Ruminations on Russia

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

oh well that's the end of summer.

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.

Technorati Tags: Corruption, Russia

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

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.

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.

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."

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

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.

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.)

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.

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.

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.

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.

Technorati Tags: inflation, Russia

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.

Technorati Tags: Russia

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%.

Technorati Tags: Russia

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.

Technorati Tags: Corruption, Russia

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.

Technorati Tags: Corruption, Russia

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.

Or for Russia but whisper that quietly....

My return to the office, leaving SWMBO and the increasingly cute cost centre #1 ("CC#1") in London has allowed me to review the thousands of rss feeds that have piled up in my feed reader.  (Actually this is a fallacy SWMBO is CC#1 and CC#1 is therefore CC#2 but you can't write about your wife that way.)

Which is why I am now posting (again) on GAZP-China relations.  A year ago the press was full of doom and gloom stories of Russian gas going east to China.  Today the story below is that Russia would rather have the gas for its own regions - albeit that this is as much a story about squeezing Exxon to give up on Sakhalin 1 as it is about domestic gas shortages.

At the same time as GAZP is a. trying to reduce gas supplies to China, and China is trying to keep the gas price down, Eni and GAZP are signing a MOU to study a southern gas pipeline in to Europe - again bypassing New Europe.

All of which goes substantially unreported by the mainstream press.

20th June 2007
By Clare Watson
Russia's state-owned gas monopoly Gazprom has told the Kremlin to cancel a contract to supply China with 80 billion cubic meters of gas a year, as it would leave Russia without sufficient gas for its own needs, the BBC has reported.

The gas would have been sourced from fields in Siberia and would have been exported from US company ExxonMobil's Sakahlin-1 development on Russia's Pacific coast, the BBC revealed.

The publication cited Alexander Ananenkov, Gazprom's deputy chief executive, as saying: "We consider it necessary for a directive to be issued and Sakhalin-1 gas to be sold to Gazprom so we could supply gas to Russia's regions and for the gas not to be exported as proposed by ExxonMobil."

Gazprom's demands have renewed fears that the country is wielding its rich oil and gas reserves as a political tool, while monopolizing the exploration and production projects being carried out on its territory. If the Kremlin agrees to cancel the agreement with China, the country would be denied access to Russian energy resources, the BBC said.

Although Mr Ananenkov is reported to have said that the state's four far eastern regions alone require more than 15 billion cubic meters of gas a year, China is also in desperate need of energy supplies because of its rapidly expanding economy.

According to Reuters, Gazprom said in June 2007 that the company has been in talks with ExxonMobil in the hope of acquiring all of the gas from its Sakahlin-1 project.

Technorati Tags: Gas, GAZP, China, Russia

And suddenly more on Alfa vs Reiman.  A very good overview of the legal proceedings without too much rehashing of the really old stuff.

Law.com - Arbitrators Tackle Russian Corruption in Fight Over Cell Phone Operator:

Arbitrators Tackle Russian Corruption in Fight Over Cell Phone Operator

Michael D. Goldhaber
The American Lawyer
June 20, 2007
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Image: Photodisc Red

Both sides got dirty in the tussle over Russian cell phone operator OAO MegaFon. In Switzerland, industrial spies searched an arbitrator's garbage. In Bermuda, a retired British spy turned private eye persuaded a gullible KPMG International accountant to turn over confidential company information via a "dead drop" in the basket of his moped. And those are most likely the tactics of the (relatively) good guys.

The case pits Russian conglomerate Alfa Group Consortium and its allies against a Bermuda investment vehicle called IPOC International Growth Fund Limited. The prize: a stake in MegaFon worth up to $2.5 billion today. IPOC accuses Alfa of directing the dirty tricks in this case. But Swiss arbitrators and judges have found IPOC to be guilty of something much worse than dumpster diving. They have declared IPOC to be a vessel for Russia's minister of telecommunications, Leonid Reiman, to launder money stolen from the Russian people. Reiman, say the Swiss arbitrators and judges, abused his office by issuing a valuable cellular license to a company that he himself controlled, then parked the proceeds in IPOC.

