|From: Sam Citron||12/27/2008 1:09:26 PM|
|The Isle That Rattled the World [WSJ]|
Tiny Iceland Created a Vast Bubble, Leaving Wreckage Everywhere When It Popped
By CHARLES FORELLE
REYKJAVIK, Iceland -- A boy charged to the front of an angry crowd here recently and tossed a carton of skyr, a popular local yogurt-like snack, at the Parliament building. It splattered on the rough-hewn stone.
He and thousands of Icelanders were protesting one of the strangest economic failures of the global financial crisis. This past fall, every bank that matters in this tiny nation -- that is, all three of them -- failed. Iceland's currency, the krona, became worthless beyond its shores. The country's financial system stopped working.
"We are pissed off at the government," said one young man, pausing between fusillades of eggs. A roll of toilet paper arced across the Nordic sky.
Iceland is an extreme casualty of an era in which it became extraordinarily easy to borrow money. But it was more than that: An examination of the nation's banking system, which collapsed over about 10 days this autumn, reveals the degree to which Iceland was one of the international financial bubble's most enthusiastic players. Home to fewer people than Wichita, Kan., Iceland became so leveraged and so deeply intertwined with the global financial infrastructure that its collapse has rattled the world from Tokyo to California to the Middle East.
In Japan and Hong Kong, bond buyers got stuck holding all-but-worthless debt. In Beverly Hills, a real-estate developer was forced to default after teaming up with an Icelandic bank to build condos near Wilshire Boulevard. A German regional lender, Bayerische Landesbank, suffered big losses on its Icelandic investments contributing to its need for a €30 billion ($42 billion) bailout package.
And in recent weeks, Naomi House, a hospice in southern England, had to cancel a service in which aides made house calls to give the parents of dying children a helping hand. Some £5.7 million ($8.7 million) -- two-thirds of its available cash -- is frozen and may never be fully returned. It was deposited in an Icelandic bank.
Khalid Aziz, chairman of the hospice trust, says he didn't think twice back in 2005 when Icelanders bought the local bank. "With the globalization of markets," he says, "everybody owns everything these days, don't they?"
Until very recently, the 21st century had smiled on Iceland. Last year, it boasted the highest standard of living of any country, according to the United Nations -- outranking the U.S., for all its McMansions and drive-through coffee shops, and Sweden with its government-paid parental leave and other generous social benefits.
High interest rates set by the central bank kept foreign money flowing onto the island, strengthening the krona and making imported goods easily affordable. Iceland's ports unloaded ships full of swank Scandinavian furniture, building materials for new houses and sport-utility vehicles. Imports were boundless: Recently, cape gooseberries were a common adornment on the plates of Reykjavik's chic restaurants.
Iceland has long had many valuable natural assets. It sits amid some of the world's best fishing grounds, and that industry sustained the local economy for centuries. It is a wild, beautiful place where some people still believe in alfar, or elves.
The cinematic landscape of fjords, glaciers and reindeer attracts adventurous tourists and their dollars. The earth's innards bubble to the surface in volcanoes and geysers -- a product of Iceland's location atop the violent meeting point of the North American and Eurasian tectonic plates.
But in the early 1990s, some people felt Iceland could be more than a showcase for nature and producer of salt cod.
Leading the charge was David Oddsson. A shaggy-haired former mayor of Reykjavik, Mr. Oddsson was an Icelandic character: a writer of short stories and religious hymns, the one-time host of a comic radio program and, as a youth, an aspiring actor who dressed as Santa Claus to earn pocket money at Christmas.
He was known for his wit, says Hannes Gissurarson, a member of Mr. Oddsson's inner circle at the time. When Shimon Peres, the Israeli politician, visited Iceland, Mr. Oddsson jokingly said to him: "You are the chosen people, we are the frozen people," according to Mr. Gissurarson.
Mr. Oddsson became prime minister in 1991 promising to bring an end to the country's boom-and-bust cycles tied to the fish catch. He blamed the trouble on the state-controlled economy, which put bureaucrats in charge of fishing, the media, even a travel agency.
Within a few years, Iceland had sold off companies worth a combined $2 billion, a big sum for the small economy, says Mr. Gissurarson.
For Mr. Oddsson, what most held Iceland back was government control of banking, which put politicians in the position of determining how capital should be allocated. "The crucial factor," he said in a 2004 speech, "was the iron grip that the Icelandic state had on all business activity through its ownership of the commercial banks."
He sold them all.
From Fish to Finance
Icelanders embraced change. The highly educated populace launched biotechnology and software companies. Ossur hf, an Icelandic maker of artificial limbs, grew into a global supplier of high-tech prosthetics. At this year's Beijing Paralympic Games, the South African sprinter Oscar Pistorius won three gold medals wearing Ossur's "Cheetah" brand legs, running the 100-meter dash in 11.17 seconds.
Industrialists harnessed the energy of volcanoes and waterfalls to power aluminum smelters. Alcoa Inc. built a giant smelter among Iceland's eastern fjords.
But Iceland's biggest foray was into banking. Almost immediately, the newly privatized banks started looking overseas for growth. There was a simple reason: The local economy is small. With only 300,000 citizens, there aren't enough Icelanders to open new accounts.
In 2000, Kaupthing Bank, Iceland's biggest, had assets of just 208 billion kronur. By June 30 of this year, its assets had ballooned some 30 times, to 6.6 trillion kronur.
By earlier this year, the three main banks had grown so much that they accounted for around three-quarters of Iceland's stock-market value. Their loans and other assets totaled about 10 times Iceland's gross domestic product.
Central Reykjavik has a small-city feel -- rows of gabled houses and lamplit streets. But driven by banking, it became a mini financial capital.
Icelandic tycoons held court at hotel bars and hip eateries that overshadowed the port city's seafood shacks. At one, Sjávarkjallarinn, or Seafood Cellar, chefs put Icelandic fish in outré combinations with exotic ingredients. Its signature appetizer: a Mason jar of lobster, cauliflower and a truffle-flecked foie gras sauce.
Universities lured the children of fishermen and trained them in finance. In 2005, Silja Sigurdardottir, 26 years old, was an engineering student, then switched to financial math. "The banks were really big, and everything was going up," she says.
Ms. Sigurdardottir got her masters in 2007, and worked for Kaupthing for one year. During that time, "I didn't really worry about money," she says.
Those days are over. She was laid off in October. Next year she plans to begin studying for a new degree, in sustainable development. "Now I have to go back to being a poor student," she says.
Much of Iceland is on a similar trajectory. After years of growth, Iceland's GDP is forecast to shrink by 8% next year. Inflation, at 18% and expected to rise, is gutting the value of regular Icelanders' assets and crimping their once-flush household budgets.
"We have a major macroeconomic problem on our hands," says Geir Haarde, the country's prime minister.
To a degree, the wealth Iceland enjoyed during the boom years was a mirage. It was conjured by high interest rates, which attracted vast sums of foreign money.
Paradise of Returns
Iceland became a paradise of high returns, even for individual foreigners simply looking for a bank account. For instance, in July, Kaupthing's Isle of Man subsidiary offered 7.15% on one-year deposits.
High interest rates kept the currency, the krona, strong. The strong krona, in turn, made the prices of imported goods -- flat-screen television sets, SUVs -- low. So Icelanders went on an epic shopping spree. They dodged the expense of borrowing at those rates, though, by instead borrowing at lower interest rates in foreign currencies (Japanese yen, Swiss francs) to finance homes and other big purchases.
Like Americans who rode a housing bubble thanks to the U.S. Federal Reserve's maintaining low interest rates for years, Icelanders had found a cheap source of borrowing to finance their consumption.
As long as foreign money kept flowing into Iceland, everything remained fine. But an outflow would dangerously reverse the equation, and set the stage for calamity.
Iceland isn't the only small country to be whipsawed by foreign money flooding in, then gushing out. Hungary and Latvia were similarly hit.
What makes Iceland different: It tried to build a global banking center on top of a tiny currency. So when foreign investors tried to pull out -- converting kronur back into dollars or euros en masse -- its currency fell like a rock, spurring more withdrawals.
Amid Iceland's euphoria, there were warnings. In 2006, analysts at Danske Bank wrote a paper titled "Geyser Crisis" saying that Iceland's banks had grown too much, and the country was dangerously reliant on the willingness of foreigners to keep sending money.
Hedge funds attacked the Icelandic krona. The banks weathered the assault, and the krona bounced back. Fatally, Iceland viewed its successful defense as proof of the banks' resilience.
But the Danske Bank team wasn't wrong, just early.
Meantime, Iceland's new breed of tycoons was living large.
Among them was Jón Ásgeir Jóhannesson. He traveled by yacht, jet and helicopter all emblazoned "101" -- the name of a chic Reykjavik hotel owned by his wife.
Mr. Johannesson, who parlayed a discount-grocery business into a empire that spanned frozen food and high-end retail, went on a global acquisition spree.
In 2006, he scooped up famed London retailer House of Fraser. His holding company also owned a big chunk of Iceland's third-largest bank, Glitnir Bank hf.
One of Glitnir's predecessor institutions had been the state's Fisheries Investment Fund, which helped fisherman buy trawlers. In recent years, Glitnir became much more complex, borrowing heavily from European banks to finance a global expansion. It financed Mr. Johannesson's House of Fraser deal.
By mid-2008, strains in Iceland were starting to show. As the financial crisis simmered in the U.S., banks world-wide were getting warier of lending to each other.
They particularly worried about the remote and deeply indebted island nation of Iceland.
Days of High Crisis
In a matter of just days starting in late September, Iceland's entire banking system failed. This account of the final days is based on documents and interviews with a dozen or so people close to the banks and the government.
Inside Glitnir's headquarters in mid-September, CEO Lárus Welding and his deputies faced a problem: The bank had issued bonds five years earlier, to pay for its expansion, that were now coming due. Glitnir had to make a payment of €600 million on Oct. 15.
Glitnir feared it didn't have the cash.
Mr. Welding, silver-haired at age 32, had taken his job just a year earlier. Previously, he ran the London branch of Iceland's second-biggest bank, Landsbanki Islands hf, and helped run one of its most-popular products, "Icesave," a service that led Britons to sock away money at high interest rates. Hundreds of thousands of them did, pouring in billions of pounds.
Glitnir, however, didn't have access to piles of pounds or euros to pay back creditors. Unlike Landsbanki and Kaupthing, Glitnir hadn't bulked up on foreign deposits.
Mr. Welding's bankers tried everything to raise cash: They attempted to sell Norwegian subsidiaries. They tried to borrow foreign currency. But no one wanted the krona-denominated mortgages and car loans that Glitnir could offer as collateral.
