White Sun of the Desert

An understanding of basic economics was always in short supply in the Soviet Union, and it is not exactly in abundance in modern Russia.

Natural gas is undervalued and its price less susceptible to producer influence than oil because long-term contracts dominate the industry, Gazprom deputy chief Alexander Medvedev said.

…

“Objectively, natural gas is undervalued,” Medvedev said. “The era of cheap energy is over.”

Natural gas futures on the New York Mercantile Exchange have dropped 21% this year and are down 69% since last year’s high of $13.694 per million British thermal units. Gas for March delivery fell 0.9% today to $4.447 per million Btu at 2 p.m. in New York.

…

The gas price is linked to the price of oil, which is also undervalued, Medvedev said. “Oil at $85 per barrel is more justified than $45 per barrel,” he said.

The spot value of oil and gas is whatever somebody is willing to pay for it right now.  The future value of oil and gas is whatever anybody is prepared to pay for oil and gas futures.  Clearly, those who are actually wanting to buy oil and gas do not agree with Mr Medvedev’s assessment as to what his products are worth.  I suppose if he tried to flog his car, he’d be complaining that buyers were undervaluing it by only offering $19,000 and “objectively” it was worth $23,000.  Somebody should tell Russia’s captains of industries that the days of their being able to assign arbitrary prices which everyone must pay ended almost 20 years ago.

From the same article, this also amused:

The global financial crisis may mean an opportunity for Gazprom to purchase more assets at low prices, including in North America, Medvedev said, declining to comment further. The company may borrow money for the purchases from Russia’s state-owned banks at low interest rates, he said.

So state-owned Gazprom, which is massively in debt and the recipient of government bailout money, is going to borrow yet more money from state-owned banks at artificially low interest rates to purchase foreign companies which are struggling financially?  Sounds like one hell of a business plan.

On a related note:

Gazprom Neft, the oil arm of Russia’s gas export monopoly Gazprom, may emerge as a new owner of mid-sized oil outfit Russneft, according to reports.

Moscow-based financial daily Vedomosti quoted a source close to Sberbank , Russia’s largest bank, as saying such a deal could take place because the current effective owner of Russneft, Russian businessman Oleg Deripaska, was struggling to service his debt.

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Most of the debt belongs to Sberbank, which wants Gazprom Neft to take over Russneft and its debt.

Sberbank is state-owned.  Gazprom Neft is state-owned.  Little wonder that Gazprom Neft is Sberbank’s preferred buyer of the debt.  The consolidation of Russia’s banking and oil industry under a nationalised umbrella continues unabated.

There’s nothing quite like like a dose of economic reality to reveal preferences: 

Venezuela increased oil shipments to the US in January, despite President Hugo Chavez’s anti-US rhetoric and a promise to Opec to cut output, the US Department of Energy said.

Crude shipments from Venezuela to the US rose to an average 1.2 million barrels per day in January, up 14% from December, according to data from the department. Venezuela had promised to cut exports to the US by 16% starting 1 January to comply with Opec cuts.

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Chavez has often vowed to diversify Venezuelan oil markets, slashing its reliance on the US and boosting exports to allies such as China. When Opec asked its 12 members to reduce output by a combined 4.2 million barrels per day in January, Venezuela agreed to a 364,000 barrels-a-day cut, 11% of total production, and vowed the bulk of those cuts would come from exports to the US.

But tough times may now be stalling those plans, said [energy analyst Roger] Tissot, who suggested it would be easier for Venezuela to cut expensive, long-distance shipments to China, or discounted sales Latin American and Caribbean neighbors under Venezuela’s Petrocaribe pact instead.

Heh.

A spokesman for PDVSA declined to comment on the US report.

I bet he did.

Times are changing in Yuzhno-Sakhalinsk, and proof of this comes in the form of something I have never seen before in the town, and a few people I have spoken to on the subject say the same thing: a large banner in the centre of town advertising expatriate housing.  A year or two ago this would have been unheard of, and prices for expatriate housing just seemed to be spiralling eternally upward.  So what’s changed?  Firstly, Exxon have finished their main construction project.  Typically, it takes about 10%-20% of the number of people to operate and maintain a facility than to construct it.  There were also a lot of subcontractors involved in the construction, who have now packed up and left or downsized.  In addition, Exxon completed the construction of their new housing complex, meaning several dozen well-paid expats moved out of their apartments in town.

The process of demobilisation from the island of large numbers of foreign workers which Exxon has started marks the beginning of the end of the boom which Sakhalin has experienced for the last five years.  This process will gather pace and become a flood as the construction phase of the gigantic Sakhalin II project nears completion at the end of 2008.  Our company alone is looking to reduce its workforce on the island from about one thousand to fifty or sixty.  Almost every other contractor and subcontractor will be doing the same, many of whom will leave altogether.  It is highly likely that the number of foreigners working and living in Sakhalin in 2009 will have gone from the tens of thousands at the peak a year ago to just a few thousand.  This cannot fail to have an enormous effect on the local economy.

