MBS Blog

“Best kept secret in Europe!”  That is the cornerstone behind the founding of MBS Ltd.  Our philosophy is that we can help companies navigate and mitigate the pitfalls and obstacles of doing business here, to take advantage of the many opportunities. This requires vision, and a LONG TERM perspective. For those individuals and companies that have that, the rewards will be great as Ukraine is a “virgin” market, untapped and ready to be reshaped.

We believe Ukraine will at some point, break free from current restraints and “leap frog” over many of its more developed neighbors like Poland. With MBS Ltd. and very soon BOZONGO.COM, investors and entrepreneurs will have the tools they need to realize their goals here.

Hard-Core Investors Staying Put Despite Endless Crises

KIEV, Ukraine — Weak competition, high profits still make nation a promised land for some businesses. No matter what Ukraine throws at them, a small, hard-core group of foreign investors – from giant multinational corporations to lone expatriates – weathers the turbulence.

A conveyor line at the Trostyanets chocolate factory in Sumy Oblast, the biggest Kraft Foods factory in Ukraine.

They stay through crisis and boom times, “blue” and “orange” politicians, a hryvnia worth 4.6 to the dollar and a national currency that trades closer to 10.

They stay put when other foreigners get scared away by headlines of rampant corruption, a sea of bureaucratic red tape and political chaos. Who are these determined businesspeople? Do they make a lot of money here? If so, how do they manage to swim in Ukraine’s muddy waters?

“Ukraine is the best kept secret in Europe,” insisted George Logush, vice president of Kraft Foods International and area director for Ukraine, Eastern Europe and Central Asia. “The European media did a wonderful job, focusing on negative things and rarely showing positive aspects. [To them, I say]: ‘Thank you for sheltering this market for us from the competitors.”

Kraft Foods Ukraine is part of Kraft Foods, the world’s second-largest food and beverage company. It is one of the most successful investors in Ukraine, known by Ukrainians for Korona and Milka chocolate, Jacobs coffee, Lux potato chips, holding a leading position in all three categories. In 14 years, Kraft invested more than $150 million into Ukraine’s economy and increased its business by 100 percent, Logush said, a feat that “would not be possible in very many countries.” Today, the Kraft group boasts annual revenue in Ukraine of about $400 million on domestically-produced products, and more on imports, such as coffee.

The company arrived in 1995, when the economy was still reeling from the collapse of the Soviet Union four years earlier. The hryvnia, the new national currency, had not yet arrived. In its place, until 1996, Ukrainians used the karbovanets, a coupon-like form of payments.

One of the keys to Kraft’s success, Logush said, has been the company’s ability to take advantage of hard times to introduce new product lines. “Now we launch biscuits,” Logush said. “Crisis is the time when you can shake up the established order, because it’s being shaken anyway.”

Yet Kraft remains one of a relatively small number of multinational corporations and foreign investors who have ventured into Ukraine, a vast and largely untapped market of 46 million citizens.

The nation has attracted a mere $35 billion in foreign investment since independence. By comparison, nearly $200 billion has poured into neighboring Poland, a European Union member with eight million fewer citizens than Ukraine, since the Soviet Union’s collapse.

Many investors have stayed out because of corruption, red tape and political squabbles between ex-Prime Minister Victor Yanukovych’s “blue” forces and the “orange” ones led by the now-dissolved alliance of President Victor Yushchenko and Prime Minister Yulia Tymoshenko.

Jorge Zukoski, president of the American Chamber of Commerce, said Kraft’s success is shared by many foreign investors brave enough to tiptoe into the market. They stay, Zukoski said, because they’re generating higher profits than they might in other nations. By establishing themselves first, companies such as Kraft grew fast, faced limited competition and can look forward to high growth rates ahead.

Zukoski said it helps to be in a place for the long run.

“At the end of the day, the large strategic and institutional investors that we represent see the current global financial crisis as a short-term blip on the radar screen. They look at Ukraine as a 50- to 75-year play and understand that there are very few countries left in the world that have the potential to drive future growth for their companies.” Despite the challenges and difficulties, chamber members keep striving for a Ukraine that is “competitive and well-positioned when global growth resumes,” Zukoski said.

But for some investors, the headaches of doing business in Ukraine are simply too much. And, while normal economic cycles are manageable, sometimes Ukraine’s off-the-charts corruption is not.

“The crisis did not affect our business in Ukraine as much as the corruption,” said Hanan Mor, owner of an investment company, in an interview with Israel’s Calcalist newspaper. “That is why we are stopping any business initiatives in this country.”

But the cheerleading and individual success stories cannot hide the fact that, by many measures, Ukraine’s business climate remains unfavorable. The list of grievances is long: unstable legislation, corruption, red tape, non-transparent taxation system, raider attacks, abuse of intellectual property and auctioneer rights.

Politicians are aware of the problems, even if they seem unwilling or unable to improve the situation. As parliamentarian Nataliya Korolevska told an investors’ conference in February: “As the world investment capital reaches $1.5 trillion, Ukraine has to do everything to participate in the process under competitive terms.”

Hard-core investors say instability is part of the game.

“I’ve been here for 15 years and this country has never been stable. I wouldn’t advise anybody to stay out of Ukraine, just because they want to wait for the next election,” said Glen Willard, a 15-year business veteran in Ukraine and founder of Willard, an advertising and public relations company.