Indeed, suddenly no one wanted kronur at all. The exchange rate was in freefall.
The mid-September collapse of Lehman Brothers in New York had panicked financial firms world-wide -- bringing lending between banks to a standstill. Given Glitnir's acute need for a loan, that was very bad news.
Glitnir hoped Bayerische Landesbank would let it be late with a €150-million payment on a loan, freeing up some cash for the bond repayment. No dice. On Sept. 24, the Germans asked to be paid on time.
Mr. Welding phoned Glitnir's chairman, Thorsteinn Már Baldvinsson. "This has not been a good day," he said.
Iceland was beginning to be cut down to size.
The Krona Crumbles
Mr. Haarde, the prime minister, spent Sept. 24 in New York City at the United Nations General Assembly. The talk there was of the financial crisis then laying waste to Wall Street. Yet while Lehman Brothers had just gone bankrupt, Europe hadn't yet felt the full force.
The Icelandic delegation headed across town to Nasdaq headquarters, where Mr. Haarde, smiling for the photo op, rang the closing bell.
Back in Reykjavik, however, Iceland's own Glitnir bank was flirting with disaster. With Mr. Haarde out of town, Messrs. Welding and Baldvinsson turned for help to Mr. Oddsson, the former prime minister.
In 2005, Mr. Oddsson had moved across town to another position of power: chairman of the central bank's board of governors. The Glitnir men said they could need between €500 million and €600 million.
Mr. Oddsson didn't commit. "Let's keep in touch," he said, according to a person familiar with the matter.
There was a problem: Iceland's central bank -- which is supposed to act as a lender of last resort when banks get into a bind -- hadn't stockpiled very many euros to lend. By the middle of this year, it held just €2 billion in foreign-currency reserves. By contrast, Iceland had more than $70 billion (€49.9 billion) in debts to foreign banks.
It had plenty of kronur. But nobody wanted those.
That weekend, Iceland's political and banking leaders scrambled to avert cataclysm. The chiefs of the three banks met at the offices of the state banking regulator to hammer out a shotgun merger. The most likely deal -- a tie-up of Landsbanki and Glitnir -- would still require the government to provide euros so Glitnir could make its payments.
Euros, of course, were just about as scarce in Iceland as cape gooseberries had once been.
Within the government, a split emerged about what to do with the few euros Iceland did have. Some advocated in effect lending Glitnir the money. But central-bank officials said a loan would be a waste: Glitnir would just be back later for more, they argued.
Instead, they proposed the government make a large investment directly in Glitnir, in return for equity.
This had its risks. The prime minister's chief economic adviser, Tryggvi Thor Herbertsson, worried that diluting Glitnir's shareholders would torpedo other banks' shares.
The evening of Sunday, Sept. 28, Mr. Oddsson summoned the top Glitnir officials. As Messrs. Welding and Baldvinsson arrived at the central-bank headquarters to learn Glitnir's fate, Mr. Welding turned to his colleague. "Do you realize," he said, "It's over."
Mr. Oddsson said the government would be willing to take a 75% stake in Glitnir for €600 million.
Monday morning, when the deal was announced, bank shares collapsed. Rating agencies knocked down the debt ratings of Glitnir, Iceland's other banks, and Iceland itself. The krona dropped like a stone.
Britons Take a Hit
In Spain, watching television at his home, Daniel Herzberg caught a news report about Iceland's banks. He got worried.
A few years ago, he and his wife had deposited £10,000 in the Guernsey branch of a British savings bank. A year later, Landsbanki bought the branch.
Mr. Herzberg, a 39-year-old expatriate Briton who organizes bicycle and walking tours, emailed the bank to ask whether his money was safe. He and his wife, Lucy, were saving for home renovations to accommodate their 2-year-old, Oliver.
On Friday, Oct. 3, Mr. Herzberg got an encouraging reply: Landsbanki would back foreign depositors. The email also pointed out that Icelandic bank regulators just a few weeks earlier had found Landsbanki "strong enough to withstand a severe shock to the financial system."
"Everything's fine," Mr. Herzberg said to his wife.
Except it wasn't.
The bad news about Iceland had startled many Brits with money in Landsbanki's Icesave accounts. That weekend, they withdrew some £200 million.
Alarmed, British banking authorities told Landsbanki it had until Monday afternoon to replenish the London branch with about the same amount.
The UK Financial Services Authority declined to discuss the Icesave sequence of events.
A couple of hundred million pounds was something Landsbanki didn't have just lying around. Like any bank would, it had lent or invested the deposits it had taken in over the years.
Landsbanki had little choice but to turn to its lender of last resort, Iceland's central bank. Saturday, major shareholder Björgólfur Thor Björgólfsson paid a visit to Mr. Oddsson to ask for a loan. Mr. Björgólfsson and his father, Björgólfur Gudmundsson, are perhaps Iceland's most prominent tycoons. In 2006, the father purchased West Ham United, a top British soccer club.
Meantime, Prime Minister Haarde and other top officials -- bankers, regulators, labor-union leaders, parliamentarians and pension-fund administrators -- scrounged everywhere for euros that might be used to prop up the banks.
Brief Midnight Hope
Around midnight on Sunday, there was a burst of hope. Mr. Haarde told a small crowd gathered in the lobby of Iceland's Parliament building about a new plan taking shape: Iceland's pension funds would sell some overseas investments to raise foreign currency, then let the government buy the foreign currency for kronur.
By Monday morning, that idea was dead. The pension funds weren't eager to sell assets at fire-sale prices into a global crisis.
Iceland had run out of moves.
Monday afternoon, a weary-looking Mr. Haarde addressed his countrymen. He warned that the banks' grave troubles threatened the whole island. "The Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool," he announced on television.
The solution: Iceland would seize the banks. That evening, Parliament passed a new law enabling this to happen.
The next morning, Tuesday, Oct. 7, Landsbanki was nationalized. Iceland's depositors would be protected from losses, the government said.
In the U.K., banking authorities didn't like the sound of that. British depositors had billions of pounds in Icesave -- and no one was saying anything about protecting them.
In a heated phone call, British Treasury chief Alistair Darling asked Iceland's finance minister if British depositors were getting left out in the cold. "Do I understand that you guarantee the deposits of Icelandic depositors?" Mr. Darling asked, according to a transcript published in the Icelandic press.
"Yes," replied Arní Mathiesen.
"But not the branches outside Iceland?" Mr. Darling asked.
"No," Mr. Mathiesen said, not beyond the €20,000 minimum prescribed by European regulations. Later in the call, Mr. Mathiesen said Iceland probably didn't even have enough money to meet the €20,000 minimum.
"Well," said Mr. Darling, "that is a terrible position to be in."
Mr. Darling's office didn't respond to a request for comment. In public remarks, he has recounted a version of the call that is consistent with the transcript. Mr. Mathiesen couldn't be reached.
Despite the Landsbanki debacle, executives at Kaupthing remained hopeful about survival. Kaupthing hadn't seen massive outflows from its own British deposit service (which, luckily, didn't have "Ice" in its name). And Iceland's government had agreed to give Kaupthing the €500-million loan it needed.
Working late Tuesday at the bank's headquarters -- an airy glass building with a waterfall in the atrium -- they hammered out a proposal to take over Glitnir and sell its foreign assets. Thus, two of Iceland's three banks would pull through.
Early Wednesday morning, Kaupthing's chairman was working with his bankers to try to sell some UK assets, when bad tidings flashed across his TV screen: British authorities, worried about the solvency of Kaupthing's U.K. subsidiary, had seized its assets and transferred them to the Dutch bank ING.
The seizure would trigger a cascade of defaults for Kaupthing, blows it simply couldn't survive.
The next morning, Iceland's government took over what was left of Kaupthing. Glitnir, too, was eventually brought under government control.
In Iceland, the reaction has been shame and anger. Popular targets are British Prime Minister Gordon Brown and Mr. Darling, blamed for precipitating Kaupthing's collapse. They are also reviled for using an anti-terror law to seize other Icelandic assets. Also attracting a helping of blame is Mr. Oddsson.
His spokesman declined several requests for comment.
In a brief telephone interview in October, Mr. Oddsson said Iceland's foreign-currency reserves per capita were greater than most other countries. And in a spirited October interview on Icelandic television, he said it was the banks that should have been made smaller, not the currency reserves larger.
In a November speech to an Icelandic business gathering, Mr. Oddsson rejected blame for the crisis, saying the central bank had limited supervisory authority over banks, and that he had, in fact, warned of the banks' profligacy.
Blaming Mr. Oddsson is "totally unjustified," says his friend Mr. Gissurarson, also a member of the central bank's supervisory board." The currency crisis was brought about by Gordon Brown," he says. When the U.K. seized Kaupthing's assets, that ended Iceland's best hope keep that institution alive itself.
Mr. Brown has vigorously defended Britain's moves, saying they were necessary to protect British savers after Iceland signaled it would back local depositors but not foreigners.
Iceland's Global Fallout
One thing that might have saved Icelandic capitalism was joining the euro. Appealing to national pride, Mr. Oddsson long resisted moves to join the European Union and adopt the common currency. Perhaps most crucially, joining the EU would have meant bureaucrats in Brussels would then regulate Iceland's use of its fishing stocks -- a political third rail in Iceland.
In the October TV interview, Mr. Oddsson was unbowed in his views of the euro. "If we were tied to the euro, for instance, we would just have to succumb to the laws of Germany and France," he said.
The growth of Iceland's banks abroad was astonishing. When they fell, they left a mess to clean up that spills across the globe.
Glitnir owned two Norwegian banks. Landsbanki took deposits across the Atlantic in Nova Scotia -- then spread halfway across Canada to open a private-banking office in Winnipeg.
Kaupthing launched operations in Luxembourg, and raised an investment fund and bought a power plant in India. Two weeks before it collapsed, Kaupthing also wooed a Qatari sheikh, Mohammed Bin Khalifa Al-Thani, into buying a 5% bank stake for 25.6 billion kronur. A spokeswoman says the stake is now virtually worthless.
Kaupthing also hired a real-estate banker to drum up business. Among the resulting projects was the Beverly Hills condo development. Kaupthing teamed up with land developer CPC Group, and borrowed $365 million to help finance the purchase of eight acres of land abutting Wilshire Boulevard.
The loan was due Oct. 9 -- the day Kaupthing was seized by Iceland. CPC was unable to make the whole payment. The project is in turmoil.
