Saturday, September 6, 2008

A Russian Economic Primer


Global Market Brief: The Financial Aftermath of the Russo-Georgian War

A redefinition of Russia has taken place - rather jarringly - following its war with Georgia, and the entire world is reassessing its position and relations with the resurgent power. This reassessment includes financial factors - a much more tender area for today's Russia than for the Soviet Union, because Russia's large economy is tied into the global economy.

During the Russo-Georgian war, Russia's stock index declined to its lowest level in two years, the ruble registered its largest monthly decline against the U.S. dollar in more than nine years, and foreign investment flight amounted to $25 billion in just three weeks, according to French investment bank BNP Paribas.

But the flight of foreign direct investment that has resulted from deteriorating ties between Russia and the West will not hurt Russia as much as is believed. Rather, Russia will be dealt a massive blow when the West ceases giving Russian companies the financial access they need to continue expanding or even operating. The main reason Russian companies have done so well in the past few years (and made Russia a much stronger country) is that foreign entities have been the ones financing their expansion. This is all about to change.

The Russian Model

There are three main types of financial models in the world: Western, Asian and Russian. The Western financial model is economically based, with gaining money and profit as the end goal; such a model tends to crush inefficiency and protect the system as a whole. The Asian model is socially based. This model's goal is maximum employment and social stability, where money is used as a political resource for non financial ends despite all inefficiencies. The Russian model is politically based. In Russia, finance is a political tool to control the country and operates much like money for loan sharks or organized crime. The system is highly inefficient, but it allows a very small few to hold all the power in an enormous country.

It is the Russian model that has made it nearly impossible for Russian companies to gain access to cash outside their own earnings and has led them to look outside the country. To put it simply, a company needs money in order to grow; in its search for that money, it has three options. It can use its own money, but this limits a company in its ability to make major purchases, take on large projects, or greatly or quickly expand. This option has been seen not only in companies' purchases, but in most financial transactions in Russia. A good example of this in Russia is mortgages, which the country had never seen until the past few years. Previously, Russians had to use their own money to buy homes without any financing options.

The other two options involve borrowing money, either by taking out loans or by issuing bonds. A loan would have to come from a bank, and any sizable loan would have to come from a large (most likely Western) one. Issuing bonds is like dividing up pieces of a loan to a number of purchasers.
Most Russian companies cannot turn to Russian banks for loans, because the banks are either too small to finance major projects or are state- or oligarch-owned. Of Russia's 10 largest banks, the top five are all state-owned, which means that if a company wants to finance a major project it has to develop an understanding with the Kremlin. Traditionally, the major state banks have stayed out of financing large projects, mainly because they have no expertise in these fields. When the government does actually step into the role of financier, it is usually because of political or control issues and not because the Kremlin sees a good investment.

The other large banks in Russia are typically oligarch-run. The oligarchs are billionaires who lead most of Russia's vital sectors, both private and state-controlled. Most of these individuals rose to power during the Yeltsin-era "shock therapy" transition from socialist structures to capitalist ones (which more resembled a free-for-all), but the oligarchs who have remained in power are either owned by the Kremlin or have the Kremlin's blessing to continue holding strategic sectors. During their rise, the oligarchs basically created their banks in order to fund projects or manage their own companies. For example, Rosbank was created by the owners of Interros - oligarchs Mikhail Prokorov and Vladimir Potanin - in order to finance projects by Interros' Norilsk Nickel, the world's largest nickel company. These banks typically are not able to take on any other company's major projects and often cannot handle major financing for their own related firms; moreover, these oligarchs have no interest in funding any rival oligarch's expansion plans. The oligarchs also created these banks in order to keep the Kremlin from having a say in their companies and projects (though the Kremlin has since either worked its way into partial ownership of most "private" banks or placed lackeys as bank chiefs).

Russian companies cannot issue bonds to the domestic market simply because there are not enough interested people in the country with the money to buy them. Those who have money to spend are, once again, the government or the oligarchs, and all the same rules apply to their investment in bonds as to the banking sector.

The only option left has been for Russian companies to turn to foreign money and banks. This is an option Russian companies have turned to only very recently (in the last five years) after the fall of the Soviet Union and a decade of economic turmoil. The Russian market has been so starved for capital - particularly for investment, and for nearly a century - that foreigners are seeing a lot of bang for their buck in financing Russian companies, and they have been lending cash and snapping up bonds left and right. The potential for growth in Russia is so great that foreign cash is estimated to fund 70 percent of Russian debt. It is foreign loans and bonds that are actually making a difference in Russian companies and economic expansion.

