The Russian Way in business - part 2

Just to verify my previous writing about the Russian Way, please check out this article in New York Times: Guilty Verdict for a Tycoon, and Russia

Here are a few delicious excerpts from the text:

But Mr. Putin’s line is just that — a line. In addition to tossing Mr. Khodorkovsky in jail on trumped-up charges, the Russian authorities also brought bogus tax claims against Yukos itself, shoving it into bankruptcy. Then the government created a dummy corporation to take over its assets, which it sold off, for far less than they were worth, to state-run oil and gas companies, primarily Rosneft, a poorly run company that is now the biggest oil producer in Russia.

“I have never witnessed a state steal such a large amount from investors,” said James A. Harmon, who, as president of the Export-Import Bank of the United States in the late 1990s, spent much of his time dealing with Russia. Said Edward Donahue, a Massachusetts accountant who had invested in Yukos: “They stole my investment,” Mr. Donahue was among a group of investors who tried to sue Russia to get their money back. (The case was thrown out of court.)

Even since the Yukos affair, corrupt Russian politicians and businessmen have routinely used arbitrary laws and regulations to grab assets that didn’t belong to them. Royal Dutch Shell was the majority partner in a group that included the state-owned monopoly Gazprom to develop a giant oil and natural gas field. Suddenly, in 2006, it ran into severe environmental and regulatory problems — problems that disappeared as soon as Shell ceded majority ownership to Gazprom.

A few years ago, BP was the controlling partner in a huge joint venture, amounting to 25 percent of its reserves, with a Russian company called TNK. TNK wanted to control the venture — so, naturally, BP suddenly had visa and other problems. Its business began to be disrupted. Robert Dudley, an American who was running the venture — and is now the chief executive of BP — had to flee the country and go into hiding for a time. Needless to say, the joint venture arrangements were rewritten.

And here's an another interesting piece. This is pretty much the same argument I floated in my writing...

To put it more bluntly, assets that were stolen from Yukos investors like Mr. Donahue six years ago are now being recycled to a new group of investors via Rosneft. Plainly, this doesn’t bother the Russian government, and it probably won’t bother whichever investment bank handles the Rosneft deal. But it should bother the rest of us — a lot. After all, if you can steal the assets once, what’s to prevent you from stealing them again?

So, by all means, go and invest in Russia. Your money's perfectly safe... not.

The Russian Way in business

Russia seems to have a peculiar culture in business and politics, probably the heritage of communist years mostly affecting it. What I find mostly abhorring is the culture where the powers-to-be can twist everything the way they want with no regard to justice, human rights or other aspects of democracy.

In Russia, this culture is clearly thoroughly ingrained in the society and its structures, where most frightening is the way even the judicial system is subjected to the will of the ruling class. Most abhorrent examples where how, for instance, Mikhail Hodorkovski was sentenced to a lengthy imprisonment and stripped of his wealth just because Vladimir Putin wanted it so. And the judicial arm of government rushed to do his bidding, quite probably out of fear of falling out of his favor. I am also more than a little bit suspicious that the government might have its hand in Anna Politkovskaya's murder as well. If not, at least it is very clear that the government was behind the poisoning of Alexander Litvinenko in London in 2006...

Well, that is the darker side of the Russian way of handling things. It is not always that tough in business life, especially in international business, where they can't always use as absolute methods of solving a problem. However, they know how to extort and use dirty ways to get their way.

Concrete examples, you say? Ok, let's start from the big ones, where foreign businesses have been blackmailed into submission. The Royal Dutch Shell's project called Sakhalin-2 springs to mind. You can read about it here. It was one of the biggest oil and gas projects in the world, and the Russians wanted control of it. They had made a deal with Shell about developing this area that gave Shell the majority ownership and control over the project. Shell had started the project in 1994 and had invested something in the area of 10-20 billion euros in it. So, the Russians let the Shell invest and build the field, and when it was nearing completion and it was time to collect the fruits, the Russians grabbed it. The operation was camouflaged as environmental problems and certain environmental permits were suspended to up the pressure and prevent production in the fields. Putin's boys also used some legal threats and in the end Shell had to submit. Suddenly all the environmental problems disappeared after the power-and-wealth grab was successful...