What is true for rented housing is true for office space.  The lease on our office is due to expire on 31st January 2008, and the landlord called me up last week gleefully telling me he would have to increase the rent if we wanted to renew.  He didn’t want to send me a proposal with the new rates, he said we should meet to discuss it.  No, he couldn’t come to my office, I should come to see him.  In an apartment somewhere.  No thanks, I said.  With that, he started shouting that plenty of other people want the office space and he’ll simply rent it to them.  I doubt it.  It took a morning of looking to find two suitable office spaces, in buildings newer than our current one, and for a cheaper rate.  We are paying well above market rate for out current office, largely because last year we were caught in a vice between workload and the expiry of our lease.  Not so this year.  We are about to take a better, cheaper office, and our current landlord can find some other mug to rent from him at 25% over market rate.  The availability of office space in Yuzhno-Sakhalinsk shot up when Exxon finally moved into their enormous new office building, freeing up whole floors all over the town.  And as the contracting companies downsize or leave, yet more becomes available.  Furthermore, one or two new office blocks have either recently been built or are due to be completed shortly.

Russians have never been too strong on economics ever since they spent 80 years pretending the laws of such didn’t apply to them.  Many of the residents of Yuzhno-Sakhalinsk are probably no better informed now.  The town witnessed an extraordinary boom as the giant oil and gas projects kicked off on the island, and the residents benefitted enormously in the form of salaries several times the national average, rental prices on a par with Moscow, and business opportunities in abundance.  A year or two ago, landlords could demand any price they wished for a property, suppliers of goods and services set out the rules and changed them at will, inviting any company who complained to go elsewhere, and if you were Russian and spoke a smattering of English you could get a well paid job, sit and do nothing, and move to a better job a month or so later.  In itself, none of this was a bad thing for Yuzhno-Sakhalinsk, in fact I think it was a very good thing.  But as any Russian should know, such excess brings with it a nasty hangover, and I don’t think anyone in the town is prepared for it – least of all our office landlord.  The mood amongst the local population is generally that the good times will last forever, and the economic power they had two years ago will last forever.  I can’t figure out if they are in denial, or they are simply blundering along in ignorance.

Take another example.   A year or two ago it was almost impossible to find a decent canditate for any position in a company.  Anyone who was any good at anything was employed already, and their employers made sure they kept them.  Those who did find themselves on the job market usually demonstrated why within a week of starting a new job.  That was then, this is now.  These days, CVs are starting to drop through our door, CVs of people with experience who have worked for foreign companies.  Two years ago, nobody had any experience and you had to take a chance that they’d turn out okay.  Nowadays, people come with experience, history, and a reference.  In the last four months, we have taken on two members of staff who have been demobilised from a construction project, have come with a good reference from their previous employers, and the expectations we had of them have largely been met.  Yuzhno-Sakhalinsk is a small town, and for years many of the local Russians seemed to think that reputation in the job market didn’t matter, as those were the days when being Russian and having a pulse almost guaranteed a job.   Employees used to stomp out of the door waving two fingers at the management, and start afresh in another company right away.  These days, I get phone calls from managers in other companies saying an ex-employee of mine has swung through the door applying for a job, and what did I think?  Some of the local Russians have been extremely smart in adapting to this shift in the balance of power, making sure that they build up a good reputation with an employer who then passes on his or her CV to a friend in another company with the recommendation they take the individual on.  Others are still stuck with the Soviet-like belief that they are entitled to a job under any terms they demand.

And yet another example.  The number of suppliers of goods and services has increased, and competition has entered the marketplace.  Nowadays, companies can demand to be treated like customers and not beggars, and supplier assessments are possible.  Suppliers can now be blacklisted, and are.  Three quotes can be obtained for most purchases, something which was nigh on impossible two years ago.

These patterns are only going to intensify and solidify until Yuzhno-Sakhalinsk becomes a normal market economy, where customers are treated as such and suppliers chase their business.  For many, the economic correction is going to be harsh: salaries will drop, no longer will they be able to depend on $30,000 per year income from renting out their apartment, and they will have to work to keep their jobs.  Any random group of Russians contains at least a few extremely smart and hard working individuals, and these will be the winners of the new reality.  But the days when everyone was a winner in Yuzhno-Sakhalinsk are quickly coming to an end.

The first topic of this post could be viewed as a footnote to this post, in which I mourn the lack of a decent supermarket in Yuzhno-Sakhalinsk.  Branded goods have come in for a lot of stick in the past few years, culminating in the book No Logo, the author of which seems to think it would be better if the world’s consumables were not produced by large multinationals and carrying brand names.  Critics of the book normally point to brands as being part of the system which guarantees, or at least attempts to uphold, the quality of a product. 