The fiercely fought dispute takes arbitration into new territory. Long after the James Bond sideshow is forgotten, the MegaFon arbitration will be remembered as the first case where arbitrators broadly evaluated a party's criminality. Rather than merely contesting IPOC's interpretation of the contract, Alfa and its allies tried to defeat IPOC's claims by arguing that IPOC violated Swiss, British and Russian criminal laws with a money laundering scheme. Arbitrators often judge whether the underlying contract in a dispute was obtained by bribery -- but the Zurich tribunal in the MegaFon case went further. It ruled that IPOC could not reap the benefit of the disputed agreement because IPOC is a criminal organization and its money was tainted. "We haven't seen any precedent," says Swiss firm Homburger's Balz Gross, who represents an Alfa ally in the case. "It's the first award to uphold a money laundering defense."

In effect, the Zurich panel conducted a private judicial investigation into the crime of money laundering. To some lawyers this is admirable, and to others it is outrageous. "You're at the edge or beyond," says one IPOC lawyer, "of what a private adjudication system can do."

The case grew out of two option agreements that IPOC signed in 2001 with a holding company called LV Finance Group Limited. The agreements gave IPOC the right to buy from LV certain telecom assets that now form a quarter of MegaFon. By 2003, when IPOC decided to exercise its option, the value of the stake had risen considerably. According to IPOC, LV tried to extract a higher price from IPOC; when IPOC refused, LV ignored the agreement and sold the stake for a higher price in a series of deals that transferred control to an Alfa affiliate. The stage was set for a struggle between two Russian potentates: Mikhail Fridman, the oil tycoon who is chairman of Alfa, and Leonid Reiman, the telecom minister with blurry ties to IPOC.

Soon after the sale to Alfa, IPOC filed three arbitrations with the help of Winston & Strawn, two in Switzerland and one in Sweden. In Switzerland, IPOC aims to enforce its option agreements with LV. In Sweden it argues that Alfa violates MegaFon's shareholder agreement by owning a big stake in MegaFon's rival Vimpel-Communications. With a pithiness that would do credit to Tony Soprano, Reiman's lawyer expressed Reiman's position in a message that was secretly captured on videotape (and later presented into evidence in related litigation): "He doesn't want fucking Alfa in MegaFon. That's it."

Alfa and its allies turned to the best Western legal talent that money could buy. In Switzerland, LV hired the local firm Homburger and the London office of Weil, Gotshal & Manges. (Weil was recently replaced by London's SJ Berwin, after Weil's partner on the case withdrew for personal reasons and its senior associate on the matter switched firms.) In Sweden, the Alfa affiliate CT-Mobile retained Freshfields Bruckhaus Deringer.

While Alfa's law firms argued to the arbitrators that IPOC was laundering money -- and IPOC denied it -- other professionals did their work with cloak and dagger. While the subterfuge can't be squarely pinned on Alfa, it seems designed for Alfa's benefit. The fun began in May 2004, when the arbitrator Bernard Meyer-Hauser, chair of the Geneva panel, reported to the police that private investigators were going through his garbage and trying to access his personal bank account. The incident was traced to Kroll Inc., the investigative and security services firm. Although Alfa has retained Kroll for other needs, LV denied any connection to the dumpster dive. Indeed, LV argued that its opponent had hired Kroll in a setup to make LV look bad. LV asked the chair to recuse himself. Meyer-Hauser refused. LV then withdrew from the Geneva arbitration, choosing instead to focus on Zurich. The Geneva panel ruled in IPOC's favor in August 2004, finding that the smaller of the two option agreements was enforceable.