In most countries, deposit-protection schemes cover at least some money lost by savers, at significant cost to local treasuries. Britain and the Netherlands are putting up billions of euros to cover their depositors. Iceland will reimburse some funds, but not for years.
Mr. Herzberg and the 2,000 other depositors in Landsbanki Guernsey have been paid 30% of their £120 million in deposits. But the bank's court-appointed administrator isn't optimistic that they'll get the rest back. Guernsey has no deposit-guarantee protection.
Account holders with large balances, like Naomi House, the British children's hospice, are out of luck. Some 250 children suffering from cancer and other diseases come to Naomi House each year. Many pass through its doors only for a temporary stay. Others come there to die.
In better times -- in fact, just three years ago -- Naomi house decided to start building a second facility, for teenagers. Construction isn't finished, so to keep the project going, Mr. Aziz, the charity's chairman, says the trust may be forced to sell its stocks and other investments.
Mr. Aziz hopes the government can help his charity, given that it is spending billions on bank bailouts. "Against the eye-watering sums that are being bandied around," Mr. Aziz says, "this is nothing."
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|From: Sam Citron||12/30/2008 11:59:00 PM|
|Gazprom, Once Mighty, Is Reeling [NYT]|
By ANDREW E. KRAMER
MOSCOW — A year ago, Gazprom, the Russian natural gas monopoly, aspired to be the largest corporation in the world. Buoyed by high oil prices and political backing from the Kremlin, it had already achieved third place judging by market capitalization, behind Exxon Mobil and General Electric.
Today, Gazprom is deep in debt and negotiating a government bailout. Its market cap, the total value of all the company’s shares, has fallen 76 percent since the beginning of the year. Instead of becoming the world’s largest company, it has tumbled to 35th place. And while bailouts are increasingly common, none of Gazprom’s big private sector competitors in the West is looking for one.
That Russia’s largest state-run energy company needs a bailout so soon after oil hit record highs last summer is a telling postscript to a turbulent period. Once the emblem of the pride and the menace of a resurgent Russia, Gazprom has become a symbol of this oil state’s rapid economic decline.
During the boom times, Gazprom and the other Russian state energy company, Rosneft, became vehicles for carrying out creeping renationalization.
As oil prices rose, so did their stocks. But rather than investing sufficiently in drilling and exploration, Russia’s president at the time, Vladimir V. Putin, used them to pursue his agenda of regaining public control over the oil fields, and much of private industry beyond.
As a result, by the time the downturn came, they entered the credit crisis deeply in debt and with a backlog of capital investment needs. (Under Mr. Putin, now the prime minister, Gazprom and Rosneft are so tightly controlled by the Kremlin that the companies are not run by mere government appointees, but directly by government ministers who sit on their boards.)
“They were as inebriated with their success as much as some of their investors were,” James R. Fenkner, the chief strategist at Red Star, a Russian-dedicated hedge fund, said of Gazprom’s ambition to become the world’s largest company. “It’s not like they’re going to produce a better mousetrap,” he said. “Their mousetrap is whatever the price of oil is. You can’t improve that.”
Investors are now fleeing Gazprom stock, once such a favorite that it alone accounted for 2 percent of the Morgan Stanley index of global emerging market companies. Gazprom is far from becoming the world’s largest company; its share prices have fallen more quickly than those of private sector competitors. The company’s debt, amassed while consolidating national control over the industry, is one reason.
After five years of record prices for natural gas, Gazprom is $49.5 billion in debt. By comparison, the entire combined public and private sector debt coming due for India, China and Brazil in 2009 totals $56 billion, according to an estimate by Commerzbank.
Mr. Putin used Gazprom to acquire private property. Among its big-ticket acquisitions, in 2005 it bought the Sibneft oil company from Roman A. Abramovich, the tycoon and owner of the Chelsea soccer club in London, for $13 billion. In 2006 it bought half of Shell’s Sakhalin II oil and gas development for $7 billion. And in 2007, it spent more billions to acquire parts of Yukos, the private oil company bankrupted in a politically tinged fraud and tax evasion case.
Rosneft is deeply in debt, too. It owes $18.1 billion after spending billions acquiring assets from Yukos. And in addition to negotiating for a government bailout, Rosneft is negotiating a $15 billion loan from the China National Petroleum Corporation, secured by future exports to China.
Under Mr. Putin, more than a third of the Russian oil industry was effectively renationalized in such deals. But unlike Hugo Chávez of Venezuela or Evo Morales of Bolivia, who sent troops to seize a natural gas field in that country, the Kremlin used more sophisticated tactics.
Regulatory pressure was brought to bear on private owners to encourage them to sell to state companies or private companies loyal to the Kremlin. The assets were typically bought at prices below market rates, yet the state companies still paid out billions of dollars, much of it borrowed from Western banks that called in the credit lines in the financial crisis.
Rosneft, which was also held up as a model of resurgent Russian pride and defiance of the West as it was cobbled together from Yukos assets once partly owned by foreign investors, was compelled to meet a margin call on Western bank debt in October.
Critics predicted Russia’s policy of nationalization would foster inefficiency, or at the very least disruption as huge companies were bought and sold, divided up and repackaged as state property. At stake were assets worth vast sums: Russia is the world’s largest natural gas producer and became the world’s largest oil producer after Saudi Arabia reduced output this summer to support prices.
A deputy chief executive of Gazprom, Aleksandr I. Medvedev, predicted the company would achieve a market capitalization of $1 trillion by 2014. Instead, its share price has fallen 76 percent since the beginning of the year and its market cap is now about $85 billion.
By comparison, Exxon’s share price Monday of $78.02 is down 18 percent since January. The company’s market capitalization is $393 billion. And the Standard & Poor’s 500-stock index stocks is down more than 40 percent for the year
Mr. Medvedev, the Gazprom executive, defended Gazprom’s performance and attributed the steep drop in its share price relative to other energy companies to the company’s listing on the Russian stock exchange, which is volatile and lacks investors who put their money into companies for the long term.
Mr. Medvedev said the share price “does not reflect the company’s value” and blamed the financial crisis that began on Wall Street for the company’s woes.
It is true that Gazprom is far from broke. The company made a profit of 360 billon rubles, or $14 billion, from revenue of 1,774 billion rubles, or $70 billion, in 2007, the most recent audited results released by the company.
Valery A. Nesterov, an oil and gas analyst at Troika Dialog bank in Moscow, said Gazprom’s ratio of debt to revenue — before interest payments, taxes and amortization — was 1 to 5 in 2007, high by oil industry standards but not so excessive as to jeopardize the company’s investment grade debt rating.
The company, meanwhile, says it will go ahead with capital spending to develop new fields in the Arctic, and continues to pour money into subsidiaries in often losing sectors like agriculture and media. It is also assuming, through its banking arm, a new role in the financial crisis of bailing out struggling Russian banks and brokerages.
Investors say an unwillingness to cut costs in a downturn is a common problem for nationalized industries, and another reason they have fled the stock. When oil sold for less than $50 a barrel in 2004, Gazprom’s capital outlay that year was $6.6 billion; for 2009, the company has budgeted more than $32 billion.
Gazprom executives say they are reviewing spending but will not cut major developments, including two undersea pipelines intended to reduce the company’s reliance on Ukraine as a transit country for about 80 percent of exports to Europe. Gazprom and Ukraine are again locked in a dispute over pricing that Gazprom officials say could prompt them to cut supplies to Ukraine by Thursday.
“All our major projects in our core business — upstream, midstream and downstream — will continue with very simple efforts to meet demand both in Russia and in our export markets,” Mr. Medvedev said.
But revenue is projected to fall steeply next year. Gazprom received an average of $420 per 1,000 cubic meters for gas sold in Western Europe this year; that is projected to fall to $260 to $300 in 2009.
“For them, like everybody else, sober realism has intruded,” Jonathan P. Stern, the author of “The Future of Russian Gas and Gazprom” and a natural gas expert at Oxford Energy, said in a telephone interview.
A significant portion of the country’s corporate bailout fund — about $9 billion out of a total of $50 billion — was set aside for the oil and gas companies. Gazprom alone is seeking $5.5 billion.
For a time, Gazprom, a company that evolved from the former Soviet ministry of gas, had been embraced by investors as the model for energy investing at a time of resource nationalism, when governments in oil-rich regions were shutting out the Western majors. In theory, minority shareholders in government-run companies would not face the risk their assets would be nationalized.
But with 436,000 employees, extensive subsidiaries in everything from farming to hotels, higher-than-average salaries and company-sponsored housing and resorts on the Black Sea, critics say Gazprom perpetuated the Soviet paternalistic economy well into the capitalist era.
“I can describe the Russian economy as water in a sieve,” Yulia L. Latynina, a commentator on Echo of Moscow radio, said of the chronic waste in Russian industry.
“Everybody was thinking Russia had succeeded, and they were wondering, how do you keep water in a sieve?” Ms. Latynina said. “When the input of water is greater than the output, the sieve is full. Everybody was thinking it was a miracle. The sieve is full! But when there is a drop in the water supply, the sieve is again empty very quickly.”
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|From: Sam Citron||1/4/2009 3:03:47 PM|
|Brazilian Companies Step In To Educate Future Workforce|
By Joshua Partlow
Washington Post Foreign Service
Tuesday, December 9, 2008; A01
VITORIA, Brazil -- Fabiana Nunes Rodrigues didn't know much about trains. But she wanted a good job, she said, something stable, maybe as a mechanic, like her grandfather. Brazilian college courses didn't offer much in the way of technical instruction. But one company in her home town did, and she already knew it well.
Since she was 15, Rodrigues had spent her afternoons in technical classes sponsored by the mining giant Vale, the world's largest producer of iron ore. So it made sense that when she graduated from high school she would enroll in Vale's nine-month train maintenance course on this vast corporate campus on a rise above the Atlantic Ocean.
"I've always wanted to work for Vale," said Rodrigues, 18, standing in a maintenance facility where cranes were lifting hulking metal tubing from a train engine. "Now many of my friends want to take this class, too."
Vale also wants people like Rodrigues, and is willing to do a lot to get them. With more than 150,000 employees worldwide, it is one of several large corporations in fields such as mining, aerospace and construction that are driving Brazil's ascent in the world economy. But the firms' ambitious plans for growth have bumped into a problem hampering development across Latin America: a higher education system that does not churn out enough engineers and others with technical skills, even as the global economic crisis depresses demand.
Despite being one of the world's most populous countries, Brazil does not have a single university ranked in the top 100 internationally. Of its college graduates, 5 percent are engineers, far below the rates of countries such as China and South Korea, according to Brazilian businesses.
