European Economics – Russia – Germany – France – Italy


We are not safe doing business in Russia
Employees are in constant danger of being harassed, arrested and killed, writes William Browder.

By William Browder 7:21AM GMT 14 Feb 2011

Today, Sergei Lavrov, the Russian foreign minister, arrives in London to meet leading British politicians and officials in a bid to revive bilateral relations, increase business ties and attract UK investors to Russia. Doubtless, there will be a good deal of talk about modernising the Russian economy and extolling the virtues of investing in it. Reference will be made to large investments made by BP, Pepsico and other multi-nationals as evidence of the “improving investment climate”.

But before anyone takes these representations at face value, they should hear my story.

For 10 years, I was the largest foreign portfolio investor in Russia, with 6,000 investors from 30 countries totalling $4.5 billion (£2.8 billion) under management. Our investment strategy in Russia was to improve rights of minority shareholders, promote good corporate governance and expose corruption.

The trouble began after my fund launched a campaign to clean up the multi-billion dollar corporate malfeasance taking place in the Russian state-owned gas monopoly Gazprom, and in Surgutneftegaz. After we named names and exposed the details of several enormous corruption schemes, the Russian foreign ministry declared that I was a “threat to national security”. On November 13, 2005, I was deported and barred from re-entering the country.

My deportation was the beginning of an unimaginable nightmare. On June 4, 2007, the Russian police raided my offices in Moscow, seizing documents which were then used by Russian officials to expropriate our investment holding companies, forge billions of dollars of fake liabilities and embezzle taxes that we had paid to the Russian government the previous year. Incredibly, officials then approved – overnight – the largest fraudulent tax refund in Russian history, amounting to US$230 million. This was paid out two days later to a group of criminals working hand in hand with corrupt officials. Meanwhile, my employees and I received anonymous death threats.

So we hired a young Russian lawyer named Sergei Magnitsky to investigate. Working with lawyers and forensic investigators, he pieced together evidence of the criminal conspiracy and testified on the record against senior police officials, judges and criminals involved. Sergei was then arrested by the same police officers he had provided evidence against, locked away without bail or trial and shuffled between increasingly harsher detention centres for a year in an effort to get him to change his testimony. He was denied medical care and family visits, and tortured. After 358 days in detention, he was found dead. The Wall Street Journal described his death as a “slow assassination”.

What happened to Sergei was not a one-off. Neither is what happened to me, nor to many others. Mikhail Khodorkovsky is set to spend 14 years in a Siberian jail after his former company Yukos Oil was expropriated by the Kremlin following trumped-up charges. In 2006, Shell was forced to sell 50 per cent plus one share of its lucrative Sakhalin Island project under threat of serious criminal charges. BP was hit with a £148 million tax bill as well as having 148 employees expelled from the country. Telenor, Ikea, NewsCorp, Motorola and Nestle have endured similar illegal sanctions by the Russians.

It is a fact that there is no safety for people working in Russia and no protection of property rights. Local journalists have been attacked and killed in broad daylight, human rights activists and intellectuals are silenced, opposition leaders are detained, business competitors and professionals are wrongly accused and prosecuted, and foreign whistleblowers or international journalists are deported.

In today’s Russia, British citizens are not safe to invest or do business. In fact, the more successful you are, the more likely you are to be targeted by the corrupt regime. Nor does it stop at money and assets, but extends to the horror of divided families, and physical violence. Turning a blind eye to this reality is not the answer.

It is time for the British Government to look after the interests of its people in its dealings with Russia. Just as the Foreign Office routinely issues warnings against visiting countries where the life and liberty of British citizens will be threatened, it has a duty to issue “business warnings” as well. The Government should advise companies against doing business in countries that do not promote a safe investment environment or guarantee the rule of law and safety of citizens. Russia is a country in which British companies are in constant danger of having their assets expropriated and their employees harassed, arrested and killed.

There are many attractive countries for British business to invest in – but Russia is not one of them. It’s time to make that clear.

William Browder is the founder of Hermitage Capital Management.