Yuzhno-Sakhalinsk would be a good place to put the two opposing theories to test.  Putting forth anecdotal evidence from my own experience, I have found that there are a few products in the supermarkets here in addition to the ones you would probably find on the moon, such as Coca-Cola.  When I am hunting through rows of tins and jars bearing the names of mysterious Russian manufacturers such as Favourite Garden or My Family, I am drawn to the few international brands such as Parmalat, Heinz, Nestle, and Green Giant.  Maybe there is a familiarity comfort factor at play here, but to be honest I’d never heard of Parmalat until they fell into financial trouble a few years back, and to my knowledge I’d never bought their products until I came here.  So I’m thinking my preference of goods coming with a label I have heard of and have seen abroad is because I believe these brands carry a stronger guarantee of quality than the brands I have never heard of. 

But that’s just me, and anecdotal evidence doesn’t say much.  What does say a lot is the premium people are prepared to pay for the internationally branded goods, which is usually 30%-50% higher than the locally branded goods.  If these items were to stay on the shelves for weeks, then it would be safe to say that the international brand is not worth premium being charged for it.  But as things are, the internationally branded goods tend to disappear pretty quickly, which is clear evidence that people are willing to pay considerably more for internationally branded goods than products carrying an unfamiliar brand name.  As an experiment, I’d like to see Naomi Klein put in a year in Yuzhno-Sakhalinsk and inspect her shopping basket every time she buys in some groceries.

I’ve been meaning to write a post on this subject for a while now, but I was prompted to do so today after I read some of the other blogs named by The Times on their 50 Best Business Blogs.

One of the blogs named under the Retail section of the list is Tescopoly, which is:

An alliance of organisations concerned with the negative impact of supermarket power.

There is little doubt that many people will feel a negative impact of Tesco’s astonishing success: competitors, for example.  But I am in serious doubt as to whether the consuming public, more commonly known as ‘customers’, share this view.  Judging by Tesco’s sales figures, probably not, and Tescopoly implicitly acknowledge this with the statement:

Growing evidence indicates that Tesco’s success is partly based on trading practices that are having serious consequences for suppliers, farmers and workers worldwide, local shops and the environment.

which makes no reference to customers. 

But this post is not about whether or not Tesco’s success at giving customers what they want comes at the expense, unacceptable or otherwise, of local shops, farmers, suppliers, etc.  It is about living in a place without a decent supermarket, and on this point I have quite some experience. (more…)

It is a well known fact that Russian salaries are very poor, with the average monthly wage in many Russian towns being little more than a few hundred dollars, which is often barely enough to live on.  In Yuzhno-Sakhalinsk, the wages are much higher than the Russian average because of the presence of the oil companies and their dozens of suppliers and subcontractors, but the absolute salary paints a false picture because the cost of living in Yuzhno-Sakhalinsk is higher than any other city outside of Moscow, and many times higher than towns of similar size.

There are probably several good reasons as to why salaries in Russia are so low, but one of them revealed itself in all its splendour as I was preparing an annual budget this morning.

Under Russian law, employees are entitled to 28 days paid holiday a year.  In addition to this they also get 11 days paid public holiday per year, making a total of 39 days.  If the employee works in the Russian “Extreme North” region, which includes Sakhalin Island, they get an additional 16 days paid holiday per year, making a total of 55 days.

By Russian law, the working week is 5 days; 40 hours long for men and 36 hours for women.  55 days per year on a 5 day week equates to 11 weeks paid holiday per year, which is over a fifth of the working year.  Spread evenly over the entire year, an employee in Yuzhno-Sakhalinsk could get away with a 4-day week with a man working 32 hours, and a woman putting in just under 29 hours to justify her salary.

Furthermore, overtime must be paid at a rate of x1.5 for the first two hours per day, and x2 for any hours worked over that.

It’s a small wonder that salaries in Russia – especially those of women - are shockingly bad.  Who is going to pay anyone a high salary for putting in an average of 30 hours per week?

Do Russians hate Americans?  It’s a good question, one that I can’t answer, and I expect nor can anyone else.  Verbally, they certainly dislike America and, like the denizens of the Middle East, register their displeasure by grabbing any opportunity to visit, study in, or emigrate to the USA with both hands.  So it’s hard to know.

That said, one thing is for sure: they all hate George Bush.  Why?  Many reasons apparently, but here’s one.  Under Clinton, the dollar was stronger against the rouble than it is now.  Almost nine years after the rouble collapsed in 1998, wiping out savings and businesses overnight, Russians still do not have confidence in their own currency and hence insist their salary is paid in dollar equivalent.

And under Bush, the dollar has fallen against the rouble, hence Russians get paid less than they did before.  Bush is president, so the reasoning goes, and therefore he is solely responsible for the weakening dollar, which is making Russians poorer.  So they hate him.

Is it only Russians who fail to see the irony here?