Tough Times for Ronald in Russia

I was once told a story by an American who found himself working in Russia in the early 1990s.  He had met a fellow American who was involved with the opening of McDonald’s in Moscow, and the latter was finding things rather frustrating, particularly when trying to introduce western standards of customer service to the staff.  Apparently, he told one of the Russia servers to greet the customers and offer a smile, which prompted the following response:

“Why?  We’re the ones with all the burgers.”

It seems that almost 25 years later some Russians still haven’t worked out the basic relationship between business and customer as far as McDonald’s is concerned:

Russia’s consumer watchdog has announced unscheduled checks on McDonald’s restaurants across Russia as part of a probe into food standards.

The move comes after watchdog Rospotrebnadzor temporarily shut four McDonald’s restaurants in Moscow.

The actions come amid rising tensions and sanctions between Russia and the West over the crisis in the Ukraine.

The regulator denied the checks were politically motivated. McDonald’s said “top quality” food was its priority.

The regulatory agency said: “There are complaints about the quality and safety of the products in fast food restaurant chain McDonald’s.”

BBC Moscow correspondent Steve Rosenberg said: “The suspicion is that because McDonald’s is one of the symbols of America, that’s why it’s encountering problems now.”

Russian MPs have also called for checks on other US fast-food brands, including Burger King and KFC, he said.

“It does seem, if not the public, then the people in power, are losing their appetite for American fast food,” he added.

The primary beneficiary of McDonald’s in Russia are those Russians wishing to purchase its products, who number in the millions.  (This point was driven home to me once when somebody in Sakhalin asked me, in all seriousness, to bring him a Big Mac meal from Moscow when I returned from a business trip.  The flight is 9 hours.)

The secondary beneficiary of McDonald’s in Russia are the Russian owners (it is a franchise), managers, employees, and suppliers whose income derives from its operations.  As somebody with a greater grasp of economics than a Russian policymaker points out:

“It’s an extraordinary decision, because McDonald’s is the great symbol of the West, but at the same time they’ve set up the most extraordinary network of suppliers in Russia to keep the whole system going.

“There are now something like 300 McDonald’s across the country, and they’ve got an enormous network of people providing them with potatoes, and beef, and everything that goes into the product… In fact, it’s going to hit an enormous number of people inside Russia.”

I am quite certain that those who have ordered these closures have no idea of the impact that this will have on ordinary Russians (and even if they did, they wouldn’t care) and genuinely think that Americans are making billions of dollars as the only beneficiaries of McDonald’s operations in Russia.

To find such economic ignorance you’d really have to go to…well, Russia.  25 years ago.  Plus ça change.

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The False Start of Electric Cars

I have noticed that there is considerable optimism in some quarters about the future of electric cars, and many people are pointing to Norway as a sign that the internal combustion engine may be on the way out:

Norway may seem like an odd place for electric cars to thrive, but the 1,493 Tesla Model S new registrations last month set a new single-model sales record. That’s more than sales of the two next-best selling models, the Volkswagen Golf and Nissan Leaf, combined. In fact, so far this year, the Tesla Model S is the best-selling car in a cold country that has quickly warmed to electric vehicles.

Only when you look a bit closer you find the underlying reason as to why Norwegians have taken to the Tesla in such numbers:

Unlike many European countries, where electric cars carry a huge price premium, there is no import tax or 25% VAT tax on [electric vehicles] in Norway. 

And that reason is the government has, through taxation (particularly import taxes, which are a function of horsepower), made the price of ordinary cars artificially high. From Wikipedia:

As an example, by early 2013 the price of the top selling Nissan Leaf is 240,690 krone (around US$42,500) while the purchase price of the 1.3-lt Volkswagen Golf is 238,000 Krone (about US$42,000).[9] Electric vehicles are also exempt from the annual road tax, all public parking fees, and toll payments, as well as being able to use bus lanes.

Plus what gets left out of the purchasing figures in Norway is how many of these cars are bought by government departments for whom image is more important than value for money.

