Naked Businessmen and Businesswomen Flee China, Russia

Large numbers of China's wealthy businesspersons and government officials have already moved their families and much of their assets overseas. Such persons are known as "naked officials" and "naked businessmen" in the parlance of rumours and off the record conversations about China trends.

Now more and more of these naked men and women are angling to join their families overseas, and renouncing their Chinese citizenship.

According to the 2011 Private Wealth Report, 27% of Chinese entrepreneurs worth more than 100 million RMB ($15.9 million) have already emigrated, while another 47% say they are considering doing so. The number of these so-called “naked businessmen” is massive. The main reasons for businessmen emigrating are: their children’s education, protecting assets, and preparing for retirement.

Increasingly, the general Chinese public has grown aware of this dramatic trend. Last year, out of 5,000 investment immigration visas issued by the U.S., Chinese people accounted for two-thirds of them.

Undoubtedly, the most dazzling fact in all of this is that over 70% of China’s privileged have either emigrated or are on the way to emigrate. It is definitely not normal for 70% of a country’s wealthy class to want to leave the place where they were born and made their fortune. When we connect this piece of news to another study conducted a few years back in which it was said 80% of China’s wealth is in 20% of people’s hands, then it is easy to imagine the scale of the loss of China’s national wealth. _BI

The same phenomenon has been taking place in Russia, since the coming of the Putin power grab and persecution of perceived competitors over the past several years. London has been a particular destination for these naked Russians -- and Putin is not happy about it.

A failing Russian economy is fuelling a brain drain in favour of the British capital, while the City of London’s reputation for light-touch regulation is proving another draw.

...The relative ease of London life means that many Russian businessmen with interests in their home country prefer their families to live here while they make the four-hour commute to Moscow by executive jet. They are also keen to send their children to British schools such as Eton – half a dozen sons of oligarchs started there this year.

“The Russians come to London because it is pleasant and safe,” says Andrew Wordsworth, partner in the Mayfair-based private investigators GPW, whose clients include British-based Russians.

... In the eyes of Vladimir Putin, president of the Russian Federation, Britain’s willingness to provide sanctuary for that group of disaffected Russians known as the London Circle, headed by his friend-turned-mortal-enemy Boris Berezovsky, makes it a hostile power. _Telegraph

These trends are not particularly auspicious omens regarding the futures of China and Russia. But if one is well connected to the corrupt power centres of either country, it is still possible to milk their tattered carcasses.

China Times reported that according to a recent study conducted jointly by the Hurun Research Institute and Bank of China, 60% of China’s richest, (i.e. with assets worth of more than 10 million RMB - $1.6 million) are either applying to emigrate or have already done so.

“Only half a million dollars is enough to obtain a Green Card through the EB-5 Immigrant Investor Program. That’s the price of a Beijing apartment. It’s worth it!” confided a man called Zhang.

Giving their children a better educational environment, safeguarding their wealth, and preparing for their retirement are the three major reasons given by these naked businessmen, according to South Weekly.

...According Austar, one of China’s biggest emigration agencies and also one of China’s most prosperous businesses in recent years, the six most popular destinations for China’s naked businessmen were Canada, United States, Australia, New Zealand, Singapore and the U.K.

In 2009, of all the investment visas in the U.S., 53% came from China. While in 2008, Canada approved more than 10,000 investment visas, of which 70% came from China. _WorldCrunch

More: Why is China suddenly starting to unravel?

Business in Russia etc.: A Worrisome Future On the BRICs?

Russia ranks 120th on the World Bank’s ease of doing business index. Despite promises of reform, Moscow has yet to transform its image, if not reality, as a corrupt Mafia state. It is some distance from being competitive with major economies in most industrial and service sectors. Capital flight more than doubled in 2011 to $84.2 billion (from $33.6 billion in 2010) and is projected to be some $50 billion in 2012. The current political environment has made it more difficult for small and medium businesses to thrive.

Still more worrisome looking to the future is Russia’s brain drain. Over 1.25 million people have left Russia in the past decade, and in a recent poll in Novaya Gazeta, 62.5 percent of 7,237 readers surveyed said they were considering leaving because of discontent with the economic and political regime. This is playing out against the backdrop of negative demographic trends and projections suggest that Russia’s population will shrink from its current 142 million to some 124 million by 2030. _National Interest

Instead of reforming, Putin's Russia appears to be digging itself more deeply into the role of authoritarian oil state, with close ties to dictators and tyrants, and a rapid shutting off of opportunity for the average Russian at home.

Six months after returning to power in the face of mounting opposition, Russian President Vladimir Putin is exercising his political capital—and doing so in imperial fashion. The most recent example: earlier this month, sitting at a small table in his ornate, oak-walled office in the Kremlin, Putin announced that Russia was creating the world’s largest publicly traded oil company. The goal: to restore the glory of Russia the only way Putin seems to know how—the raw acquisition of power. “He is trying to keep stability, as he sees it, with billions of dollars in oil,” said Evgeny Gontmakher, an analyst at the Institute of World Economy and International Relations, a Moscow-based think tank. “I predict chaos.” _Anna Nemtsova

I have always seen Putin as something of a thug. But until recently, I considered him to be at least a bit shrewd. Lately he has been behaving like a total knucklehead.

As a result, the early promise that he displayed after the end of the tumultous Yeltsin years, seems to have faded away altogether.

More than 2.5 million people have left Russia during the past decade, sparking fears of a new brain-drain.

A third of Russia's young professionals are thinking of leaving the country, according to the Russian market research company ROMIR.

Many of them are making plans to go to countries whose economy is performing less well than Russia's. So why do they want to leave? _BBC

There is plenty of empty land in Russia, as ethnic Russians emigrate and as those who stay fail to procreate.

Meanwhile, China grows stronger -- building better ships, submarines, military jets, and drones & cruise missiles. The dragon watches and waits impatiently for an opening to seize the tempting riches of a rapidly depopulating Eastern Siberia.

China has its own problems with corrupt authoritarianism, of course. But China's corruption has not become as much of an obstacle to doing business, as Russia's corruption has been. Still, China is struggling with brain drains and capital flight, just like Russia.

Meanwhile, of the other BRICs, India is drowning in corruption. And with an average population IQ that is much lower than that of either Russia or China, India's ability to distribute its technological and economic progress through most of its population is quite limited. In addition, besides having to face a nuclear Pakistan and a nuclear China on its different borders, India is perpetually poised on the verge of a bloody religious civil war that could break out at any time.

Finally, Brazil will do well as long as commodities prices are flying high. Should China in particular slow its buying spree, the millstone of corruption around Brazil's neck is likely to show itself by a decline in the nation's economic numbers.

Putin's Russia: Crumbling of a Potemkin Facade

This article is adapted from Al Fin Energy


Russia's facade is in the nature of a Potemkin Village. Superficially vibrant and forward looking. But look deeper and you will see a deeper, more disturbing truth.

At a time when Russian oil production is falling and large-scale investment is badly needed to open up new fields, the Kremlin is instead spending $55 billion in cash and shares to acquire control of a major oil company from the private sector.

As the government splurges, Russia's oligarchs are shifting more money abroad because of the poor investment climate. Deputy Economy Minister Andrei Klepach estimates that $50-60 billion of private capital will flow out of Russia this year. Moscow bank Uralsib predicts the figure could hit $80 billion.

...Almost a third of city-dwellers would like to emigrate from Russia, according to a poll in September. Among young people the proportion rose to nearly half. The most favored destinations were Europe, the United States, Australia and New Zealand.

The reasons for this exodus of talent and money? A growing sense among educated Russians that their country is heading in the wrong direction, and that no change is likely._Reuters

Half of Russian men do not survive to the retirement age of 60. Russia's abysmal male mortality is due to alcoholism, suicide, murder, smoking related diseases, tuberculosis, HIV, drug abuse, and a general feeling of futility, hopelessness and despair.

This is why Russia's young are so desperate to get out. They see what is happening to their parents, uncles, aunts, and other middle aged Russians. They want no part of that dead end life.

Other than rich natural resources, Russia's main asset is the minds of its people. Too bad the corrupt Putin government is squandering that vast resource of human wealth.

There is a good reason why ambitious young Russian men are scrambling for overseas jobs, and why beautiful young Russian women are trying so hard to find a good match with a foreign man. [Warning: Link to matchmaking site. Married men forbidden to click on link.] By the way, there are many dozens -- perhaps hundreds -- of similar websites, indicating that the desire to get out of Dodge Russia is not limited to a few.

Learn to look beneath the veneer, for everything that is even the least bit important. You will save yourself a lot of regret.

How Long Can Russia's Soviet Era Oil Infrastructure Go It Alone?

