Category Archives: Finance

Handouts Slip Through Yemen

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Peter Salisbury writes: Yemen was already a poor country when a 2011 popular uprising descended into inter-elite violence, bringing the economy to a standstill and tipping millions of people into poverty. Today, more than half of Yemenis live on $2 a day or less. 

In November 2011, Ali Abdullah Saleh, Yemen’s president of 33 years, agreed to step down. He ceded power to his longtime deputy Abd Rabbu Mansour Hadi, who was tasked with guiding Yemen through a political transition that is meant to end with a referendum on a new constitution, followed by general elections.

This October,  a new premier, Kahled Bahah, declared the economy to be a top priority for the supposedly technocratic cabinet he put together a month after being appointed. But that doesn’t mean that things are about to get better. There’s simply no money left.

The government is on course to spend $14 billion in 2014, almost three times its expenditures of a decade earlier. Meanwhile it’s been bringing very little in. Repeated attacks on a major oil export pipeline have cut off an important source of state revenues, while collection of taxes and payments to state utilities has been minimal.

The government’s response to the mounting fiscal crisis: Ask the neighbor for more money and keep on spending. The backers of the transition — the United Nations, the United States, the United Kingdom, and the states of the Gulf Cooperation Council — have imposed practically no accountability on the president, offering him seemingly limitless political support and refraining from criticism even as he has foundered.

Take the $435 million the Saudis gave to underwrite the cost of welfare payments. Although the money was transferred to the government in July, the fund has struggled to get the finance ministry to cough up the cash it needs to make quarterly payments.

Similarly, in December 2013, Qatar pledged $350 million towards reparations to military officers, civil servants, and landowners who were forcibly retired or had property stolen after 1994 north-south civil war.

A punishing debt repayment regime now accounts for around a fifth of all state spending. Yet Sanaa has spent practically nothing on investment and infrastructure improvements —  the kind of spending that produces growth and jobs.

Keeping track of the money being spent hasn’t been a priority.  International interventions in countries like Yemen come with their own moral hazards. The West feels the need to back transitional administrations and presidents because they see them as the best option for stability — and because that often serves western interests in other realms, such as security. Hadi, for example, has given firm support to U.S. counterterrorism efforts in Yemen.

That helps to explain the muted response to the missing money for welfare payments to Yemen’s large population of poor people. Members of the diplomatic community in Sanaa acknowledge that there’s an issue and talk about “pressuring” Hadi to resolve the problem, but say that they can’t push too hard because of the need to keep the president onside.

Yemen

Saudi Arabia Plays Oil Politics

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Andrew Scott Cooper writes, On January 2, 1977, the Shah of Iran made a painful admission about his country’s economy. “We’re broke.”    Court minister Asadollah Alam predicted still more dangers to come: “We have squandered every cent we had only to find ourselves checkmated by a single move from Saudi Arabia,” he later wrote in a letter to the shah. “[W]e are now in dire financial peril and must tighten our belts if we are to survive.”

The two men were reacting to recent turmoil in the oil markets. A few weeks prior, at an OPEC meeting in Doha, the Saudis had announced they would resist an Iran-led majority vote to increase petroleum prices by 15 percent.

Over the summer of 1977, industrial manufacturing in Iran fell by 50 percent. Inflation ran between 30 and 40 percent. The government made deep cuts to domestic spending to balance the books, but austerity only made matters worse when thousands of young, unskilled men lost their jobs.  Economic distress eroded middle-class support for the shah’s monarchy — which collapsed two years later.

Today, oil prices have again plummeted, from a high of $115 per barrel in August 2013 to under $60 per barrel in mid December 2014. There’s no doubt that shale has eroded Saudi Arabia’s “swing power” as the world’s largest oil producer. But thanks to their pumping capacity, reserves, and stockpiles, the Saudis are still more than capable of crashing the oil markets — and willing to do so.