Personally, I am of the belief that the uptake of electric vehicles in Norway doesn’t tell us anything about the future viability of electric cars.  When you look at the development of the motorcar in the US between the wars, the boom was driven by an overwhelming desire of individuals to move around freely and independently, and the car companies rushed to meet that demand whilst the oil companies competed with one another to build the infrastructure to support it.  I can’t think of anything further from this situation than a government taxing the hell out of something and shoving a population in the direction of their chosen product.  Would Norwegians be buying Teslas if ordinary cars were reasonably priced?  According to this Reuter’s article, Norway’s electric cars require an annual public subsidy of up to $8,200.  This is the future?

What we have here is a government picking a winner, and this rarely ends well.  The underlying assumption is that everyone driving electric cars is a desirable end, and I’m not convinced this has been proven.  Norway registered about 11,000 electrical vehicles in 2013, which might make Oslo’s air a bit cleaner and the streets quieter, but is in no way indicative of what might arise should even half of Norway’s 5m inhabitants eventually switch to electric cars.  11,000 electric cars quietly charging themselves off the grid at night won’t make much difference, but 2.5m of them?  You’re going to need a lot more power stations to cope with that sort of demand, and although Norway currently produces around 96% of its electricity using hydroelectric power it is far from certain that they would not need conventional power stations to meet the increased requirements.  In any case, it is somewhat unlikely that other countries, should they choose to emulate Norway in this regard, would be able to meet the increased demands using renewable energy sources.

In fact, the whole drive to use electric cars seems at odds with campaigns by Green organisations and politicians who are constantly nagging us to save negligible amounts of energy by unplugging phone chargers and not using TVs on standby mode.  I think when most people talk of electric cars, they think charging them is simply a matter of plugging them into a grid which is already in place, and I suppose this is true while their numbers remain small.  But an increase in just one order of magnitude – let alone two or three – is going to require a complete overhaul of the electricity generation infrastructure in a manner which is going to render unplugging phone chargers even more negligible than it is now.

Just where is this additional power going to come from?  Wind is a non-starter, suffering from the same physical limitations the Dutch faced on their windmills a couple of hundred years ago.  Tidal sounds great, except it is mind-bogglingly expensive to construct and maintain, and wrecks the local environment. Wave power suffers from the difficulty of converting uneven, irregular reciprocal motion into rotary motion and the fact that any wave powerful enough to be of any use is likely to have a big brother in the vicinity which will destroy any device used to harness its power.  Solar has potential, but the technology is likely a few decades away yet.  In 40+ years time I can envisage an efficient system whereby solar power is used to generate energy which is stored in cells, and converted to electricity in cars which is then used to power a motor.  But even with huge leaps in solar technology I don’t think we’ll ever be in a situation where:

Solar > electricity > battery > motor

is an improvement over:

Petrol > engine

either in terms of efficiency or overall effect on the global environment.  Not even close.  As I say, perhaps this might work:

Solar > energy cell > electricity> motor

with the energy cells being instantly replaceable, but until then I think this whole electric car concept is dead in the water.

Aside from the economics, the enormous appeal of the motor car is its flexibility, a large part of which it is its near-permanent availability.  The electric car, as currently envisaged, does away with this as it is unavailable for several hours while it charges.  Unless one can predict exactly when the car will be used and for how long then it won’t be much use, and although in theory this sounds ideal for regular commuting the shortcomings of such a system quickly become clear.

Even those who use their cars mainly for commuting also use them for unplanned or irregular trips, e.g. at weekends or in emergencies.  The non-availability of an expensive asset will become an issue to even the most organised of citizens, and some might even keep an ordinary car as a spare.  And supposing you hit traffic on the way to work?  You can switch off the car and conserve your battery, but let’s hope you don’t live anywhere too hot or too cold (like Norway!) otherwise it’s not going to be very comfortable.  One of the beauties of the internal combustion engine is the waste heat means even the crappest of crap cars is warm; people don’t realise how damned cold a car would be without the engine pumping out heat, and to generate the equivalent amount of heat from a battery will eat into the range considerably.  According to this calculator driving with an outside temperature of 21°C with no heater gives you a range of 283 miles; drop the temperature to zero and put the heater on and you’re at 234 miles, a reduction of 17% (and 27% with the smaller 60kWh battery).  And that’s for a new car, that reduction will increase only as the battery and heating elements start to wear.  You could find yourself thinking you’ve got enough juice to get to where you want to, and then hit traffic and find your destination is outside your range.  The advantage of the internal combustion engine is that they burn little fuel when the vehicle is stationary yet keep you warm with no additional fuel cost.