The following article was previously published on Al Fin Energy''

“For foreign oil companies seeking to expand production and reserves, Russia is now off limits,” Robbert Van Batenburg, head of research at Louis Capital Markets LP in New York, said in a telephone interview yesterday. The BP accord “is probably scaring the others away.” ...

Since 2004, Putin has been tightening the government’s grip on the Russian oil sector, moves that made it increasingly difficult for foreign producers to establish or maintain footholds in the country, said William J. Andrews, a fund manager at C.S. McKee & Co. in Pittsburgh....

“The Russians are nationalistic and are going to keep the oil reserves for themselves,” said Andrews, who helps manage $14 billion. “They don’t really have a legal system or a political system. It’s a dictatorship.”

...“Ten years ago, Russia was a much more open place to do business,” Molchanov said. “But that is no longer the case, thanks to Vladimir Putin. The international oil companies are having to look elsewhere for opportunities at a time when the set of opportunities is growing more limited and costly.” _BW

But is Russia -- with its neolithic infrastructure and shrinking ethnic Russian population -- in a position to cut itself off from western expertise and the technological advances that are occurring at a rapid pace in the western world? Is this the same phenomenon of a hubris born of backwardness that brought down the Soviet Union?

Russia's Putin has been banking on rapidly rising oil prices. But more and more western analysts -- including Citi and Goldman -- believe that global oil prices will stabilise near present levels through 2020, and possibly beyond. To finance his ambitious military, nuclear, and technological goals, Putin needs for oil prices to approach $150 a barrel. As long as prices stay near $90 levels, Putin must either restrain his ambitions, or draw down his dwindling reserves.

If Putin refuses to open Russia to outside investment and infrastructure upgrades, he is limiting himself to more devious methods of supporting his grandiose goals for Russia. Methods which include starting proxy wars in and around the middle east to increase the geopolitical risk premium of oil -- driving up global oil prices.

It is a type of "painting oneself into a corner," which appears to be a common character failing of Russian leaders down through history.

Between Russia's core population collapse, its disintegrating public health infrastructure, a debilitating brain drain, and the steady drip, drip, drip of capital flight outside the country -- more intelligent and wise Russians must understand the desperate need for a change in direction.

With Putin at the helm, Russia sails perilously through hazardous straits.

More: A Weak Russia is A Dangerous Russia

Zuckerberg, Facebook, and Russia's Brain Drain

Russia is important to Facebook, and Facebook is important to Russia. Russian investors have sunk $billions into the global social network company, and Facebook has played a role in some of the deep underlying social ferment occurring in Putin's Russia.

...Mark Zuckerberg, the founder of Facebook, met Russia’s prime minister and former president, Dmitri A. Medvedev, on Monday.

...Facebook played an integral role in political dissent in Russia last winter, allowing street protests to coalesce when handing out fliers or posting notices on corkboards would not have worked.

Russia is also home to two large and early Facebook investors, Alisher Usmanov, a steel tycoon, and Yuri Milner, an expert on monetizing social network traffic in emerging markets. The two partly cashed out in the initial public offering of Facebook stock earlier this year but still own billions of dollars’ worth of shares.

...Earlier this month, in another step deeper into the Russian market, Facebook made a deal with one of Russia’s mobile phone operators, Beeline, to provide a free application to subscribers. _NYT

Many people in Russia are worried about how Facebook will affect the ongoing brain drain of young technologically savvy Russians to the west:

Facebook has been enticing program developers from Russia, Pavel Durov, founder and General Director of the biggest Russian social network VKontakte, told Vedomosti. “I know for sure that one of the VK Cup [VKontakte developers’ competition] finalists is already working for Facebook,” said Durov. When asked whether VKontakte employees are generally leaving for Facebook, Durov said: “We aren’t fools. It’s a sinking ship.”...

...programmers make $30,000-$40,000 a year in Russia and $70,000-$80,000 in the United States.... Western companies have every reason to be interested in Russian programmers: they are as technically proficient as Indian developers, for example. Russian programmers even surpass others when it comes to creativity and the ability to address unconventional tasks, says Russoft Association President Valentin Makarov. _Indrus

The salary comparisons above may be a bit misleading (and subject to changes in the price of oil & gas): The opportunities to achieve positions for top-level programmers in Russian companies is far more limited than the number of positions for much higher paid programmers in western companies. From Facebook to Google to Microsoft and on and on . . . the appetite of western tech companies for clever engineers and coders is insatiable -- even in the middle of a prolonged Euro-crisis and Obama recession.

Russia herself can be seen as a sinking ship, in terms of demographics and the dull, grey inertia that grows more debilitating to Russian society for every year that the corrupt Putin government maintains control.

Facebook is one symbol among many, of the strong appeal of more balanced economies outside Russia -- foreign economies that are not dependent in a life or death manner on just one industry.

Russia's technology sector has suffered well over a decade of brain drain, and Russia in general has suffered from corruption, capital flight, a crumbling public health infrastructure, a collapse in populations of ethnic Russians at the same time that Muslim immigrants are flooding into the country illegally, and legally.

We can always hope that the Russian people will find a way out of their largely self-made labyrinth of stagnation. But they have no historical guide by which to plot a better course. Perhaps if enough of Russia's best young people leave the country, and learn better ways of doing things, some of them may return to push Russia toward nation-saving reforms.

Deep Structural Problems Threaten China, Russia

Both China and Russia suffer from deep, structural problems which threaten the long-term viability of their respective governmental organisations. Many of China's problems can be symbolised by the ongoing spate of collapsing buildings, bridges, tunnels, power lines, railways, and other types of hasty construction and engineering.

Business Week

Nearly every month brings news of an infrastructure failure, dramatic or mundane. In August a new $300 million eight-lane suspension bridge in Harbin collapsed, sending four trucks tumbling and leaving three dead. In 2009 a nearly completed building in Shanghai toppled like a domino because its foundation was inadequate. The U.K.’s Telegraph reported that within months of opening last year, the $210 million Guangzhou Opera House began to shed its glass window panels and developed large cracks in its ceiling. Last year writer Evan Osnos chronicled on his New Yorker blog the premature decline of his courtyard house: “When the rainy season hit Beijing, our house began to show its age. About four years old, to be precise.”

All of this is at odds with the image overseas of China winning the “infrastructure race,” as the headline of an Aug. 24 online story from Foreign Policy put it. China’s structural woes stem in part from the government’s focus on quantity of growth over quality.

...Poor materials can cause problems: The collapse of school buildings in the wake of the 2008 Wenchuan earthquake was due in part to the use of low-quality cement, resulting in so-called tofu buildings. “When cement is mixed inadequately or when other materials are mixed in, it’s not very strong, so any major storm or stress on a building could make it fall down,” says Francis Cheung, author of brokerage firm CLSA’s 2012 report, China’s Infrastructure Bubble. _BW

China's problems go much deeper than corrupt and sloppy engineering, of course. China's banking system is choking on bad loans to state-owned and state-connected enterprises. Every part of China's government is tied up in the massive corruption -- from the military to civil security forces to local governments to top and mid-level political officials.

Built on such a shaky foundation, China's future as a going concern should be open to question -- at least in its present iterative form.

Putin's Russia -- a neo-fascist enterprise corrupt from top to bottom -- is beginning to suffer for its over-dependence on energy prices and profits:

Gazprom, the natural gas company controlled by the Russian state, is in crisis. It is likely to fall victim to the shale gas revolution that is under way across the US. The shale gas revolution will probably have telling consequences for Russian state capitalism and President Vladimir Putin’s power....

...Gazprom’s demise looks likely. With its demise, Russia’s revenues would dwindle. Mr Putin‘s model of state capitalism would suffer a devastating blow from Gazprom’s fall. If not even Gazprom is viable, which Russian state company is?...

...Curiously, in 2011 Gazprom was formally the most profitable company in the world with purported net profits of $46bn, but these profits were hardly real. Investment analysts opined that no less than $40bn disappeared through inefficiency or corruption. Gazprom’s cash flow was barely positive.

In their 2010 booklet Putin and Gazprom , Boris Nemtsov and Vladimir Milov, the opposition politicians, detailed how assets were being stripped from Gazprom through large kickbacks on pipeline construction and cheap sales of financial and media subsidiaries to Putin cronies. Since shareholders have realised that only their dividend yield is material, Gazprom’s market value has plummeted by two-thirds from $365bn in May 2008 to $120bn today.

For years, many analysts have said that Russia will reform only when the oil price falls because Gazprom seems to be the Kremlin’s main slush fund, which is now being drastically reduced. The Kremlin will have little choice but to forsake its mega-projects. It has already abandoned the mastodon Arctic Shtokman field. The next steps should be to back out of South Stream, the superfluous and exceedingly expensive pipeline project, as well as the planned gigantic sky-rise headquarters in St Petersburg. But that will hardly suffice. This dysfunctional former Soviet gas ministry will have to be cut up into real companies, which need to be privatised.

