Or just do deals where the actual burden to repay is pushed back into the future (and you won't be around anymore if and when they falter). Thus the City and Wall Street can appear to generate more jobs than the industries they kill off destroy. In addition, with New York and (even moreso) London dominating finance worldwide and not just domestically, they can create jobs and capture wealth locally while imposing their requirements on companies and activities in other countries, thus creating little or no pain at home (see the graph below on how the UK as a whole can be defined as an offshore financial center, just like any Caribbean Island...)

So, while to some extent parasitic on other economies, it might at least make sense for the UK and the US - as nimbler, faster, smarter economies, they reap the benefits of globalisation and are understandably promoting their interests by defending globalisation. And hey, they are providing real services to investors around the world, who are "free to seek out the best returns around" and "voting with their feet/money."

But in fact, this is but a transitory phenomenon, underpinned by a single underlying factor: the long decline of inflation, and thus of interest rates, over the past 25 years.

We've been living in a long, massive bull market for bonds, born off the inflation of the 70s, and the grand ride which was made possible by the new financial tools offered by the IT revolution and by Reagan/Thatcher inspired deregulation is about to come to an end. The returns we've grown used to were just a long but temporary phase in a natural long term economic cycle, and, despite the final boost provided by 'Bubbles' Greenspan in the last few years, not something that can be sustained on a permanent basis. Put simply, it is not possible to generate 15% per annum returns on capital forever when the underlying economy is growing only by 3%.

As the interest rates go up again, and liquidity tightens again, the financial industry is going to run out of the underlying resource that sustained it - easy and plentiful access to money. As that constraint imposes its implacable discipline, and the financial industry finds out that it no longer has anything to offer to its clients (trading stuff, or trading imaginary products remotely backed by stuff, will no longer be so much more profitable than making stuff), it is going to shrink and withdraw. And the countries and cities that have bet on that industry for their prosperity will face the resource curse, as their core activity loses steam and alternative activities, having being neglected for so long, no longer exist or are too small or uncompetitive to make a difference, and cannot pick up the slack. This is what I propose should be called the Anglo Disease.

As this reversal has not yet taken place, and as this prediction threatens the livelihoods of many of my readers, I expect to be mocked and dismissed, but bear with me and help me work on the concept.

I hope to expand on the idea in further diaries, and I hope to get your feedback (including questions if you're not sure you understand what I wrote - maybe I am actually talking nonsense, for all my apparent trust in my assertions). The topic ties in neatly with the critique of neoliberalism I've been trying to write about in the past, to our unsustainable focus on growth as a sign of success, to worries about resource availability, and to the "inevitability" of the Western model - or rather of its financial brat, the Anglo-Saxon capitalist market economy, so there is a lot of matter to write about, and I hope you'll join in the fun.