The limited range isn’t actually the issue, as petrol cars also have a limited range.  The problem is the charging time, which renders the vehicle unavailable for several hours.  If you run low on petrol, you spend 5 minutes filling up and you’re on your way again.  Anyone who relies on an electric car to complete a journey within 20-30% of the maximum range is going to have to be very well organised – which most people aren’t, particularly when it comes to travelling by car – and have luck on their side as well.  The whole concept on which the current breed of electric cars is based will collapse as soon as there are more than a handful of stories of people being caught out miles from home – children in the back, howling – and having to wait at a charging station for hours before being able to continue the journey start to appear on the internet.  Until electric cars can overcome this issue, perhaps by using instantly replaceable energy cells instead of recharging, I don’t think they’re going to make even a dent in the supremacy of the internal combustion engine.

Whatever the Norwegians think they’re doing, game-changing it ain’t.  I give it a year or two before we start seeing news reports of electric cars found abandoned by their owners between Bergen and Stavanger due to a flat battery and a desire to sleep somewhere warm that night.

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Expect Trouble Over Nigeria’s Removal Of Fuel Subsidies

Fortunately Boko Haram never made good on their threat to bomb Lagos, which had the authorities send hoardes of security personnel onto the streets and our security department sending telling us to stay out of nightclubs on New Year’s Eve.

This, however, is expected to affect us severely:

The Nigerian authorities have announced the start of a controversial plan to scrap fuel subsidies – which is expected to push up petrol prices.

The government has spent more than $8bn (£5.2bn) on the subsidies in the past year and says it will use some of the money to improve infrastructure.

Labour unions have called for “mass protests”.

Many Nigerians regard cheap fuel as the only benefit they get from the nation’s oil wealth.

Now most people would stop here and derive a formula by which plenty of crude equals cheap petrol, as is the case in Kuwait, for example.  But they’d be wrong, for reasons the BBC points out:

Nigeria is Africa’s biggest oil producer but most of the available 2 million barrels per day are exported in an unrefined state.

The country lacks refineries and infrastructure so has to import refined products such as petrol, which is expensive.

What the BBC hasn’t pointed out is that successive Nigerian governments, or at least the individuals that comprise them, have deliberately let the country’s refineries slip into disrepair and failed to upgrade them because the importation of fuel provides a vehicle by which money from the state coffers can be transferred to individuals.  These scams can be complex, but often they are no more sophisticated than mis-stating the cargo on a bill of lading.  An importer exaggerates what he has brought in on the paperwork, collects the subsidy from the government, and that paid on the fictional volume is pure profit.  Nice work if you can get it, and sadly for Nigeria’s finances it looks as though an awful lot of people can.  It isn’t just one or two individuals getting in on the action here, it is likely to be hundreds of departments, authorities, or plain criminal gangs and thousands of individuals benefit.  At a cost to 170m Nigerians, of course.

But that’s not all.

Nigerians are heavy users of fuel, not just for cars but to power generators that many households and businesses use to cope with the country’s erratic electricity supply.

The other thing the BBC does not tell us is that successive Nigerian governments, or at least the individuals that comprise them, have deliberately let the country’s power stations slip into disrepair and failed to upgrade them (do you see a pattern here?) because forcing the entire population to buy an (imported) generator run on imported fuel from which a hefty profit is drawn makes those same individuals very rich.  Okay, 170m ordinary Nigerians suffer as a consequence, but who are they to deny functionaries with handy family connections the opportunity to cruise the streets of Lagos in a Porsche Cayenne?

Nigeria’s two main labour organisations, the Trades Union Congress and the Nigerian Labour Congress, issued a joint statement condemning the move.