_FT

h/t The GWPF

Both China and Russia are nations of great ambition. But no matter how ambitious a government's goals, if the foundations of its very existence are cracked and crumbling, the Potemkin Village is unlikely to remain standing long enough to bluster its way to the final goal.

Russians Are Disappearing from Siberia

Siberia’s population is disappearing. In a generation, if current trends continue, the vast land—one and a half times the size of China—will have fewer inhabitants than Moscow or St. Petersburg. Today, only 38 million people live in Siberia—2 million fewer than 20 years ago, according to Russia’s Institute of Demography—even though the region constitutes up to 77 percent of the nation’s landmass. Almost three quarters of Russia’s population is crowded west of the Ural Mountains, where the best and brightest of Siberia are flocking, too, away from the crumbling infrastructure, widespread corruption, and lack of opportunities in their homeland.

... _DB Newsweek

Siberia is where most of Russia's energy and mineral wealth resides. If there are no Russians in Siberia, who is going to fill the vacuum, and harvest Russia's natural resource wealth?

Meanwhile, the rest of Russia is suffering from many of the same problems that are causing the Russian population of Siberia to dry up and blow away.

Russia’s biggest problems are inefficient healthcare and public services, and rampant corruption.

“In Vancouver, an ambulance crew takes three minutes to arrive,” Pavel said. “In Russia you can wait for 40 minutes. If you’re in a critical condition, you can die.” On his blog, Pavel reported corruption at a medical academy, whose alumni are often given priority places at the St. Petersburg hospital where his grandmother died. “I looked up what the students write on social networks,” he said. “Every other conversation is about which professor accepts bribes and how much an exam costs.”

“In 2007 I was optimistic about my future in Russia, in 2008 I hoped Putin would leave and the situation would start to improve gradually,” Pavel said. “I also hoped that millions of people like me would change the situation for the better. But there are too few of us.” _Moscow News

And there are fewer and fewer all the time. While Russia's immigrant population is growing and propagating, much of the ethnic Russian population is planning how they can get out.

When there is no demand for talented and innovative Russians in their own country, it is inevitable that they will seek better and more productive lives in other countries. As a result, Russia is turning into a blank space on the world map. _Moscow Times

Given the opportunity, over 20% of Russians -- mainly young, educated ethnic Russians -- are prepared to leave the country. This number is greater outside of Moscow and St. Petersburg, but even in those cities, significant numbers of Russians are fed up with living and working conditions.

Beautiful Russian Girls

The link above is to one of dozens of sites geared to men of Europe, North America, Oceania, and wherever else working males may feel under-appreciated by the women of their acquaintance. Young fertile Russian women across the country want to find greener meadows for establishing new lives and starting families. The same is true for young, ambitious and educated Russian men.

Official government news outlets will deny all of this, of course. According to the Russian government, there is no problem here, so just move along please. But to anyone observing the international situation dispassionately, it is clear that there is a serious problem, which is likely to affect a number of important international trends.

Keep your eyes open, and be aware of both the dangers and the opportunities. Perhaps someday, Russians can find a way to make their country a place worth living.

The Destiny of the World, As Told by Demography

According to a leading demographic researcher, Russia, Japan, and Germany are finished as world leaders.

Demographics is destiny, the theme of [David Foot's] Boom, Bust & Echo books, and national outcomes are therefore predictable by charting population mixes...

Among large economies, Germany, Russia and Japan are aging so rapidly they will not be major powers in the future. In all three, deaths will continue to rapidly outpace births every year.

Europe’s exceptions are France and Scandinavia, where social policies have encouraged higher birthrates through generous family benefits, day-care subsidies, lengthy maternity leaves, among other policies.

Southern Europe is hopeless, in terms of birthrates and economic activity. Interestingly, even though Germany ages, the country has overcome its demographic decline by aggressively automating, thus enhancing productivity and economic growth through exports.

_Financial Post

These are the words of David Foot, a Canadian demographer and author.

Foot captures some of the aspects of "demography as destiny," and badly misses other crucial demographic factors. But no one is perfect.

For a country to successfully replace its aging workforce, it needs a birthrate of 2.2 children per family, Foot said. He added that Canada is only managing a rate of 1.7 per family and that means Canada's labour woes are going to get even worse.

"Canada is significantly older than the U.S. and Mexico, with a much bigger percentage in the older-age brackets and ever fewer numbers of young people being born in Canada," said Foot.

...Canada is in better shape than many other countries around the world, said Foot. Italy, Spain and Greece have the oldest populations in Europe, while former powerhouses such as Germany, Japan and Russia have been watching their populations decline significantly.

"These are three countries that are never coming back as global powers. Germany, Russia and Japan are powers of the past ... not the powers of the future."

Foot said the future superpowers include China, India and Brazil while Turkey is emerging as the future power within Europe.

"Within five years a Muslim country will be the biggest market in Europe." _Canadian Business

Russia's immigrant population is growing, and is responsible for recent rises in Russian birth rates.

Russia is now an immigrant society. In Moscow and other major cities, migrants from the ex-Soviet states of Central Asia, the Caucasus and Eastern Europe do the work that natives turn down. Tajiks sweep the streets, Moldovans wait tables and Uzbeks work on construction sites. The metro flutters with flyers stuck inside carriages hawking the mobile numbers of professional forgers -“We Make Your Moscow Permit.”

Russia has become the second most popular destination for migrants in the world after the USA. In St. Petersburg hour long queues snake round the migration bureau where hundreds of migrants nervously swap cigarettes for job tips as they wait to register. Magadan on the Pacific has several Georgian restaurants and even on the dirt tracks of northern Siberia, Uzbek cafeterias are not uncommon.

...In 2009 the Russian Migration Service claims over 10 million migrants entered the country. They add that as many as 5 million illegals“are living in the shadows.” Many experts agree that the migrant population is over 8.5 million, although off the record, some diplomats suggest the real figure may be over 15 million. That would be roughly 8 million more workers that the 6.7 million drop that Russia has recorded since 1991. _Immigrant Russia

Russia has been trying hard for several years to boost its program of legal immigration. At the same time, the Russian government has not been able to stem the ongoing collapse of the ethnic Russian demographic.

The ongoing loss of highly educated and accomplished segments of the population, continues to deal the wounded bear severe demographic blows at the highest levels. And like Japan, Russia's working-age population is destined to shrink precipitously -- particularly in the ethnic Russian demographic.

Ethnic Russians are disappearing particularly quickly in the most resource-rich parts of Siberia, while ethnic Chinese and other non-Russian populations are growing in size and influence.

If one believes Russian government statistics -- and smart people probably shouldn't -- Russian birth rates have "skyrocketed" while Russian death rates have "plummeted." But those statistics -- even if honest -- are rarely if ever stratified by ethnicity for public consumption. It is likely that just as demographer Foot says, Russia's (and Japan's) glory days are in the past.

Unfortunately for Foot's other predictions, the Canadian demographer neglects crucial factors such as average national IQ, market dominant minorities, particular influences of specific political economic ideologies, levels of violence in particular populations, and other devastatingly important factors that affect the wealth or poverty of a nation.

Demographics is indeed destiny. But sometimes even the best demographers fail to understand the full spectrum of demographic influence on societal success.

Try not to make that mistake.

And remember: It is never too late to have a dangerous childhood.

Russia's Gazprom Struggles Against the Current

Gazprom profits are an important foundation of Putin's system of government. But Gazprom is confronting difficult challenges -- both outside of Russia and inside of Russia itself. No one knows how long the company can continue playing its current role of propping up the Putin regime, which is facing significant opposition on many fronts.

Russian President Vladimir Putin, who faces the biggest protests of his 12-year rule, could lose power overnight if the oil price sinks and he fails to reduce corruption... "The regime may fall apart overnight, and in a way that we don't know. It may be in a peaceful way, it may be in a bloody way," _India Times

[Gazprom] is large and sprawling and, with a seemingly eternal income stream, had no need to be innovative or especially adept at what it did. ... Unlike oil, natural gas until recently was difficult to ship except in pipelines; this gave Gazprom a guaranteed, if partial, monopoly as a gas supplier to Europe.

...But that era is passing. Gazprom executives have been very slow to recognize the competition. ... The advent of shale gas in the United States has increased supplies and driven down spot prices worldwide, and Europe can now buy liquefied natural gas from the Middle East at a relatively attractive price. It is also exploring its own shale-gas potential. Customers have been renegotiating contracts, as the Russian giant comes under more pressure.