As in 1977, the Saudis instigated this flood for political reasons. Oil markets remain important venues in the Saudi-Iranian struggle for supremacy over the Persian Gulf. This isn’t the first time since the late 1970s that Saudi Arabia has used oil as a political weapon against its rival.

The Saudis understood that the best time to crash the markets would be when prices were already soft and consumer demand low. In early December, just a few months after Saudi Arabia unleashed its latest oil flood, the Saudis were no doubt pleased to see the price of breaad (the staple of the Iranian diet) shoot up by 30 percent in Tehran.

Riyadh’s real hope is that escalated production will force Rouhani’s government to implement an austerity budget that will ultimately stoke underlying social unrest and once again push people into the streets. If this happens, it would reinforce the Saudis’ faith in oil as a potent weapon in the battle to dominate the Middle East. And oil floods, in turn, would likely continue their periodic, dangerous rattling of both the markets and the region.

Bread prices in Teheran

Draghi Calls for Deeper Political Union in EU

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Mario Draghi writes:  There is a common misconception that the euro area is a monetary union without a political union. But this reflects a deep misunderstanding of what monetary union means. Monetary union is possible only because of the substantial integration already achieved among European Union countries – and sharing a single currency deepens that integration.

If European monetary union has proved more resilient than many thought, it is only because those who doubted it misjudged this political dimension. They underestimated the ties among its members, how much they had collectively invested, and their willingness to come together to solve common problems when it mattered most.

Yet it is also clear that our monetary union is still incomplete. This was the diagnosis offered two years ago by the so-called “Four Presidents” (the European council president in close collaboration with the presidents of the European Commission, the European Central Bank, and the Eurogroup). And, though important progress has been made in some areas, unfinished business remains in others.

But what does it mean to “complete” a monetary union? Most important, it means having conditions in place that make countries more stable and prosperous than they would be if they were not members. They have to be better off inside than they would be outside.

In other political unions, cohesion is maintained through a strong common identity, but often also through permanent fiscal transfers between richer and poorer regions that even out incomes ex post. In the euro area, such one-way transfers between countries are not foreseen (transfers do exist as part of the EU’s cohesion policy, but are limited in size and are primarily designed to support the “catching-up” process in lower income countries or regions). This means that we need a different approach to ensure that each country is permanently better off inside the euro area.

This implies two main things. First, we have to create the conditions for all countries to thrive independently. All members need to be able to exploit comparative advantages within the Single Market, attract capital, and generate jobs. And they need to have enough flexibility to respond quickly to short-term shocks. This comes down to structural reforms that spur competition, reduce unnecessary red tape, and make labor markets more adaptable.

Until now, whether or not to carry out such reforms has largely been a national prerogative. But in a union such as ours they are a clear common interest. Euro area countries depend on one another for growth. And, more fundamentally, if a lack of structural reforms leads to permanent divergence within the monetary union, this raises the specter of exit – from which all members ultimately suffer.

In the euro area, stability and prosperity anywhere depend on countries thriving everywhere. So there is a strong case for sharing more sovereignty in this area – for building a genuine economic union. This means more than beefing up existing procedures. It means governing together: shifting from coordination to common decision-making, and from rules to institutions.

The second implication of the absence of fiscal transfers is that countries need to invest more in other mechanisms to share the cost of shocks. Even with more flexible economies, internal adjustment will always be slower than it would be if countries had their own exchange rate. Risk-sharing is thus essential to prevent recessions from leaving permanent scars and reinforcing economic divergence.

A key part of the solution is to improve private risk-sharing by deepening financial integration. Indeed, the less public risk-sharing we want, the more private risk-sharing we need. A banking union for the euro area should be catalytic in encouraging deeper integration of the banking sector. But risk-sharing is also about deepening capital markets, especially for equity, which is why we also need to advance quickly with a capital markets union.

Still, we have to acknowledge the vital role of fiscal policies in a monetary union. A single monetary policy focused on price stability in the euro area cannot react to shocks that affect only one country or region. So, to avoid prolonged local slumps, it is critical that national fiscal policies can perform their stabilization role.