“We alert the populace to begin immediate mobilisation towards the D-Day for the commencement of strikes, street demonstrations and mass protests across the country,” the statement said.

“This promises to be a long drawn battle; we know it is beginning, but we do not know its end or when it will end.”

“We are confident the Nigerian people will triumph,” it said.

No, I am quite confident that whatever happens the Nigerian people will get shafted, as usual.  Now subsidising a staple product to keep a population happy is a stupid policy, be it for petrol, bread, rice, domestic gas, or anything else.  It distorts the market, generates perverse incentives, is inefficient, and costs the government an increasing amount each year which eventually becomes unaffordable.  Then when they try to remove the subsidy, they’re faced with a revolution.  It was the removal of bread subsidies in Egypt and elsewhere that was partly responsible for the Arab Spring in 2011.  What starts off as a bung to keep a population content soon becomes a permanent entitlement, and too few of the recipients are comfortable enough around the pages of an economics textbook to understand that it was a rotten idea from the beginning.

But I can see the Unions’ point here, even though I believe their concern for the common Nigerian is about as sincere as that professed by Nigeria’s politicians, or politicians of any nationality for that matter.  Far too many of Nigeria’s multiple layers of government are run for the benefit of the individuals which comprise them, and as a result – or perhaps as part of the same disease? – the rest of the country expects their share of the loot as well.  Thus any policy, initiative, project, or scam which transfers government resources into the pockets of individuals is seen as fair game by all, and the objective is to maximise the stream of revenues or benefits which flows in your direction.  The idea that government revenues are a limited resource to be divided carefully amongst competing interests and spent wisely for the good of the whole country is as alien to Nigeria as okadas are to Oslo.

The truth is that the ordinary Nigerian is going to be clobbered by the inevitable jump in fuel prices, whilst the myriad other scams and fraudulent schemes perpertuated by those in power continue unabated.  Even though the Nigerian government is doing the right thing in removing the subsidy, it needs to come as part of a package of far more serious reforms.  Otherwise, the people, fired up and driven on by the Unions, are not going to be a happy bunch.

This could well get serious.

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Why Some Countries are Poor

“Why do some places prosper and thrive while others just suck?”, asks P.J. O’Rourke at the start of Eat the Rich, “It’s not a matter of brains.  No part of the earth (with the possible exception of Brentwood) is dumber than Beverly Hills, and the residents are wading in gravy.  In Russia, meanwhile, where chess is a spectator sport, they’re boiling stones for soup.”

By the end of his book you’ll be laughing a lot, but his conclusions are somewhat vague.  Although he identifies the mechanisms by which some countries are either doing pretty well or doing very badly, he doesn’t ever quite manage to answer his own question.  Which is fine, because the book is a hoot.  But here’s my take on things.

Having done a lot of observing people, lots of people, in different countries on three continents all going about their daily lives, I reckon the success or otherwise of a country depends pretty much entirely on the ability of any two people of that country picked an random to trust one each other.

When I have seen populations being an awful lot poorer than they should be, which adequately describes most of the places in which I have worked except for Kuwait where people were an awful lot wealthier than they should be, the lack of trust is evident.  Here’s an example.

When I was living on Sakhalin, my wife was working in a brand new hotel located bang in the middle of Yuzhno-Sakhalinsk, the regional capital.  The hotel was owned by three local gentlemen who had made their fortunes, using fair means or foul, in Sakhalin’s lucrative fishing industry.  Attempting to diversify their portfolio, they decided to go into the hotel business.  The diversity idea was sound enough, but they didn’t know much about hotels.  The top floor, which offered lovely views of the mountains behind the town and a terrace to boot, was earmarked to be used for storage.  The bar was going to be in the basement.  Somebody talked some sense into them and the bar ended up being located on the top floor, but if anyone wonders why the windows are so small given there is so much worth seeing from them, that’s why.  The hotel was built by a Chinese outfit to a pretty decent standard, and it’s fair to say the initial phase of the project looked to have gone all right.  Some ripples were felt when the hotel management company hired to run and staff the place went bankrupt, and shortly afterwards franchise talks with the Ramada chain fell through (I suspect when it dawned on the Russians that franchise agreements don’t involve parent groups doing something for nothing and presenting your books for frequent inspection is part of the deal), but generally things got off to a good start.