Willard admitted that the worst part of doing business in Ukraine is its unpredictability. “Other than that, business is not easy anytime, anywhere,” Willard said: “So just get over it.”

Kraft’s Logush also said Ukraine is not for the squeamish.

“If you need to find an excuse to leave the country, you’ll find it,” Logush said. “Particularly, in terms of political instability, I think people are just extremely shortsighted and purposely blind. How long has democracy been in Ukraine?”

American businessman Paul Waters is one of hundreds of expatriates who have thrived on the Ukrainian market. Since arriving 17 years ago, Waters appears to have done a little bit of everything in Ukraine and he has no intention of leaving. From steel trading to the construction business, software and solar panel systems development, Waters said that “Ukraine has been very kind to me. I could be sitting on my boat in California fishing. But in Ukraine, I am enjoying everything. It’s not a Disneyland, it is real,” Waters said.

Waters did, however, confess that it took him awhile to get accepted. He also was cheated several times by Ukrainian partners.

“When I arrived, there were all these Soviet bosses, running businesses and, certainly, they were not as open to our ideas,” Waters said. Ukrainian companies still lack efficient administrators, but they have plenty of highly educated people, computer wizards and other professional standouts to choose from, according to Waters.

Seasoned foreign investors have had success in the financial, insurance and telecommunication sectors, as well as food production and construction, according to Konstantin Stepanov, chief analyst at Sokrat investment group.

The leading individual foreign direct investment in Ukraine’s all-important metal sector came from the $4.8 billion re-sale of the former Kryvorizhstal steel mill in Kryviy Rih, the nation’s largest steelmaker, to ArcelorMittal Steel in 2005. The sale followed a scandalous purchase by a group led by Ukrainian billionaires Rinat Akhmetov and Victor Pinchuk, who bought the steel mill for six times less than what ArcelorMittal, the world’s largest steel company, paid in an open auction.

So, 18 years after independence, Ukraine still represents a big gamble with big potential payoffs – and terrible downsides. It’s a high-risk, high-reward game, Logush admitted. But many are betting that emerging economies will get out of the crisis more quickly than developed ones.

“Which of them will [foreign investors] gamble on first? The ones with the greatest multiplier effect, the largest scales, like China and Brazil. But they always want to spread the risks,” Logush said. “I think those who’ll go into the Ukrainian economy will do very well.”

(from the Kyiv Post)

Although this article in the Wall Street Journal (www.wsj.com)  is about a so-called “trend,” taking place in the United States due to the financial crisis, it is really old news for those who live and work in emerging markets.  Keeping money someplace other than a bank is normal in Ukraine, as well as Russia.  

China-which has seen the biggest growth of any economy in the last 30 years and has a more developed banking system, insurance (private…and nothing like the Federal Deposit Insurance Corporation in the USA), annuities, as well as brokerage accounts- money is literally stored in the mattress…or nearby… by a majority of people.

Mistrust of government and financial institutions particularly, is deeply ingrained in Chinese as well as other Asian cultures. Numerous financial panics throughout Chinese history may have something to do with it. The Chinese are big savers as a result.

By some estimates, the average Chinese person saves almost 40% of their income. This is true whether they reside in mainland China, Hong Kong or Taiwan or have migrated elsewhere. This thrift is also a contributing factor to the huge amount of foreign currency reserves that the Chinese Government can draw upon. “Mattress savers” make bank deposits too…at least in China.

Actually, for Americans…what is “new”, is also old. Our parents and grandparents were savers. They did not have credit cards, overdraft protection for their checking accounts, and were frugal due to memories-real or indirect-of the Great Depression. Interesting that my generation is re-learning what we used to dismiss as quaint stories from a bygone era.

By MARK PENN

With E. Kinney Zalesne

As the financial crisis swept across the nation these past few months, one of the first microtrend groups to emerge is the New Mattress Stuffers — people who have lost their trust in the financial world, and are preparing for the next meltdown.

Just as 9/11 created a vast industry in building security, so the recession could create a big industry in personal financial security — a new kind of survival kit. New Mattress Stuffers don’t care about the 10% interest rate on GE preferred stock that Warren Buffett snapped up; they care about making it through if hard times get even worse. As a result, firms which can offer ironclad guarantees of safety will appeal to this new group. These are people who have lost their faith in the housing market, the stock market, their bank, their big corporate employer, their auto company, and their last president. What is left but themselves? 

Forget about huge, sweeping megaforces. The biggest trends today are micro: small, under-the-radar patterns of behavior which take on real power when propelled by modern communications and an increasingly independent-minded population. In the U.S., one percent of the nation, or three million people, can create new markets for a business, spark a social movement, or produce political change. This column is about identifying these important new niches, and acting on that knowledge.

In the old days, Mattress Stuffers literally hid all their assets in their homes — construction crews today are still discovering tin cans of cash in walls hidden 75 years ago by people who died without having told anyone about their nest eggs. The New Mattress Stuffers aren’t crotchety misers, though — they’re active Baby Boomers who, until just a few months ago, were heading happily into their 60s with inflated assets, unlimited second-job opportunities, and IRAs crammed full of stocks.

Now, the shocks they are feeling are taking them into strange and uncharted territory. Most Americans are so far removed from holding physical assets that their first reaction is to stuff their money into Treasury Bills instead of into a tin can. But there are other ways they can calm themselves.

