Ruminations on Russia

There is an desperate desire to link energy security and Israel and Hizbollah's attempt  to drag Lebanon (back) in to the dark ages.

Michel Chossudovsky at The Canadian Center for Research on Globalization is merely the latest to make the attempt and provides one of the worst examples of the genre which will allow me to make the most fun of it.

Hat tip to Sharp and Sound.

Firstly the relationship between the conflict and Lebanon and energy security; none, absolutely none and grow up.  Israel has a population that is approximately the same size as Scotland - 6mn and has none of Scotland's reserves.  Lebanon by size is half the size of Israel.  It also has no meaningful hydrocarbons - indeed its main industry is reconstruction; with apologies to The Now Show.  The main sponsors of both sides, the US and Iran, are either the world's largest consumer or one of the largest producers.  The chance of a global conflagration over a battle between Israel and a bunch of Shia thugs is very low.  So we might miss some very clever security software and Intel may be able to downscale some of its production capacity.  Not entirely sure what Lebanon uniquely contributes to the world economy, other than building contracts.  Humus does not count.  If you want to bring Syria in to the equation please provide examples of how its destruction will impact the global economy.  The only reason that the current conflict might seem more important than it actually is has something to do with Israel's excellent PR machine and the number of civilians suffering from collateral damage - that's dying.

And so to what is wrong with Chossudovsky's article.  Well where to start.

A synopsis might help you;

• Baku - Ceyhan is a global attempt to tie Israel in to the global energy security infrastructure so that Caspian oil can get to Asia and not to either Europe or the US.
• Israel is part of the pro-US, anti-Russian energy security policy - which makes GAZP's moves in to Israel slightly baffling.
• Russia has been weakened by Baku-Ceyhan - as you will have noticed during G8
• Israel will determine where Caspian production goes.........“The strategic implications of this re-routing of Caspian sea oil are farreaching.”  You don't say - not sure that anyone other than Israel knows anything about this.
• This will undermine Russia's attempt to control oil and gas pipelines to Asia; which will in any event come from Kazakhstan.

Short version - this is specious nonsense.

[composed and posted with ecto]

Technorati Tags: Energy, Gas, Oil, Israel, Russia

Both UFG and Morgan Stanley issued updated notes on Comstar UTS after they reported 1H (?) numbers.

Both focused almost exclusively on Comstar's failure to conclude the acquisition of the balance MGTS which is owned by the Government.

They managed to hide the almost complete failure of a very expensive marketing campaign to acquire pay-TV subscribers by including the real RUR/$ exchange rate as opposed to, well what precisely?  One of the houses managed to cut its EOY pay-TV subscriber subs in half.  That's right - they are precisely 50% less than forecast just three months ago - but that's OK because a new marketing campaign which does not focus on pay-TV might attract more broadband subscribers.

Having previously decided that most of Comstar's competitors would disappear, which their models continue to show, they are beginning to admit that the competition looks stronger than previously admitted.  Albeit that they believe that one of the greatest threats to Comstar's broadband business is unbundling of the local loop.

In case the analysts ever get to read blogs - guys you need to take your head out of your ass.  None of its competitors gives a flying f**k whether the local loop is unbundled this year, next year or indeed next century.  ADSL is an old solution which is fairly irrelevant to the Moscow market.  Do a straw poll on customer satisfaction, look at the up/down speeds which Comstar offers, compare this with its competitors and understand why this matters when offering more than just Internet.  Understand the capex/opex costs in comparison with its competitors. Look at the network reliability, try to understand why subscriber uptake for pay-TV has been so poor and why it will continue to be so whilst companies slavishly follow US pay-TV models.

And then finally ask yourselves whether management is capable of responding to these challenges.  I would suggest that Comstar might well be able to acquire MGTS - that is a core management talent.  Running the business is much harder.

[composed and posted with ecto]

Technorati Tags: Broadband, Comstar, Russia

This has been sitting in my too-be-blogged pile for a while.

At about the same time as the FT reported on the lack of good management talent in China and India in “How India and China risk being stifled by a skills squeeze.” The FT's sister paper in Moscow/Russia Vedomosti reports that Moscow's top management are the third most expensive in the world, and that's before you factor in competence/performance (below in Russian only.)