Since Brazil's education system is falling short, Vale, like several other Brazilian companies, has decided to build its own.
"For years, technical education was not the main focus of the government," said Marco Dalpozzo, Vale's global human resources director. "Mining was not seen for the last 20 years as a great opportunity or a vocational business opportunity for the country. So you have professions for which Vale had to create their own entire system of education."
Over the past few years, several Latin American countries have enjoyed soaring growth rates as they exported oil, minerals and agricultural products around the world. In Brazil, gross domestic product more than doubled, to $1.3 trillion, in the five years ending in 2007, while inflation dropped to 3.6 percent, a quarter of the 2003 level.
Yet recent studies have shown that workers in Latin America have less education than those in East Asia and Eastern Europe and that the percentage of students enrolled in high school is far lower than in developed countries. In Colombia, one out of every 700,000 people receive PhDs, compared with one in 5,000 in developed countries, wrote Jeffrey M. Puryear and Tamara Ortega Goodspeed in a contribution to a book published this year titled "Can Latin America Compete?"
"The region's limited number of scientists and advanced degree recipients weakens the region's competitiveness by limiting countries' ability to use and generate knowledge, and to carry out research," they wrote.
For younger students, Latin American countries have focused in recent years on building schools and expanding access to public education, rather than improving the quality of that education, said Emiliana Vegas, a senior education economist at the World Bank. Teachers' pay raises are based on longevity rather than performance, and few parents are used to demanding more rigorous standards.
"Most Latin American parents have less education than their kids. They feel their kids are already receiving an advantage they didn't get," said Vegas, who co-authored the book "Raising Student Learning in Latin America." In the most recent results of the Organization for Economic Cooperation and Development's triennial tests of 15-year-olds from 57 countries, the Latin American countries that participated, including Brazil, Argentina and Colombia, consistently scored near the bottom. "It's not just that kids need to go to school, they need to learn in school," Vegas said.
Poor education leads to a lack of skilled workers. A survey of more than 1,700 industrial firms by Brazil's National Confederation of Industry last year found that more than half could not find enough trained workers. The biggest companies in Brazil, as well as elsewhere in Latin America, have taken it upon themselves to change this dynamic.
For the past several years, Embraer, an airplane manufacturer, has partnered with Brazilian universities to train thousands of engineers, and in June, the company opened an educational headquarters at its Eugenio de Melo plant in Sao Paulo state.
The declining global demand for minerals amid the financial crisis has recently slowed Vale's rapid growth. The company said last week that it would cut 1,300 jobs and that about 5,000 workers would take enforced holidays in coming months to slow production. But the company said it is still investing heavily in its future employees.
Over the next five years, Vale estimates it will need 62,000 new workers. This year, about 7,000 students are taking courses in its schools and training programs, from graduate studies for engineers and geologists to technical courses for high school graduates. The company has opened three schools and is building a fourth to educate potential employees. It pays students salaries and health benefits, provides food and dental care, and sometimes offers bus passes and hotel rooms to students who don't live close to their classes, all part of the fierce competition for skilled local labor.
"The biggest companies woke up in the past years, and they all need these kind of professionals," Dalpozzo said. "So the companies that want to have a sustainable future need to invest in that."
In Vale's sprawling compound in Vitoria, students in matching brown short-sleeve shirts and pants gathered in a classroom last month to discuss their training before heading off to work alongside their mentors repairing trains.
"When they arrive they don't know anything about trains," said Rosimar Mario Pignaton, 44, a 24-year Vale employee who is a mentor.
For three months, the students learn theory in the classroom, and for six months, they work alongside technicians to get a practical feel for the job. They work seven hours a day and are paid $170 to $510 a month. "It wasn't like I had a specific interest in Vale, but it was the course that attracted me. It is a very good course," said Acy de Vasconcelos Almeida, 28, as he twisted a wrench on a 2,300-gallon fuel tank. "But if I become an employee here, I would be happy to work here my whole career."
Vale says it hires nearly 70 percent of the students who complete its training programs. In another company class in Vitoria, students learned about railroad line signals and data transmission in preparation for working on a line from Vitoria to the nearby state of Minas Gerais. Monik Rodrigues Espirito Santo, 21, said she had always enjoyed math and physics and became excited about electrical circuits in high school. She hopes to eventually study engineering in college but decided to enroll with Vale first.
"Most of the people want to work as fast as possible, so the fastest path is to do a technical course and get right into the market," she said.
"The private colleges are very expensive, especially in engineering," said another student, Leonardo Pereira Alves, 27. "For someone who makes the minimum wage, the cost of university is terrible."
Educating a workforce also opens up marketing opportunities. The construction and plumbing supply company Amanco has launched a series of classes in 56 hardware stores to teach construction technique -- using Amanco products -- via lessons broadcast from a studio in Sao Paulo. About 26,000 students have completed the two-month course so far and graduated as "construction doctors."
"There are a lot of people who are working now without any kind of training. They learn with their fathers or uncles and do things the way that they did before, but have no formal training," said Marise Barroso, director of marketing for Amanco. "In Brazil, 80 percent of the construction business is informal."
If construction workers know how to use Amanco pipe fittings and tubing, she said, they will recommend these products to their customers. Amanco has found that sales of its products are 26 percent higher in stores where the classes are offered.
"There is nothing like this in any other country in Latin America," said Luiz Ros, a manager at the Inter-American Development Bank, which supports the Amanco project. He said that construction companies typically pitch their advertisements to the consumer but that it is often the construction worker who actually decides what materials to buy.
"What's fascinating is they're doing this for profit . . . by understanding who decides and who doesn't," Ros said. "The ultimate result is they are creating a community of well-trained and qualified production workers in Brazil when it is facing a huge bottleneck in terms of qualified construction workers."
At a recent Amanco-sponsored class in the city of Cabo Frio, outside Rio de Janeiro, students practiced using a table-mounted device that melted the ends of polypropylene tubing to quickly fuse sections of pipe. "This is really innovative technology," said the teacher, Alcides Jose Sampaio.
This chance to learn a trade has inspired Antonio Carlos Alexandre da Conceicao. In his 33 years, he had worked as a janitor, office boy, doorman, security guard, farmhand, ice cream vendor -- basically any form of day labor he could find.
"And now this is an opportunity for me to say: 'Oh I have this profession, a fixed profession. I'm in this career. I'm a plumber,' " he said.
He still wasn't sure what job, if any, awaited him.
"When you have a background like I have, working as a farmer, or those simple kind of things, it's hard for me to dream about something else," he said. "But learning these things and listening to people talk about new things happening, I'm allowing myself for the first time to dream."
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|From: Sam Citron||1/4/2009 4:15:29 PM|
|The Irish Economy’s Rise Was Steep, and the Fall Was Fast [NYT]|
By LANDON THOMAS Jr.
IT’S 3 a.m. at Doheny & Nesbitt, a favorite watering hole of Dublin’s political and business elite, and the property tycoon Sean Dunne stoops to retrieve a penny from the pub’s grimy floor.
One would think that Mr. Dunne, Ireland’s best-known building developer, would be in bed at this hour. It’s a weeknight, after all, and he has meetings that begin before first light.
What’s more, the Irish economy, pummeled by the most severe housing bust in Europe, has collapsed. And the gossip around town is that Mr. Dunne, whose brazen deal-making and Donald Trump-like lifestyle epitomized the country’s euphoric boom, might be going bankrupt.
But, no matter, a penny is a penny.
“I am never, never too proud to pick a penny up from the floor,” Mr. Dunne said. He is on perhaps his fifth pint of Guinness, capping a rollicking night of Champagne cocktails, followed by a wine-soaked dinner — yet his thick brogue is clear of even the faintest slurring.
“I grew up with nothing and I know the value of money,” he adds. “The Celtic Tiger may be dead and if the banking crisis continues I could be considered insolvent. But the one thing that I have is my wife and children — that they can’t take away from me.”
It is not known whether Mr. Dunne will fall victim to today’s world financial catastrophe, but there is no doubt that his country has.
Everything, it seems, has grown worse here. The recession started earlier and its bite has been deeper. Housing prices have fallen by as much as 50 percent. Bank shares have plummeted by more than 90 percent. Unemployment is approaching 10 percent.
The roots of Ireland’s fall date to more than 20 years ago, when a clutch of economists, politicians and civil servants put their heads together in this very pub and planted the philosophical seeds for the Irish economic miracle.
Known widely as the “Doheny & Nesbitt School of Economics,” these beery musings soon became government policy that chopped taxes in half, sharply reduced import duties and embraced foreign investment — a radical transformation that gave birth to the Celtic Tiger and perhaps the most open and vibrant economy in Europe.
But beyond the glow of this sudden efflorescence that made Ireland the fourth most-affluent country in the Organization for Economic Cooperation and Development, a housing bubble had begun to form. Low interest rates, a wave of inward immigration and a bank lending spree drove housing’s share of the economy to 14 percent, the highest in Europe, from 5 percent.
Developers like Mr. Dunne became multimillionaires and — much like the hedge fund and private-equity elite in America — became visible public and cultural figures. They were living large in a country just coming to grips with its ability to show a little swagger.
Ireland’s policy makers, like their counterparts in the United States and Britain, were seduced by record tax inflows and a full-employment economy. They paid little heed to the lonely voices that warned of the crash that finally came over the summer, when interest rates in Europe began to rise. Banks that had steered more than 60 percent of their loans toward property stopped lending, and asset values plummeted.
“We have repeatedly warned that the government’s housing policy was extremely dangerous,” said John Fitz Gerald, an economist at the Economic and Social Research Institute, a leading policy center in Dublin, who has long urged that the government stanch housing demand by raising taxes. “You will now see unemployment going to 10 percent and we will experience a sharp drop in output.”
He shakes his head and sighs: “This was predictable, but the government just did not deal with it.”
BY wide consensus here, two events have come to define — both culturally and financially — the sweep and excess of the Irish property boom. Both revolve around Sean Dunne.
In July 2005, Mr. Dunne paid 379 million euros for a seven-acre plot in the exclusive Ballsbridge neighborhood of Dublin and promptly announced that he would tear down the two luxury hotels on the site to build a high-end commercial and residential development.
That deal amounted to 54 million euros an acre, one of the highest amounts ever paid for land in Europe. His subsequent architectural plan featured a soaring Dubai-like office tower cut in the shape of a diamond that anchored a futuristic community of expensive houses and glamorous shops, and the price tag of one billion euros shocked Dubliners with its gall and ambition.