Meanwhile, more strange tricks came to light. Before the February 2006 trial in Stockholm, two mysterious individuals tried to get the arbitrators Yves Derains and Werner Melis involved in a conflicting case, and gave them inappropriate information on tactics in the MegaFon arbitration. The arbitrators did not take the bait, but IPOC views the affair as another ham-handed attempt by Alfa to suborn the judges.

Most sensationally, the private investigation firm Diligence Inc., of Washington, D.C., ran a sting operation infiltrating IPOC's auditor, KPMG, for much of 2005. A former British spy working for Diligence claimed to be still active and persuaded a KPMG accountant in Bermuda to turn over confidential IPOC materials, until the detective's cover was blown by an anonymous tip. Diligence was retained by the D.C. lobbyists Barbour Griffith & Rogers. Barbour Griffith refused to say which client it was acting for, but it works for an Alfa affiliate, Alfa Bank, on other matters, and Diligence billed the matter under an entry referring to "A Telecom," according to one IPOC complaint.

IPOC maintains that Alfa entities are responsible for all three episodes of espionage and has used documents obtained in Bermuda as evidence in the arbitrations. IPOC also alleges that Alfa has paid more than $11 million to witnesses, which IPOC characterizes as bribes for perjury. While Alfa and its allies deny any responsibility for the spying, they freely disclose million-dollar payments that, in their view, compensated witnesses for risking their personal safety and ruining their Russian business prospects. There's nothing illegal about such payments, say lawyers for IPOC's opponents -- and, they add, the witnesses have been deemed reliable by the Zurich arbitrators and the Swiss courts.

"Alfa's business practices might perhaps be described as muscular," says one lawyer for an Alfa affiliate, "but there's no comparison between that and massive state corruption." As it turned out, the most persuasive witness against IPOC would be produced by IPOC itself.

Momentum shifted dramatically in Alfa's favor in January 2006, when IPOC changed its story about its ownership. IPOC had long maintained that it was not owned by Reiman, the Russian minister, but by Reiman's lawyer, Jeffrey Galmond, a Danish-born independent practitioner in St. Petersburg. In an affidavit in a related proceeding, IPOC suddenly admitted that Galmond was not the owner. IPOC has never quite acknowledged that it is owned by Reiman -- Reiman vehemently denies it -- nor has it offered any plausible alternative. What seems to have compelled IPOC to change its story was newly disclosed correspondence from Galmond's law office in 2001-02 indicating that Reiman was the owner. IPOC's opponents say that it could no longer hide the obvious.

The new evidence produced dramatic results in the Swiss arbitrations. After a free-ranging inquiry that cost about $5 million, the Zurich tribunal ruled against IPOC. The panel found that "Proposed Witness No. 7" (Leonid Reiman) was IPOC's "sole beneficial owner." They also found that he had violated Russian and Swiss criminal law when, in 2000, he used his office as telecom minister to grant a cellular license to Telecom XXI, a company that he secretly controlled, then flipped the license for $40 million to Russia's OAO Mobile TeleSystems and funneled most of the proceeds into IPOC. The Zurich panel concluded that IPOC's option agreement with LV was illegal and therefore unenforceable. The Swiss national courts affirmed the anti-IPOC Zurich award in August 2006; last February they vacated the pro-IPOC Geneva award and remanded the case.

Elsewhere, the news for IPOC turned from bad to worse. In January, the Bermuda Monetary Authority initiated proceedings to "wind up" IPOC, signaling that Reiman's company may be too tainted even for an offshore financial haven. Bermuda seeks to seize IPOC's remaining assets, including an undisputed 8 percent stake in MegaFon. Finally, on April 30 in Stockholm, the third arbitration panel ruled against IPOC. The tribunal in Sweden chose to rest its decision on traditional contract grounds, finding the portion of the shareholder agreement relied on by IPOC to be invalid under Russian law. On the fraught question of money laundering, the Stockholm panel stayed above the fray.