At the same time, though, Putin is shaking up the gas business at home. A beneficiary has been a domestic competitor called Nova­tek, which recently snapped up a Gazprom subsidiary known as Sibur for way under market value. Novatek may, reportedly, get permission to start exporting gas, as well, breaking Gazprom’s monopoly.

“The favoritism toward Nova­tek is pretty striking,” Gaddy said. The company is half owned by Gennady Tymchenko — a former judo instructor who knew Putin when they belonged to the same martial arts club in St. Petersburg. He also runs a Swiss company called Gunvor that has become extremely profitable as a middleman in exports of Russian oil. His partner is Leonid Mikhelson, who rose to second-richest man in Russia on the Bloomberg billionaire index thanks to the Sibur deal — the index valuing Sibur at its actual value, not what Novatek paid for it.

The government has also announced that it is reversing its policy and once more placing its own people on the Gazprom board. That is unlikely to substantially change the way the board — already a rubber stamp — runs its business. It is probably a sign of “a fight under the rug” between Prime Minister Dmitry Medvedev and Igor Sechin, a close associate of Putin and head of the Rosneft oil company, Krutikhin said.

One thing remains unchanged, no matter who wins that inside struggle, Milov said: “Putin is the central figure who makes the major decisions.”

Is he preparing for Gazprom’s decline? “I would hope they’re thinking about that,” said Greene, at the New Economic School. But it’s difficult to imagine, he said, how you could remove Gazprom from the political and economic system in Russia and still have the system. _WaPo

Russia itself is a nation in slow motion decline. Its best young people choose to emigrate to the west. Capital flight continues to plague efforts to create an economy separate from energy, mining, and logging. The public health situation is horrendous, and the core ethnic population is slowly being replaced by Muslim immigrants -- both in civilian and military populations. And in the far East, Chinese influence continues to expand rapidly.

Russia's leaders and ruling classes have never been known for thinking on their feet, or being able to quickly adjust to changing circumstances. The next 2 decades are likely to be a time when they may wish to increase their flexibility more than just a bit.

Russia Faces a Troubled Future

Russia of today is an oil-rich country controlled by corrupt politicians, mafias and wealthy elitists who buy foreign goods and keep their wealth in foreign banks; send their children to Western schools and universities; take vacations abroad; and even seek health care in the Europe and the United States.

Vladimir Putin exemplifies this focus on personal gain. Shlapentokh said the Russian president and his friends have gone so far as to merge Russian companies with foreign corporations for the promise of owning Western stocks. Further, while Putin indulges his personal whims – such as organizing expensive international sporting events – the country suffers from low-quality medical services, inept education, bad housing and many other problems...

...“This desire to secure their wealth abroad stems from the uncertainly that comes with living in a politically unstable country,” Shlapentokh said. _Michigan State University

This corrupt leadership style is similar to what one sees across the third world. While a corrupt leadership thrives on a nation's natural resources, the masses of people tend to suffer.

One should not be surprised, then to see the significant brain drain and ongoing capital flight out of Russia.

Putin cracks down on any opposition threatening his administration, with the Kremlin routinely suggesting protestors leave or face harassment or even imprisonment. Nearly 1.3 million citizens have left Russia during the past three years. Ultimately, the many problems facing Russia are collectively eroding the cultural beliefs and institutions that make a country united and strong, Shlapentokh says.

“This has put Russia in a weak position for resisting terrorism or potential attacks from her neighbors. In short, Russia is not in a position to be a major global force despite its nuclear arsenal, the size of the country, its natural resources, and its position on the UN Security Council.” _Futurity

Such corrupt, counter-productive, intolerant governing style inevitably creates a society where the masses of people avoid risk, and thus avoid taking chances in search of opportunity. It is an atrophying society, which goes along with the ongoing demographic atrophy of Russia's core ethnic Russian population.

Any gains seen in Russia's population are coming from a ballooning Muslim immigrant sub-population. This growing sub-population within the core population is already generating problems with crime, intolerance, and ethnic violence.

Russia's leadership is living it up as if there would be no tomorrow. And in a significant sense -- for the masses of ethnic Russians -- they may be right.

Russia, Gazprom, Change Their Tune On Shale Gas

Cross-posted to Al Fin Energy

Gazprom's top managers have for years said that shale gas production would never threaten demand for Russian gas. Gazprom has recently started to change its view...

Russia's economy ministry sees "serious" risks posed by shale gas to the revenue of Gazprom (GAZP.RS) beginning in 2014, as higher supply from the nontraditional hydrocarbons may hurt prices and demand for Russia's pipeline gas.

"Gazprom had undervalued the importance of shale gas, but is starting to look at it seriously," Deputy Economy Minister Andrei Klepach said Tuesday as he presented a weaker outlook for the country in 2012 and beyond.

Russia satisfies about a quarter of Europe's demand for gas, which generates revenue for the budget.

Mr. Klepach added that the ministry also saw a lower outlook for gas prices in Europe, driven by both the euro-zone economic crisis and a higher supply of shale oil and gas from other sources. _WorldOil

After years of denial by Putin and Gazprom's top executives, Russia is finally acknowledging what Al Fin energy analysts have been saying all along. But political deception is nothing new for Russia or Putin. It is only those who still give the Russian government credibility who were fooled.

Meanwhile, Russia is jumping into shale fracking for oil & gas big-time, despite all that Putin has said about the evils of shale fracking. I suppose the shale oil & gas bonanza would look evil to a corrupt pol such as Putin, when it threatened his corrupt system.

Present recovery rates at various tight oil projects across Russia are between 2 to 8 percent. However, tight oil reserves could account for as high as 62 percent of Russia’s total reserves.

In the face of all this, Russia looks eagerly to the success experienced by North America in its shale revolution. The geology of the Bazhenov is quite similar to that of the Bakken shale here in the U.S., meaning fracking could be the solution to Russia’s oil situation.

The Russian oil producer Rosneft has already paired up with ExxonMobil (NYSE: XOM) to jointly work the Bazhenov formation. They will begin drilling in the Bazhenov and Achimov formations in 2013, following completion of an ongoing geological study. Rosneft has also reached an arrangement with Norwegian firm Statoil (NYSE: STO) to develop Russian oil assets in Southern Russia and West Siberia.

Other major oil companies like Lukoil (PINK: LUKOY) and Gazprom (MCX: GAZP) are also exploring ways of developing tight oil reserves.

The Russian unconventional oil and gas market could be heading for a time of profit and success. _Energy & Capital

This development points out some interesting things about Russia's economic future:

1. Russia's "prosperity" depends primarily on its energy production
2. For Russia to maintain its production, it must attract the expertise of foreign companies
3. Everything that Russia has said about the dangers and the inconsequential nature of shale oil & gas, was nothing but a politically expedient smoke screen
4. Russia needs to exploit its own vast shale oil & gas reserves

There are other interesting tidbits that can be read from between the lines, but that is enough for now.

Meanwhile, Europe's emerging recession is already having an effect on Russian gas profits:

Russia’s Economy Ministry is reportedly cutting its gas export forecast for this year due to sluggish demand from recession-mired Europe.

The forecast is said to be reduced to 193 billion cubic metres (bcm) from an earlier 212 bcm.

A government source has told Reuters that it will also reduce its average export price estimate.

State-controlled Gazprom has a monopoly on Russian gas exports.

Earlier this week the Deputy Economy Minister Andrei Klepach had said the gas export forecast would be reviewed, in the face of competition from US shale gas and liquefied natural gas. _Euronews

This tells us that Russia is reluctant to admit its earlier lies, when it claimed that US - style development of the global shale gas resource was no threat to future Gazprom profits.

It is important to understand that Russia's budget (official and unofficial) not only depends upon oil profits, but also depends upon gas profits. If Gazprom profits begin to fall because its customers in Europe and Asia begin to develop their own tight oil & gas resources, Russia's government will come under serious financial pressure.

Socialism in Venezuela vs. Cronyism in Russia vs. ...

Hugo Chavez' socialist revolution has been championed by many Americans, who would like to see Chavez' experiment repeated in the US. Here is more about Chavez' revolutionary success in Venezuela:

It is clear that the Chávez regime has been squeezing every last penny out of the oil sector...the money hasn’t just been used for social programs, but also to fund Venezuela’s expensive foreign policy, as well as its efforts to cover up the results of poor policy, rampant cronyism, and the general mismanagement of the public sector. When things go wrong, Venezuelan citizens are the ones who pay the price for the state’s poor choices.