Hobbled by delays and vocal neighborhood opposition, the project sits before a local planning board that on Jan. 30 will either approve or scrap the plan.
The second moment occurred in 2004 when Mr. Dunne, who is now 54, celebrated his second marriage, to Gayle Killilea, a former gossip columnist 20 years his junior, by inviting 44 of his friends on a two-week Mediterranean wedding cruise on the yacht Christina O, on which Aristotle Onassis and Jacqueline Kennedy married.
Much as the $3 million birthday party for Stephen A. Schwarzman, the Blackstone Group founder, came to be seen as a crass display of private equity’s manifold riches, the Dunne wedding was viewed similarly in Ireland: as a conspicuous and garish expression of the man and his business.
That a billion euro property plan and a gaudy wedding celebration should be held up as cautionary exemplars of Ireland’s pursuit of money angers Mr. Dunne. In his view, it speaks to what some call the Irish disease.
“Jealousy and begrudgery are still alive and well in Ireland, and whoever eradicates them should be prime minister for life,” he says as he tucks into a heaping plate of gravy-drenched turkey and mashed potatoes in the restaurant of one of the two hotels he owns — and is hoping to raze. “It’s part of the Irish psyche and it is the result of 800 years of being controlled by other people, of watching everything the master or landlord is doing.”
Mr. Dunne’s compact paunch, reddish cheeks and mischievous grin — which he occasionally deploys with a wink of his eye — can give him the air of a department store Santa. But his business methods are far from jolly: he is notorious for taking legal action against all who cross him, from local newspapers to rival property developers.
He defends his purchase of the Ballsbridge site as responsible, not reckless, as his critics have deemed it. He points out, too, that his winning bid was just slightly more than the second-highest offer and that subsequent property sales had far exceeded his submission of 54 million euros an acre.
Still, he recognizes that times have changed. Just recently, he pruned staff at his development company, and some of his senior executives agreed to take 50 percent pay cuts.
Asked where he will find the 600 million euros that he needs to tear down the two hotels, dig a massive hole in the ground and erect his vision of a new Dublin, he ruefully remarks: “It is fair to say that there is not a queue of bankers lining up to lend to me right now.”
But he says the project will be completed, assuming that it wins approval of the planning board. “If anyone wants to bet I can’t do this, I will take that bet,” he says, citing, without specifics, talks with Asian banks and a sovereign wealth fund. “You have to have steel in a certain part of your body to do this job, and as one of my bankers recently said to me, ‘Sean, the only thing that will take you out is a stray bullet.’ ”
IN many ways, the ups and downs of Mr. Dunne’s life and career mirror the Irish economy’s own rise and fall. Born into a house without electricity or running water in the small provincial town of Tullow, outside Dublin, Mr. Dunne studied construction economics at a technical college in the 1970s.
Along with many of his countrymen, he forsook the stagnant Irish economy — in his case, choosing bartending in New York City and working on an oil rig in Canada.
With the Irish economy still afflicted by an unemployment rate of about 20 percent in the 1980s, and a punitive overall tax rate, he began his real estate career in London. He moved back to Ireland in 1990 and began a string of property deals.
He initially focused on government-sponsored housing projects. But as the Irish economy began its true take-off, demand came from the growing corps of newly wealthy Irish, many of whom were returning to Ireland from abroad. They were joined by a wave of foreign workers.
After years of emigration and economic stagnation, Ireland’s housing stock was depleted, precipitating a housing euphoria. Capital gains taxes were low, as were interest rates. Banks stood ready to lend, offering mortgages with no money down to a house-hungry population.
The projects of Mr. Dunne and a small circle of developers grew in size and scope until the skyline of Dublin, never known for its tall buildings, began to fill with cranes and great shiny towers.
Signs of a bubble were everywhere: a family home in Dublin cost as much as a similar abode in Beverly Hills; house prices more than doubled over a 10-year period; and household debt as a percentage of G.D.P. jumped to 160 percent from 60 percent during the same period.
Irish banks, unlike those in the United States, didn’t dole out that many subprime loans. Rather, they lent furiously to big property developers who themselves were liberated to build pell-mell by government-imposed tax breaks.
Mr. Dunne, who says he put 35 percent cash down — or about 125 million euros — for the Ballsbridge project, says that even with the drop in asset values, he still has hope that the project can be completed.
“This is the way God made me, with heavy shoulders and an ability to carry a great load,” he says, forcefully rejecting the rumors of his financial demise buzzing around Dublin. (One of the more fantastic claims was that his financial troubles had forced him to take a month’s recuperation in a mental institution.)
“Failure is not an option for me,” he says. But others aren’t so sure.
The Irish government recently announced a $7.5 billion bank bailout and took majority stakes in the country’s largest banks, a move that followed the government’s earlier promise to guarantee all bank deposits.
Analysts are uncertain that the government will allow the banks to continue to support the type of high-risk, high-reward projects that have become the bane of their financial existence.
“The banks in Ireland did not lend recklessly to individuals; they lent recklessly to developers,” says Ronan Lyons, an economist at Daft, Ireland’s largest property Web site. As for the Ballsbridge project, he may well take Mr. Dunne’s bet.
“I would be surprised if it gets built,” Mr. Lyons says. “The migrants are going home, there is a surplus of properties for sale, and even though this is a landmark project there is just not an appetite for large projects now.”
WHILE the pain is acute in Dublin, at least the city has the small comfort of having enjoyed the full benefit of the boom.
Such is not the case in the city of Limerick. Traditionally one of Ireland’s more depressed cities, Limerick was a latecomer to the property party. While there were some good times, the downturn has had a more wrenching effect there, with unemployment over 14 percent — among the highest rates in Ireland.
The layoffs have picked up speed around Limerick in the last month, as construction companies have stopped work, seemingly on a dime, sending such a procession of jobless to seek assistance that the local unemployment office became the second busiest in the country.
The waiting room in the office is dank and gloomy, and Dale McNamara, 20, wonders how a professional life once so charmed came to be so hopeless. Since graduating from high school as an electrician, flourishing building work in the area kept him more than busy and flush enough to buy a new car, start a family and consider buying a house.
Then, without warning on Dec. 5, he was told that it would be his last day of work, just six months before he would have received his certificate as an independent electrician.
Since then, he has been frantically knocking on doors, but to no avail. Now, as rent, heating bills and car payments pile up, he is beginning to feel desperate, unable to afford a night out or a Christmas present for his 20-month-old baby.
“If I don’t get a job in the next two weeks, I am worried about losing my house,” he says. “We have no money.”
He looks at his number in the unemployment lines and grimaces — he has been waiting four hours now and his name has still not been called.
“My grandfather says this reminds him of the 1930s when everyone left for America and Australia,” he adds. “There is just no work here.”
More dire, however, is the condition of the permanently unemployed in Limerick’s festering ghettoes, where experts say the unemployment rate touches 70 percent. During the early years of the economic revival, the government did its best to spread money to such areas, which are a feature of urban life all over Ireland.
IN fact, it was through social housing projects like these that Mr. Dunne got his start as a developer. But as the investment returns in the private sector became quite obviously more lucrative, the attention paid to so-called social estates like Moyross, on the northern outskirts of Limerick, wavered.
Crime, gangland disputes and a sense of anomie flourished as Moyross and other similar projects evolved as cocoons of poverty and hopelessness amid the riches and celebration of the Irish miracle.
“This place missed out entirely on the moment,” says Stephen Kinsella, an economist at the University of Limerick. “There has been no accumulation of wealth here.”
Walking through the garbage-strewn, empty roads on a cold, misty afternoon, Mr. Kinsella points to the shuttered houses and the mothers still dressed in pajamas taking their children home from school. Social workers in Moyross refer to the “pajama index”: the more men and women one sees who do not take the time and care to dress for the day, the worse the economic situation tends to be.
The Irish government has recently begun a regeneration project in Moyross that would result in large new investments in housing and infrastructure, but the going so far has been slow.
For Brother Shawn O’Connor, a Franciscan monk who has been living and working with the poor in Moyross for more than a year now, the vicissitudes of the Irish property market are a notion as distant as is his hometown, Red Hook, a village in the Hudson Valley of New York.
Brother O’Connor is the local superior of the community of Franciscan Friars, who do their work in some of the world’s most destitute communities. He and his fellow monks extend day-care assistance and spiritual counseling to the needy. They survive themselves on four hours of daily prayer and food handouts from neighbors — as Franciscans, they take a vow of chastity, poverty and obedience and thus do not spend money on any personal items, including food.
He recognizes that the deprivation of his community is severe, but suggests that it may be an easier hardship than the experiences of many Irish who have seen their riches disappear.
“There was this one story of a guy who shot his wife, son and daughter,” he says. “He had overextended himself. There is this desperation for wealth and people go after it — only to find out that it is not enough.”
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|From: Sam Citron||1/12/2009 7:53:04 PM|
|Capitalism Freezes in Worldwide Winter of Discontent (Update2)|
By James G. Neuger
Jan. 12 (Bloomberg) -- As capitalism staggers through its first globalized economic crisis, the costs won’t be measured only in dollars and cents.
From newly rich Russia to eternally impoverished sub- Saharan Africa, social strains are threatening the established political order, putting some countries’ very survival at risk.
In the past month, Nigerian rebels threatened renewed warfare against foreign oil producers, Russia sent riot police from Moscow to quell an anti-tax protest in Siberia and China’s communist leadership warned of social agitation as the 20th anniversary of the Tiananmen Square massacre looms.
The disillusionment and spillover effects of the global recession “are not only likely to spark existing conflicts in the world and fuel terrorism, but also jeopardize global security in general,” says Louis Michel, 61, the European Union’s development aid commissioner in Brussels.
Somewhere in the wreckage may lurk an unexpected test for U.S. President-elect Barack Obama, 47, one that upstages his international agenda just as Afghanistan’s backwardness and radicalism led to the Sept. 11 attacks that defined the era of George W. Bush only eight months into his term.
Among the possible outcomes: instability in Pakistan, a more aggressive if economically stricken Iran, a collapsing Somalia, civil disorder in copper-dependent Zambia, a strengthened, drug-financed insurgency in Colombia and a more warlike North Korea.
Cascading Into a Crisis
The U.S. housing slump that began in 2007 has cascaded into a worldwide crisis that forced central bankers to cut interest rates to near zero to unlock credit markets, pushed governments to bail out their biggest banks amid a $1 trillion of writedowns, and sent titans like General Motors Corp. and American International Group Inc. begging for bailouts.
The World Bank reckons trade will shrink for the first time in more than 25 years, deepening the economic hole for governments in developing nations, where higher food and fuel prices cost consumers an extra $680 billion last year and pushed as many as 155 million people into poverty.