Unsurprisingly, things were not to last.  Had the Russians been sensible they’d have stuck a management company in charge, given them an expected rate of return, and turned their attentions to other ventures.  Instead, typically, they decided that heading a fish mafia had given them all the experience needed to run a supposedly international standard hotel and started getting involved in the day-to-day activities.  First they decided they didn’t need so many western managers, so they were shuffled off, and one of the Russian’s daughters installed as General Director.  Any management decision, such as whether to pay the waitress three kopeks an hour more, had to be approved by them, and it usually wasn’t.  The General Manager’s job, which after a couple of years was handed to somebody more local, maleable, and cheap consisted of running about doing whatever the owners’ wanted him to do that particular morning.  They sacked the head chef, replacing him with a Russian who had little experience and even less interest.  And so on.  After two years the hotel had failed to maintain the standards reached when it was launched with such fanfare.

But that’s not the point of the story, as the owners would have made buckets of money from a hotel in Yuzhno-Sakhalinsk in the middle of an oil boom.  However, the hotel was only part of the project.  The owners had in their minds an entire complex built in three or four phases, which would eventually comprise the hotel, offices, and a leisure centre complete with swimming pool.  Phase 2 of the project was the construction of an office block adjoining the hotel, and it was well under way when the hotel opened.  Built by the same Chinese company which did the hotel, the office block was nearing completion in late 2007 at a time when office space was at a premium and there were still plenty of western and Russian companies coming into town looking to set up.  My wife, who was in charge of sales, had numerous enquiries as to when the building would be finished and discussions even took place regarding floor space, layouts, etc.  Connected by a corridor to the hotel, this would have been the premium office location in town, and by extension the whole island.  But it was never finished.  Work stopped in late 2007, and when I last went there in October 2011 it was still in exactly the same state – about 95% complete – although starting to deteriorate.  The scaffolding, the shipping containers in the yard around the back, the windows with the polythene protection still on, were all exactly as it had been when work stopped.

What had happened was one of the fishing bosses had decided to bail on the project, for reasons unknown.  What followed were months of squabbling about how much his share was worth, coupled with petty tit-for-tats which did little to improve the experience of the hotel’s customers and staff.  No agreement was reached, and nobody was prepared to put any more money in to finish the building, so it just stood there, uncomplete, deteriorating, and earning nobody anything, for years.

It doesn’t take much to realise that this inability to reach an agreement was monumentally stupid on the parts of all involved.  Now this wouldn’t happen in the US or UK, for two reasons.  Firstly, a Brit or American would compromise.  Despite the reputation Americans have for cut-throat business practices, they will take a hit if it means the overall business venture will progress.  There is no ego, pride, or loss of face at stake if the bigger picture shows everybody winning.  This is not the case in most of the world, where “face” matters.  Anyone who has attempted contract negotiations with a Korean engineering company, for example, will know that for a Korean to concede anything in such a situation is akin to admitting his dick is small and his wife deserves somebody more manly.

But the Russian society which often rewards strong-armed machoism over quiet compromise is not the main reason why Russian business is in such poor shape.  The reason is nobody trusts one another.  In the US or UK, the conundrum with the office block would be solved by the party who wants to leave finding an outside buyer for his share.  With little more than a few pieces of paper and a lawyer or two, his ownership of the project could pass to a complete stranger who would be confident that if the venture made money, he would be rewarded.  Not so in Russia.  No outsider would buy into a project with people who he didn’t know personally, as he would assume – correctly – that as soon as the money was invested he would either be strong-armed out or the others would disappear, never to be seen again.

And this reluctance to trust others in Russia is why the place never develops to its potential.  In the US or UK, if you have a business idea, you can issue bits of paper in return for which random strangers will hand over money to get your idea off the ground.  If you make money, so do they.  This means the income expected in the start-up period is limited only by how many people you can persuade to invest, and this can be up to any number you can think of.  In Russia, who do you get to invest in your new business venture?  Nobody is going to invest in a stranger’s business, as contracts in Russia are meaningless and the courts as bent as the Moskva river south of the Kremlin.  If three people do get together and pool their money, usually each one is looking to rip off the other two out of fear that they will be looking to rip him off.  And most of the time this is not paranoia but an accurate assessment of the true intentions of his new partners.