Three things seem likely at this juncture: first, no one will be able to trust whatever “investigation” the Chavez government undertakes. It will be an obvious whitewash. Second, conditions for oil workers are unlikely to improve. Third, the usual crew of Chavez defenders in the United States, desperate after all these decades of misery and failure to point to some place some where, where authoritarian socialism isn’t a dreary charnel house and economic failure zone, will struggle to convince themselves that things are just fine in Bolivarian Venezuela. _Walter Russell Mead

Chavez' is up for re-election, but with the total control he has seized over every aspect of Venezuela's government, elections in Venezuela may not mean the same thing as they mean in an actual democratic country.

Meanwhile in Russia, cronyism is alive and well, with the Pussy Riot safely locked up and no longer a threat to the state. Oil prices are high, and the Russia's crony classes are living well for now. But Russia and its cronies have many other problems that must be concealed from the public eye:

A recent government crackdown on Russian media, particularly online information portals specialising in health tips and harm reduction methods for drug users, has sparked widespread public opposition, with critics claiming that the 'draconian silencing' of public health advocates could worsen an already perilous health situation in the country. _Russia-Health

Besides suffering from a sub-par system of medical care and public health, Russia's men are being poisoned.

Largely due to cronyistic suppression of opportunity in Russia, the men of Russia have sunk to such a pathetic state that more and more Russian women have given up on finding a suitable mate.

"...Russian women simply have no interest in marrying Russian men,” says Irina Zhuravleva, the head of Russia’s census department at the Federal Statistics Service. A single woman herself, Zhuravleva says she “never had any interest in marrying a drunk...

The dating prospects are so grim, in fact, that Shpakova and many other Russian women of her generation are consciously deciding to stay single. Moscow alone boasts more than 3 million single women between the ages of 25 and 50, out of a population of 11.1 million (that’s three times the number of single Muscovite men). In Russia as a whole, there are 11 million more women than men, due in part to a century of bloody revolutions, gulags, and wars that drained the country’s male population. Add to that the fact that male life expectancy is particularly grim in Russia—on average, 59 years, as opposed to a woman’s 73 years, the largest gap of any country in the world—and you’ve got a serious demographic imbalance. _Simply Beastly

Russian males barely live long enough to claim a pension, on average.

Meanwhile, crony Russia is looking westward to socially democratic Europe, hoping to squeeze some wealth from the continent before the tight oil & gas revolution reaches European shores. But in the land of the ubiquitous welfare state and ongoing demographic collapse, poverty is returning to claim its due. In the land which China is counting on to re-start its moribund exporting enterprise, recession is setting in, and Euro leaders are doubling down on the foolish policies which led them to this state of affairs.

And in the US -- the only country that is actually capable of turning the global economy away from the abyss -- voters cannot decide. They cannot seem to choose between a failed US president who is leading their country more deeply into debt, despair, and demographic decline . . . and a former Massachusetts governor who was also successful in the private sector -- a man who -- unlike his opponent -- is bold enough to lay out a broad array of tangible plans for the nation's future.

We are seeing a world that is growing more unstable, with a dumbing down of electorates in the advanced world, and the ascendancy of corruption in Russia, China, India, in several failing states of Europe, and in Obama's America.

Hope for the best. Prepare for the worst.

The League of Immortal Billionaires

PopSci

Earlier this year, a Russian media mogul named Dmitry Itskov formally announced his intention to disembody our conscious minds and upload them to a hologram--an avatar--by 2045. In other words he outlined a plan to achieve immortality, removing the human mind from the physical constraints presented by the biological human body. He was serious. And now, in a letter to the members of the Forbes World’s Billionaire’s List, he’s offering up that immortality to the world’s 1,266 richest people.

“Many of you who have accumulated great wealth by making success of your businesses are supporting science, the arts and charities. I urge you to take note of the vital importance of funding scientific development in the field of cybernetic immortality and the artificial body,” Itskov wrote in the letter. “Such research has the potential to free you, as well as the majority of all people on our planet, from disease, old age and even death.” _PopSci

If this idea pans out, it will provide the Earth's billionaires with more time to accumulate wealth and influence than they could have previously dreamed. Such billionaire avatars would have the time to play high stakes games of poker stretching over centuries, rather than mere hours or days.

Over such time periods, the Earth's economies are likely to experience any number of boom and bust cycles -- each cycle presenting huge opportunities for capital acquisition. The power to manipulate markets, economies, and governments would grow accordingly.

We are learning that China's economy is not up to the task of saving the world from another recession.

Peter Misek: We came back from China really depressed, I have to say. It appears that mainland China is correcting significantly. The statistics the government publishes, frankly we think are largely fabricated. So you have to rely on other statistics such as retail sales, electricity usage, mall traffic, etc. And what we saw, and what we heard was pretty grim. We think consumer electronic sales could be falling double-digits year-over-year in June and thus far in July. And we think the catalyst frankly is job losses. The premier of China was on this morning basically saying the labor situation is severe, meaning job losses are accelerating and unemployment is skyrocketing. _Mish

Europe is experiencing rapid capital displacement:

Source
You can see capital moving rapidly away from the marginal European economies toward those which are considered to have a sounder financial basis. What you cannot see in this chart is the capital which is moving out of the EU entirely, to Switzerland and elsewhere.

An immortal billionaire avatar could easily pull the strings to move large blocks of capital from one arena to another, as the situation warrants. Just as long as financial institutions could be sure that the avatar was sending the orders, and not some hacker who had tapped into the avatar's communications network or data base.

Personally, I do not see a great deal of capital flight going into Russia. Likewise, it isn't very probable that many billionaires will be eager to move their "souls" into a Russian controlled data bank complex, if they are not eager to move their capital there.

Russia's core population is slowly collapsing. Will this Russian media tycoon open his data banks to receive the souls of ordinary Russians, to keep the country's "population" from dwindling to virtually nothing? That might be one way to save the country, and would certainly be a nobler gesture than the attempt to trap and control the wispy remnants of Earth's billionaires, inside an electronic purgatory.

Why Russia Hates the Global Gas Bonanza

Multiple voices out of Russia have been condemning the global shale gas movement -- deriding unconventional gas as "unsafe," "uneconomical," and "irrelevant." In other words, Russia is running scared, hoping that irrational lefty-green influences over western governments will subdue Gazprom's unconventional competition, before Russia loses all of its lucrative, high priced natural gas contracts.

Economist

Poland is just one of many countries suffering under extortionate Russian natural gas prices, which would like to develop its own cheap shale gas resource:

If geologists are right, up to 768 billion cubic meters of natural gas sits trapped in shale deposits deep beneath the surface in Poland, enough to meet the country's needs for the next 50 years and more. The estimates have tantalized Poles with visions of ending their reliance on Russian gas, which warms them through harsh winters but puts them at the mercy of their former masters far more than they would like. _LA Times

Other of Russia's customers looking to slip the Gazprom chains from around their necks include the Ukraine, China, and a number of central and western European nations.

The unconventional-gas bonanza has roughly doubled the gas resource base, a measure of the total gas in the ground rather than what might be economically recoverable. In 2009 the IEA estimated the “long-term global recoverable gas resource base” at 850 trillion cubic metres (tcm), against 400tcm only a year earlier. The main reason for the rethink was shale gas and other unconventionals. Not just America but parts of Europe, China, Argentina, Brazil, Mexico, Canada and several African countries, among others, sit atop as yet unknown quantities of gas that could transform their energy outlook.

...Historical factors have led to another anomaly: much of the gas traded across borders is sold at prices linked to those of crude oil. When gas was first brought to market as a commercial fuel in the 1960s, as an alternative to home heating oil, it made sense to price it against a substitute. But there was also a more subtle reason. Oil was used as an independent price arbiter for Dutch gas in the 1960s and then for Algerian and Norwegian gas in the 1970s because neither side could influence the supply and demand for it. The system persisted as Russian gas came to Europe in the late 1970s. But the economics have changed, and valuing one commodity in terms of another now seems bizarre.

...A more competitive market the world over would doubtless make gas cheaper by breaking the link with oil, but that will be difficult to bring about. Gazprom, Russia’s huge state-run gas producer and supplier of 25% of Europe’s gas, is strongly opposed to dropping oil indexation. A tussle is under way between it and the continent’s big buyers. Some pundits say that gas must eventually become a global fungible product like oil, with regional price differences closing as more gas is shifted in the form of LNG, draining gluts and making up shortfalls in regional production in North America, Europe and Asia......

Gas producers are naturally happy with the high prices resulting from oil indexation, arguing that without them the economics of big gas projects would never work. But Rick Smead of Navigant, a consultancy, thinks there are good reasons for all concerned to want competitive gas prices. He points out that they would reduce regional price volatility and provide gas producers with a broad and flexible market instead of having to rely on a single consumer at the end of a pipeline. That should offer an incentive to make the huge investments required.