The price of gold is down as hedge funds unwind their positions, but the sale of gold coins is up — because New Mattress Stuffers are stockpiling them for themselves and their children. And this was happening even before the crisis hit in full force. Between May and September of this year alone, sales of U.S. Mint gold coins grew by more than 600 percent. Over one million coins have been sold so far this year.

While almost every company in America is seeing a downturn, sales of home safes and vaults are surging. Sales of guns this year are up 8 to 10 percent.

And cash is the new plastic. Our own just-completed Holiday Spending Survey shows that most Americans are going to use more cash and charge less on their credit cards than in the past. Although most of us have lived in a plastic world so long we can barely remember people like my dad who carried around wads of bills, Americans are now seeing the first real dip in credit card sales in decades. Fear of credit and credit cards is a renewed emotion.

To take advantage of these trends, some of the dying post offices might want to open spots for safe deposit boxes instead of P.O. boxes. Investment advisers may start talking about return of your money instead of return on your money. And jewelers may start to tell you to “don’t forget to stash away a diamond or two.”

If the post-war economic expansion brought us the baby boom, this crisis may bring us a baby squeeze — a sharp reduction in births nine months from now, as refraining from having kids is the ultimate consumer pull-back. And instead of staying home, the evidence shows that more couples are going to the movies, with attendance up for this relatively low-cost evening.

People don’t talk much about their mattress-stuffing behavior. It kind of defeats the purpose if you tell people where your stash is. But there’s a hunger out there for security hedges — a gun, some cash, a little gold, a small safe in the bedroom — in case all the ATMs suddenly shut down. The TV shopping channels could be hawking that “Safe Haven” combination right now, a complete home solution.

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Technorati Tags: Richard Hainsworth, short-term funding, Russian economy, CIS countries, tax year, irrational exuberance, irrational pessimism, traders, corporate defaults, Russian banks, liquidity, Anton Olff, emerging markets, foreign competition, RusRating/Global Rating, Russia, www.businessneweurope.eu, economic crisis, Russian government,

As with many emerging markets, Russia should continue to grow despite the Global Economic situation. The direct link between oil price levels and economic growth is key.

This from  www.themoscowtimes.ru:

GDP Posts Weakest Growth in 3 Years

10 December 2008By Maria Levina / Special to The Moscow Times

Economic growth fell to its slowest rate in three years in the third quarter, at 6.2 percent, the State Statistics Service reported Tuesday, and economists say even lower growth is in store for 2009.

Actual GDP growth in the quarter missed the Economic Development Ministry’s forecast of 7.1 percent, driven by significantly slower growth in the construction, retail, transport and communications sectors.

The decline continued a slide from 8.5 percent GDP growth in the first quarter and 7.5 percent in the second, and if the trend continues the final number for the year could be in the 6 percent range.

“Next year’s GDP growth could range from negative 5 percent to plus 5 percent, depending on what happens to oil prices and the steps taken by the Russian government,” said Yevgeny Gavrilenkov, chief economist at Troika Dialog. “If it continues to throw away currency reserves to defend the ruble, Russia may face a fiscal deficit and zero economic growth.”

He said allowing the ruble to depreciate is one step that could be taken to prop up growth numbers. 

“In the past, the Russian economy grew even with oil prices of $30, $40 and $50 per barrel but at a different exchange rate,” he said. “In the current environment, Russia’s goal should be to achieve positive economic growth and avoid a fiscal deficit.”

In year-on-year terms, growth in the fourth quarter could end up at zero, partly as a result of slower production growth and partly because the number was strong in the final quarter of last year, said Yekaterina Malofeyeva, chief economist at Renaissance Capital.

She said she expects growth this year to finish above the 6 percent mark — at 6.2 percent — and that next year’s figure could range from zero to 3 percent.

“If oil prices average $70 a barrel next year and the ruble is allowed to depreciate, GDP growth could reach 3 percent,” Malofeyeva said. “Otherwise, it could be flat.”

Although the Economic Development Ministry has yet to release an official forecast, in recent informal comments it has put the number at 3 percent to 3.5 percent if oil prices average $50 per barrel for the year.

But economists say conditions have been shifting so rapidly that providing anything resembling an accurate forecast for 2009 would be difficult until all the numbers for the final quarter of this year have been released.

The Economic Development Ministry said Monday that it was revising its forecast for manufacturing growth for the year downward, from 5.2 percent to 2.9 percent. The figure for the first 10 months of this year was 4.9 percent, so the ministry’s forecast suggests that it is expecting disastrous results in November and December, with production dropping by over 10 percent. 

Gavrilenkov said he believed that a 2.9 percent production forecast was overly pessimistic but, if accurate, would mean that the country is entering a severe depression.

He added that losses on the manufacturing side could be balanced somewhat by growth in the service sector, as consumer spending has remained relatively strong. As such, he said he expected GDP growth of 6.8 percent to 6.9 percent this year.

Natalya Orlova, chief economist at Alfa Bank, said she was surprised by how low the production numbers were.

“Given that the October numbers showed there was essentially no growth (0.6 percent), we originally assumed a drop in production of 2 to 3 percent in November and December, which would still imply a growth rate of around 5 percent for the year,” Orlova said. “But if we are to believe the numbers from [Economic Development Minister] Nabiullina, with a drop of more than 10 percent in November and December, then the situation seems more serious.”

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This is the kind of news….that is not really news…at least to someone who does business in emerging markets. Nonetheless, it is good to keep tabs on where bribes need to be paid to get business.