As a result, the income which can be expected during the start-up of a Russian business is limited to the savings of the sole proprietor, whatever his wife brings in from her day job, and whatever else he can scrape together from deals on the side.  Russians don’t even trust their own families, too many of them including a wayward brother or uncle who is likely to make off with the contents of the safe to fund a weekend of casinos and vodka in Vladivostok.  This is why the Korean Sakhaliners do so much better in business than the ethnic Russians in Yuzhno-Sakhalinsk, much to the disgust of the latter who thought the whole thing was unfair.  The Koreans trust each other within the family, and given their families were large and inter-marriage common, a new business can pull in the efforts and cash of four or five adults rather than some poor sod on his own.  How can a country expect to develop its medium-sized businesses – the backbone of any nation’s economic development – when nobody can be anything other than a sole proprietor?

The same is true of Nigeria.  They trust each other even less than the Russians, which is why any business you see is either owned by a government official or well-connected foreigner, or it’s a bloke in flip-flops walking the streets with a sewing machine on his back.  Or a woman with a baby strapped to her back and 10kgs of bread balanced on her head.  If any Nigerian asked another to invest in his business venture in return for the promise of future dividends, everyone would think he’d gone mental.  Or if the proposed investor actually ponied up the cash, they’d think he was mental.  This utter lack of trust between Nigerians is ever-present in the lives of expats.  Everything must be paid for right now, in person, and in cash.  I’m sure Lagos’ traffic problems would halve overnight if Nigerians didn’t insist on seeing somebody in person at the time of a business transaction.  Even my own employer prefers to have expats sat in traffic for an hour carrying hardcopies of forms between offices rather than trust its employees to send a faithful scan.

Many workers here have an accommodation problem, including all the drivers.  The reason for this is all landlords insist on having one or sometimes two years’ rent paid up front in cash.  Few drivers can afford this, so they ask their employers (i.e. the expats) to loan them the money.  Nobody in their right mind would loan them the money as there is a very high risk – and this has happened – that you’d never see your driver again.  But they do have a problem, because they cannot raise enough for the rent, leaving them with nowhere to live which isn’t three hours from where we all stay.  But I started to wonder why, given that there are dozens and dozens of them in this position, why they didn’t form groups and get somewhere together.  Each one of them seemed only to consider getting a place all on their own, which when you think about it is nuts.  No British student would live on their own, and most people in the UK continue to houseshare for the first 2-3 years after they get their first proper job.  Getting your own place is simply not affordable on a low salary, so you jump in with some others.  I asked my driver why he didn’t gather up a few others, pool their cash, and pay down the first year’s rent.  “I want to live by myself,” he said.  By the tone of his voice he seemed gobsmacked by my suggestion.  I didn’t pursue it, because pointing out that he couldn’t afford to live by himself would have been stating the bleedin’ obvious (they currently all sort of shack up in a day-room on the first floor of the residences).

But I don’t think it’s an aversion to sharing per se which stops them doing the obvious, it is simply that they do not trust each other one iota.  Probably if they gave all their money to one person to pay the landlord, they would never see him again.  Or he would do a deal with the landlord to allow only him to stay there and not the others.  Or he would not tell the landlord about the arrangement at all, and would just move in on his own and lock the door.  Or the landlord would not be comfortable with 3-4 men in his apartment as he could easily be out-muscled, so sharing is probably forbidden anyway.  Or each would worry that one day they’d come home from work and find one of the others has cleared out everyone’s possessions and skidaddled.  Or a combination of all of the above.

Whatever it is, this lack of trust keeps people poor and miserable.  Be it supposedly wealthy hotel owners in Russia or lowly drivers in Nigeria, if people in a country cannot, will not, or do not trust each other whatsoever, that country will not be going very far.  And trust being mainly a cultural thing, changing a country’s fortunes in this respect is going to be near impossible.  I don’t hold out much hope of the office block in Yuzhno-Sakhalinsk being occupied or Lagos’ drivers finding somewhere comfortable to sleep any time soon.