If the “shale gale” blowing through America can be replicated worldwide, the huge surpluses it would bring could hasten the advent of a global market. Just as the 20th century was the age of oil, the 21st could prove to be the century of gas. _Economist

In early 2009, at the height of winter, Gazprom withheld gas from Ukraine in a dispute over prices and payment, a shutoff lasting for days that also affected delivery to more than a dozen other shivering European nations. On at least one day in February of this year, Poland detected a sudden 7% drop in supply from Gazprom; some suspect Russia was holding back some of its gas for itself to combat a nasty cold spell. _LATimes

Russia not only stands to lose its ability to extort high gas prices from its customers -- it is in danger of losing many of its customers altogether. Since Russia's government depends upon Gazprom profits to finance many of its "unofficial" expenditures, the crony-ocracy at the highest levels of Russia's government is extremely concerned.

Losing China and Eastern Europe would be a significant blow to Gazprom. But the loss of western Europe might be the final straw, leading to revolutionary changes inside Russia.

These are basic, earth shaking trends which should be taught to every school boy and girl. Unfortunately, almost all school boys and girls are too busy being indoctrinated into climate hysteria and politically correct multicultural mind pablum, to have time to understand what makes the world go around.

Unconventional natural gas is just the beginning. Unconventional liquid fuels are closing in on economic production when oil sells for between $100 and $120 a barrel. As technologies continue to improve, that breakeven price is slowly but surely dropping.

If Russia is to benefit from its vast resources of energy wealth, it had best open itself to foreign investment and development as quickly and cleanly as possible -- cleaning out the destructive corruption and cronyism from top to bottom to make way for a better future for Russia's people.

For if Russia continues down its current path, it is certain to lose everything East of the Urals in a matter of decades, and perhaps everything else shortly thereafter.

Russia's Business Climate: An Uphill Battle

Russia still suffers a brain drain. A study by the World Economic Forum (WEF) suggests that bright young Russians are flocking abroad even faster than they were in the early 2000s. Many are fleeing the insecurity of living in a mafia state—the fear that a well-connected goon will show up one day and announce that your business now belongs to him.

“Everybody pays [bribes], even those who insist they are totally clean,” says an investment banker in Moscow. Companies owned by the state or powerful oligarchs enjoy some immunity from extortion, but smaller private firms do not, which is why Russia has so few of them. _Economist

In the WEF’s study Russia fared worse than India, China and Brazil on the affordability and availability of finance. The other BRICs are not exactly models of lean, clean government either, but their states are less predatory than Russia’s. And their economies rely more on talent and less on hydrocarbons. Reviving Russian industry will be a long struggle.

...Three years ago Mr Deripaska brought in Bo Andersson, a former GM man, to turn GAZ around. A conscientious Swede, Mr Andersson insisted on zero tolerance for corruption. For a Russian factory this was a tall order. But he has got rid of various “managers” who ran businesses on the side, helping themselves to GAZ’s supplies. He has introduced bonuses for workers who turn up sober and refrain from stealing, and the sack for those who do not. Thousands of surplus workers have been laid off; more will follow. This has not made Mr Andersson popular in Nizhny; hence the bodyguard who accompanies him everywhere, even inside the plant. GAZ is now in profit and producing double its 2009 output, despite cutting its workforce by half to 23,000, says Mr Andersson. In 2010 only 16% of vans rolling off the line were fit to be sent out without remedial work; that is now up to 64%. _Economist

Good enough for Russia, perhaps, but not good enough to compete internationally. It will be an uphill battle all the way.

Besides fighting corruption and crime, businesses must find and keep good conscientious workers. Unfortunately, in Russia that is easier said than done. Disease, alcoholism, mental illness, and drug addiction all plague Russia's working age population.

Most of Russia's 2.5 million drug addicts are aged 18 to 39 — a generation of Russians lost to heroin.

"The only thing the government can do is save the new generation, because we cannot be saved," said Valery, a former heroin addict from the Volga River city of Samara. He gave only his first name because his support group does not allow contacts with the media. _SFGate

Russia's fertility rate is still below 1.5 -- far below replacement level. When one counts only ethnic Russians -- excluding immigrants -- the fertility rate is much lower yet.

Russia is in many ways the world's richest country, in terms of natural resources. But due to bad government, Russia is also one of the world's poorest countries in terms of realistic hope for the future.

Russia needs tens of thousands of men like Bo Andersson -- the man mentioned above who tried to clean up GAZ, and succeeded to a certain point. But where is Russia going to find them? And how can Russia keep them alive and out of Putin's prisons while they are trying to save the country?

Russia Suffers Drain of Brains

A brain drain from Russia has been funneling its brightest minds to the West, while the nation’s embattled higher education system struggles to find its place in the post-Soviet world. _NYT

Russia's educational system has been losing ground for decades. Consequently, Russia's brain-drain is occurring at earlier and earlier ages and stages of the educational process.

Not only are the best Russian science and technology graduates being lured overseas, sometimes the recruiting takes place even before graduation.

And those students who stay behind in Russia are studying more superfluous subjects, rather than the much needed scientific and technological areas of concentration.

Comfortably settled under the gilt ceiling and surrounded by statues of tsarist-era heroes, the participants of the Strong Russia 2012 summit were in an amicable state of mind, at least until the deputy economics minister of the Kaliningrad region stood up.

Mikhail Gorodkov spoke about an issue that few in the room could ignore: the lack of specialists needed to support Russia's development.

"With the excess of economists and lawyers that we have right now, there will simply be nobody left in 10 years to add to gross production [in Russia]," Gorodkov said.

The issue, although not a novelty to the summit participants, is a sore one. While authorities are soliciting more local and foreign investment by positioning Russia as a technological leader, the quality of the country's working staff has steadily declined.

Eighty-six percent of companies in Russia experience a deficit of qualified personnel, according to a study by Antal Russia. The June 2012 poll was based on information gathered from 200 companies.

Technical specialists, qualified retail workers, engineers and IT staff are the hardest to find. This shortage of qualified workers is expected to worsen in 10 to 15 years as Russia's demographics show fewer people of working age.

Part of the problem is the current fashion among youth to train to be economists, lawyers and managers, said Viktor Sadovnichy, rector at Moscow State University.

There is such a surplus of these professions on the market now that the newly graduated professionals are having trouble finding jobs or are forced to settle for jobs that pay 10,000 to 12,000 rubles ($370), Sadovnichy said.

The results of the Unified State Exam are a good indication of the professions that graduates are choosing to study. The number of students who pass the physics exam, which is necessary to go on to study engineering, is currently only 2 percent of the number that the technology sector needs to function, Sadovnichy said._Moscow Times

Capital flight from Russia continues, although at a lower level since the price of oil has dropped.

Should the price of oil remain for long below break-even for the Russian government budget ($120 - $150 per barrel), Russia's problems will have just begun.

Vladimir Putin has big plans for Russia, but he will need to find a way to bring in greater profits to the one-trick-pony energy state. The global price of natural gas is likely to drop lower -- making it difficult for Gazprom to support unofficial state projects. And Putin needs for the price of oil (Brent) to exceed $120 a barrel in order to pay off cronies and to finance all the new weapons systems he wants to build.

Putin's best hope for the future is if US President Obama is re-elected, prolonging the extreme dysfunction and weakening of his greatest enemy nation. Because it is only a matter of time before Russia will have to confront China militarily. And when that happens, Putin does not want the US to be in any condition to take advantage.

BRICs: Can the Tail Wag the Dog?

Ever since the 2008 collapse of the great global economic bubble, the hopes of the chattering economic classes have ridden on the BRICs -- the emerging economies of Brazil, Russia, India, and China. Aside from Russia, the BRICs have population heft and momentum, something most of the more advanced nations cannot claim. There is also a sense in those countries that it is somehow "their turn" to excel.

But what if the BRICs are only the tail to the global dog? If the dog is sick, can we really expect the tail to do everything the dog would normally be able to do?

The BRICs have been exporters to the more developed economies. But the more developed economies are sinking under dysfunctional policies and leaders. Can the BRICs succeed and prosper without developed markets to buy their resources and products?

Champions of the Submerging World
China is economically dependent upon exports to Europe and North America -- markets that have not been doing well over the past few years. Brazil is economically dependent upon not only Europe and North America, but is very much dependent upon Chinese demand as well.

As goes China, so goes Brazil. China's insatiable appetite for oil has benefited Brazil over the past few years. If China's economy continues to lose momentum because of the European crisis, that will impact Brazil ... even if Brazil doesn't have as many direct ties to Europe's consumers and banking system.

"Brazil is a play on China. There are concerns that Brazil is overexposed to China," said Carlos Constantini, head of research at Itaú BBA, an investment bank in São Paulo. That's a big reason why Brazil's benchmark Bovespa stock market index is down more than 6% year-to-date.