When MTS, one of Russia's top 2 mobile phone companies, started to face up to slowing growth it shuffled its management twice in an attempt to work out how to keep costs under control.  A rising tide has hidden many management faults.  The economy is growing considerably faster than the pool of management talent available. In trying to hire a marketing director for our broadband business we are faced with two problems; those with experience are excluded because their experience has taught them to do the very things we are seeking to avoid, and secondly they refuse to be paid by results.  So you have to take a punt on someone enthusiastic and bright who has not been tainted by gaining experience in a badly-run competitor.  Marketing and sales is one particularly weak area; I would imagine that all areas of retail suffer from the same paucity of talent and skill as Russians continue to ignore democracy with their wallets.  Controllers and accountants are one potential exemption from this rule; except that its very difficult to find one who is able to think outside the very small accounting box.

Expats are no panacea.  In start-up business its almost impossible to parachute someone in and make them effective inside one year unless they are long-term Russia-residents and fluent Russian speakers.  In larger multinationals expats will continue to provide a skill transfer service.  Albeit that I believe that in many of these companies there is an almost complete management disconnect between senior expats and the Russians running the day-to-day business.  I am sure that senior management in P&G are unaware that its brand managers are regarded as some of the most corrupt in the FMCG industry.  Increasingly expats no longer price themselves out of the market in price terms but there are too many instances of failure to overcome the belief that a talented Russian is worth considerably more than an expat.

[composed and posted with ecto]

[composed and posted with ecto]

Technorati Tags: Company, management, Russia

Which is a shame as I was looking forward to an evening on Red Square with Eric Clapton.  The MT's report suggests that the Kremlin withdrew permission:

Eric Clapton's concert on Red Square has been canceled after authorities abruptly withdrew their permission, the rock singer and guitarist's publicist said.

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Technorati Tags: Corruption, Clapton, Russia

The Copydude left an intelligent comment on my FT-comment post and linked to a delusional piece of writing by Peter Ziehan; Russia Where Now? He asks whether may Russians have ever heard of the “Andropov Doctrine” - Google certainly has not.

I am concerned that this really is mainstream thinking in the US/UK.  It is written in terms that only Cold War warriors use and sees relations between nations as being essentially competitive/zero-sum-game.  I have posted many times that negotiations in Russia are frequently seen as such; I had naively thought that the West's view was more win/win.  Clearly not.

Many American commentators fundamentally misunderstand the energy security dialogue.  Their gas comes from friendly shores, Texas, Oklahoma or Canada (it was a joke - smile) so security of gas supply across a series of inter-connected pipelines is not an issue.  Europe and Russia need to create a common security policy born of a common understanding; and ignore mindless comments from external commentators.

There is just so much wrong with this article that I just despair.

[composed and posted with ecto]

Technorati Tags: Energy, Gas, Russia

The child lies like a rag doll - a symbol of the latest Lebanon war:

[composed and posted with ecto]

Technorati Tags: Israeli, Palestine, Fisk, Lebanon, Warcrimes

The very smart and very right Jerome a Paris responds to Philip Stephens op ed in today's FT.  The FT piece requires subscription if you read all the quotes in Jerome's piece you get the whole article and a commentary.

Anyway here it is; European Tribune - Temper tantrum.

The collective ET reply is posted below:

Sir,

In his column today (“The west folds before Putin's bluff”), Philip Stephens sees the energy relationship with Russia as a zero-sum game where one party has to lose, and he finds fault with our political leaders for giving up without a fight.

However, he does not make clear in what precise fashion this is a win-or-lose situation, or what fighting harder (or “calling Putin's bluff”) would entail. And beyond that, this article is revealing of an unacceptable attitude to sovereign foreign nations and the natural resources on their territory.

It is no coincidence that this is happening at a time when the UK and North America are suddenly losing their natural gas self-sufficiency and look to a future where, like Japan and most European countries, they need to import a significant portion of their gas, in particular from Russia. As energy becomes scarcer, we have the choice to either use less of it or to deal with those able to provide us with our needs. “Dealing with” does not mean “ordering around” or “being sanctimonious to”. It means listening to, and in all likelihood taking into account what is said. And if we don't like it, then we can always go back to option one: using less energy.