Germany’s new boom: making money by making stuff

While the UK and US increasingly relied on the financial sector, Germany concentrated on manufacturing

Larry Elliott in Munich, Monday 14 March 2011 22.00 GMT

Strolling the broad, prosperous streets of Munich, it is worth recalling the times over the past decade when Gordon Brown used to boast in his budgets about how the UK economy was leaving Germany for dead.

Now – following the most successful year for Europe‘s biggest economy since the euphoria that followed reunification two decades ago – that looks like the sort of prediction English football fans make ahead of each World Cup: premature, based on little more than wishful thinking – and wrong. “We will have a golden decade now,” says Hans-Werner Sinn, president of Munich’s Ifo Institute, one of the country’s leading thinktanks. Sinn wrote a book early in the last decade, when unemployment was high and pessimism rampant, called Can Germany be Saved? His view then was that it could be. Now he says it has been.

The phrase “crisis, what crisis” also springs to mind outside the Audi plant an hour up the autobahn in Ingolstadt, where a happy band of German motorists have turned up to pick up their new cars, fresh off a one-kilometre production line churning out 2,500 vehicles a day, six days a week.

“2010 was our best ever year,” says Jurgen de Graeve, Audi’s head of communications. “At the beginning of last year it was clear the market was about to turn up but we didn’t expect it to happen so fast.”

Current trading conditions for Audi, as for the rest of German industry, have been transformed since the long, hard winter of 2008-09, when some factories slashed output by up to 90% as the financial crisis threatened a second Great Depression. Overdependent on its export sector, Germany suffered a 20% drop in manufacturing output in 2009.

But government wage subsidies meant companies could keep highly skilled workers employed part-time rather than throwing them on the dole, enabling industry to respond quickly to the pick up in global demand. There is now confidence the traumas of 2008-09 will help the country reinvent itself after a troubled period in which the economy was hobbled first by the costs of reconstruction in the former East Germany, then by the uncompetitive rate at which Germany joined the single currency, and finally by the collapse of the IT bubble in 2001.

It was then that the rumours of inexorable decline started to circulate. The list of defects was long: pampered workers; an over-generous welfare state; a too cosy relationship between companies and their bankers; the lack of a venture capital industry; too high a reliance on family-run manufacturing businesses; a population that was getting older and starting to shrink. Put together, the view was that for decades Germany had been living on past glories – the explosive growth of the Wirtschaftswunder, or economic miracle, in the 1950s and 1960s – and had allowed its economy to become sclerotic.

Now there is belief the good times are coming back, and that some of the weaknesses flagged up in the 1990s and 2000s have turned out to be strengths.

It will, however, take more than one year of powerful growth to convince sceptics – inside and outside Germany – that a second Wirtschaftswunder is guaranteed. The integration of the old communist lander is far from complete: money has moved from west to east, the people have moved in the opposite direction. Some Germans now say the old East Germany is the equivalent of a Potemkin village: the buildings have been given a makeover but the mass exodus of the young means there is no one living in them.

The skewed nature of Germany’s growth is also a concern. Unemployment is falling, and in rich states such as Bavaria it is below 5%, but there are few signs yet of a classic export-led revival broadening into a pick up in wages and consumption.

Heiner Flassbeck, once adviser to Oskar Lafontaine – briefly the leftwing finance minister to Gerhard Schröder – is one who says there is no real comparison with the 1950s and 1960s, when the proceeds of growth were shared by companies and their employees.

In those days, German workers worked hard and grew prosperous, earning higher wages as the factories they worked in became more efficient. Over the past decade, there has been another productivity spurt as German companies have overcome the handicap of an over-valued exchange rate on entry into the single currency by making themselves hyper-competitive. This time, though, workers have not enjoyed the fruits of their labour. Real wages have stagnated, consumption stayed weak.

“Over the next 10-15 years there has to be an increase in wages to shift demand from the export sector to domestic demand,” Flassbeck says, echoing the calls from the International Monetary Fund and the Organisation for Economic Co-operation and Development for Germany to play its part in evening out the imbalances in the global economy between those countries that run massive trade surpluses and those with chronic deficits. As the two biggest exporters in the world, China and Germany are seen as sharing a common problem: “Chermany”, it is said, needs to import more.