It an ironic way, the authors of this report-Transparency International-have raised the bar not only in emerging markets like Russia, China and Ukraine, but also in the developed economies like the United States. This would apply not only to the financing of political campaigns or the “sale” of Senatorial offices, but specifically to the types of financial instruments that may have been the catalyst for the Global Economic meltdown.

What is needed is greater transparency in the financial services industry. Many investors had been blinded or lulled into a false sense of security by the advice of institutions that have a direct financial stake in keeping information private. Indirectly, these companies were being “bribed” by their clients to give favorable ratings and analysis. As I was reminded during my short time on Wall Street, “when was the last time you heard of an investment bank urging their clients to sell?”

In some ways, emerging markets are more “honest,” as it is assumed that corruption is part of the normal process of doing business. While this doesn’t negate the need for reform, or diminish the fact that corruption is a huge obstacle preventing development in emerging market economies, it also means those with higher standings in the “least corrupt” category need to look at their own institutions more carefully as well.

 From www.ft.com:

Emerging powers’ companies bribe ‘routinely’

By Michael Peel in London

Published: December 9 2008 15:57 | Last updated: December 9 2008 15:57

Chinese, Indian and Russian companies bribe routinely to win overseas contracts, a global survey of executives claimed on Tuesday, highlighting fears that leading emerging economies are undermining international efforts to tackle corruption.

The bribe-payers’ index published by Transparency International, the anti-corruption group, ranks the three nations and Brazil in the bottom five of 22 countries surveyed.

The research highlights how intensifying global competition for natural resources and infrastructure projects threatens a “race to the bottom” between established western multinationals and leading companies from the new financial powers.

Huguette Labelle, Transparency International chair, called on all big exporting countries to join the landmark OECD anti-bribery treaty, which so far has been signed by 38 mainly rich nations.

Ms Labelle said Transparency International’s research “provides evidence that a number of companies from major exporting countries still use bribery to win business abroad, despite awareness of its damaging impact on corporate reputations and ordinary communities.”

The Transparency International index ranked Russia in last place with a score of 5.9 out of 10, with India and China also both scoring below 7.

Belgium and Canada topped the rankings jointly with a score of 8.8, while all the other members of the Group of Seven leading industrialised nations except Italy scored more than 8.

The countries ranked in the index account for about three-quarters of world foreign direct investment outflows and exports of goods and services. The survey – carried out by Gallup International, the polling organisation – is based on the perceptions of 2,742 business executives from 26 countries, including six in Africa, four in Central and South America, and eight in Asia.

The research says the most corrupt sectors among 19 surveyed are construction, real estate, energy, heavy manufacturing and mining, while the cleanest are information technology, fisheries and banking.

Many anti-corruption activists warn that the expansion of companies from emerging economic powers into resource-rich but often poorly governed countries in Africa and elsewhere could prolong and extend a tradition of bribery already established by western multinationals.

The OECD has launched a partnership with the African Development Bank to fight bribery on the continent, while Chinese officials will attend a meeting of the OECD’s anti-bribery working group this week .

Another TI index published in September accused the world’s wealthiest countries of failing to live up to their commitments to fight corruption, highlighting fears that only the US and a few other nations were serious about tackling graft by their businesses.

TI’s surveys are widely seen as useful yardsticks on corruption, although their basis on business executives’ perceptions rather than more objective measures means they are susceptible to individual prejudices.

Funders of the latest index include the German and Norwegian development agencies and Ernst & Young, the international accounting firm.

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One of the side effects of the Global Economic Crisis-and we have to come up with a new name for this “crisis,” is the steep falloff in the amount of money sent home by immigrants and workers abroad. Many emerging market economies depend on this income to sustain themselves. The fallout from the falloff could be huge…..

Technorati Tags: Global Economic Crisis, State Real Property Cadastre, Bishkek, Chisnau, Kyrgyz Republic, Akylbek Japarov, Armenia, Matthias Luke, Kiel Institute, Kazakhstan, Uzbekistan, construction, Russian government, Anton Olff, external finance, Russia, United States, Western Europe, Dushanbe, World Bank, IMF, Shigeo Katsu, Tajikistan, Moldova, NGO, CIS countries, recession, Clare Nuttall, Almaty, Organization for Economic Co-Operation and Development (OECD), remittance payments, emerging markets,

This article is from one of our favorite bloggers: Mike Hewitt provides the “big picture” of individual nations relative to the global economy.  The picture is not pretty for many.

http://www.financialsense.com/fsu/editorials/dollardaze/2008/1205.html

The extreme level of public debt in developed nations in particular…and these charts don’t measure corporate and private debt…portend an almost certain re-alignment of economic power.  China for example, can be compared to the United States at the beginning of the 20^th century. The United States is now like post World War II Britain. It may never fully recover.

The  result of the changes is the full emergence of transition economies.  Unburdened by massive debt, with growth oriented economies that have incorporated  free market mechanisms,  emerging market economies could  take the lead a lot faster than previously reckoned. Indeed, that may be the “silver lining” in the current economic cloud.