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Apple Jumps ExxonMobil

There was much masturbatory journalism going around last month when Apple overtook ExxonMobil as the world’s most valuable company.  Apple is one of those enormous American corporate behemoths which dimwitted lefties (which adequately describes most journalists) don’t mind, mainly because they buy its products and don’t really understand how Apple works.  All they know is until recently they had a cool CEO.  Contrast this with Exxon, whose products they also buy and also don’t understand how it works.  All they know is Exxon deliberately destroys the global environment in the course of making only 10 people in the world better off, and is headed by a man called Rex Tillerson and last time they saw anything called Rex it was running around Jurassic Park chewing up Land Rovers.  Whereas Apple had Steve Jobs, and everyone knows jobs are good.

The BBC dutifully reported on this shift of stock market numbers (something it spends half the time telling us should not be the focus of economic decision-making), but seemed a little vague about why it occurred:

Whereas Exxon has limited growth prospects, because it is reliant on oil prices and new oil discovery, Apple can continue to come up with new technology products.

Exxon has always been reliant on the oil price and new oil discoveries.  It’s a friggin’ oil company, after all.  These aren’t things which waltzed in the door yesterday morning and took the board of directors quite by surprise: this has been the case since the company was founded, so as an explanation of why Exxon is suddenly less valuable it is useless.  Similarly, Apple’s theoretical ability to continue to come up with new technology products is no different from that of any other technology company – IBM, for example.  But IBM is not the most valuable company in the world and Apple is, meaning there must be more to it than this.  But the BBC is not about informing people because that would require prior understanding.  The BBC is more about throwing up a headline, putting some airheaded comment masquerading as analysis directly beneath it, and inserting speech marks around anything they’re unsure about and mean to come back and check later but never do.

Anyway, I don’t know why Apple is considered more valuable than Exxon.  I suspect it is because with both Obama and his fellow idiots across the Atlantic taking lessons from the Soviet Union on economic policy, some people have realised we’ll all soon be driving about in Ladas and drinking distilled shoe polish to keep warm and we won’t be using as much oil.  So the oil price has dropped.  Some other people have simultaneously spotted that in a world where violent protests are ongoing about the cost of living, an awful lot of these same protestors are waiting with slathering chops for the arrival of the iPhone 5, which will retail (unaffiliated with any network) for the price of a small laptop.  If the western world is refusing to pay for health, education, transport, or even a museum ticket but is prepared to burn a fortnight’s salary on an iPhone, no wonder Apple is up and Exxon is down.  It takes Exxon a few years to recoup the capital costs of a major project, the west might not survive that long.  Or if it does, it’ll be sick, thick, and going nowhere.  I don’t know how we’ve managed to find ourselves in the middle of a major global economic downturn whilst catapulting the manufacturer of luxury goods – yes, iPhones are – to the top of the world’s most valuable companies, but somebody’s bullshitting somewhere.  It can’t only be the spouses and offspring of Russian oligarch’s who are buying Apple products (although a visit to the Apple store in London or Paris would convince you otherwise).  It looks to me as though governments are trying to convince those with money for a new iPhone to pay for their own brats’ education and theatre tickets, but they’ve already lined up a slopey shoulder app for download and are saying “Fuck you, I’m buying a new phone.”  Which would be fine, but these dickheads are adding on “And don’t forget, kiddo’s school is crap and needs a new roof.”  Something doesn’t add up.

One thing’s for sure, if the western economies are looking so crap that the oil price is affected and Exxon’s stock downrated, then sooner or later this same crap economy is going to catch up with those who were about to buy an iPad until they realised they were sitting in darkness because their electricity has been cut off.  Apple should enjoy it while it lasts.

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Russian Economics

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.

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.

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Reavealed Preferences in Venezuela

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.

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.

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Approaching Economic Realities

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.

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Logos please, and more of them

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.

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Thank Goodness for Supermarkets

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. Continue reading

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