This is the way Russian government operates. They invite foreign companies to invest in Russia and when those foreign companies are hostage to the investment they have made, Russians take what they want by blackmail. And then they are surprised when foreign companies are a little reserved in investing in Russia? Go figure...

Let's take a couple of smaller examples, where we Finns have also tasted the rotten culture of our dear neighbour. First, import of Russian birch. Russia is mainly an exporter of raw material and their forest and paper industry is rather primitive. In comparison, Finland is known for its high tech forest and paper industries over the world and exports lot of its knowledge, technology and machinery abroad.

Vladimir Putin wanted Finnish companies to invest in Russian forest and paper industries and, supposedly, to develop them to the same high level as in Finland. He decided to force them to create paper mills etc. in Russia and do the refining of raw materials there, instead of exporting the materials and doing the added value work elsewhere. Vladimir decided that he would make the Finns to bring the high tech know-how and the capital required into Russia for free. After they would have made their investment, he could once again hold them hostage and demand what he wanted. Birch was what the Finnish forest industry required, so he decided to set big export tolls on birch. This way he would soon have the technology and the Finns would fix their primitive forest industry into a global success. And naturally, the Finns would pay for everything. Brilliant thinking!

However, Vladimir's plan backfired. The Finns didn't want to be held hostage and adjusted to the situation by stopping birch import from Russia. Finnish forest industries were forced to close a few factories to do so. So, Vladimir didn't get his way but lost the birch export to Finland. He tried to rectify the situation by promising to postpone the tolls by a few years, but it was too late. Finns didn't want to invest in opening anew the already closed factories, especially when the trade partner was so unreliable. What guaranteed that Vladimir wouldn't pull the same show all over again?

Here, things would be different, if Vladimir had tried to buy the technology and consultation and had formed a partnership with Finnish companies to that end. He would have gotten what he wanted in the first place, but he would have had to pay for it. Instead, he decided to get it for free by blackmail. Russians really would need to learn new, honest ways of doing things. Coercion and manipulation only works to a certain extent.

Examples can be found in abundance, but let's mention two more, briefly. First, the Russians took most of the export and import traffic on wheels by these same sort of tactics a few years back. Much of the export from Europe to Russia goes through Finland and 5-10 years back Finns did most of the transportation on wheels. Finns had great quality trucks and everything required, Russian trucks were very unreliable and oftentimes down right dangerous on the roads. However, Russian authorities at the border started to make things so miserable for the Finnish trucks, that soon Russians started to take over. Russian trucks got through the border with no problems, but Finnish trucks had to wait days on end, were punished with arbitrary and changing extra costs and regulations etc. At times the Russians authorities even demanded that Finnish trucks had to have an escort to drive to Moscow. With horrible costs, of course.

With all this happening, Finnish transportation suddenly became much more expensive and slow and business started to move to Russian firms. This even forced many Finnish companies to move their company's official headquarters to the Russian side to acquire Russian plates for their trucks. After that, they could circumvent the difficulties and costs that Finnish trucks had to absorb.

Finnish department store chains have also had their share of problems. Stockmann had to move one of it's department stores in Moscow after having no help from the police in a row with the owner. Stockmann had rented a building, which was later sold. The new owners wanted to extort a huge rent and cut off electricity when Stockmann didn't give in to their demands. The police was of no help, and eventually Stockmann had to find another location and move its store.

So, this seems to be the Russian way in business and I am afraid it's going to take decades before that changes. One thing that helps this change is the transparency provided by internet and other means of instant communication. It is no longer so easy to hide things, so even the Russian bureaucrats have to respect publicity...

Nuclear deterrent and game theory exemplified

Speaking of North Korea's case and the bilateral nuclear threat some interesting questions emerge. For instance, I've asked myself questions like "would North Korea have the 'courage' to strike with nuclear arms" and "would US be forced to retaliate or what would happen afterwards"?

Game theory can give you precise answers to these questions posed here, but as well you can figure out the answers by yourself. I have to believe that North Korea would never take the risk of nuclear strike, unless it thought it has been struck first with nuclear arms. And why is that, then? That is because the US would be forced to strike back with no other alternatives and the Mad Emperor of North Korea wants to live, not commit suicide.