Technorati Tags: China, United States, World War II, Britain, www.dollardaze.org, Mike Hewitt, Wealth of Nations, debt, transition economies, emerging markets, corporate debt, private debt, Anton Olff, Intermational Monetary Fund, IMF, G-7, Japan, Germany, UK, France, Italy, Canada, government liabilities, Foreign Reserves, Sovereign Wealth Funds, United Arab Emirates, Abu Dhabi Investment Authority, Dubai Workd, Singapore, Temasek Holdings, Norway, Government Pension Fund of Norway, Kuwait, Kuwait Investment Authority, China, China Investment Corporation, Australia, Australian Government Future Fund, Qatar, Qatar Investment Authority, Libya, Libya Investment Authority, Alaska Permanent Fund, Brunei, Brunei Investment Agency, South Korea, Korea Investment Corporation, Kazakhstan, Kazakhstan National Fund, Chile, Copper Stabilization Fund, Russia, Russian National Wealth Fund, Malaysia, Khazanah Nasional, Canada, Alberta Heritage Fund, Taiwan, National Stabilization Fund, Bahrain, Bahrain Mumtalakat Holding Company, Iran, Oil Stabilization Fund, Oman, State General Reserve Fund, Saudi Arabia, Saudi Arabia Sovereign Wealth Fund, foreign reserve holdings, India, Brazil, Algeria, Mexico, Switzerland, Turkey, Hong Kong, Poland, Nigeria, Indonesia, Argentina, Romania, Venezuela, Netherlands, Spain, CIA,

The many causes of the ongoing global financial crisis will no doubt be discussed, dissected and argued about long after the crisis recedes. One significant factor has been the lack of transparency in investment vehicles such as Mortgage Backed Securities, derivatives, corporate financial statements and ultimately the markets.

A result of the crisis will be a revised perspective on the part of investors….to say the least. They will be less trusting of current modes of analysis, as well as more demanding for information. Again: transparency will be key as the ability to measure value and risk may have been obscured as much by the lack of financial regulations and standards, as well as the imposition of regulations.

The article below from www.pajamasmedia.com by the CEO of Cypress Semiconductor Corporation, refers to accounting regulations in the United States. While it relates to conditions there, it is instructive of how well intentioned government actions can cause further harm to businesses and markets.  This is especially instructive for emerging markets where the lack of transparency is an even greater challenge, and continues to hinder investment and economic growth.

December 3rd, 2008 2:00 am

T.J. Rodgers: My Financial Statements Are a Mystery, Even to Me

Why are the Pharisees of Accounting in the U.S. trying so hard to destroy American business?  Having crippled high tech entrepreneurship and made it nearly impossible for any U.S. company to ‘go public’, the people who set the rules of financial disclosure are now making corporate financials so obscure that investors literally have no way of knowing the financial condition of their companies.

In 2002, in reaction to Enron and other perceived corporate excesses of the Dot.com Boom Congress passed the Sarbanes-Oxley Act.  The Financial Accounting Standards Board (FASB) followed suit be revising its Generally Accepted Accounting Principles to make corporate accounting more transparent.

But in my experience, all that these new laws and regulation have done is make corporate finances more opaque - and is killing off the creation of new public companies in the United States.

The first step in the wrong direction came when FASB mandated that companies list “intangibles” such as “goodwill”, as corporate assets, artificially inflating balance sheets. After that, FASB meddled with the revenue recognition rules, in some cases not allowing companies to report revenue from cash payments received from a customer for a delivered product. Finally, and worst by far, FASB mandated punitive and nonsensical rules for so-called expensing of stock options.

These accounting burdens, combined with the onerous yet ineffective mandates of the Sarbanes-Oxley Act, are starting to take a real toll on American businesses and markets. In 2007, only $8.5 billion or 7.7 percent of the total $109 billion in issuances of Initial Public Offerings were launched on U.S. stock exchanges, down from 60.8 percent a decade ago.

This isn’t merely the law of unforeseen conseqences, but as time passes, evidence of willful blindness in the face of facts. It would be one thing if, after six years, you could point to a greater transparency for investors and the general public regarding corporate financial transactions - but not is that not the case, but I can tell you from personal experience that Sarbanes-Oxley and the new FASB regulations actually make a company’s financials less transparent to the people who run the company. Let me give you an example from my own career.

Indecipherable Financial Statements Harm Business, Markets

I first noticed the misleading nature of Generally Accepted Accounting Principles a few years ago when an investor called to complain about the small amount of cash on our balance sheet. Since we had plenty of cash, I decided to quickly quote the correct figures from our latest financial report. But to my surprise, I could not tell how much cash we had either. With its usual-and almost always incorrect-claim of making financial reporting “more transparent,” the Financial Accounting Standards Board had made it difficult for a CEO to read his own financial report.

FASB is a group of seven theoretical accountants based in Norwalk, Connecticut. Its website shows that no FASB member ever started or ran a successful business and that only one member has even held a senior position in a prominent public company other than an accounting firm. Yet, FASB mandates the Generally Accepted Accounting Principles that corporations must use to report to their shareholders. The Securities and Exchange Commission enforces FASB mandates with the threat of criminal prosecution.

Although GAAP reports became more complex and less transparent during the 1990s, by 2001 GAAP accounting was good enough to enable companies to report accurately, both internally for control purposes and externally to shareholders. Unfortunately, since then - thanks to the new rules — the FASB-mandated GAAP reports have become nearly useless. I no longer bother to read the financial reports of companies I follow because I would literally need an analyst to decipher them for me.