To allow national fiscal stabilizers to work, governments must be able to borrow at an affordable cost in times of economic stress. A strong fiscal framework is indispensable to achieve this, and protects countries from contagion. But the crisis experience suggests that, in times of extreme market tensions, even a sound initial fiscal position may not offer absolute protection from spillovers.

This is a further reason why we need economic union: markets would be less likely to react negatively to temporarily higher deficits if they were more confident in future growth prospects. By committing governments to structural reforms, economic union provides the credibility that countries can indeed grow out of debt.

Ultimately, economic convergence among countries cannot be only an entry criterion for monetary union, or a condition that is met some of the time. It has to be a condition that is fulfilled all of the time. And for this reason, to complete monetary union we will ultimately have to deepen our political union further: to lay down its rights and obligations in a renewed institutional order.

 

Karimova’s Corrupt Tentacles into Norway?

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David Crouch reports: Norwegian businesses who partner with businesses from other countries can become involved in corrupt acctivities unwittingly.  Transparency Internationa suggests that three reent investigations in Norway should be a wakeup call to caution.

In Norway. Jon Fredrik Baksaas, chief executive of Norwegian telecoms group Telenor, turned a blind eye to the payment of bribes by VimpelCom in Uzbekistan. Telenor holds 33 per cent of the shares in VimpelCom and 43 per cent of the voting rights.

US and Dutch authorities are investigating allegations that VimpelCom acquired telecom licences by paying bribes through a Gibraltar-based shell company controlled by the Uzbek president’s daughter Gulnara Karimova, who herself is under investigation in Switzerland for money laundering.

The VimpelCom investigation widens a probe into corruption at Scandinavian telco TeliaSonera, which led to a clear out of senior management in 2013 at the company, part owned by the Swedish and Finnish governments.
Telenor said in a statement that by stepping down from VimpelCom’s board, Mr Baksaas would “eliminate any potential conflict of interest under the circumstances” while the allegations are investigated. The company denies that it could have done more to ensure transparency at VimpelCom. A hearing will be held  in Norway’s parliament on the case on January 14.

Telenor is 54 per cent owned by Norway’s government.

The recent focus on Telenor follows a scandal in which Yara International, a Norwegian fertiliser company, received the largest fine in Norwegian corporate history for paying bribes in Libya. Four former senior managers, including the former chief executive, were charged with serious corruption, which they all deny. A spokesman for Yara said it is a different company today than when the issues in question took place.

A Norwegian defence group Kongsberg was charged with “gross corruption” relating to its activities in Romania. As part of an ongoing investigation, Romanian and Norwegian authorities raided assets in Romania in September. Norway’s prosecutor declined to comment on progress in the case. The company said it has zero tolerance for corruption and is co-operating with the investigation.

All three scandals this year concern overseas business practices in countries that are struggling with corruption. The Norwegian state has significant stakes in each of the three companies.

Trade Andersen, a business adviser at government agency Innovation Norway, said, “It is often easy to engage [Norwegian] management in anti-corruption efforts at management meetings, but all too often good intentions and ambitions are not translated into practice in the organisation.”

Gulnara Karimova, Corrupt Tentacles into Norway?

No Room in the Middle

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The Middle Class is disappearing in America.  As study after study has shown, the US economic recovery has been a top-heavy affair, with the bulk of the wealth regained from the Great Recession benefitting the wealthiest Americans.

A report by the Pew Research Center found that the wealth gap between high income Americans and middle income Americans is now the biggest on record. “In 2013, the median wealth of the nation’s upper-income families ($639,400) was nearly seven times the median wealth of middle-income families ($96,500), the widest wealth gap seen in 30 years.

Additionally, the net worth of America’s high-income families is nearly 70 times that of lower income families.