Nuclear-armed Pakistan, once touted by Bush as the key U.S. ally in the war on terror, sits at the nexus between economic insecurity and extremism.
“Blood and tears” may be Pakistan’s fate, says Thaksin Shinawatra, 59, who as prime minister of Thailand fought rural poverty during a stormy five-year tenure until his ouster by a military coup in 2006. “That’s where I’m worried, and also about political stability, and the terrorist activities are there,” he said in an interview.
On Nov. 25, Pakistan clinched a $7.6 billion International Monetary Fund bailout to avert a debt default amid ebbing growth and an inflation rate of 23 percent in December that is ruining the livelihoods of its poor.
A day later, an Islamic terrorist group went on a rampage in Mumbai, India’s financial hub, killing 164 people and adding a bloody new chapter to six decades of animosity on the subcontinent. India accused Pakistan of harboring the militants, much as the Taliban uses ungoverned Pakistani tribal regions as a launch pad for attacks on Afghanistan.
Neighboring Iran is among the energy-exporting states afflicted by the 74 percent drop in oil prices from last July’s peak of $147.27. The government, reliant on oil income for more than half the budget, may pare subsidies for utility bills, adding to the pain of October’s 30 percent inflation rate.
Axis of Evil
Elections in June may determine whether Iran, part of Bush’s “axis of evil,” presses ahead with its nuclear program -- or may change little regardless of outcome, says Yousef al- Otaiba, the United Arab Emirates’ ambassador to the U.S. Whether or not President Mahmoud Ahmadinejad is re-elected, power will remain with Ayatollah Ali Khamenei and religious leaders.
“Whoever comes to office in June is going to be a different face of what I think is the same policy,” al-Otaiba said in an interview.
On a global scale, the spiral of economic distress and political radicalism has been at work throughout history, from the bread riots that stoked the French Revolution to the mass unemployment that brought the Nazis to power in Germany. Some dictators, like Hitler and Stalin, turned on their neighbors after disposing of internal enemies. Others, like Mao, walled off their societies, condemning millions to misery.
The increasingly lopsided world economy “provides fertile ground for extremism and violence,” French President Nicolas Sarkozy said at a conference last week in Paris. With globalization, he said, “we expected competition and abundance, and in the end we got scarcity, debt, speculation and dumping.”
Extremism and Violence
Historians say it’s too early to declare the end of the intertwining of the global economy, under way at least since the collapse of the Soviet bloc in 1989. For one thing, developed nations still have a huge stake in the system: Even with $29 trillion wiped off the value of global equity markets last year, the Dow Jones Industrial Average is back where it was in 2003, hardly a time of privation.
As a result, disturbances in the West -- from Greece’s worst riots since the 1970s, to a 31 percent increase in New Year’s Eve car torchings in France, to a pickup in shoplifting at 84 percent of major U.S. retailers -- won’t shake the foundations of those societies.
Failed and Failing
It’s the failed or failing states that stand to lose the most. “The punch line: Poverty does cause violence,” says Raymond Fisman, a professor at Columbia Business School in New York. Researchers led by Edward Miguel of the University of California have even quantified it: a 5 percent drop in national income in African countries increases the risk of civil conflict in the following year to 30 percent.
The frailest nations are those concentrated south of the Sahara desert, plagued by a legacy of despotism, corruption, disease and economic misfortune -- often all at once. The region accounts for seven of the top 10 countries in a ranking of “failed” states compiled by the Fund for Peace, a Washington- based research group.
With commodity prices sinking, cutting the UBS Bloomberg Constant Maturity Commodity Index by almost half in the past six months, mining companies including Anglo-American Plc, De Beers, Lonmin Plc, and Xstrata Plc are slashing jobs, adding to Africa’s economic woes.
Nigeria, holder of Africa’s biggest fossil-fuel reserves, is staring into a $5 billion budget hole due to the oil-price swoon. It also confronts an emboldened guerrilla movement in the southern Niger Delta, the oil-producing region that has attracted the likes of Royal Dutch Shell Plc and Chevron Corp.
“The outlook is not optimistic,” says Pauline Baker, president of the Fund for Peace, which ranks Nigeria 18th on the most-at-risk list. “Unless Nigeria begins to pull itself together, I think with the lowering oil price in particular it is quite vulnerable.”
As incomes shrivel in the poor world, the economically troubled rich world isn’t able to fill the gap. Even when the going was good, the Group of Eight industrial powers were struggling to meet a 2005 commitment to increase annual aid to poor countries by $50 billion by 2010. Now, official donations are set to fall by as much as 30 percent, the European Commission predicts.
The IMF may need another $150 billion to help reverse the damage to emerging markets, Managing Director Dominique Strauss- Kahn says. While “demand may be above what we have,” Strauss- Kahn said in an interview that he is convinced the IMF could scrounge up the extra funds.
Perched between advanced economies and the raw-materials exporters in the southern hemisphere is Russia, which used the eight-fold oil-price surge from 2002 to 2008 to reassert its claim to the great-power status that evaporated along with the Soviet empire.
Under President-turned-Prime Minister Vladimir Putin, that newfound clout became manifest in last year’s invasion of neighboring Georgia and this month’s shutdown of gas shipments to Europe. The tactics deflected domestic attention from the onset of the first recession since Russia’s debt default in 1998. The ruble dropped 19 percent against the dollar in 2008, the steepest slide in nine years. Today, it fell to 31.0533 per dollar, the lowest level in almost six years.
Belligerency fueled by sudden wealth is likely to be inflamed by sudden scarcity, says Harold James, a history professor at Princeton University.
“Economic difficulties are always a spur to foreign political adventurism,” James says. “In Russia, there’s already a big devaluation, there’s unrest in Siberia and other provincial cities. This is really where the destabilization is going to come from.”
As Russia clashes with its neighbors, China may be headed toward domestic repression. While growth of 7.5 percent as predicted by the World Bank will outstrip the industrial economies, the pace will be the slowest since 1990, the year after the army put down the Tiananmen pro-democracy uprising.
China’s recipe for raising the standard of living has relied on creating jobs in coastal boomtowns like Shanghai as a magnet for millions of poor from the vast, rural interior. Now that formula is breaking down. More than 10 million migrant workers lost their jobs in the first 11 months of 2008, an unidentified Labor Ministry official told Caijing Magazine last month.
Using Communist Party code for riots and civil disorder, the state-controlled Outlook Magazine last week warned that a spike in “mass incidents” will test the government’s ability to preserve the social peace.
At stake is the endurance of the Chinese hybrid of an open economy and closed political system. During its two-decade rise that has increased gross domestic product almost 10 times to make China the world’s fourth-largest economy and engine of global growth, a buoyant economy provided insurance against political dissent.
In a worst-case scenario, U.S. intelligence agencies warn, the communist leadership would roll back China’s integration into the world economy.
“Although a protracted slump could pose a serious political threat, the regime would be tempted to deflect public criticism by blaming China’s woes on foreign interference, stoking the more virulent and xenophobic forms of Chinese nationalism,” the U.S. National Intelligence Council concluded in November.
China has known outbursts of chauvinism in the past and remained intact, thanks to a social hierarchy dating back to the age of Confucius. Poorer countries lacking that political anchor face a bleaker outlook.
The crisis “could undermine the development momentum,” Liberian President Ellen Johnson Sirleaf said in an interview. “It would mean joblessness would increase, and that could undermine the stability of nations.”
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|From: Sam Citron||1/15/2009 12:43:31 PM|
|Chinese officials gamble, and their luck runs out|
By Mark McDonald
Thursday, January 15, 2009
MACAO: As mayor of a small city in the Chinese hinterland, Li Weimin started out innocently enough, playing the slots in nearby Macao, games with names like Five Dragons, Chinese Kitchen and Super Happy Fortune Cat.
But he soon began to try his hand at other games, and for higher stakes, financing his increasingly frequent trips to glitzy casinos by dipping into the municipal budget and several real estate firms under his control.
"It was easy for me to borrow or divert money from those places," the 43- year-old Li said at his trial, according to a state-run newspaper, China Daily. Eventually he lost $12 million and was sentenced to 20 years in prison.
Li is one of an increasing number of Communist Party bosses and government officials who, government prosecutors say, pillaged state funds, company accounts and municipal treasuries to try their luck in Macao, which sits just across the border from Guandong Province.
Many of the biggest losers have been sent to prison and at least 15 have been executed. Some have committed suicide. The scandals have become a source of deep embarrassment for the Chinese government, which has now begun cracking down on travel visas for Macao.
While gambling remains illegal in mainland China, it is pure oxygen for Macao, which Portugal handed back to China in December 1999. The tiny territory, which has been enjoying a gambling-tourist-building boom since 2004, relies on gambling for 75 percent of its tax base.
Now the biggest gambling market in the world, Macao has annual gambling revenues higher than the Las Vegas Strip and Atlantic City combined. Among its 31 casinos is the world's largest, the Venetian Macao.
Much of that prosperity is now threatened, experts here say, not only by the global economic crisis but also by the crackdown on gambling by the government in Beijing. The issue is so sensitive in China that more than a dozen interview requests over the past month were refused by government and party leaders.
A Chongqing official, the head of the local Communist Party's propaganda department, was accused of embezzling a total of $24 million. Along with a co-worker, he blew at least half the money at the Casino Lisboa here, according to Xinhua, the official Chinese news agency.
The Chinese officials who gamble here lose mostly at baccarat, the game of choice in Macao, but they also lose at blackjack, poker and a dice game called Fish-Prawn-Crab. And even though many of them are neophyte gamblers, they often bet thousands of dollars on a single hand.
A 2008 study of 99 high rollers from mainland China showed that 59 had some sort of state affiliation: 33 were government officials, 19 were senior managers at state-owned enterprises and 7 were cashiers at state businesses. They were typically men, between 30 and 49 years old, and lived in mainland areas close to Macao.
The government officials reported losing an average of $2.7 million each, according to the study, which was conducted by Zeng Zhonglu, a professor at Macao Polytechnic Institute. State managers lost $1.9 million each, on average, and cashiers dropped an average of $500,000. Most said their gambling careers lasted less than four years before they were found out.
Their losses at the tables bankrupted at least 10 companies. An editorial in the Beijing Youth Daily said gambling by public officials "threatens the safety of the national treasury," though it is unclear just how much public money has been gambled away.
"I doubt even the Chinese government knows," said Desmond Lam, an expert on Macao and Chinese gambling who is currently a senior research fellow at the University of South Australia. "Still, the figure is likely to be very substantial, at least in the hundreds of millions so far.