One big step in the wrong direction came when FASB mandated that after an acquisition, companies list “intangibles” such as “goodwill” as corporate assets, artificially inflating balance sheets. After that, FASB meddled with the revenue recognition rules, in some cases not allowing companies to report revenue from cash payments received from a customer for a delivered product. Finally, and worse by far, FASB mandated punitive and nonsensical rules for so-called expensing of stock options.

As I’ve already noted, these new rules are having a devastating effect upon America’s companies and markets. And it’s getting worse. Duncan Niederauer, the CEO of the New York Stock Exchange, reports that as of July 1, 2008, “only four sponsor-backed deals (those with either venture capital or private equity investors) raised a mere U.S. $1.7 billon,” down 90 percent from the 2007 figures. Unfortunately for the rest of us, FASB doesn’t care about consequences; it rarely considers the bureaucratic burdens it imposes on companies

This increased regulation burden makes it less attractive for venture capitalists to fund small startup companies-an economic disaster for Silicon Valley, the most prolific producer of America’s technology successes (and, by extension, new job creation in this country). On July 7, the president of the National Venture Capital Association, Mark Heesen, addressed the current IPO drought by stating, “We need to put regulators, legislators, presidential candidates and the private sector on notice that this situation represents a serious problem that will have long-reaching economic implications if not addressed. We view this quarter as the canary in the coalmine.”

The case of my company’s confusing cash report was explained by a GAAP accounting rule that mandated spreading the liquid assets on our balance sheet into three categories: cash and cash equivalents; short-term investments; and “other assets,” a category containing both liquid investments, like Intel stock, and illiquid investments, like the stock of a startup company. My company’s actual cash position is inferable from our official 172-page 10-K report, but only by those willing to dig into the 74 pages of footnotes. Few investors would have the time to do that exercise for just one stock, let alone a portfolio.

Let me say this one more time: It is only going to get worse. And fixing this mess can only occur at the highest levels of government - which means that rescue isn’t coming any time soon.

In the meantime, we are going to have to survive on our own, navigating our way through useless, confusing, and often downright wrong financial reporting to find those tiny pearls of truth that we need to compete and survive in a volatile economy. And since the official guardians of our financial integrity, are not only unhelpful, but actively working against us, I have compiled the following nine rules on the unfortunate realities of GAAP financial reports.

Rule 1: GAAP reports do not allow the average investor to know how much cash a company has.

My most recent encounter with inaccurate AAP reporting came as I prepared to write the President’s Letter for Cypress’s 2007 annual report by reading our SEC-mandated Proxy Statement, which said that I had earned $11.3 million in 2007-a number that seemed not only wrong to me, but wrong by a factor of two. That night, my wife (and domestic CFO) reported to me that I had taken home $4.7 million in 2007: $1.5 million in salary and bonus; a $1.2 million special stock bonus awarded for the success of our solar energy company, SunPower; and a $2.0 million gain from exercising a decade-old 1997 stock option grant that was about to expire.

With those two figures so wildly different, I decided as a tiebreaker to the Cypress tax department the next day to find out how much they thought I earned. Both they and the IRS said I earned $4.7 million in 2007-in direct contradiction to our Proxy Statement.

How did GAAP accounting distort my reported 2007 income? One error comes from the accounting for my retirement account, which contains tax-deferred income I earned and saved over my career. The account grew by $1.7 million in 2007 because it held stock that appreciated during the year. I neither own nor can borrow against that retirement account, but GAAP and SEC rules required that the $1.7 million gain in it be reported as my 2007 personal income.

Rule 2: Old income can be reported two times-or more.

My apparent 2007 income was also inflated by the phantom income I did not receive that is attributable to my company’s having to “expense” stock options that vested during the year. I neither bought any options at a discount nor sold any for a gain. I simply received the right to buy some options. If I died or my company performed poorly, the potential value in those unexercised options would never be realized, yet my company was forced to declare them as actual 2007 income for me and a “loss” for the company.

According to FASB, I “earned” an extra $4.9 million in 2007 — without putting a penny in the bank — because at option granting, the GAAP rules simply mandated that my unvested shares had a built-in gain of at least 60 percent of their face value, which I received as the options vested. The GAAP rules further required that one-fifth of that unpaid “gain” be reported as income each year. This constitutes another supposedly transparent FASB accounting rule: Hypothetical income is calculated on a stock option that an employee does not own and is counted against corporate earnings. Moreover, that one-time calculation of CEO pay (and corporate loss) is locked in for five years-even if the stock goes down and the options are never even exercised.

Of course, the IRS would never dare tax me on the phantom income - not without losing the case in tax court.

The errors and misrepresentations can get extreme. Ian Cockwell, CEO of Brookfield Homes, was reported as “earning” a negative $2.3 million in 2007 in his company’s proxy statement. It seems that some of the “income” from prior years, which he never took home, did not materialize according to FASB’s one-size-fits-all formula and had to be subtracted from his 2007 reported income.

Rule 3: Due to the faulty logic embedded in GAAP stock option expensing rules, companies over report their CEOs’ earnings and, worse yet, underreport corporate earnings.

In many cases, the errors are large. In 2001, presumably to prevent a few companies from generating the appearance of growth through serial acquisitions, FASB decided to make acquisitions less financially appealing by implementing the deeply flawed concept of forcing acquiring companies to put intangible assets-assets that do not exist and have no value-on their balance sheets. Here is an example of the theory behind this nonsense: When one company acquires another, say for $2 billion, the acquiring company puts the value, say $1 billion, of the acquired company’s real assets on its books. In this example, the acquiring company would then be required to put the remainder of the $2 billion acquisition price on its books as a $1 billion intangible asset. With this FASB edict, the real assets of U.S. corporations-cash, buildings, trucks and the like-were mixed deceptively with intangible assets on balance sheets.