Describing the Putin years as a “steady drift from nascent democracy to authoritarian kleptocracy” is also disingenuous. A “steady drift from chaotic kleptocracy to authoritarian kleptocracy”, a net positive for most Russians, would be more appropriate. “A steady drift from cowed-impotent-and-submissive to uppity-and-impossible-to-ignore” might be an even better label from the perspective of Western elites and explains their current annoyance (as expressed in Mr Stephens' column)...

To date, Russia (and before it, for many years, the Soviet Union) has been an extraordinarily reliable supplier of gas, and there is no reason to believe that this will change. Gas infrastructure creates co-dependencies and neither party can use the mutual dependency to any lasting profit - both lose out from conflict. Russia is currently benefitting from much higher oil and gas prices, caused by our reckless push for ever more energy to be burnt, and is reacting mostly benignly to what can only be described as the self-indulgent tantrums of a spoilt kid. We have no God-given right to the energy resources of the rest of the world, and Russia, despite the supposed decline or weakness imputed by Mr Stephens, is unlikely to have its hand forced.

It's time to drop the self-righteous tone and speak in good faith with Russia - or to work on reducing energy demand.

Best Regards,

Jerome Guillet
Editor, European Tribune

Note: a longer comment on Mr Stephens' article can be found on European Tribune, at http://www.eurotrib.com/?op=displaystory;sid=2006/7/18/11939/9588

“Some simplistic sentences undermine your underlying point.

If turned on its head you might want to ask why the Bush, Chirac and Blair and Koizumi folded like proverbial deck chairs. VVP is genuinely popular. He is not a lame duck despite an expiry date that is similar to Bush and Blair.  Popularity may not be a good measure of democracy.  Which should make Bush and Blair's foray in to Iraq intensely democratic.

Russia never had a nascent democracy.  It briefly had a populist drunkard.  Russians voted for roubles in pockets ahead of a desire to vote for an egomanical local dictator (now otherwise foundly remembered as Governors, previously thought of as truly organised crime.) You may disagree with the people's choice, but they made a concious descision that a TV made somewhere other than Belarus was a step in the right direction and and a Ford Focus ahead Zhiguli was a giant leap - now they just have to learn to drive.

I will agree that Russia is increasingly an authoritarian kleptocracy - this however is better than a disorganized kleptocracy that is now foundly remembered in the West as a nascent democracy.

There is much that is very wrong with Russia; but by fixating on democracy and kleptocracy you allow VVP's pair of 7's seem like a strong hand.

It may also be worth trying to square the sentiment that Russia does not have the capital to develop Shtockman (for example) with your previous assertion that Russia is strong due to the high natural resource prices.”

[composed and posted with ecto]

Technorati Tags: Gas, GAZP, G8, puppy, Russia

The Sunday Business in quite a good article on the simultaneous over-production and over-pricing that characterizes the French wine business today.  The Siege of St Emilion.

Meanwhile here in not-so-sunny Moscow there is no wine on the shelves (that's none).  Friends coming around for dinner are now cautious about over-consumption of our rapidly declining stocks.  The likelihood is that the cellar will be bare before our supplier will be able to sell us more.

Only in a business controlled by the FSB could you manage to have a world-wide glut and a domestic shortage.

[composed and posted with ecto]

Technorati Tags: Corruption, Russia

It would appear that GAZP agrees with the analysis.  Two caveats; first its an article by RFE/RL which means that it has a point to make.  Secondly, it is in GAZP's interest to point out that domestic pricing is too low to stimulate demand.  What both this article, and the GAZP study, and the UBS analysis show is that Russia's Energy Strategy is already outdated 3 years after it was published.

Despite my snide remarks about Claude Mandil's concerns about lack of investment in the Russian gas industry, it would appear that 2008-2015 could be a worrying period for one of European or Russian domestic gas supplies.

UBS' Russia gas analyst published 12th July a long (125 page) analysis of the Russian gas supply demand dynamic.  He says little that is new to anyone that is familiar with the Russian/FSU gas industry.  What he has added are a raft of statistics around which proper discussions can be held.

I don't believe that I am fundamentally breaking the terms of my agreement with UBS by quoting the second para of the executive summary:

“Russia's gas market and export supplies are at an inflection point, headed for dramatic change with far reaching consequences.  The scale at which these trends are developing and affecting the sector are being largely underestimated, in our view.”