Wealth, which Pew defines as “the difference between the value of a family’s assets (such as financial assets as well as home, car and businesses) and debts,” is different from income (the amount of money a family brings in in a given year), another measure of widening inequality that has come under scrutiny in recent years. The two are related, and wages and income have certainly stalled as the rest of the economy picks up steam.

Wealth, however, is a deeper measure of financial well-being, taking into account reserves that a family might be able to fall back on in the event emergencies, like layoffs, and live off during retirement. In the wake of the Recession, higher income families have managed to regain some or all of the wealth they’ve lost, while middle and lower income families remain behind.

That growing disparity has  a lot to do with the nature of the recovery over the past six years or so. The stock market has long erased all of the losses it suffered after the 2008 crash, and the wealthiest Americans tend to have a larger proportion of their money tied up in such investments.

Middle class Americans, on the other hand, have more wealth tied up in their homes – compared to the investment sector, and the housing collapse decimated such wealth for many. In comparison to the stock market rally, the housing recovery has been relatively weak.

“Upper-income families have begun to regain some of the wealth they lost during the Great Recession, while middle-income families haven’t seen any gains,” Pew concluded.

The wealth gap may have been exacerbated by the recovery, but it was growing long before.  In the 30 years since the Federal Reserve started keeping track, the richest Americans have nearly doubled their nest eggs. Middle income Americans have grown theirs by just 2.3 percent.

No Place in the Middle?

French Fries Crisis in Japan?

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McDonald’s Holdings Co (Japan) Ltd has embarked on the emergency measure of only offering small-sized french fries to customers as a protracted labor dispute at U.S. West Coast ports has contributed to long delays in imports.

The fast-food chain said it was importing more than 1,000 tonnes of frozen fries by air, which began arriving last Monday and had begun routing another 1,600 tonnes through ports on the U.S. East Coast which should begin arriving in late January.  Those steps alone, however, are not sufficient to prevent a shortage.

rToyama said the company, which has 3,100 stores in Japan, was not placing any limit on the number of small-sized fries a customer may buy but the resumption of medium-sized and large-sized fries remains unclear. She declined to comment on the impact on earnings.

The cargo backups at U.S. West Coast ports dragged on into a third month amid industry reports of prolonged shipment delays for goods ranging from yoga apparel and rice to NBA bobblehead collectibles and frozen french fries.

Cargo that normally takes two to three days to flow through the affected ports, accounting for nearly half of U.S. maritime trade and over 70 percent of imports from Asia, now faces lag times of up to two weeks, the National Retail Federation said.  The congestion has been most pronounced at the twin ports of Los Angeles and Long Beach, the nation’s two busiest cargo hubs, where marine officials reported 11 ships anchored on Thursday waiting for berths to open.

The number of freighters kept waiting outside the two ports has fluctuated from about eight to 18 on any given day since the slowdown began there around mid-October, said port of Los Angeles spokesman Phillip Sanfield.  Smaller backups have hit other West Coast ports, including Seattle and Tacoma in Washington state.

The slowdowns have coincided with prolonged labor talks between 20,000 dockworkers and the Pacific Maritime Association, representing terminal operators and shipping lines at 29 West Coast ports. Their latest contract expired June 30.

Management has accused the International Longshore and Warehouse Union of orchestrating some slowdowns on the docks to bolster its leverage at the bargaining table.  Union officials deny organizing protest delays but acknowledge individual dockworkers may have acted out of frustration over the pace of contract talks.

Other factors cited are a shortage of tractor-trailer chassis used for hauling cargo containers from the ports, a situation created when shippers decided to sell off their chassis to equipment-leasing companies.

Union and port officials also cite record import levels at the peak cargo season, rail service delays and the advent of super-sized container vessels delivering greater cargo volumes.

Smiles Are Free, Fries are in Short Supply

How Rice Gets to the Table in Japan

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As Japan began reconstruction after the end of World War II, the paramount issue was to feed a nation of hungry people. Infrastructure was ruined and farmland abandoned. Agricultural reforms compelled landlords to sell off their large land holdings to the tenant farmers who worked those lands. Newly-incentivized farmers quickly brought the agricultural sector back into production.