Skeptics of the Zurich money laundering ruling note that the arbitral system has neither the tools nor the safeguards of a criminal justice system. "Arbitrators are not prosecutors," complains an IPOC lawyer. "They're guys like me sitting around a table in Zurich." Arbitrators lack criminal law expertise, have no investigative staff and have more limited power to enforce subpoenas. At the same time, the accused is deprived of the presumption of innocence and the right to a full appeal.

But objectively, there is much to like in arbitrators tackling criminal law. Arbitrators in high-stakes cases are often more talented and better financed than prosecutors or the judges that, in many jurisdictions, investigate cases themselves. Most crucially, arbitrators are independent; in many nations, prosecutors and investigating judges are not. Two Russian-controlled entities would not be settling their dispute in arbitration if they trusted the Russian justice system. Russia has yet to investigate Reiman, who is a friend of President Vladimir Putin. "Uncle Leonid," as he is sometimes called by associates, is wearing a Russian regulator's badge to this day.

Arbitration may not afford full protections to the investigated party, but neither does it possess the power of incarceration. Civil adjudication can also redress crimes, and where criminal law has failed, civil justice serves as a useful backstop. Surely arbitrators serve the public interest when they out a great secret crime. If the bad guy's enemies are not exactly good guys, that only thickens the plot.

Technorati Tags: Reiman vs Alfa, Russia

Someone dropped me an (anonymous) comment asking how Mr. Reiman was getting on in his ongoing campaign of lying through every pore in his body.  And I have to admit that I have been negligent in keeping you all up to date. Looks as though Mr. Friedman and his friends in the TNk part of TNK-BP have had bigger things on their minds and poor (figuratively of course) Leonid Rozhetskin has become the sideshow, or is that freak show, in lieu of the next steps - whatever they maybe.

Rozhetskin’s suit against Reiman: details:

Rozhetskin’s suit against Reiman: details

Telecom
April 25, 2007, Wed 09:23 AM Moscow

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Russian Information Technologies Minister Leonid Reiman seems to be having serious problems. Leonid Rozhetskin, MegaFon founder has accused him in threatening, money laundering, and attempts to manipulate the Russian legislation in order to get control over the operator. Mr. Rozhetskin asks for $500mln compensation. However, his “selective memory” puts in question the serious intention of his accusations.
An American citizen of Russian descent, Leonid Rozhetskin, has revised his suit against the Minister of Information Technologies Leonid Reiman. He filed the suit to the New-York South district court on the US Act against corruption in autumn last year. Mr. Rozhetskin demanded that Mr. Reiman should stop hunting the former and pay compensation as stated by the court. Later Mr. Rozhetskin himself estimated the damage caused to his business at $500mln.

In 2000 Leonid Rozhetskin founded the Moscow Sonic-Duo operator. He later exchanged the company’s controlling share for 25,1% of the Russian MegaFon operator. The man claims he had to face strong pressure on behalf of Mr. Reiman.

Mr. Rozhetskin said Mr. Reiman entrusted Jeffrey Galmond to deal with the share transfer process. Mr. Rozhetskin signed an agreement with Mr. Galmond to sell 77% of Sonic Duo shares to the IPOC fund “at a low price”. Mr. Rozhetskin claims when he asked Mr. Galmond who was behind IPOC, the latter replied: “It is Reiman’s structure”. Mr. Galmond now claims he is the IPOC owner and denies any Reiman connections to it. In December Mr. Rozhetskin allegedly singed an agreement under pressure to sell the remaining shares to IPOC. However, he later refused to fulfill the two agreements and left MegaFon in 2003. His shares went to Alfa Group.

Leonid Rozhetskin - the main troublemaker on the Russian telecom market
Leonid Rozhetskin - the main troublemaker on the Russian telecom market

Mr. Rozhetskin also explained the reason for adfressing the American court. He said Mr. Reiman uses American structures in his offshore networks. He allegedly owned the Luxemburg Complus Holdings through the US registered Alpine Strategic marketing. He had all the assets registered there in 1990s.