And why would the US be forced to strike back, you ask? Why couldn't they just leave it be and negotiate a peace with North Korea, because the damage is already done and striking back won't alter that? This is where the game theory comes into play. The US would be forced to retaliate because otherwise their nuclear weapons would no longer work as a deterrent. If they did not retaliate, other rogue countries with nuclear weapons might think they can strike with no fear of US retaliation. Even North Korea would probably think they can do it again with no consequences. That's why the US would have no other choice than to strike back. A deterrent is a deterrent only as long as the other parties BELIEVE that you will strike back regardless.

So, the BELIEF that you will strike back is essential here. In other words, the CREDIBILITY of the fear of retaliation is everything. This fear of retaliation also works in business life, in price wars for instance. Credibility is the key word, whether it is about the fear of retaliation or your good business reputation or something else. That's why organizations and people cling so desperately to their good reputation and try to keep it untarnished. It is not because they are such decent people or decent organizations as much as it is the fear that business or other possibilities in the future are in jeopardy if they lose their credibility. If someone cheats once and it becomes known, nobody wants to do business or anything important with them any more out of fear of getting cheated, too. Because this is about the future possibilities, sometimes businesses getting out of business altogether cheat in the end. That's because they have no fear of retaliation and losing a reputation doesn't mean anything to them any more.

That's also why people want to have a good reputation in business life as in real life, too. You might find it very difficult to land a good job, if it came known to the employer that you occasionally cheat. Even if you do it once, it is a strong deterrent enough against hiring you, because your credibility as a trustworthy person is compromised. However, if the employer doesn't know it and you look the part, you're fine. So, in the end it is once again about beliefs. BELIEFS and CREDIBILITIES.

Back to the nuclear issue. What about Iran's run for the nuclear arms? Iran must have certain motives to pursue the nuclear issue so adamantly, as Israel and the US must have certain motives to try to stop that from happening. I'll not discuss the Iranian motives as I am more interested in the other side, for now.

Israel and the US strongly state that a nuclear-armed Iran would pose a threat to the whole international community and Israel explicitly states that Iran might want to totally destroy Israel. Is that a credible statement? I don't think so, even if all the free thinkers in the US seem to also describe it as the real reason. I suspect they just don't want to voice the real reasons.

Let's examine this in some detail. Would Iran's nuclear arms pose any more threat than some of those little pre-Soviet countries with nuclear arms? I don't think so. Bear with me and try to follow my logic a bit. Let's try two different scenarios here. In the first, Iran would try to strike Israel with nuclear arms itself. Let's call this scenario A. In scenario B Iran would provide some terrorist organizations with nuclear arms.

In scenario A, Iran would strike Tel Aviv and/or Jerusalem with nuclear missiles. Or they could try to "wipe Israel off the map" with all their nuclear arsenal at once. What would happen? Even if Israel was totally destroyed, its submarines in the Mediterranean would launch a devastating counter-strike with nuclear weapons at Iran. Also the United States would nuke Iran, so Iran would stand to absorb terrible destruction from these two countries' armies. The first priority of Israel and the US would probably be to make sure that Iran never again fires another nuclear missile. Second priority, at least to the United States, would probably be to make sure that there would be as little damage to the oil fields as possible. Therefore the US would probably want to limit the nuclear strikes to some of the biggest cities in order to not to make the whole country uninhabitable so that no oil production could take place afterwards. Iran is one important producer of oil and that happens to be of great importance to the world economy. Anyway, all the bigger military installations inside Iran would probably be totally wiped out with conventional weapons by Israel and the US. They would not want to run the risk that Iran could strike again with nuclear weapons.

To complete the picture, it is good to notice that Israel and the US would also quite probably want to immediately take out the highest leadership in the country. Those who made the decision to use nuclear weapons in the first place. So the leadership of Iran would vanish amazingly fast either vaporized by nuclear arms or destroyed with conventional weapons.

Now, if you have followed my reasoning this far, I think you're ready to answer if Iran would ever dare to try the scenario A and strike Israel with nuclear weapons? My logic tells me that Iran would never dare, because it would amount to national suicide as well as personal suicide for the leadership. They would not dare.