Japan has been doing all right for itself. In terms of total volume of food produced, it is number five in the world. It’s a nation obsessed with food self-sufficiency and food security.

With the distorting forces of the global economy, a graying of the population who till the land, a huge agricultural cooperative that may not be representing the true needs of its constituents, and a ruling government party that actively opposes the cooperative, Japan is going through some huge changes.

JA Zenchu (Central Union of Agricultural Co-operatives) is a mammoth organization that not only represents the interests of 47 prefectural agricultural co-ops and controls a huge insurance company and one of Japan’s largest banks. JA Zenchu has been steadfast in supporting tariffs on foreign rice (up to nearly 800 percent) and has been opposed to Japan joining the Trans Pacific Partnership (TPP).

In the other corner of the struggle over food, there’s the current government, controlled by Shinzo Abe and his Liberal Democratic Party (LDP). Abe and his allies would love to break JA Zenchu.

In the current battle between JA Zenchu and the LDP, the LDP seems to be winning. And it’s not just on the political front. Market concerns are changing the roles of middlemen, unions and wholesalers. A huge grocery store chain, Aeon, is beginning to buy rice directly from producers.

The farmers average age around 66 – and they’ve long depended on the advocacy of the JA Zenchu and protectionist policies of the government. Even parties like the LDP still depend on rural turnout during elections.  They’re pushing for an end to production controls by 2018, but still subsidizing farmers who switch to other crops or produce rice for livestock.

On one hand, a system is in place that supports small farmers and crop diversity. But the co-op that protects these farmers seems more concerned with insurance and banking.  The current government is focused on pushing Japan out of its decades-long economic slump through monetary policy and a rush to corporatize farming.   What direction Japan takes remains the big question.  Rice will remain on the Japanese table. How it gets there is up for grabs.

Growing Rice in Japan

Price of Oil Anyone’s Guess?

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Oil prices are carrying on the trend from the second half of 2014 and continuing to drop to lows not seen since 2009.  Energy stocks overall on Wall Street were the worst performing of 2014.

The U.S. Dollar has continued its strong performance at the end of 2014, and this week has hit its highest level since March 2006.  Problems for competitor economies in Asia and Europe have resulted in the dollar index, which measures dollar strength against several other major currencies, reporting 9 year highs of 90.90 as of this morning.

Against the Euro, the dollar has reached a four and a half year high and against the Yen, a seven and a half year high.  All of this points to the U.S. being the global market leader early in 2015, in spite of the so-called oil price war with Saudi Arabia and job losses as the oil and gas industries respond to a lower price climate.  Regardless of the worrying particulars of the U.S. energy scenario on its own, it is important to assess it in context:  China’s economy is slowing as it moves from investment to consumption; Japan has fallen into recession and Russia faces a similar threat in the near future; and growth in Europe is crawling.

Surprising news has come from Russia as we begin the New Year, with oil output for 2014 reaching a record high average of 10.58 million barrells per day.   The Russian Energy Ministry data also highlighted new records for oil and gas condensate production in December of 10.67 million bpd.  Russian energy exports to China also reached new highs of over 22.6 million tons (452,000 bpd) with this forming an integral part to Russia’s post-sanctions strategy of diversifying its international energy clients with a specific focus on the Asian markets.  The Energy ministry is forecasting a decline to 525 million tons in 2015 in light of falling oil prices and an impending recession, while the IEA is predicting a 1% drop in oil output overall for 2015.  Gazprom released figures indicating an output drop of 9%, an all-time low, citing the war with Ukraine as the main reason.

Still it seems that anything can happen in 2015.

From Cars to Camels

Russia and Turkey: Hanging on for Dear Life

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Semih Idz writes:  The friendship between Recep Tayyip Erdogan and Vladimir Putin clearly bolsters the positive atmosphere between the two countries. It is, however, no secret that mutual economic interests provide the driving force for Turkish-Russian ties today.