The Zurich Tribunal decision is the main argument in Mr. Rozhetskin’s suit against Mr. Reiman. Meanwhile, in his suit to the American court Mr. Rozhetskin didn’t mention the fact that the tribunal has declined his claims on Mr. Reiman’s threats recognizing hi as IPOC owner. The judges thought Mr. Rozhetskin had quite a “selective memory” if he remembers only some events that took place in winter 2001. besides they were surprised Mr. Rozhetskin, being an American citizen and a lawyer, didn’t inform his lawyers about Mr. Reiman’s threats.

As to Leonid Reiman, he said he was glad about Mr. Rozhetskin filing a suit to the new-York court, since the case will put an end to the slender which he came across the during the recent few years. IPOC also denies Mr. Rozhetskin’s accusations. “If Mr. Rozhetskin was forced to sell MegaFon shares, why was the agreement formed by his lawyers and they had the only sample, and we find it difficult to get a copy of it”, IPOC representatives say.

Technorati Tags: Corruption, Reiman vs Alfa, Russia

China is doing a great job of putting Europe's fears to rest over gas being shipped east.  With domestic unregulated gas prices rapidly approaching $100/mcm China is demanding to buy gas at less than that price INCLUDING transportation costs.  Don't worry the nasty bear will be warming you up and cooling you down for some time yet.

China Rejects Gazprom Gas Deal:

China Rejects Gazprom Gas Deal
Yet another round of talks on gas exports from Russia to China has fallen through after China’s CNPC refused last weekend to buy fuel from Gazprom at more than $100/1,000 cu. meters, a Kommersant source reports. Selling gas at $100 would be unprofitable for Gazprom which plans to sell it at $125 on the domestic market after 2011. Industry experts say that the first gas will be sent to China no earlier than in 2014.
Russian gas monopolist Gazprom and China’s CNPC discussed possible gas sales at the International Economic Forum in St. Petersburg last Sunday.

The two sides did not reach a final agreement as the Chinese oil and gas corporation tries to negotiate a lower price while hoping to buy fuel from Sakhalin-1, according to Gazprom foreign relations director Stanislav Tsygankov. Gazprom confirmed the schedule and amount of gas supplies from Eastern and Western Siberia, Mr. Tsyganvkov said. “But we won’t be building or producing until a purchase agreement is signed,” he underscored.

Russia is to send 48 billion of natural gas through two gas pipelines to China after 2011, under the 2006 intergovernmental agreement. Talks on gas price were supposed to finish in 2005 when the Chinese were pushing for $70 per 1,000 cu. meters. More talks in 2006 did not bring any results either. It appears that negotiations have not advanced much this year. A Kommersant source says CNPC now would not like to pay more than $100 for 1,000 cu. meters. Gas accounts for as little as 2.5 percent in the country’s energy balance. What is more, several large gas fields have recently been discovered in northern China, which makes an agreement with Gazprom less urgent.

Industry experts note that Gazprom will not be gaining any profit, selling gas at $100 while domestic prices are to reach $100 to $125 per 1,000 cu. meters of gas in 2011. “Gazprom’s shareholders would feel very negative about the deal to sell gas at $100 to China while you can sell it at more than $200 in Europe,” says Valery Nesterov, an analyst with Troika Dialog. Economists at MDM Bank expect gas exports to China to start no earlier than in 2014 or 2015.

Technorati Tags: Gas, GAZP, Russia

Tim, of White Sun of the Desert fame provides the perfect intro to the inflation problem - i.e. I was trying to find an intro, and here it is.

We have a boiler rigged up in the apartment linked to the shower and bathroom sink, but after meddling with it last night all we got this morning was a minute of hot water before it turned icy cold.  I’ve meddled some more this morning, opening and closing various valves and taps I found hiding in a recess behind the bathroom tiles, and I hope by this evening we will have enough hot water for a decent shower.  If not, we’ll be in for some harsh summer mornings.