"And if you include the undetected money, it must be higher."
China had tried repeatedly to clamp down on gambling by public officials but had never had much success until hitting on the idea of limiting visas. The new visa regulations, which went into effect last summer, limit mainland officials to just one trip every three months, and for no more than seven days, and have been highly effective, gambling analysts and scholars say.
"It has been a very, very serious problem, but it's better now," said Zeng, the author of the study on high rollers. "The mainland government has strict controls over officials coming to Macao."
But along the way, the restrictions have helped turn Macao's boom into something of a bust, a connection that was underscored on Monday, when the stocks of Macao casino companies plunged by a fifth after Beijing announced that it would retain the visa controls. Share prices of the companies are down more than 80 percent on average from their highs a year ago.
Casino bosses, tour operators, shop owners, restaurateurs and hoteliers say they are feeling the pain from what Samuel Yeung, the manager of the landmark Hotel Lisboa, calls "the tightening control of mainland China."
Gambling revenues are plunging and luxury shops are empty. Soaring hotel and apartment towers stand half-finished. Thousands of construction and casino workers have been fired. Last month at the Venetian, half the singing gondoliers on its indoor "Grand Canal" were abruptly fired.
"The government is saying Macao is going too fast and we need to cool it down," said Davis Fong, a business professor and director of the Institute for the Study of Commercial Gaming at the University of Macao. He cited a freeze on new projects and tighter regulations on the territory's casinos.
It is as if the gold is running out in the Klondike.
"It's not so much the global downturn that's having an effect on Macao; it's the visa restrictions that are having the most impact," said Anil Daswani, an analyst in Hong Kong who follows the gambling industry for Citigroup. "Clearly there was way too much capital coming into Macao, and the mainland is trying to cool the economy.
"But it's definitely worrying. Volumes are down materially."
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|From: Sam Citron||1/21/2009 1:54:33 PM|
|Ireland’s Banks Sink With Decline of ‘Celtic Tiger’ (Update2)|
By Dara Doyle and Louisa Nesbitt
Jan. 21 (Bloomberg) -- The bloodletting may be far from over for Ireland’s banks as the wheels come off what was once Europe’s fastest-moving economy.
The government said Jan. 16 it would seize control of Anglo Irish Bank Corp. following a scandal that forced the resignations of its chief executive officer and chairman. Three days later, Brian Goggin, CEO of Bank of Ireland Plc, said he will retire a year early following a bailout announced in December that also included Allied Irish Banks Plc. Bank of Ireland fell as much as 33 percent today in Dublin.
“Nobody can stop what’s happening,” said Ken Murray, CEO of Blue Planet Investment Management in Edinburgh. “It’s going to carry on, and governments are going to have to come up with the capital because the market doesn’t have it.”
Ireland’s financial industry fed the so-called “Celtic Tiger” as the economy more than doubled and banking shares increased at least fivefold in the decade ending in 2006. Now the property market is collapsing, Irish financial shares are down more than 90 percent from a year ago, and some analysts say it’s just a matter of time before Bank of Ireland and Allied Irish, the two biggest lenders, combine or end up in state control.
“Merging is one possibility that needs to be actively looked at now,” said Ray Kinsella, business professor at the University College Dublin. “The second option is nationalization, to take them into public ownership for a fixed period of time.”
Ireland needs both Bank of Ireland and Allied Irish to survive, said Alan Ahearne, a lecturer at the National University of Ireland in Galway and a former economist at the Federal Reserve in the U.S. “So it would be reasonable for the government to put more money into them or even nationalize them,” he said.
Allied Irish was unchanged at 45 euro cents at 1:30 p.m. in Dublin. The company now has a stock market value of 397 million euros, less than Bank Zachodni WBK SA, the Polish bank it owns. The Irish financial index fell 7.9 percent.
Ireland’s banking policy is designed to avoid a banking failure ‘under any circumstances,” Power, foreign affairs minister Peter Power said today in an interview with Dublin-based broadcaster RTE today. The government will provide “whatever funds are necessary” to enable Allied Irish and Bank of Ireland finance themselves, he said.
The government’s “firm intention” is to keep Allied Irish and Bank of Ireland in private ownership, Finance Minister Brian Lenihan told lawmakers yesterday. Allied Irish CEO Eugene Sheehy said in a message to employees that he believes the Dublin-based bank will remain independent.
Ireland isn’t alone in having to deploy taxpayer’s money. The British government increased its stake this week in Royal Bank of Scotland Group Plc to 70 percent as the Edinburgh-based lender faced its biggest loss in British history. The Bank of England also plans to buy 50 billion pounds ($69 billion) of assets, and the U.K. may back hundreds of billion pounds of securities hurt by market turmoil.
Convincing investors to stump up money for Irish banks is a tall order, according to Andrew Ramsbottom, who helps manage 7.3 billion pounds for Deutsche Bank AG in Liverpool. Ireland’s economy is set to slump 5 percent this year, Western Europe’s worst performance, the European Commission forecasts.
“International investors don’t seem to want to know at the moment,” said Ramsbottom.
The six-member ISEF Index of Irish financial companies has dived 96 percent during the past year. The companies together now are worth less than a fifth of Dublin-based CRH Plc, the world’s second-biggest maker and distributor of building materials.
“Investors have lost faith in the Irish economic story and in the banks,” said Jim Power, chief economist at Dublin-based investment and insurance company Friends First. “They are not going to be able to raise money.”
Ireland’s house prices, which quadrupled between 1997 and early 2007, lost 15 percent in two years, according to a monthly index by the Economic and Social Research Institute in Dublin.
Irish banks are owed 39 billion euros by real estate developers, the country’s financial regulator said on Oct. 14. Development land values have fallen at least 40 percent in the last year, according to the Irish unit of CB Richard Ellis.
Amid concern about the bad debts, Ireland’s government on Dec. 21 said it would invest 2 billion euros in both Bank of Ireland and Allied Irish and underwrite a further sale of shares of as much as 1 billion euros each.
Failure to Disclose
The difficulties may have been exacerbated by troubles at Anglo Irish, a Dublin-based bank that lends to businesses.
Already facing mounting losses on property loans, Anglo’s woes increased last month when Chairman Sean Fitzpatrick quit after saying he failed to fully disclose loans of as much as 129 million euros from the bank over an eight-year period.
CEO David Drumm left a day later and Finance Director Willie McAteer resigned last week.
“Clearly the market is saying, we don’t want anything to do with the banks,” said Brian Lucey, associate professor in finance at Trinity College Dublin. “I guess the only way forward is nationalization for all the banks.”
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|From: Sam Citron||1/27/2009 11:12:31 AM|
|Ukraine Stares Into an Economic-Political ‘Abyss’ (Update2)|
By James M. Gomez and Daryna Krasnolutska
Jan. 27 (Bloomberg) -- For Europeans, last week’s resumption of Russian natural gas shipments ended a two-week energy dispute. For Ukraine, it may have ended any hope of weathering the global financial crisis.
The accord with Russia will increase Ukraine’s spending on gas by almost 7 percent, to $9.16 billion, at a time when soaring bond yields are raising the specter of default. Already, Ukraine is living on the first installment of a $16.4 billion bailout from the International Monetary Fund. Further payouts will depend on whether the country balances its 2009 budget, cancels a tax on foreign exchange and strengthens banking laws.
Ukraine hasn’t been so fragile since the early 1990s, following the breakup of the Soviet Union. The economy may shrink as much as 10 percent this year, which would be the deepest recession in Europe except for Iceland’s. President Viktor Yushchenko’s support is close to zero and clashes with Prime Minister Yulia Timoshenko may bring down the government.
“The country is staring into the abyss, both politically and economically,” said Neil Shearing, an analyst at London-based Capital Economics Ltd. “I can’t think of another country that will be hit harder this year” in eastern Europe.
The 2004 Orange Revolution, which brought Yushchenko and Timoshenko to power when both favored joining the European Union and the North Atlantic Treaty Organization, seems far away.
A promise of EU membership hasn’t been offered, and NATO ruled out near-term entry for Ukraine and Georgia last December, though support for Ukraine in the longer term would keep the region stable, said Czech Deputy Prime Minister Petr Necas, whose country holds the EU’s six-month rotating presidency.
“We are interested in having a stable and economically prosperous Ukraine,” Necas said in an e-mailed answer to a Bloomberg question yesterday. “Ukrainian workers undoubtedly contribute to the economic growth in the Czech Republic and we do not regard them as a threat.”
The outcome of the energy controversy has strengthened Russian Prime Minister Vladimir Putin, 56, who said on Jan. 8 that Ukraine’s leadership was “highly criminalized.” Over time, Ukraine’s income from transit fees for natural gas may be jeopardized as Europe seeks or builds more stable supply routes.
The dispute with Russia that left Ukraine and other eastern European countries without gas is only the latest in a series of events that brought the country to the brink of collapse.
Global steel prices have fallen 50 percent since a record in July, hurting the country’s largest export and cutting sales for VAT ArcelorMittal Kryvyi Rih and Metinvest BV. The higher gas costs will deepen this year’s expected contraction. Gross domestic product will shrink as much as 10 percent, according to Shearing, and 9 percent based on HSBC Holdings Ltd. forecasts.
Yields on Ukraine’s $105.4 billion of government and company debt, now at 25.67 percent, are the highest of any country with dollar-denominated debt except Ecuador, which defaulted in December.
The gross foreign debt includes direct state debt, including loans from the IMF, the European Bank for Reconstruction and Development; domestic Treasuries owned by foreigners; bank borrowing, including bonds and loans; and corporate debt, including bonds and loans.
The Ukrainian currency, the hryvnia, has lost 38 percent in the past year against the dollar and the benchmark stock index has plunged 75 percent.
Like fellow Russian gas customers Bulgaria and Slovakia, Ukraine failed to diversify its power sources or budget for a gas- price increase that Russia has been trying to impose since Yushchenko took office at the beginning of 2005. The agreement between Russian gas exporter OAO Gazprom and NAK Naftogaz Ukrainy will make Ukraine pay market prices starting next year.
The bickering between Yushchenko, 54, and Timoshenko, 48, has gone on since they began sharing power, crippling the government’s ability to pass legislation to strengthen the banking and economic systems and sell unprofitable state assets.
“You can start by putting the Ukrainian government on the stand,” said Fredrik Erixon, director of the Brussels-based European Centre for International Political Economy. “One can blame other factors, but the simple fact is you can avoid the situation you have seen in Ukraine with better policies.”