What about the scenario B? No, they would not dare to sell nuclear arms to terrorist organizations for if those weapons were used and could be traced back to Iran, Iran would be held responsible. I happen to believe that the consequences of that would be quite identical to those in scenario A. So, I really don't believe Iran would try this alternative either because it is suicidal as well.

If you're still not convinced enough think about the economic repercussions on Iran's economy. What would happen economically if Iran ever struck first with nuclear arms? Even if we assume that the US and Israel would not retaliate for some reason and would even leave the Iranian leadership in tact, what would happen? Not many countries would want to trade with Iran any more and their economy would collapse. Even now they are importing about half the gasoline they need because they don't have the capacity to refine enough of their own oil. That import is plummeting right now because several international companies have recently stated that they have stopped deliveries to Iran due to the new economical sanctions approved by the United Nations. They are also having great troubles at this time with foreign investments and foreign capital and expertise they desperately crave, because international companies are less and less willing to invest in Iran because of the sanctions and the volatility of the situation. If Iran's exports and imports would plummet totally due to a nuclear strike, it's economy would collapse fast.

So, I think we have concluded clearly, that Iran would never strike first with nuclear arms for obvious reasons. Therefore I don't buy the official reasons that both Israel and the USA offer us. Israel and the United States probably have quite different motives for their efforts to keep Iran from acquiring nuclear weapons, but they obviously don't want to state their real reasons.

Comment if you agree or disagree, that would be interesting to read. I would also be intrigued to learn of your opinions on what are the real motives of Israel and the US? As well as what are the motives for Iran to try to acquire nuclear arms?

North Korea - the disobedient and misbehaving child of international community

North Korea and its notorious and cruel leader Kim Jong-il tends to pop up every once in a while, usually when NK is throwing a fit or having a tantrum as the Washington Post so eloquently put it. While I watch the show, I can't help but think about the psychology behind the North Korean behaviour. Or how the game theory, especially behavioural game theory, is a useful and applicable tool in appreciating what is happening in this international show. Or how this setting reminds me of a disobedient and misbehaving child trying to manipulate his or her parents.

This is how the son of a gun behind all this looks like. And of course his father was similar in all aspects and raised his son to have a serious character flaw of which we all now get to enjoy. Not.

As I don't have enough information on the objectives and interests of the important players I won't even try to do an analysis of the situation game-theory style. I'll just list some thoughts on the subject.

North Korea is a poor country and its economy is in shambles. It can only manage with food aid from foreign countries and even so its people go malnourished and starved - the ruling class excluded, naturally. At this time China is its main food supplier due to the fact that South Korea finally understood the foolishness of giving massive amounts of free food aid to North Korea to no avail. North Korea's conduct has usually been like the disobedient and ungrateful child - after it gets its way it reneges on its promises and is never grateful for received free help but demands more. It's like a child stamping his/her foot to the ground and making never-ending and unreasonable demands.

For a surprisingly long time it has gotten away with it, but it can't continue indefinitely. As long as the parents - the international community - is divided it easily gets its way. As a cunning child tries to drive a wedge between his/her parents and thrives when the parents don't have a unified front and a unified voice, the same way North Korea manipulates the international community wiggling and squirming any which way it can. China still seems to adamantly back the mad emperor, but it will be interesting to see if Obama can manage a successful approach. In many a fight Obama has proved in my eyes to be a master strategist with great knowledge of human psychology and I wouldn't be surprised if he could manage to pull it off. He may need another term for it even though North Korea might crumble in just a few years. I believe Obama is the greatest president the US and A has had for several decades and I hope he might get even this North Korean problem at least on the right track if not solve it.

These two photos show well who is doing the starving and suffering in North Korea. In the first picture you see a North Korean mother and the other picture portrays the fat cat himself...





Back to the psychology. It is intriguing how well and analogously these two entities of a disobedient and manipulative child and a misbehaving and manipulative country - or its regime - compare. Even though the country is a much much larger entity, it can be seen to act as an individual entity much like the child. The way this country acts and tries to milk every possible benefit is very much like the child. In this case the child has been given his/her weekly allowances despite not keeping his/her side of the bargains made. Perhaps now is the time the parents finally wake up and take notice.