Also unfortunately, the boiler does not supply hot water to the kitchen sink, meaning I either have to wash up with cold water or boil kettles and pour them into the washing up bowl.  Bear in mind that we (or rather, my employers) are paying $2,700 per month for this place, plus the electricity bill.

Once upon a time goods in Russia were cheap and shitty.  Then 1998 came along and they got cheaper, in the places that are doing well now the service improved.  Then the oil price hit $70/bbl and inflation really kicked in.  The statistically minded amongst you will point me to the statistics which show that it is slowly coming under control - I will point to people like Tim who are paying a very full market price for no hot water - a situation which may last for three months.

In my own industry core services have increased 3x since 2000-ish but the productivity and service quality has stayed the same.  Net net services which cost the same in cash are provided more slowly, less reliably and with less guarantee.  This cannot last.

Take it to the simplest level.  Go eat a meal in a top Moscow restaurant.  Once you have finished negotiating with the bank manager for an overdraft objectively compare the quality of the food (raw ingredients and cooking) with a comparable restaurant in London or New York.  The empirical evidence of a month in London and a month on the road in Europe and US would suggest that for the same price the quality of the food, but not the eye candy, was infinitely superior.

Technorati Tags: Russia

Reach for the bottle too often and it will eventually reach for you.

GAZP is probably the only company in the world with a policy for the CEO being zapoi-absent

Gazprom CEO Taken to Hospital
Gazprom CEO Alexey Miller has cancelled the trip to St. Petersburg Economic Forum. The reason is the health problems.
Miller’s hospitalization was confirmed by Gazprom briefer Sergey Kupriyanov. It was the scheduled hospitalization actually, but “some complications emerged in the course of the treatment.” Although Miller’s health is improving, Andrey Kruglov has been appointed an acting CEO till the end of this week, Kupriyanov specified.

Apart from addressing the Forum, Alexey Miller was to negotiate there with top-ranked officials of Qatar and top managers of Qatargas about a string of projects related to CIS.

Rosneft CEO Sergey Bogdanchikov won’t go to St. Petersburg either. But the absence of this official was well-expected, as Rosneft didn’t seal the sponsor agreement with arrangers.

The absence of Miller and Bogdanchikov notwithstanding, this business forum in St. Petersburg will be the most representative of the last few years, hitting several fold the 2007 summits in Davos and London in terms of attendance.

Technorati Tags: GAZP, Russia

Standing in lifts with people who ate pickled garlic for breakfast.

Technorati Tags: Russia

Heathrow Terminal 1 has been retro-designed to move the frustration coefficient as close to a maximum as is possible. It starts with bag drop, a misnomer. It takes longer to drop the bag than it used to check-in, compounded by waiting for a Cyrillic illterate check whether my visa is in date.

The next queue is for security and today was being organised (sic) by a recent arrival from the Indian sub-continent. Next queue: newspaper, chewing gum and water. And then we queued to take off.

Domodedovo, by contrast, had one 5 minute queue for passport control, a 5 minute wait for luggage and THOUSANDS of people moving very slowly and wearing short skirts.

As an aside, Britain's contribution to Russia since the 'collapse' is fat women wearing midriff-bearing tops. Please stop it, I'm tired and cranky.

Or in my case the other way around abandoning SWMBO and SWMBO2 in London on the Sunday after the Friday when Imperial Energy (IEC.L) was (mostly) reprieved from Mitvol's predations and TNK-BP was given two weeks to a. wait until the G8 summit is out of the way and/or b. for Alfa and Access to lower their price expectations for the TNK part of TNK-BP.  Meanwhile Rusal announces that it is has been given Kremlin clearance to list on the main board of the LSE.  To be fair that's not what it said but that's the truth.  The spin meisters who placed the story in the Sunday Times would have you believe, oh gullible reader, that by listing its shares, as opposed to GDR's Rusal would be subject to greater corporate governance and disclosure rules.  That is what is known as steaming heap of bullshit.