Sudden Changes

But the Georgian-Russian war has changed all of this. It is not that the war was the proximate trigger for the massive fall in Western confidence in Russia; rather, it was a clear sign of a downfall already in progress. General perception of and confidence in Russia has now changed - especially in the West. Russian companies (and then the Russian economy) will have to shift when the reality hits that the West simply no longer has confidence in Russia or its companies. Russia was already a risky market, given the Kremlin, oligarchs and organized crime, but when global credit conditions are poor - as they are now - investors tend to shun riskier ventures.
According to BNP Paribas, the amount of debt raised by Russian companies in August was 87 percent less than July's levels, and the issuance of new equity nearly halted - from $933 million in July to $3 million in August. This dramatic slowdown will not lead to a Russian collapse (the country does have its own money), but Russian companies will find it very hard to raise capital and fund expansions, leading to stagnating operations.

Russian President Dmitri Medvedev is already hearing the cries of Russian companies and oligarchs over the tightened situation and restrictions from world financial markets. Medvedev will be meeting with the country's biggest firms and businessmen at the annual Russian Union of Industrialists and Entrepreneurs summit on Sept. 19-20. Medvedev has vowed to unveil a new program for easy credit soon after the summit, once he has input from the country's business leaders.

The Kremlin's Options

There are three options for Moscow. First, Russia could just take the blow, no matter how many ticked-off oligarchs it creates. This would mean that some of Russia's most powerful companies would have to revamp their plans entirely. Such a move would definitely affect the expansion plans of non state firms, but it will also hit many state companies - like energy giants Rosneft and Gazprom - which have been gorging on the bonds markets. It also means that the Russian government, which uses many of the companies as champions and tools for domestic or foreign control, would have to overhaul its future strategy as well.

Second, the government could learn how to spend money. Moscow does not have a problem with cash and holds the world's third-largest foreign currency reserve (currently just under $600 billion). The problem is that the government does not like to spend any of its reserves unless it is desperately needed. The only time in the past decade the Kremlin has dipped into the reserves was to finance its war with Georgia. But some Russian oligarchs, like Potanin, are already calling on the Kremlin to tap its reserves to ease the crisis.

The third option is the most difficult: Russia could actually set up a real large bank for real large loans. But this would change the country's entire financial model and cut the Kremlin's and local politicos' abilities to control and manipulate who can borrow money and for what. The social and economic implications of this option are something that the Kremlin has never shown it is willing to risk. Setting up a real banking structure would offer people in Russia a resource outside the government's control, which would in turn give them the ability to have an opinion and hold economic power, and potentially rival the government in making decisions - something that Russia has never seen or allowed before.

Thursday, August 7, 2008

Anxiety and Hemmaroids

I hated being drug to Lakewood International Outreach Church when I was a kid. I still remember Dodie Osteen looking down her beak at myself and Brian when we were inciting giggle fits with the other kids in church. I will also never forget the shyster minister they brought in who talked my mother into "donating" her Eastern Star ring that my father gave her. That should have been a family heirloom and at the time we damn sure could have used the money ourselves. Anyway, to make a long story short, I have no fond memories of the Osteen clan or that megachurch.

Fair is fair though and I saw a story today about some one who is just blantantly trying to make a buck off of the Osteen name and money grabbing powers. Seems a Flight Attendant was just turned into a quivering pile of jelly because she had an altercation witha rich woman on a plane. I would love to see if she would have made the same claim had the passenger not been in 1st Class.

Fact is this story caused me to LOL because of her claims of HEMMAROIDS from all the stress. Now #1, I have never heard of stress causing Hemmaroids. I know it does a lot of thinsg but a puckering butthole is not one I ever heard of, nor would I EVER have told anyone! Read on my friends about the rich ministers wife, the grumpy flight attendant, a spilled drink and a puckering butthole.

HOUSTON — A Continental Airlines flight attendant's lawsuit against Victoria Osteen, wife of nationally known pastor and author Joel Osteen, was expected to go before a jury, attorneys said.

Sharon Brown alleges in a civil lawsuit that Victoria Osteen, co-pastor of Houston's popular Lakewood Church, assaulted her during a Dec. 19, 2005 flight from Houston to Vail, Colo., by throwing her against an airplane bathroom door. She also alleges Osteen elbowed her in the left breast.

The Federal Aviation Administration fined Victoria Osteen $3,000 for interfering with a crew member during the flight.

Rusty Hardin, her attorney, adamantly denies the allegations.
"It's absolutely insane," Hardin said Wednesday in an online edition of the Houston Chronicle.
Attorneys for both sides on Wednesday will attempt to seat a jury and Joel Osteen was expected to testify during the trial.

In a pretrial frenzy of finger pointing, lawyers for both women say airplane passengers and Continental employees will testify it was the other woman who was out of control.

The FAA report states that Osteen asked another flight attendant to clean a liquid on her first-class seat armrest. When that attendant said she would get another flight attendant, Osteen grabbed a second flight attendant and took her to the seat, the report said. The second attendant said she would call cleaning personnel and headed to the cockpit, the FAA said. Osteen followed her and came across Brown, whom she pushed and elbowed in the left breast in an attempt to get to the cockpit, according to the report.