In all this, most surprised I am of China's attitude. Even though China has been fairly recently humiliated as North Korea in the nuclear debacle took action contrary to China's public suggestions and later North Korea has been caught red-handed in the sinking of Cheonan, the South Korean warship, still China seems supportive of the mad emperor. The most obvious reason stated for China's attitude is the fear of massive stream of fugitives from North Korea to China if North Korea was to fall. However, I find this hard to believe. I believe it wouldn't be a total catastrophe for China if it was to take care of 10-20 million North Koreans. Maybe it's more probably the fear of a nuclear capable government succumbing to total chaos if the government and communist system was to totally unravel in North Korea? And maybe even the communist pride not wanting to see a communist fellow country falling apart? And maybe North Korea is a convenient little buffer between China and the US forces in South Korea? Who knows? Anyway, it will be interesting to watch what happens in the near future...

Read more of the situation here: www.northkoreanrefugees.com

The Old Hypocrite

I have been following closely the pedophile scandal evolving in the Catholic Church. I am happy that they are finally forced to admit their sick mistakes and even more glad I am about the example of Belgian earthly powers taking over an abuse investigation. Church clearly seems to have conflict of interest when investigating it's own priests' abuses of children. Those priests should be investigated and punished according to the earthly practises and laws. The so-called punishments the Church has meted out are ridiculous when compared to the gravity of the crimes. Or do you think it is enough of a punishment to move an abusing priest to office duty and not even take away his priesthood after he has molested dozens of children? No jail time?

I believe one problem in the Catholic Church contributing to these problems is celibacy. It is quite unnatural for a human being and may contribute to these sick occurrences. At the same time I am pondering about how widespread these problems really are? For instance, how widespread sexual abuse of children is in the churches that don't preach celibacy? Is there less sexual abuse? And what about the islamic world? Does it happen there as well?

During these latest waves of this scandal the Catholic Church has tried to whitewash the Old Hypocrite, the Pope, as an ardent and fierce advocate against child abuses and a strict punisher of abusers. I didn't much buy into that earlier and now, according to a New York Times article, some newly unearthed documents paint a completely different picture. Here are a few brief excerpts from that article:

"But church documents and interviews with canon lawyers and bishops cast that 2001 decision and the future pope’s track record in a new and less flattering light.

The Vatican took action only after bishops from English-speaking nations became so concerned about resistance from top church officials that the Vatican convened a secret meeting to hear their complaints — an extraordinary example of prelates from across the globe collectively pressing their superiors for reform, and one that had not previously been revealed.
...

The office led by Cardinal Ratzinger, the Congregation for the Doctrine of the Faith, had actually been given authority over sexual abuse cases nearly 80 years earlier, in 1922, documents show and canon lawyers confirm. But for the two decades he was in charge of that office, the future pope never asserted that authority, failing to act even as the cases undermined the church’s credibility in the United States, Australia, Ireland and elsewhere.
...

But the future pope, it is now clear, was also part of a culture of nonresponsibility, denial, legalistic foot-dragging and outright obstruction. More than any top Vatican official other than John Paul, it was Cardinal Ratzinger who might have taken decisive action in the 1990s to prevent the scandal from metastasizing in country after country, growing to such proportions that it now threatens to consume his own papacy. "

Perhaps it would now be time for the Old Hypocrite to step down? The Onion previously published a funny article on the subject heavily criticizing the actions of the Catholic Church and the Pope. You can read it here: Pope Vows To Get Church Pedophilia Down To Acceptable Levels

Raping languages

Me thinks it is time to write some lighter stuff for a change. Perhapsly I've got this all wrong? Perhaps all the writings in a blog don't have to be full of substance and facts and rationale?

This time I am gonna rant and rave about raping languages, my favourite hobby. Rape a language or play with words, whatever which way you wanna put it. I've found I am constantly doing it, so I must have some kinda weird urge to do so. I seem to rape all the languages at my disposal, pretty much every day of the week.