India's sharp decline is perhaps the most surprising since that economy was thought to be the least exposed to Europe. Russia, however, could really suffer if the global economy doesn't show some signs of life soon. Crude oil prices have plunged below $100 a barrel to the mid-$80s. Crude prices are now down more than 20% from their highs of the year. And oil could dip further if the Euro-wreck leads to significantly lower demand for crude worldwide.

"Russia was a darling for awhile and there was all this talk about how oil would never fall below $100 a barrel. Their economy is so levered to oil and commodities and they haven't been able to diversify." Mata said. _Thick as a BRIC

Cracking BRICs
It is true that India's economy -- despite minimal exposure to the European crisis -- is starting to slump. India is still desperately poor, after all, and its government is abysmally corrupt. Nothing kills a nascent economic boom so quickly as greedy governments.

One interesting development out of all this economic turmoil, is that Russia's Putin is turning to the Russian far East and to Russia's relationship with China, in an attempt to hedge his global bets.

Much of Putin's far East and China strategy should be seen as wishful thinking: China's population is still on the ascendancy, looking for lebensraum, while the ethnic Russian population is steadily shrinking away and leaving a huge void.

Putin's attempts to engage China in joint industrial and technological enterprise are likewise built on shifting sands. China has always appropriated the intellectual property of its "partners," and proceeded to to make pirated and counterfeited products. Russia is feeling the sting from multiple thefts of designs of planes, ships, submarines . . . If Putin proceeds with his farcical plans (see above article link), Russia will feel that sting yet again . . . and again . . . and again . . .

When Putin attempts to lock China into a long-term gas contract at today's inflated prices, he will be bucking the tide of China's development of its own vast shale gas resources. Somehow, it is unlikely that China's leaders will be amused at Putin's condemnation of the "fracking" process, which China is using to develop its tight gas deposits. Particularly when Russia is using the exact same fracking process to develop its own shale resources in Siberia.

An attempt by BRIC nations to circle the wagons and to feed each others' prosperity -- without outside input from the more developed economic world -- is not likely to succeed at this early stage. But it is possible that the US will eject the anti-free market and anti-energy policies of the Obama administration, in November's election. And it is possible that at least some countries of Europe will turn away from demographic decline and the green dieoff agenda.

If those things should happen, the health of the dog may be restored, and the tail may be set to wagging once again.

With or Without Putin, Russia is Slipping Away

One of Russia's biggest problems is that many of its best people are moving out, and they are being replaced by people who are -- shall we put it kindly -- sub-par. Unskilled workers from the republics are flowing into Russia, while its best trained and most skilled workers and professionals are finding their ways abroad.

Even worse, ethnic Russians who stay in Russia achieve fertility rates less than 1.5 child per woman -- even with pro-natal Kremlin policies -- while Chechen women maintain fertility rates well above 3 children per woman. Two thirds of births from ethnic Russian women are from women between the ages of 20 and 29 -- a part of the population that happens to be shrinking at this time. In less than 15 years, the number of Russian women in that age group are estimated to be reduced by almost 50%.

Russian women continue looking abroad for marriage, family, and child-raising, because -- frankly speaking -- Russian men are not reliable, and Russia is no place to raise a child.

What really matter are job security, crime-free cities, family life and health, and in all these yardsticks Russia is slipping. I won’t go into the dismal life expectancy for men or the crime stats, but Russia has a major problem. It is a real concern when wealthy Russians start packing up their bags and settle abroad.

For Russia, which boasts a highly educated and intellectual population with vast achievements in science and technology, it is dangerous to be so dependent on fossil fuels and minerals. Russia’s successful military and space programmes have yielded few known commercial spinoffs. More than 20 years after the Soviet Union dissolved, Russia doesn’t have a globally renowned consumer durables brand. _Indrus.in

The quality of Russian higher education, for the most part, is somewhat overstated. The severe brain drain of the post-collapse era left Russia's intelligentsia depleted, the brain drain continues.

Salaries and the terms of faculty appointments and promotion are central to the well-being of the academic profession and its contributions to the university. If salaries are inadequate, the “best and brightest” will not be attracted to academe...in a globalised world, salaries in one country affect academe elsewhere, as professors are tempted to move where remuneration and working conditions are best....Russia and the former Soviet states pay quite low salaries, even when their economies are relatively prosperous.....For academics in those countries with quite low salaries — such as China, Russia, Armenia or Ethiopia — the academic profession faces a crisis. _TheHindu

Not all Russian professors are worth hiring abroad -- just like many social science professors in the west are not worth hiring at all. But for those who are accomplished in science and technology, the temptation to migrate abroad can be overpowering.

Russia's economy has been pegged to its energy resources for decades. Now, Russia is trying to re-invent itself in terms of business and innovation. But doing so will be very difficult.

Russia’s reliance on the export of oil and natural gas and lack of integration into regional and global markets inhibit economic growth. Although Russia’s World Trade Organization accession this year will open the Russian economy to greater foreign trade and investment, there is not yet an effective strategy for economic development. The authors recommend a “twin-vector economic strategy” that simultaneously orients Russia’s economy toward the East and West, so that it can benefit from advanced technology and investment from both.

The most obvious constraint on Russia’s ability to pursue such a strategy [Outlook 2030] is its poor climate for business and investment, in particular the pervasive corruption that crops up at every level of state and society. In addition, the country’s underdeveloped public health system, relatively anemic middle class, continuing “brain drain” emigration and aging workforce will hinder Russia’s competitiveness and attractiveness for investment. Though “Outlook” avoids the “third rail” of Russian politics -- addressing official corruption at the top levels of government -- it recommends the Kremlin adopt policies to foster the growth of small business, eliminate excessive bureaucracy and even offer greater freedom and support for civil society. Putin has shown little enthusiasm in practice for such reforms... _Carnegie Endowment

Russian life expectancy continues to be horrendously low, for a nation that claims to be developed. Few Russian men live long enough to enjoy more than a year or two of vodka-sotted retirement. Heart disease, accidents, and violent crime take care of those that alcoholism, suicide, HIV, and drug resistant TB do not handle.

A more in depth look at Russia's demographic prospects (PDF)

The recent crash of Russia's first new airliner design in decades will not help build Russia's new reputation for world-class innovation. And the theft of military technology systems by China -- a growing competitor on second and third tier defense markets for Soviet era weapons systems -- does not help to keep Russian weapons and technology manufacturers in business.

Voters in Russia have never been taken seriously. Now that Putin has achieved "President For Life" status, there is no reason for the Kremlin to do more than give them lip service from now until the military machine rusts, the oil & gas wells give out, and the Russian ethnic demographic passes the point of no return.

Who wouldn't want to get out?

Russian Energy Oligarchy's Fears of Shale Gas Rising

Now and again Russian President Putin has warned Russian gas-giant Gazprom that it must face the growing threat of abundant shale gas. Shale gas is a massive and newly accessible energy resource ranging from North America to China to South America to Europe. But it is the shale gas resources in Europe and China that Putin is most worried about, for those resources represent a huge and devastating threat to Russia's ability to finance its government. Putin's ambitious plans to make Russia into a world superpower, like the collapsed USSR, are at stake.

Could the boom in shale gas challenge the leadership of Russia in gas?

Until now, Moscow and Gazprom have seemingly been nonchalant about the threat. But as the impact of the boom in US natural gas production becomes clear, depressing prices to levels not seen in 10 years and increasing the prospect of the country becoming an exporter, the Kremlin is beginning to pay attention. The change in attitude is led by Vladimir Putin, Russia’s president-elect. He told the Duma last week that the boom in shale gas can “seriously” reshape the global energy market. “National energy companies, obviously, must respond to these challenges,” he said, in a clear reference to Gazprom. ...The biggest risk for Russia is not the US shale gas but the potential of the development of similar reserves in neighbouring Bulgaria, Romania, Poland and Ukraine.


Eastern European countries are racing to tap shale deposits using the same technology – hydraulic fracturing, known as fracking, and horizontal drilling – used in the US gas industry. Gazprom supplies Europe with about 20 per cent of its gas needs, so the development of shale deposits in its backyard is a serious long-term threat. Until now, European companies have found it difficult to renegotiate their expensive contracts with Gazprom because the lack of alternative suppliers. Over the next decade, the development of the European shale industry could give the Continent’s natural gas consumers a bit more leverage. _FP_via_GWPF

China is another Gazprom customer which will soon be in a good position to re-negotiate its contracts, based upon the development of its own native shale gas resource. All of these re-negotiations will be extremely painful for a corrupt energy oligarchy such as Russia, which depends upon high energy exports to finance its very existence -- an existence already threatened by an ongoing demographic collapse, a worsening public health disaster, an industrial infrastructure that cannot keep up with the west, and a military that is increasingly seen as a "paper tiger" by its ambitious neighbor to the southeast. Putin has green activists well in hand, in his battle to keep Russia's energy customers helpless and dependent upon their Russian energy suppliers. But governments are being pushed to the wall by energy prices and ongoing budget deficits. Most of Russia's customers are not overly fond of the aggressive bear, and do not care to pay for Russia to re-develop its nuclear and conventional threat.