A Dec. 17-28 survey conducted by the Kiev-based Democratic Initiatives Foundation showed that 84 percent of respondents believed the country was moving in the wrong direction even before the gas crisis started. That compares with 48.6 percent in 2007. The poll of 2,012 people had a margin of error of 2.2 percent.
The poll also found that if presidential elections scheduled for January 2010 were held today, 22.3 percent would support former Prime Minister Viktor Yanukovych, the pro-Russian opposition leader. Another 13.9 percent would pick Timoshenko and 2.4 percent would choose Yushchenko. Almost half said no politician could deal with the financial and economic crises.
“The government was not ready to meet such obvious worldwide financial threats and currently is not able to protect Ukrainians,” said Oleksandr Slobodyanyk, 27, who lost his job more than two months ago as a broker at Concorde Capital in Kiev. “I see no other option but to look for a job abroad.”
The government broke down in October after Timoshenko joined the opposition in stripping the president of some powers. Plans for early elections on Dec. 14 were later dropped after the two leaders re-formed the Cabinet and promised to work together.
Pressure on Central Bank
Now, Yushchenko blames Timoshenko -- who went to Moscow and negotiated with Putin -- for giving in too far to Russian demands. She is trying to oust central bank Governor Volodymyr Stelmakh, an ally of Yushchenko’s.
Former Soviet republics Latvia and Lithuania to the north experienced rioting this month because of anger over government failure to limit the effect of the financial meltdown.
“Ukrainians, generally speaking, have had enough of the government,” said Tanya Costello, the London director for New York-based Eurasia Group. “I don’t think there is a political leader in whom the public has its trust at the moment. So it’s more likely you will see pockets of social unrest.”
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|From: Sam Citron||1/28/2009 1:43:39 PM|
|Eying Chinese imports and electricity production. |
Both have fallen off a cliff lately [see article below, John Authers video 1/21/08 at ft.com, and seekingalpha.com], which is worrisome to those who believe that China must replace US as the world's consumer of last resort if we are to recover from a worldwide recession.
China Imports, Exports Tumble [1.12.08]
Dow Jones Newswires
SHANGHAI -- China's exports and imports both fell for the second consecutive month in December, with an accelerated contraction in trade offering a bleak outlook for the world's fourth-largest economy and highlighting the need for Beijing to rely more on potent fiscal stimuli.
The weak trade data, especially that of imports, showed China isn't just suffering from a global economic slowdown but also from a deterioration in local demand, an engine that the authorities have hoped would keep the economy going and unemployment in check.
China's exports in December fell 2.8% from a year earlier to $111.16 billion, while imports in the month fell 21.3% to $72.18 billion, a person familiar with the data said.
China's trade surplus in December totaled $38.98 billion, the person said. That was down from a record $40.09 billion in November.
The fall in December exports was lower than the median forecast of a 3.8% drop by 12 economists surveyed by Dow Jones Newswires but was higher than the 2.2% decline in November, the first monthly drop since June 2001.
The rate of decline for imports in December was sharper than the 19.1% expected by the economists and the 17.9% fall in November, the first decline since February 2005.
While the falling value of imports in December partly reflects declining international commodity prices, it also indicates "a sharp deceleration of economic growth in the fourth quarter and poor growth momentum in the first quarter," said Stephen Green, an economist at Standard Chartered Bank.
Machinery imports were weak in November and likely continued into December, showing that "there is a real downturn in domestic investment...and manufacturing," he added.
Beijing's recently unveiled four-trillion-yuan fiscal stimulus package, which will raise public spending on infrastructure and social welfare, will likely give some support to imports of commodities such as iron ore and metals this year, Mr. Green said.
The weak trend for imports could start stabilizing in the second half of this year as Chinese firms finishing running down their inventories and global commodities prices rebound, said Xu Jian, an analyst at China International Capital Corp.
China's exports in 2008 rose 17.2% to $1.43 trillion and imports last year rose 18.5% to $1.13 trillion, said the person familiar with the trade data.
The country's trade surplus in 2008 was a record $295.46 billion, the person said, up from 2007's surplus of $262.2 billion.
The market had expected a 17.3% rise in 2008 exports, a 19.3% rise in imports and a full-year trade surplus of $289.2 billion, according to the survey of economists.
China's exports will fall around 5% in 2009, extending the weakness from the past two months, said Mr. Xu.
Mr. Xu added that Beijing will likely raise export-tax rebates on more products and ease trade financing but is unlikely to use a weak yuan as a tool to help exporters.
As for China's trade surplus, despite a narrowing in December, it stayed near historically wide levels. While ordinarily trade surpluses would be welcome, the performance in the past two months was of a different and worrying nature: the strong numbers were driven by a sharper decline in imports rather than faster growth in exports as in previous months and years.
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|From: Sam Citron||2/7/2009 4:45:12 PM|
|Have Car, Need Briefs? In Russia, Barter Is Back [NYT]|
By ELLEN BARRY
MOSCOW — Does the Taganrog Automobile Factory have a deal for you! Rows of freshly minted Hyundai Santa Fe sport utility vehicles are available right now. In exchange — well, do you have any circuit boards? Or sheet metal? Or sneakers?
Here is a sign of the financial times in Russia: Barter is back on the table.
Advertisements are beginning to appear in newspapers and online, like one that offered “2,500,000 rubles’ worth of premium underwear for any automobile,” and another promising “lumber in Krasnoyarsk for food or medicine.” A crane manufacturer in Yekaterinburg is paying its debtors with excavators.
And one of Russia’s original commodities traders, German L. Sterligov, has rolled out a splashy “anti-crisis” initiative that he says will link long chains of enterprises in a worldwide barter system.
All this evokes a bit of déjà vu. In the mid-1990s, barter transactions in Russia accounted for an astonishing 50 percent of sales for midsize enterprises and 75 percent for large ones.
The practice kept businesses afloat for years but also allowed them to defer some fundamental changes needed to make them more competitive, like layoffs and price reductions. It also hurt tax revenues.
The comeback is on a small scale so far. The most recent statistics available, from November, showed that barter deals made up about 3 to 4 percent of total sales, according to the Russian Economic Barometer, an independent bulletin. Nevertheless, economists are taking note.
“Russians are so arrogant that they never cut prices,” said Vladimir Popov, a professor at Moscow’s New Economic School. By turning to barter systems during an economic downturn, he said, “you are hiding your head in the sand.”
It would be hard, however, to dissuade business owners who see barter as a point of light on a bleak financial horizon.
Among the most upbeat of them is Mr. Sterligov, who, just as the credit crunch brought most business deals to a halt, shoveled $13 million into the Anti-Crisis Settlement and Commodity Center.
Mr. Sterligov, 42, is one of the great characters of Russian capitalism. In his mid-20s, on the eve of the Soviet Union’s collapse, he was a freewheeling, chain-smoking commodities trader surrounded by leggy assistants.
But Mr. Sterligov sat out the oil-fueled prosperity of recent years. After a failed run against Vladimir V. Putin in the 2004 presidential election, he retreated to a log house outside Moscow, opting for the beard and boots of a Russian shepherd. In August, intimations of the financial crash lured him out of the woods.
He plans to use a computer database to create chains of six or seven enterprises having difficulty selling their products for cash, in which the last firm on the chain would pay the first in a single cash transaction.
It is the kind of multiparty barter that rose to prominence in the 1990s, when managers of factories across Russia devised complex barter chains to keep the maximum number of enterprises in business when none had cash to pay their bills. A computer, he said, can do the same job faster and more efficiently.
“What was in the past will remain in the past,” Mr. Sterligov said in an interview last month, from the 26th-floor suite he has rented in a Moscow high-rise. “We are making a step into the future.”
So far, economists doubt that barter will grow to the level it reached in the 1990s. Earlier in the transition to a market economy, industrialists still had little monetary stake in their businesses but were dependent on the prestige that went with executive positions, said Andrei Yakovlev of the Higher School of Economics here. They had little incentive to cut costs, and barter deals kept them going for five years, he said.
Now, business owners and managers “are really trying to reduce costs and reduce inefficiency,” Mr. Yakovlev said. Interest in barter, he said, is more likely to come from regional governments, which have the most to lose from high unemployment.
Barter is a side effect of tight monetary policy, said Mr. Popov, who is teaching at Carleton University in Ottawa. Russia is in the grip of a liquidity crisis. As in the mid-1990s, the government has made it a priority to shore up the economy by buying up rubles, hoping to avoid the panicky sell-off that comes with rapid devaluation. The ruble has gradually slid from 23.4 to the dollar in early August, before Russia’s war in Georgia, to 36.2 to the dollar last week.
As a result, the money supply continues to contract, and some enterprises turn to barter to survive. “We are stepping for the second time on the same rake,” Mr. Popov said. “The second time is a greater sin.”
Long-term macroeconomic trends, however, are the last thing manufacturers were thinking about in recent weeks.
The Hyundai factory in Taganrog, the southern seaport where Chekhov was born, rolled out a barter promotion on its Web site, offering to trade vehicles for “raw materials,” “high-tech equipment” or “other liquid goods, including finished products of various branches of industry.” Gleb Korotkov, a spokesman for the factory, said he could not be specific about what goods were meant, saying it was a “commercial secret.”
Barter deals seem to be spreading fastest in construction industries. Dmitri Smorodin, who runs a large St. Petersburg building firm, said he thought for two months before announcing in late January that he was willing to accept barter items — including food products — as payment for construction work.
He said he hoped that adopting the strategy early in the crisis would give him an edge over his competitors.
“Food we would happily accept, because it’s easy to sell,” he said. “Of course, money is always preferable.”
In contrast, Uralchem, a fertilizer producer, refused payment in grain and beef, because the company conforms to international financial reporting standards in its reports to shareholders, said Andrei Kocherov, a spokesman for Uralchem, which was founded in 2007. The modern accounting system would preclude barter, he said.
Meanwhile, in Bashkortostan, a republic in southwestern Russia, local development officials publicly encouraged businesses to develop barter chains.
Sergei Ryazanov, 30, a businessman from the Siberian city of Surgut, took out an advertisement a month ago offering to barter excess metal piping. So far, he has not been impressed by the offers he has received; he said people were not desperate enough to drop prices. He is looking for a truly liquid commodity, something universal, like gasoline. Even underwear, which, he said, “is much more liquid than automobiles.”
He was intrigued by Mr. Sterligov’s idea, though he questioned the wisdom of planning a career in barter. “It will take him a couple years to get it right,” Mr. Ryazanov said. “And then, in two years, liquidity will be back.”
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