Flassbeck says that unless Germany does so at a European level the euro cannot survive because weaker countries will face permanent austerity.

Sinn believes that falling unemployment will eventually lead to increases in wages, which in turn will boost consumer spending. There is, though, little sign of Germany’s policy-makers hastening this process. They seem quite content with the combination of factors that help explain Germany’s comeback.

The first is Germany’s economic and political structure. Prosperity is far more widely spread across the country, with none of the excessive concentration of wealth in one region found in Britain. There is an emphasis on long-term growth rather than flipping assets, and boom-busts in the housing market are unknown.

Germany was not immune from the speculative mania, and one reason Angela Merkel is prepared to bail out the struggling economies of the eurozone is that German banks are up to their eyeballs in Greek, Spanish, Irish and Portuguese debts. But there was still an industrial bedrock. Thomas Mayer, chief economist at Deutsche Bank, agrees. “Looking back, some economies were putting too many of their resources into sectors such as real estate. Perhaps they overdid it. Germany benefits from an old-fashioned structure. What looked old fashioned was more durable. The UK has overdone it but it is not the only one. The Americans, the Irish and the Spanish all overdid it.”

So, while the City boomed and Wall Street became fixated by sub-prime mortgages and collateralised debt obligations, Germany concentrated on making stuff.

This was true of the prestige international names like BMW and Siemens, but it was also true of the hundreds of thousands of lesser-known names that make up the Mittelstand. These are companies, often family run and in many cases founded a century or more ago, that provide the hidden wiring for the global economy. Germany provides the kit that other companies need to make their products, and the Mittelstand companies have become expert at dominating their corners of the market.

It is not uncommon for a German company to have a global market share of 80% in a particular piece of equipment, and despite high labour costs customers keep coming back for the guaranteed delivery times, the reliability of the products and the after-sales service.

The second explanation for Germany’s renaissance is that the country finally embraced structural reform of its economy at least two decades after Margaret Thatcher and Ronald Reagan pioneered deregulation, privatisation and welfare reform in the UK and the US.

What happened, according to supporters of this theory, is that unlike Britain and America, Germany coped well with the oil shocks of the 1970s and 1980s so saw no need to change anything in the 1980s. Towards the end of that decade, and increasingly after reunification, the economy became increasingly sclerotic, but the warning signs were ignored by Helmut Kohl.

But by the early 2000s, the evidence of slow growth and high levels of unemployment was too powerful to ignore, so Gerhard Schröder introduced the Agenda 2010 reforms which cut business taxes, slashed the top rate of income tax, made pensions less generous, cut unemployment pay and allowed the shops to stay open later.

“Schröder didn’t get the full credit for what he did,” Mayer said. “He attacked all the sacred cows and paid the price by losing the election to Merkel. Industry embarked on a ruthless cost-cutting programme, they exploited new production techniques and IT to make their operations leaner and more profitable. Some parts of manufacturing were moved overseas but not all of it.

“It is an amazing comeback. The country seems to be a lot more dynamic.”

Flassbeck has a different view. He blames the timidity of the unions on the changes introduced by the former SDP/Green coalition. “There is no pressure for higher wages because of the fear of being fired. Schröder killed the unions. That’s a nice paradox.”

The third explanation is that German investors had their fingers burned in the financial crisis and are now keeping their money safely at home. That has provided the capital for an investment boom that will help keep German industry hyper-competitive in the future. Sinn says this is a real change from the period 1995-2008, when Germany had one of the lowest investment rates in the west. “The crisis has meant the perception of risk has changed.

“Investors see that not all glitters is gold.

“There was a period under the euro when lots of attractive investment opportunities seemed to be in other countries. Government bonds seemed to be absolutely secure so German banks invested there. The risk perception means that German savings now don’t go out of Germany.”

Finally, there’s China, where year after year of 9-10% growth has sucked in exports from Germany. In part this has been demand for German cars from a rapidly expanding middle class in Shanghai and Beijing, with Audi now expecting to sell more cars in China this year than it does at home.

But it is also the result of Germany’s global dominance in investment goods, the products countries need when building up a manufacturing capacity. Britain talks about breaking into the Chinese market: Germany has done so.