Rule 4: A company can be broke but still appear to have big assets.

In the original version of this hallucinogenic accounting rule, the intangible assets were “amortized,” taken as quarterly losses in equal amounts over a period such as five years. Thus, in the example above, the “amortization of intangibles” created a phony loss for the acquirer of $200 million per year for five years. What do you get when you merge two identical companies, each like the one described above-valued at $2 billion, with $1 billion in real assets and $100 million per year in profit? Don’t say the resulting company is valued at $4 billion with $2 billion in real assets and $200 million in profit. That would be too rational.

The answer, according to FASB, is a company valued at $4 billion with $3 billion in assets-one-third of them intangible-and zero profit. Fortunately, the mystery losses caused by amortized intangibles led to the rise of reporting non-GAAP earnings, in which the GAAP phantom-asset distortions were excluded from otherwise nominal GAAP reporting for acquisitions. Today, my company and many other publicly-traded American companies are judged by analysts and investors according to these non-GAAP earnings (approximating pre-2001 GAAP earnings).

The final saga in the Alice in Wonderland “intangibles” accounting tale occurred in 2001, when I testified at a hearing of the Senate committee, which was forced to deal with the uproar over the evaporating GAAP earnings of acquisitive companies. Since no one was sworn in at that strange hearing, no one had to bear responsibility for the outcome, a compromise that kept intangible “assets” on the books. However, the amortization of intangibles was dropped in favor of an annual evaluation. Now, once a year, all companies are required to review their goodwill assets-to review the accounting residuals of acquired companies that ceased to exist years before-and debate whether the evanescent assets have gone down in value, and thus creating a phantom loss in GAAP earnings.

Institutional investors and analysts have always ignored this folly, but FASB still mandates the foolish and expensive yearly exercise of valuing things that don’t exist. And, as is true with most government mandates, there is now a camp following of firms which, for a bargain price of tens of thousands of dollars, will provide an opinion on the value of-nothing.

Rule 5: Beware of the balance sheet; it contains things that do not exist.

Companies can fund themselves by borrowing money or by selling stock. The cost of selling stock is dilution, the loss of earnings per share (EPS) due to a rising share count. The cost of borrowing money is an interest expense that lowers EPS.

One preferred form of financing for technology companies is the convertible debenture, a hybrid of debt and stock option, in which investors lend money to companies. At the end of a typical five-year convertible debenture, the borrowing company must pay back the loan in cash with interest-or, alternatively, if the company’s share price is above a “conversion price,” pay off the debt with stock at that price. If the share price at settlement is well above the conversion price, the investor has the option to take stock and make a significant capital gain.

The accounting rule used to compute the cost of a typical convertible debenture on its issuer’s financial statements is conservative, but reasonable. Companies calculate their quarterly earnings — both for the case of paying back the convertible debenture in stock and the case of paying it back in cash-and report the less favorable outcome.

By contrast, FASB’s treatment of employee stock options is outright punitive. It requires companies to report employee options in an unrealizable worst-case scenario-both as EPS dilution and as an expense that reduces EPS further. It is as if FASB has gone out of its way to make employee stock options unaffordable by double counting their cost. Most unfortunately, this change has caused many Silicon Valley companies to reduce or eliminate stock options given to rank-and-file engineers. In the long-run, that will concentrate wealth in the hands of the ‘haves’ at the expense of the ‘have-nots’, absolutely the opposite of the spirit on which the Valley was founded.

Rule 6: The profits of companies that grant employee options are often grossly understated by GAAP rules because of the double counting of stock option losses.

Without a deep dive into complicated GAAP reports, investors can no longer know what a technology company’s true (cash) profits are.

In a recent review of potential acquisition candidates, I noted an obvious error in the financial analysis of one very good target company. Its financial statements showed the company nearly breaking even, when I knew that it consistently produced 20 percent pretax profit. The disconnect came from the fact that the young MBA doing the analysis used GAAP financial statements that included all the accounting distortions described above. We adjourned the meeting until a useful analysis could be completed.

Rule 7: If a long-tenured CEO of a New York Stock Exchange-listed technology company -me - cannot decide whether to buy a company based on its GAAP financials, neither can investors.

GAAP accounting even misrepresents the revenue that some companies report.

One would think that if a company receives a cash payment for delivering a product, it would recognize revenue and profit, and pay taxes. Not so. As a board member reviewing financial statements of a startup Silicon Valley data communications company, I became very confused by the company’s reported revenue, in which were factors below the company’s actual shipments.

The GAAP accounting theory behind this problem is explained in the following example: If a company ships a product for $1 million and warranties the product for five years, there is a possibility that the product will have to be repaired or replaced. Under GAAP accounting, the result might be stated by reporting $700,000 in revenue immediately and $300,000 in revenue over time as the product warranty period winds down; for example, $60,000 in revenue per year for five years. Thus, the last $60,000 in revenue for a system shipped in 2008 might not be reported until 2013.