...Gazprom’s European customers, tired of being ripped off by Gazprom, are avidly exploring the possibilities of undertaking fracking to develop their own sources of the “blue gold,” and nowhere is interest higher than in the Russian Federation’s neighbors Ukraine, Poland, Romania, Bulgaria and China. ...the rapid growth in U.S. shale gas production has already led Gazprom to postpone the launch of its massive Shtokman gas condensate field development in the Barents Sea, which contains an estimated 3.9 trillion cubic meters (tcm) of natural gas. In 2009 the U.S. overtook Russia as the world’s biggest producer of natural gas as expanded fracking activity to extract fuel trapped in shale rocks. Even worse, by 2016 the U.S. plans to become a net exporter of liquefied natural gas, with initial sales of 31.1 million cubic meters (mcm) a day doubling within three years.
Gazprom’s exports to Europe are already falling because of increased competition.
Moscow’s National Research University Higher School of Economics Center for evaluation of commodity assets director Valery Kryukov noted that while Gazprom previously supplied 37 percent of Europe’s natural gas needs, that had slipped to 25 percent and concluded, “Russia risks losing its main source of income - the export of natural gas.” Perhaps the weirdest aspect of Russia’s views on shale gas is that it has criticized recent interest in Rumania, Bulgaria and Poland in shale gas development as environmentally irresponsible, a somewhat surreal complaint given the USSR’s ecocide inflicted by more than seven decades of headlong industrialization. _GWPF

China's situation is even more threatening to Russia than the prospect of losing its European customers. Because China is a clear and developing threat to Russia's very possession of its vast East Siberian resources -- from timber to minerals to oil & gas to uranium. If China becomes self-sufficient in gas production, not only will Russia lose a lucrative customer, it will also be faced with a more dangerous competitor -- on many levels.

Cross-posted to

Al Fin Energy

blog

A Word About Oil Prices

There is a great deal of discussion about why global oil markets are engaged in yet another price feeding frenzy. Some claim it is simply supply and demand. Others point out that both "supply" and "demand" can be manipulated in many ways. Others point to international tensions in the middle east, particularly Iran. Yet others point to Wall Street and blame the bankers. And not just a few in the US are pointing fingers at Barack Obama's broad agenda of energy starvation as being a significant factor in price increases. But where does the truth "lie?"

A speculator purchasing vast futures at higher than the current market price can cause oil producers to horde their commodity in the hopes they'll be able to sell it later on at the future price. This drives prices up in reality -- both future and present prices -- due to the decreased amount of oil currently available on the market.

Investment firms that can influence the oil futures market stand to make a lot; oil companies that both produce the commodity and drive prices up of their product up through oil futures derivatives stand to make even more. Investigations into the unregulated oil futures exchanges turned up major financial institutions like Goldman Sachs and Citigroup. But it also revealed energy producers like Vitol, a Swiss company that owned 11 percent of the oil futures contracts on the New York Mercantile Exchange alone [source: Washington Post].

As a result of speculation among these and other major players, an estimated 60 percent of the price of oil per barrel was added; a $100 barrel of oil, in reality, should cost $40 [source: Engdahl]. And despite having an agency created to prevent just such speculative price inflation, by the time oil prices skyrocketed, the government had made a paper tiger out of it. _HSW: Oil Speculation and Oil Prices

Inflation Adjusted Crude Oil Prices
As you can see from recent history, oil price shocks are nothing new to global markets. In fact, as you can see from the chart above, oil prices are not yet back to last April's (2011) highs -- the most recent price scare.

What about oil futures and oil prices? Many people suggest that if oil futures speculators do not take delivery of oil contracts, that they cannot influence the real price of oil. But that is not necessarily the case:

A speculator betting on a single futures contract will have no effect on the market. A speculator with a sizable amount of capital to put to work however, can purchase a stake that is sizable enough to sway the market, and is considered the major factor in how oil futures raise prices.

As speculators purchase on rumor rather than fact, a speculator purchasing a large amount of futures at a price that is higher than the market value of oil currently can lead to the hoarding of the commodity by producers in the hopes that the commodity can be sold for a higher price in the future.

As the supply of oil is reduced by these actions on the part of the producer, this leads to a realized increase in the price of the commodity both in the present as well as the future. An investment firm as well as oil producers stand to make a huge profit, as an estimated 60% of oil’s per barrel price is the result of speculation on the part of investment firms and other major players. _HowtoTradeStocks

Large scale, coordinated oil speculation would appear to be one way in which "oil demand" can be manipulated so as to drive up prices. There are several other ways in which this can be done, and we will look at some of those in later postings.

Those who think that oil speculators do not actually take delivery of oil may be in for a bit of a shock to discover that speculators have periodically stockpiled oil -- then strategically released stockpiles -- for some time.

The oil-storage trade is a trading strategy where oil tank owners and companies that lease storage buy oil for immediate delivery and hold it in their storage tanks, then sell contracts for future delivery at a higher price. When delivery dates approach, they close out existing contracts and sell new ones for future delivery of the same oil. The oil never moves out of storage. Trading in this fashion is only successful if the forward market is in "contango", that is if the price of oil in the future also known as forward prices are higher than current prices or spot prices. Storing oil became big business in 2008 and 2009,[1] with many participants—including Wall Street giants, such as Morgan Stanley, Goldman Sachs, or Citicorp—turning sizeable profits simply by sitting on tanks of oil.[2]

It has been estimated that one in twelve of the largest oil tankers are being used for the storage, rather than transportation of oil,[3] and that if lined up end to end, the tankers would stretch out for 26 miles. _Wikipedia

The actual proportion of tankers and oil depots used for speculative purposes is likely to fluctuate over time, according to prices and price-manipulating opportunities.

There is a great deal riding on oil prices. Hedge funds, pension funds, university endowments, foundations, big money NGOs, and more, are betting on oil prices going higher. The risk involved is significant, but with the deteriorating value of the dollar and the general stagnation in global economies, opportunities for significant returns on investment seem to be few and far between, the past few years.

While many analysts are scratching their heads as to how oil prices could increase in the absence of any clear increase in natural (as opposed to artificial) demand, Al Fin energy analysts believe that several concurrent factors are in play:

1. Russia is far more than a bystander in the current price runup More here
   
   International tensions tend to create a "defensive demand," a type of artificial demand which involves stockpiling oil in anticipation of future reductions in supply. Russia is best situated of all nations to both ramp up international tensions -- either directly or via proxies -- then to profit in several ways from a runup in energy prices.
2. OPEC has an interest in driving up the global price of oil as high as can be sustained by the markets.
3. National oil companies in many oil-producing countries neglect their oil production equipment and their oil fields, leading to artificial reduction in production and supply due to Oblomovism.
4. Official policies of "energy starvation" on the part of the US Obama administration and other western nations, leads to artificial reduction of supplies.
5. The rapid buildup of the "infrastructure to nowhere" better known as the "Great China Bubble" has led to an artificial demand surge. The Chinese government appears to be engaged in "doubling down" on this policy, despite early warning signs of impending turbulence.
6. The progressive decline in the value of the dollar creates an inexorably upward trend in oil pricing.

There are many more factors involved, of course. But it is enough to understand that the causes of the current oil price runup are many and varied.

What are the counter-vailing forces, seeking to drive oil prices downward again? The most significant force in the short-term is the desire of speculators to take profits. Once investors decide the house of cards is due for yet another inevitable collapse, the rats will get out while the getting is good.

In the intermediate term, demand destruction eventually sets in -- even in emerging nations, BRICs, and third world nations. But demand destruction in the advanced worlds of the North America and Europe never truly went away after the price runup of 2007-2008. And such demand destruction in North America and Europe is likely to add to the general economic doldrums both there and in exporting nations such as China.

In the longer term, high oil prices stimulate increased production of oil, increased exploration for new oil, better technologies for recovering more oil from existing fields, and better technologies for producing economical substitutes for crude oil. All of these price-stimulated supply increases put downward pressure on oil prices.

The entire dynamic is complex, with several opposing and reinforcing factors in play. It is best to expect to be surprised, and to be prepared, in case you are.

Cross-posted to Al Fin Energy

More: Gas Prices - Much Ado About Nothing?