The flight attendants asked to have Osteen removed from the plane; she and her family left voluntarily. Osteen denies the charges of assault.

According to court documents, Brown claims that she suffers from anxiety and hemorrhoids because of the incident and said her faith was affected. She is also suing Osteen for medical expenses for counseling.

Brown's attorney, Reginald McKamie, declined to discuss the evidence he plans to present at trial, but said medical professionals will testify on Brown's behalf.

McKamie said Brown wants an apology and wants to punish Victoria Osteen with punitive damages amounting to 10 percent of her net worth, saying his client was "traumatized" by the whole event.

Joel Osteen's weekly television address is broadcast nationally and internationally.

Monday, July 28, 2008

The Crowning of Obama

Don't the Euros understand that he is a "CANDIDATE" and not even a fully vetted by convention candidate? I guess they think that we Americans are so damn dumb and angry at GWB that we would elect a junior Senator who has no real experience but we would none the less just because he comes from a broken home, is half black, and oh by the way, is a Democrat.

McCain is no prizewinner either but I love what the Danish press had to say about this whole process when McCain had already trumped his rivals and Hillary was still duking it out with Obama. It goes something like this:

You have a bitch who is a lawyer who is married to a lawyer who wants to be President. You have a lawyer married to a bitch who is a lawyer who wants to be President. You have a genuine war hero married to a big titted blond who owns a beer distributorship. What seems to the be the problem here?

Thursday, June 26, 2008

Looting in Iowa!

Have you seen the pictures from Iowa, Illinois, Missouri, etc. of the people looting the liquor stores, carrying away televisions from retail stores, shooting at helicopters, sitting on the roof begging for someone to take care of them, collected in the baseball stadium complaining about the food and shelter being provided?



Neither have I……of course, the MSM isn’t yammering about a failure on the Fed’s part either……..yet.

Tuesday, June 3, 2008

I am exhausted and I didn't even play!

I am home on R&R and was really stoked that I get to watch some of the Stanley Cup finals in live time and not at O Dark 30 like I do in the Mid East. Last night was game 5 and I had my father-in-law over to watch the match. Weelllll,...this one went 3 overtimes and even though I am still seriously jet-lagged I was was last man standing...or is that last man reclining?

My FIL left for home after the end of the first OT and Mrs. MiG crapped out too. The little guy had already been asleep for a couple of hours by then so it was just me and the dogs. Weelllll,...not even that. The hounds were all snoozing too (Man they sleep a lot). I fought my droopy eyelids, my consumption of Fuller's London Pride, and my reclining position but I stayed up and watched it all.

The Penguins pulled it out and now we have a game 6 in Pittsburgh. I guess my FIL will have to come over to watch again. After all, I am the one with the big screen and HDTV.

Saturday, May 24, 2008

Candidates and Cliches

Carren woke me up yesterday. I was sleeping in on my only day off which is Friday. This is in observance of the Muslim work week in the year 1426 of their calendar. She Skype’d me as I had my laptop online just so it would download email. SGM Stan sends me videos all the time so I just leave it plugged in now so it does not take 20 minutes over this slow local provider to get my mail. She had her lifelong friend from California in visiting her and I think they were a little appalled at the vision I gave them of bleary eyed and freshly woken up on the webcam. All that was missing was me scratching my nut bag and some bad breath. I went back to the rack and not 10 minutes later got a cell phone call as my crew on night shift could not leave the compound. The King of Saudi Arabia was in town and all roads were blocked. That is one reason I did not DD to Bahrain for my weekly dose of expensive beer. I drove out to the site and then I called my Saudi counterpart and he took care of it. I write better in the morning and have not had any time while at work the past few weeks so I am playing a little catch up here since I am already awake. Here goes.

I can’t get excited about the presidential race. Sorry, none of them fit the bill for me but I am voting for McCain as the other two scare the hell out of me. It has nothing to do with party. I have never voted a straight ticket as I believe that is wrong and short sighted. It shows a serious lack of research by the voter on issues and the people they are voting for. There are an equal number of creeps and strap hangers in both parties. I have read what the candidates have to say and just wish we had something better out there to draw from. We are in serious need of campaign reform. There has to be a better way. This is not a good selection and I know there are better folks out there to lead us. My choice would be Condoleezza Rice if she would run.

I am excited about one race though and it is a congressional race in New York State in district N-26. David Bellavia
http://www.bellavia2008.com is an OIF vet, winner of a Silver Star (Just below Medal of Honor), author of the best book to come out of the war (House to House), and is co-founder of Vets for Freedom http://www.vetsforfreedom.org/ VFF is a non partisan organization who work very hard at getting the media to tell the truth rather than give the one sided version they have gurgitated so far. They have a PAC backing people who think like me. They are split about 50-50 Democrat and Republican. I have donated to Bellavia’s campaign and listed myself as a distance volunteer.