Unless returns and warranty expenses are significant relative to revenue, the previous and time-tested method for revenue recognition is to record revenue when a system is shipped and to handle returns as they occur. This method gives much more realistic picture of a company’s performance to investors-and to management. Under FASB’s “improved” system, companies must keep two revenue records to know what is actually going on internally. While the splitting of revenue may make sense to theoretical accountants, consider the practical burden it puts on companies.

Think about shipping hundreds of different products with different warranty terms to thousands of customers with many different contracts. In that environment, just calculating “revenue” can take weeks for a large group of accountants. Furthermore, once a company has built up a large reservoir of deferred revenue, it can have a real revenue problem that is obscured by the fact that it is still reporting revenue from products shipped years before.

Rule 8: The investor often cannot decipher the true revenue of high-tech systems companies by reading their GAAP profit-and-loss statement.

GAAP accounting rules and the Sarbanes-Oxley mandates are no longer just a source of colorful stories; they are starting to cause tangible harm to American businesses and markets. With the IPO revenue hurdle rising because of bureaucratic costs, venture capitalists are now focusing on mega-startups that can better bear the costs of government-mandated bureaucracy.

Unfortunately, small startups are a crucial component of the Silicon Valley economic model-one that has consistently prevailed over old-line companies in Japan and Europe. Silicon Valley always creates “too many” innovative companies in each new technology field-and later consolidates the intellectual property and people of those companies into dominant companies, such as Cisco Systems, the world’s leading data communications systems company. The Valley’s winning formula is to develop new technologies in many competing startups, rather than the less effective practice of developing technology in the form of a few big projects in one or two big companies.

Rule 9: Despite its theater of public hearings, FASB rarely considers the bureaucratic burdens it imposes on companies and seems incapable of understanding the impact its utopian accounting schemes have on markets.

The Wall Street of Silicon Valley is Sand Hill Road in Menlo Park, where one can drive by tens of billions of venture capital dollars on the way to Stanford University, the epicenter of Silicon Valley. The premier venture firms on Sand Hill Road always have all the money they need. Indeed, in recent years, many of them have returned funds to investors because they felt there were not enough good investment opportunities. Thus, the GAAP rules that discourage the venture funding of smaller companies directly harm Silicon Valley’s economy.

Our company’s 215 accountants and I live daily with indecipherable GAAP financial reports and draconian Sarbanes-Oxley mandates. I have become firmly convinced that we have given too much power to a board of seven accountants who have a tendency to regulate to death the wealth-creating companies that they themselves are incapable of creating-or even understanding.

When Wall Street is no longer the center of the financial world and Sand Hill Road no longer rules venture capital, all Americans will be harmed-and we will wish we had demanded simple common sense from the counterproductive bureaucrats who control our financial system. Silicon Valley changes continuously. Over time it became Test & Measurement Valley, Semiconductor Valley, Minicomputer Valley, Personal Computer Valley, WorkstationValley, BiotechValley, Communications Valley, Search Engine Valley and, most recently, Web 2.0 Valley. We are now becoming Renewable Energy Valley. This place runs on free markets, abundant venture capital, and the unbridled entrepreneurial spirit of smart, hard-working, well educated people.

The underlying mechanism of our success is a new economic social contract, under which the economic pie is broadly distributed to rank-and-file engineers, who can earn life-changing wealth from their stock options. The CEOs of Silicon Valley successes like Google often brag about the dozens, or even hundreds, of millionaires created by their companies. This spreading of wealth drives a different work ethic in Silicon Valley. A job in a startup company is a personal mission, not a paycheck. Computers turn the lights off in our buildings at 7:00 p.m. to remind our employees that it’s time to go home. It deeply angers me that government lawyers and naive theoretical accountants have been allowed to impair the economic miracle that democratized the silicon chip, the personal computer and the Internet.

In attempting to make business more ‘fair’, Sarbanes-Oxley and FASB have made the U.S economy less accurate, less efficient, and most of all, less fair.

T. J. Rodgers is a founder, president, CEO, and a director of Cypress Semiconductor Corporation. He is a former chairman of the Semiconductor Industry Association and sits on the board of directors of several high-technology companies and of Dartmouth College.

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The global economic slowdown has not slowed the consumption of fast food. On the contrary, the one thing to count on is the continuation in the growth of inexpensive fast food in emerging markets like Russia and Ukraine.

Fast food-whether it is purchased at a kiosk or market- is generally priced competitively… and is viewed as an affordable luxury, especially during lean times. It is also viewed as the type of consumable that brings a degree of  “comfort,” similar to tobacco, coffee and alcohol.

As the video below  from the Russian News & Information Agency (NOVISTI) at www.en.rian.ru/ the perceived unhealthiness of this type of food is not high on the list of Muscovites……

Technorati Tags: comfort, emerging markets, fast food, global economic slowdown, lean times, luxury, recession, Russia, Ukraine, tobacco, coffee, alcohol, Russian News & Information Agency, NOVISTI, www.en.rian.ru, Anton Olff, unhealthy, Moscow, Muscovite

Doing business in an emerging market like Ukraine is challenging. One of the biggest challenges is the lack of predictabilty. Sometimes, you just don’t know what to expect. People dissappear without reason, rules and regulations change without notice, and even things like running water and electrical power can never be counted on. 

At least some are determined to inform and prepare people so they can manage their expectations. Below is a menu insert from one of the better restaurants here in Odessa. The last line says it all. 

Anton Olff

Technorati Tags: Ukraine, emerging markets, Odessa, restaurants, rules and regulations, running water, electrical power