Their conclusion is that the supply/demand equation is just in balance (“tightness means ”crisis risk“ is real”).  They believe that domestic demand, and hence domestic pricing, is and has been under-estimated (which is definitely my view).  In order to stimulate supply from independents (i.e. not GAZP) the regulated domestic price needs to rise faster than currently forecast.  As they point out UES already purchases 1/3 of its gas on the (quasi)-open non-regulated market.  In the Volga Region, for example, FOB well-head gas prices are about 40% higher than the regulated price.  I can confirm that this is stimulating investment.  UBS forecasts that non-GAZP producers will account for a 27% share in total production in 2015, up from 15% today, and will account for 43% of domestic sales.  2015 is an unimaginably long time frame in a Russian context, but the trend is clear even if forecasting that far out is fairly meaningless.  Their forecast for domestic price rises are the most aggressive of any Russia-based investment bank; forecasting netback parity (i.e. it's equally attractive to sell domestically vs export) by 2011.

Importantly, in analyzing the the sensitivities substantially all the risks are on the downside; supply/demand is “tight” and meeting the expected 90BCM increase in demand will require “100% of Gazprom's targeted 560BCM of output, 100% of Central Asian 70BCM of export potential and just below 90% of what we estimate Russian independent producers can technically produce by the end of the decade - 148BCM.” That's tight.

The upside to this scenario is as yet undiscovered reserves or lower demand.  To be clear they are not saying that there is not a lot of gas in Russia - they are saying that it's not market ready.  The downside risks include the risk that C. Asian gas heads anywhere but through Russia in the next 5 or so years.

Their conclusions regarding supply to China put the EU/Russia energy spat this year in to context - there will be no W. Siberian gas going to China (or east) in the next decade.

[composed and posted with ecto]

[composed and posted with ecto]

Technorati Tags: Energy, FSU, Gas, GAZP, Russia

UBS' Russia gas analyst published 12th July a long (125 page) analysis of the Russian gas supply demand dynamic.  He says little that is new to anyone that is familiar with the Russian/FSU gas industry.  What he has added are a raft of statistics around which proper discussions can be held.

I don't believe that I am fundamentally breaking the terms of my agreement with UBS by quoting the second para of the executive summary:

“Russia's gas market and export supplies are at an inflection point, headed for dramatic change with far reaching consequences.  The scale at which these trends are developing and affecting the sector are being largely underestimated, in our view.”

Their conclusion is that the supply/demand equation is just in balance (“tightness means ”crisis risk“ is real”).  They believe that domestic demand, and hence domestic pricing, is and has been under-estimated (which is definitely my view).  In order to stimulate supply from independents (i.e. not GAZP) the regulated domestic price needs to rise faster than currently forecast.  As they point out UES already purchases 1/3 of its gas on the (quasi)-open non-regulated market.  In the Volga Region, for example, FOB well-head gas prices are about 40% higher than the regulated price.  I can confirm that this is stimulating investment.  UBS forecasts that non-GAZP producers will account for a 27% share in total production in 2015, up from 15% today, and will account for 43% of domestic sales.  2015 is an unimaginably long time frame in a Russian context, but the trend is clear even if forecasting that far out is fairly meaningless.  Their forecast for domestic price rises are the most aggressive of any Russia-based investment bank; forecasting netback parity (i.e. it's equally attractive to sell domestically vs export) by 2011.

Importantly, in analyzing the the sensitivities substantially all the risks are on the downside; supply/demand is “tight” and meeting the expected 90BCM increase in demand will require “100% of Gazprom's targeted 560BCM of output, 100% of Central Asian 70BCM of export potential and just below 90% of what we estimate Russian independent producers can technically produce by the end of the decade - 148BCM.” That's tight.

The upside to this scenario is as yet undiscovered reserves or lower demand.  To be clear they are not saying that there is not a lot of gas in Russia - they are saying that it's not market ready.  The downside risks include the risk that C. Asian gas heads anywhere but through Russia in the next 5 or so years.

Their conclusions regarding supply to China put the EU/Russia energy spat this year in to context - there will be no W. Siberian gas going to China (or east) in the next decade.