In case you doubt my skepticism, I urge you to read, by way of analogy, the story of Sports Direct which is still majority owned by its founder Mike Ashley.  Post-IPO Mr. Ashley still owns 57% of the business and is running it as he did when it was private - except of course he took GBP920 million out of the business and its currently trading 33% below its floatation price - oh and its Chairman just resigned.

If you can explain to me how Rusal will be exempt from the rule which says that majority shareholders can run the business anyway they like, especially as the Chairman will be its largest shareholder - I'm listening.  No seriously.  I have no objections to investors investing to make money but lets lose the bullshit - Rusal will be run for the benefit of its owners.  The other shareholders will own an option on capital appreciation - and absolutely nothing more.

And whilst I am it, more bullshit; Rusal is not raiding London investors, the Russian government is raiding TNK-BP and has raided Shell and any attempt to suggest that there is a link between the two is intellectually bankrupt.  The LSE is a market where you can play if investors want to play with you.  Rusal is the largest (?) aluminium producer in the world - investors want to play.  Russia is a (very, very long list) where national energy policy is the fig-leaf masking personal enrichment.  If investors want to rent a piece of Rusal, udachi, renting a piece of Russian natural resources is not really possible whilst the pre-election rapine pillage continues.  I contend that VVP has lost control of his cohorts and now is a very good time to keep your head beneath the parapet in case what's yours ends up in someone else's pocket.

Technorati Tags: Corruption, Rusal, Russia

For fear of debating why Russia and Europe are going through a monumental spat and who benefits and why, at the moment it would appear that comparative penis size is the Russian blog meme du jour.  As the ever acerbic Copy Dude (what did you do wrong to be de-CIS'ed?) puts it, this is the moral equivalent of Haze Homeful of Freshness Awards

copydude » A Fistful Of Winceyette:
A Fistful Of Winceyette

sleepwalkers

I am reminded that it’s time for the Fistful of Euros Satin Pyjamas Awards. When I worked in advertising, I used to promote the Haze Homeful Of Freshness Awards, which was a real mouthful too. But if you squirted your house daily with Haze, so that your eyes were red and streaming with CFCs when our mystery sniffer called, you could be the lucky winner.

It was always a golden rule of direct marketing that there should be consolation prizes. Obvious rationale: more prizes, more interest. So it was disappointing to see that only one blog per category will win the Satin Pyjama. There will be no scrapping over places for Winceyette or Polyester sleepwear.

Given the current acrimony over blog rankings, it’s rather brave of Fistful to introduce fresh controversy. Why are blogs grouped geographically rather than by genre? Specifically, how can the academic ‘European Tribune‘ hope to compete with ‘My Boyfriend’s A Twat‘ ?

Siberian Light chimes in with some more rankings.  Mental masturbation.  Particularly as this list includes the "never knowingly correct" Edward Lucas.  Edward has at last found his metier and was today writing in the Daily Mail (the link is to his own blog where, without much success he tries hard to downplay the fact that an Economist journalist is writing in the Daily Mail and yet still claiming that he means it.)  I assume that much of what he has written comes from the heart as the application of the head would have resulted in a different story.

Whilst the Ruminator was also bizarrely nominated for the Pajama awards, I have voted for English Russia as I would rather see pictures of cars in holes in the road than read my own drivel on energy security and other strange Russian goings on.

For those who know me, life is returning to normal - I'm blogging again - I wasn't going to bore you with nappy tales - but to be honest its more interesting and insightful than the Russian blogosphere.

Technorati Tags: blog, Russia

However shitty and miserable the weather is it does not rain before midday on 1 May.  Parade over, like magic the first drops of the rain pattered on the windscreen of the taxi taking me to the delights of spring in London.

OK, I don't know that they are in Switzerland, but you get my drift.