Are there lessons in this for Britain? Yes, says Martin Zeil, deputy prime minister of Bavaria. “All the countries that have kept the nucleus of their industry are more successful.” Bavaria has invested carefully in the region’s science and technology base, identifying future growth sectors such as green technology and life sciences and building up clusters of excellence that act as a magnet for investment. It takes more than a clutch of world class companies to provide a solid industrial base.

And yes too says Mayer at Deutsche Bank, who spent eight years in London watching the boom-bust come to grief. “You have to realise that Gordon Brown was wrong when he praised economic stability and high growth as the result of his policies. It was an illusion.

“A large part of the world was living on the drug of credit. The UK economy is so reliant on housing. It has a high social value. Everybody is obsessed with it. In Germany almost everybody rents.

“Britain was on a 10-year high and now it is doing cold turkey. You have to wean the economy off credit and rebalance towards production and traded goods. But it takes years and years and years. In Britain there is a tendency to take the easy way out, to just go for another gin and tonic.”

French competitiveness
France’s lost decade
A once-great industrial power looks for inspiration across the Rhine

Feb 3rd 2011 | from the print edition

AS GERMANY powers ahead, France is feeling blue. Its share of European merchandise exports has fallen from 15.7% to 13.1% in a decade. Last month a study comparing French exporters with German ones landed on the desk of France’s economy minister. It makes grim reading.

In 2000 French exports were 55% of Germany’s; now they are barely 40%. France is more competitive (a measure of price, quality and demand) in only three industries: aerospace, drinks and information technology. German cars, trucks and a host of other manufactured goods are streets ahead (seearticle).

Why? Until around 2003 France was holding its own, making up in pricing what it lacked in quality. However, there was a “rupture” in competitiveness from around 2000, says the report. Germany was battered by the dotcom bust; that made France complacent. It clung to its 35-hour working week and saw the minimum wage creep up by 17% between 2002 and 2005. The social costs of labour borne by French employers are among the highest in the euro zone: €50.3 for every €100 paid to a worker, compared with €28 in Germany, according to Medef, a French employers’ lobby.

France has more industrial companies than Germany, but many are little more than a man, a workshop and a dog. Fewer than a third of them spend money on research and development (R&D); nearly half of those in Germany do.

France lacks the German knack of meshing big companies with their suppliers. It has no equivalent of Germany’s Fraunhofer and Max Planck research institutes, which collaborate closely with industry. Its companies have also made less use of cheap central European labour: the region supplies France with only 5.5% of its imports of base and intermediate goods, compared with 18% for Germany.

The report offers a five-point plan to put French industry back on track: enact tax reforms, collaborate more, put more emphasis on human capital, focus training and research better and drive down industrial costs. In short: copy Germany.

Failure to do so could be punished severely, the report’s authors (a research outfit called COE-Rexecode) warn. They paint four scenarios. Within the euro zone France could specialise as an exporter of services, while Germany dominates industrial exports. Industry could leave France for more productive regions. Uncompetitive French firms could be kept afloat with subsidies. Or Germany could make France more competitive by raising its own wages. French firms would like this last option the best.

Some French people doubt they will achieve much by imitating Germany. France’s industrial base is now so small that making it more competitive will have little effect, says Patrick Artus, chief economist at Natixis, a French bank. Euro-zone economies should specialise rather than become homogeneous, he reckons: “It makes no sense to have 17 Germanys.”

Others suspect that the COE-Rexecode report is an attack by industrialists on the 35-hour week. The 35-hour limit can be got around by granting workers extra holidays or pay, but it still affects the attitude to work. “It’s a culture of entitlement,” says Dan Serfaty, founder of Viadeo, a social-network company, who moved half of his operation to California four months ago.

Silvio Berlusconi (Pic:AP)
The Irish Times – Thursday, March 17, 2011
Bah humbug as Italy celebrates 150th anniversary

Despite the struggling economy and a leader heading to the docks, Italian pride remains.

AS ITALY last night officially set the ball rolling on the 150th anniversary celebrations of Italian unification, a telling little joke was doing the rounds. In reference to the Italian “Liberator” and unification hero, Giuseppe Garibaldi, Northern League wags observed: “It’s not so much that Garibaldi united Italy, as that he divided Africa”.