[composed and posted with ecto]

Technorati Tags: Energy, FSU, Gas, GAZP, Russia

The press, both Russian and western, is upbeat on the Rosneft IPO.  Today's report in the FT is a good example;

“People close to the IPO on Tuesday expressed confidence in the deal, saying the order book would close on Wednesday, a day earlier than planned.”

And the FT's Monday back page again made reference to the Caveat Emptor string of posts, commenting,  in particular, on my last and very short post (something about having a day job) where I suggested that “beware was overcoming buyer.”

I stand by my point but will remake it.  There is no way that the Rosneft IPO would be populated by Abramovich, BP, Temasek et al, if institutional buyers were lining up to buy.  As the Lex column points out - “with friends like this who needs enemies?”  An institutional investor buys a share and waits for/expects capital appreciation.  BP et al buy a share and expect something else - a pipeline from Kovytka, for example.  The value of the option is probably/undoubtedly greater than Rosneft's overpricing.  The Kremlin will not enjoy having to make unrelated agreements to get the IPO done.  And mostly they won't enjoy it because it is their preferred negotiating strategy.  In case my point is not clear - the Rosneft IPO was over-priced and under-supported.  Favours have been called in, Abramovich, and agreements have been made, BP, to get the deal done.  The book maybe oversubscribed but if one “strategic” backed away at the last moment there would be a gaping hole and very few institutional investors to fill the gap.

The short-selling hedge funds must be licking their lips at the prospect of a large company with a very small real float and investment banks who will be desperately trying to support the price.  Expect first day/week volatility.  I would not be surprised if many of the specialist Russia/EMEA/energy funds are sitting on the sidelines waiting to pick-up stock at closer to fair value at some point in the near future.

I have no evidence for any of the above.

[composed and posted with ecto]

Technorati Tags: Energy, IPO, Rosneft, Russia

From the RSS-friendly ROMIR.  One half of the “they pretend to pay us and we pretend to work” equation still holds true.  Always remembering that work is something that has to be fitted in around cigarette and tea breaks .

The pay thing though is getting out of hand.

Office workers are actively using Internet at work for personal needs:
June online-survey showed that activity of 76% of Internet-users is connected with a computer. 90% of them admitted using office computer and Internet for personal needs. In majority of cases the respondents assure that they spend not more than half an hour a day for browsing Internet out of personal interest. The respondents spend minutes and hours reading news in Internet (86%), searching for information, not linked with the work  (80%), talking to friends via ICQ and other programs (60%)...

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Technorati Tags: work, Russia

It would be quite funny if he went off and spent it.  Galmond the money, Reiman his wife.

Русские миллиарды - Сколько стоит Джеффри Гальмонд:
Российский телекоммуникационный бизнес принес давнему знакомому российского министра связи Леонида Реймана – датскому юристу Джеффри Гальмонду состояние под $2 млрд. Это следует из результатов оценки 15% акций “Телекоминвеста”, принадлежащих “Северо-Западному телекому”. С такими деньгами Гальмонд мог бы занять достойное место не только в первой сотне русских богачей, но и в первой десятке датских.

[composed and posted with ecto]

Technorati Tags: Reiman vs Alfa, Russia

I am not going to translate the article below as it makes no sense in the original Russian. Highlighting one of the big issues with Russian business reporting - the reporters don't understand what they are reporting.

If you get to read the article you will discover Fairlie Investments is investing $10mn now for what will end up as a 45% stake.  An un-named Russian will get 30% for an assumed $6.67mn investment.  Thus the post-money would be $22.2mn and the pre-money $5.6mn.

Then lower down the article Sveta (the reporter (sic)) discusses possible valuation - having already done so without understanding it.  They believe that the business is worth $10mn or $400/sub or 20 months of revenue.  Somewhat down from the $1,000/sub Net-by-Net was asking for a month ago.  I'll guess that it would equate to 6-7x trailing 12 months EBITDA.

You would have to pay $10k for an analysis worth half of the above from J'son.

[composed and posted with ecto]

Technorati Tags: Broadband, Cable, Internet, investing, moscow, valuation, Russia

Looks like beware is overcoming buyer.

The IPO market has weakened.  Rubbish is being priced accordingly.

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Technorati Tags: IPO, Oil, Rosneft, Russia