It's quite likely that I owe Jerome an apology for mischaracterizing his review of the Economist article yesterday.  If you have the patience to read to page 21 (of 22) of his article "Gazprom as a Predictable Partner.  Another Reading of the Russian-Ukrainian and Russian-Belarussian Energy Crises." (which can be found somewhere at www.ifri.org) he unequivocally acknowledges Russia's most significant energy issue;

"The real long term worry is the inability of Russia to produce enough oil and gas for its own internal demand as well as for Europe's growing needs." 

This may well be a divergence from his previously held views, it also goes further than mine.  Russia does not lack reserves.  For all the right economic and risk/reward reasons there has been precious little investment in exploration since the collapse of the Soviet Union, and for reasons of cash in the decade prior to its collapse.  The low-hanging fruit has had (more) modern extraction techniques applied to them and they are reaching, have reached or are beyond plateau production.  Every barrel of oil equivalent from now on requires real lon-term cash investment, not just cash flow expropriation.  Fifth Directorate Thugs are not well-schooled in the long-term. Why should they be when emerging market investors (viz LSE) are so happy to uncritically reward short-termism (Sir Nigel Rudd,  you are right) and there is so much cash floating around in lucrative transit trades (see below). So as I have written both here and elsewhere the issue is not reserves of either oil and gas but investment in them and, to expand on the headline, an investment climate that rewards long-termism in the natural resource sector.

One, of the many, difference between continental Europeans and the anglo-saxon world is the placing of conclusions at the end of worthy articles.  The assumption being that you have both the time and the inclination to wait to the end to be told the conclusion.  The more time-constrained anglo-saxons tend to conclude first and hope that you might just honour them with a cover-to-cover read.  In true continental European style I am hiding the conclusion at the end of this post.

Western commentators on Russian energy politics frequently (always?) confuse personal wealth grabbing with national policy.  National policy is a smoke screen for cash generation justifies by nationalism.  Empirical evidence points to personal wealth creation usurping the original point of nationalizing.  Jerome would point you to the more recent spats with Ukraine and Belarus which are about dividing the spoils and not about energy policy;  80-90% of all Russian gas headed of Europe transits Ukraine.  The December 2005, and subsequent 2006, Ukraine/GAZP/Turkmen gas deals played magical games with numbers whereby GAZP pays nothing to transit gas through Ukraine provided that it sells gas at sub-netback parity rates i.e. RosUkrenergo pays European prices, minus the sum of  transit fees on all gas transiting its territory.  Except that the transit fees on all gas transiting Ukraine accrues to individuals and not to GAZP (Bill are you listening). In addition to which the replacement of Yeltsin-era Red Directors (Vyakharev et al) with Fifth Directorate Thugs means that the institutional memory has been lost and any form of industrial competence has been buried under a pile of personal wealth creation.  As opposed to personal wealth creation competing with industrial competence.

And so, finally, to the point.  If Russia's energy policy is not driven by policy but by personal wealth creation what does that mean for Russia and Europe's energy policy?  Actually it's a little scary.  If you can drag yourself back to the quotation at the top of the page someone is going to be short of gas, and maybe oil, in the medium term.  Continental Europe has been building gas-fired power stations a plenty - they are cheaper and cleaner than their competitors, except of course nuclear which is either cleaner or very, very dirty.  Russia is amongst the worlds most inefficient energy users - it starts with the apartment fortichka and goes downhill from there - and it's energy base in European Russia is predominantly gas-fired.

The gap between Gazprom and Central Asian production in 2010-15 and European and domestic demand is expected to be 100 billion cubic meters p.a. (about $100bn in revenue terms.)  We are assured that GAZP relies on the European market today (which it does).  But if domestic prices achieve netback parity in 2011 (current assumptions) why go through the hassle of exporting gas when it can be sold in Russia's borders.  Because there is little rent on domestic sales - that's why.  Always assuming the same guys are in charge of course.

So Europe should be concerned. So should Russia - because no one actually knows whose Swiss bank account will need to be filled in 2011.