This is an updated version of the old (Northern) adage which would have us believe that “Africa begins below Florence”. In other words, there remains a modern, industrialised, honest and efficient Italy, north of Tuscany while below the Arno, there is only backwardness, poverty and organised crime.

It would be nice to think such crude visions belong to the dustbin of history, with as much relevance to today’s Italy as the horseless carriage and wax cylinder recorders. Yet, the embarrassing reality of Italy’s unification celebrations is that, to some extent, they seem to be working overtime to convince us all that Italy remains anything but unified.

For a start, when the Italian cabinet discussed the celebrations a few weeks ago, there was a major difference of opinion as to whether today, March 17th, should be declared a national holiday. March 17th, 1861, of course, was the day when the deputies of the first “Italian” parliament, convened in Turin, declared Victor Emmanuel II, king of Italy. Ten days later, the parliament provocatively named Rome as the capital of the new Italy, even if at the time it remained very much the capital, not of the new kingdom, but rather of the Papal States.

At that recent cabinet meeting, two Northern League ministers voted against declaring today to be a holiday while education minister Mariastella Gelmini originally declared that schools would remain open. Even the president of Confindustria, the Confederaton of Italian Industrialists, Emma Marcegaglia, publicly suggested that the last thing that crisis-ridden Italy needed was another public holiday.

Why so much bah humbug? To a large extent, the blame lies with the federalist Northern League, the government coalition partner along with the People of Freedom (PDL) party of Prime Minister Silvio Berlusconi. For years now, the Northern League has devoted its energies to underlining the supposed ontological difference between that mythical fabrication “Padania” (northern Italy) and the south.

Lest anyone failed to get the point, Northern League leader senator Umberto Bossi underlined it during a party rally in Cabiate, near Como, 14 years ago. Noticing an Italian tricolour flag flying from the roof of a schoolhouse close to the stage on which he was speaking, Bossi said: “When I see the tricolour, I get mad. That thing, I use it to wipe my arse . . .” Those remarks earned Bossi a 16-month suspended sentence for “public insult” but they probably also earned him a lot of votes.

If the current federalist reform minister can express such sentiments, it is hardly surprising that there are those in Bossi’s northern regions who took to burning a dummy Garibaldi some days ago. Hardly surprising either that the president of bi-lingual Alto Adige, Luis Burnwalder, should argue (admittedly for different reasons) that his semi-teutonic, northern region has “nothing to celebrate”.

In an Italy in which automobile giant Fiat appears to be shifting its operational headquarters to Detroit, in which one of the most famous archeological heritage sites in the world, namely Pompeii, is falling apart and where industrial icon, jeweller Bulgari, has been sold off to France, are Italians about to kiss goodbye to a sense of patriotism and unity? Curiously, the answer would appear to be “no”.

The enthusiasm with which the audience at the Rome opera house the other night took to its feet to sing the Slaves’ Chorus from Verdi’s Nabucco, a chorus often considered an anthem for Italian unification, would argue otherwise.

The enthusiasm with which Italian rugby fans stomped out the Mameli national anthem during the desperate final minutes of last Saturday’s historic Six Nations win over France would also suggest otherwise.

As would the standing ovation afforded to former Oscar winner, Roberto Begnini, when he closed his gig at last month’s San Remo song contest with an unaccompanied rendition of the same national anthem. (Curiously the national anthem remains a “contentious” issue as illustrated by the fact that the Northern League representatives at the Lombardy Regional Council on Tuesday chose to walk out while the anthem was being played).

As Italy struggles to deal with 30 per cent youth unemployment, with an ageing prime minister about to go to court on underage prostitution related charges and with a stagnant economy, some people seem to have rediscovered national pride. To paraphrase D’Azeglio, have Italians finally been “made”?

European Economics – Russia – Germany – France – Italy

About Jerry Frey

Born 1953. Vietnam Veteran. Graduated Ohio State 1980. Have 5 published books. In the Woods Before Dawn; Grandpa's Gone; Longstreet's Assault; Pioneer of Salvation; Three Quarter Cadillac
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