Dark clouds have nevertheless started gathering over economic relations because of Russia’s economic woes.  These are worrying the Turkish business community.

The downturn in Russia comes at a time when the two countries pledged, during Putin’s Dec. 1 visit to Turkey, to increase the volume of bilateral trade to $100 billion by 2020.

Putin also said Moscow was scrapping the new pipeline to carry Russian gas to Europe over Bulgaria, and would build an alternative pipeline to Turkey.

For good measure, Putin also threw in a 6% discount in the price of gas sold to Turkey, leaving Ankara with smiles all around.

Western sanctions on Russia had also whetted the appetite of Turkish exporters after Ankara — to the annoyance of its NATO allies — made it clear it would not support the sanctions.

The shopkeepers of Istanbul’s Laleli, Osmanbey and Merter districts joined those with raised hopes, expecting an increase in the traditional and semi-official “suitcase trade” in textiles, leatherwear and cosmetics with small Russian buyers who come to Turkey for this purpose. Meanwhile, Turkish industrialists hoped to reap the advantages of the drop in the price of Russian oil.

Prospects for the lucrative tourism sector appear glum, as the number of Russians visiting Turkey is expected to fall. Russian tourists, who generally prefer Antalya on Turkey’s Mediterranean coast and resort towns close to it, leave an estimated $4 billion to $5 billion annually. .

Enver Erkn, an expert with the ALB Menkul brokerage firm, points out that Russia is Turkey’s No. 1 import market (mostly buying oil and gas) and fourth export market. Erkan says that while the drop in the price of Russian oil is a positive development for Turkey, Russia’s deepening economic crisis is not.

Agriculture, which is vitally important for the Antalya region, was suffering from the crisis in Russia. Russia is the main market for Turkey’s fruit and vegetables. Because of the drop in buying power and the devaluation there our agricultural exports have also affected.Warning Turkish contractors not to leave Russia now because their places would be filled by Chinese companies,  Karlov, a Russian minister said that if Turkish operators were concerned about the fall in Russian tourists, the solution was in their hands.

Turkey and Russia

Goldman Sachs Teams with US Government?

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Stan Gilani writes: The truth about crony capitalism, at the highest level, is being laid bare.

The public is finally getting a look inside the black box where the titans of Wall Street and their inside-jobbers in Congress and at the highest levels of the U.S. government make decisions.  Star International is suing the US for ripping off American International Group, AIG and its shareholders.   Starr is an insurance company controlled by Maurice “Hank” Greenberg, the former CEO of AIG, not long ago the largest insurance company in the world.

Apparently, this closely watched 37-day trial that was supposed to have ended in November is far from over.  Greenberg’s lawyers just got more than 30,000 new documents they were denied before.  What was covered up when the U.S. government and the Federal Reserve Bank of New York bailed out AIG (as the Fed and the government called it) washow Goldman Sachs inserted one of its directors, Edward Liddy, into the top position at AIG when the government saved it from itself.

Only no one knew how deep the Goldman connection went. No one knew how Liddy, the former CEO of Alllstate Corp. helped push through the bailout with the AIG board – without giving shareholders a chance to vote on it.

The problem for the New York Fed, the U.S. government, and Goldman Sachs was that Greenberg’s stock position was enough to kill the bailout if he had a chance to vote his shares.

He never got the chance…

It wasn’t enough that Goldman’s former CEO was Hank Paulson, the then-Secretary of the U.S. Treasury, and that Goldman got bailed out itself when the Fed and the U.S. government gave it a windfall of profits right out of AIG’s pocketbook for some credit-default swaps that weren’t even worth anywhere near what the government paid Goldman for them. That was theft, plain and simple.

it’s not theft if it’s government-sanctioned.  So, we’re finding out now how deep the rabbit hole is in this trial.

Rabbit Hole?