Anyways, this topic reminds me first and foremost of Borat and his fine documentary called "Cultural Learnings of America for Make Benefit Glorious Nation of Kazakhstan". I found it hilarious. What first springs to mind are occurrences where a man mentions "mormons". Somehow - quite unintentionally, I think - Borat picks up the word as "moron" and talks of morons ever since. Another occurrence at a dinner table - a man tells Borat he is "retired" and Borat instantly recognises the word as "retarded". The whole table then rushes to help and tells Borat that the man is not retarded... And so forth...

Probably most of the "document's" scenes are real, but most likely the climax where Borat tries to kidnap Pamela Anderson is not a real world occurrence but staged. I first thought they might have been that crazy, but I've come to realize there would be legal implications. However, some of those poor people in the movie are fooled in so a humiliating and total fashion that they must have felt grossly insulted when they saw the film or learned of it. I absolutely couldn't have done what Borat did.

One of my own inventions in the field of language-rape is the word Repuglican. It is a combination of the words repugnant and Republican. From there you might quite unequivocally figure out my opinion of the Republicans in the US and A.

Right now, no other word plays come to mind. Feel free to add your own wordplay examples in the comments, if you remember any. Funny thing, I found the concept wordplay was even defined in Wikipedia...

The short of stock market corrections

Someone strayed to this blog by asking Google "how much the stock market would correct at present". That's a good question! Let's try to answer his/her question at least in part and discuss how big stock market corrections usually are.

Before we do that, let's try our hand in predicting (=guessing) market movements a bit. Some people are afraid of a double dip where the second dip recessionwise would be on its way in the near future. However, I don't believe there will be a second dip even though it is always possible. I believe the fundamentals are so strong that there will eventually be a good surge in stock markets. No later than this fall I'm expecting a good surge, hopefully at least 10 per cent in the stock markets at least in the emerging markets and Asia. I am also hoping there will be a smallish downward plunge during the summer due to low demand in the summertime and fears that the markets are not yet through the rough patch. Therefore I took all the money under my control out of the stock markets for the summer and I am planning to put it back in come fall. So I am hoping to avoid possible 5-10 per cent downward plunge during the summer and benefit from the hopefully at least 10 percent surge between August and January. Usually trade picks up after summer and the economic news are probably by then looking continually better and all this I believe is leading to a little surge! Time will tell if my guessology will hit the mark this time...

Back to the original question. In my observations the corrections in stock markets usually hit the area of 15-30 percent of the highest values. The economic crisis in 2008-2009 was far worse and is a very exceptional and rare occasion. Typically different markets around the world lost 60 per cent of their highest market capitalization and the Russian market really hit the floor. For example the RTS index in Moscow lost about 75 per cent of its value causing total panic also in Russian government. A good reminder for Moscow, I would say, that not everything can be dictated by order of Mr Putin...

The opposite side of the coin here is that if you bought funds investing in Russian stock markets when they had lost 75 per cent of the peak value you would stand to gain 300 percent in profits when they someday reach their previous peak. Even if they don't reach the previous peak the opposite movement is certain after so rapid a plunge and you will certainly make big profits. The problem is guessing when you're close to the bottom, but I did some buying close to the bottom and when a month ago I sold everything, the Russian investment had already doubled in value.

One interesting question is how often do these plunges or crises occur? Based on my observations that would be in the range of 6-10 years, but economists put the length of these business cycles at 5 to 7 year range. That means that peaks as well as crises in stock markets occur every 5-7 years, usually. That also means that now you could probably put quite safely money into some interesting market funds and let them grow in value there for the next 3 or 4 years before the next crisis or correction is at hand. That should be a safe bet. And in any case, usually you start hearing market rumours or negative expectations in the public at least half a year prior to anything happening. So, when you start hearing these rumours more and more, it's time to get out of the market.

About the real business cycles. If my memory serves me right, there was a depression/recession in 1991-1992. The next one I remember was when the dot com bubble burst in around 2000. And then the current crisis started in earnest in 2008. These numbers, if correct, would point to around 8 years between crises.

Now, hopefully these observations will help you to develop your own Guessology ideas of future market fluctuations. I would be interested in hearing YOUR thoughts on the subject!?!