We all have our political convictions and are not afraid to state them. That is what is beautiful about our country. WE can. I have been many places where you cannot. My wish is that my son never has to see the things I have seen. Those who are in the devil’s den now are getting the light version of the war. I don’t mean to denigrate their efforts but 2003-2005 was white knuckle all the time. I believe that if we cut and run it is just a matter of time before we have an all out fracas with Iran and her proxies and that will be a first class bloodletting for both sides.
We defeated the Russians through proxy wars and economic power. We can beat Iran militarily but at great cost. We cannot beat them economically while our economy is tied to oil. The only way to prevent all of this is to either face them down now or by keeping our presence in the region as it is and growing our influence OR by making ourselves energy independent. JFK challenged us to go to the moon. We did it when everyone thought it was an impossible task. What leader is out there who will challenge us to energy independence?

I have seen great change in this region (SW Asia) in the past 25 years I have been coming here. We as Americans have gone from being a curiosity, to being admired, to being hated and now I see a swing where we are being looked at with interest to see which way we go. Gulf nationals of all types and backgrounds tell me the same thing. They tell me that they know America is the greatest country in the world and that they know we mean well while we continue to screw up. They are willing to put up with our failures as long as we counter it with a better ratio of successes. They also tell me that they too fear that zealots and madmen will take control of the uneducated and unemployed and it scares them too. A power vacuum caused by the USA pulling out will encourage the Iranians and the radicals in the region and the local governments just will not be able to stand up. They will fall one by one to the same forces that deposed the Shah. We have the opportunity to show them that we can be trusted and counted on to do the right thing. What we do in Iraq is absolutely crucial. If we pull out we are seen as wishy-washy and weak willed.

Keep in mind, people in this part of the world don’t see world events the way we do. To them a 4 year term of office is a blip. They have rulers and government policies that exist for life. Whatever we do, it must be long range and stay the same regardless of who institutes it or what form it takes. As ruthless and hateful as the Gaddafis, Assads, and Mubaraks of the region are, they are better than the alternative at this point. As repressive as the ruling families are in the region they are better than the alternative.

I go on R&R in one week. We all laugh and joke and call the airliner out of this place the “Freedom Bird”. You don’t know just how true that is. When I land in Europe I can feel the difference and am more relaxed but it is not until I get to Bergstrom Airport and see the Stars and Stripes flying above the JetBlue jet way that I know I am in the best place in the world. I am in America where I don’t worry about my government or church spying on me. I don’t worry about being a target (Except by UCLA fans!) and I can breathe the air of freedom. You may think that sounds phony and clichéd. I can assure you it is not. It is true. Ask anyone who has been here.

Monday, March 24, 2008

Democratic Convention Agenda

Just released from Denver, CO. Here is the agenda for the Democratic National Convention.

7:00 pm Opening flag burning
7:15 pm Pledge of Allegiance to the U.N. In Spanish
7:20 pm Ted Kennedy proposes a toast
7:25 pm Nonreligious prayer and worship with Jessie Jackson and Al Sharpton
7:45 pm Ceremonial tree hugging
7:55 pm Ted Kennedy proposes a toast
8:00 pm How I Invented the Internet - Al Gore
8:15 pm Gay Wedding - Barney Frank presiding
8:35 pm Ted Kennedy proposes a toast
8:40 pm Our Troops are War Criminals - John Kerry
9.00 pm Saddam Memorial Rally - Cindy Sheehan and Susan Sarandon
11.00 pm Ted Kennedy proposes a toast
11:05 pm Collection for the Osama Bin Laden kidney transplant fund - Barbara Streisand
11:15 pm Free the Freedom Fighters from Guantanamo Bay - Sean Penn
11:30 pm Oval Office Affairs - William Jefferson Clinton
11:45 pm Ted Kennedy proposes a toast
11:50 pm How George Bush Brought Down the World Trade Towers - Howard Dean & Rosie O'Donnel
l12:15 am 'Truth in Broadcasting Award' - Presented to Dan Rather by Michael Moore
12:25 am Ted Kennedy proposes a toast
12:30 am Satellite address by Mahmoud Ahmadinejad
12:45 am Nomination of Hillary Rodham Clinton by Nancy Pelosi
12:50 am Speech and toast by Hugo Chavez to the departure of 'the Great Satan,' George W. Bush
12:50 am Hillary proposes a toast to our 89 million new Democratic Mexican voters
1:00 am Ted Kennedy proposes a toast to the extinction of the Republican party.
1:05 am Coronation of Hillary Rodham Clinton
1:30 am Ted Kennedy proposes a toast
1:35 am Bill Clinton asks Ted to drive Hillary home