Retirement no joy for most because of paltry pensions

Yuliya Popova, Kyiv Post Staff Writer

An average monthlypension of $100 might be enough tosurvive on, but certainly not enough to live well on.

“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)

Julia Pilyavskaya, a Ukrainian on the MBS team provides a perspective of current events:

I read many discussions about Ukraine and how different it is from the

rest of the world. People ask me how it is to live in Ukraine. Well,
certainly it is different, it cannot be the same. We grew up having
different realities, different mentality and conditions of life.

Being isolated from the rest of the world for many years, some things unusual
for foreigners are “normal” for Ukrainians, because they have never
seen different.  And many years will pass before things will change.

Government doesn’t really care about people and not many believe this
will change with new elections. People don’t know where taxes go and
prefer not to pay them. People don’t trust banks and that is why cash
everywhere.

With our “free medicine” one would think twice before going to a hospital without money.  And so on… Most people wonder why change if it’s not going to change.

And now the most popular word is “crisis”. Whenever you go, you hear
it, in the streets, transport, restaurants, homes, television…  90 %
of conversations are only about it, and also prices that go up
constantly and are higher than in Europe, exchange rate, business that
is down, unemployment and certainly government that people can’t trust
anymore.

It will definitely take time for people to understand how to do things
properly, how to work in customers’ service, how to change attitude
and make our country more attractive to live in for ourselves first of
all.

The tension between Europe and Ukraine is increasing on another front. This article at www.unian.net seems to confirm some of the rumours swirling about; Ukraine is threatening to end the visa free regime that Europeans enjoyed over the last several years.  No word on how or if this will affect citizens of the United States or the U.K.

Several years ago, Ukraine broke with the cumbersome and expensive Soviet visa scheme still practiced in Russia. This has brought a small but measurable wave of investment, new business and tourism into Ukraine.

It has certainly made it easier for entrepreneurs to work and develop new businesses here. The continuation would certainly go a long way towards increasing further investment when the global economic crisis eases, and will facilitate an even greater transfer of wealth from West to East.

Many companies in Europe will relocate their manufacturing in the next decade. A positive atmosphere as evidenced by a visa free regime, would help with this process just as a streamlined visa process did in China during the 1990s. This does not take into account the agricultural sector which will see a flood of Euro investment when laws regarding the sale and leasing of land change.

As expats who look towards the future with optimism and hope for even more business and opportunities, let’s hope that this latest threat is merely a negotiation ploy designed to get the attention of bureaucrats in Brussels.

The Ukrainian government is certainly correct about the lack of reciprocity from the EU in terms of visa issues as well as immigration. The EU continues to treat Ukraine more as a threat than as an asset and until this mentality changes within the councils of Europe, Ukraine will have to swallow some pride, be tough and creative with regards to policy, and walk the “tightrope” between the EU and Ukraine’s powerful neighbor to the East.

Ukraine considers re-introducing visas for Europeans soon - official

Kiev, Apr 04, 2009 (BBC Monitoring via COMTEX) – 

Visa-free travels between Ukraine and Europe will be cancelled soon, maybe even before 7 May, the deputy head of the presidential secretariat, representative of the president [Viktor Yushchenko] in the Supreme Council [parliament], Ihor Popov, said in an interview with the Radio Liberty on Saturday [4 April].

“We will cancel visa-free regime with Europe soon and we will benefit from this. This will happen very soon, maybe even before the summit in Prague on 7 May 2009,” Popov said.

He said that “law-enforcement agencies complain that since Europeans come to Ukraine without visas, every three months police catch some kind of a ‘paedophile’ or a ‘maniac’”.

“Entering Ukraine, a foreigner shows a passport on the border, 10 seconds and off he goes. Later it appears that the man should not have been let in. As a result, he is put on the national wanted list since he entered without a visa and is not registered in the database,” Popov said.

Popov also said that this action can “push Europeans to cancellation of visas for us”.

Source: UNIAN news agency, Kiev, in Ukrainian 1843 gmt 4 Apr 09

There is a mad scramble for capital now. People are looking for loans from banks. The banks are looking for loans from governments. Governments are looking for loans from each other and eventually governments will have to get the money from their citizens…

Eastern Europe has been especially hard hit. It will interesting to see if nations in the European Union-who have the largest share of foreign investment in Eastern European emerging markets-will come to the rescue. With limited resources, and their own credit and banking problems, European nations are going to have a bit of trouble loaning to Eastern Europeans, especially when their own populations are also suffering.

If the situation in Eastern and Central Europe worsens however-and that is the expectation at this point-then Western Europe could be forced to help since the geo-political repercussions would be quite negative.

this from the Associated Press:

Ukraine seeks euro500 mln from EBRD

Ukrainian President Viktor Yushchenko on Wednesday met with the chief of the European Bank for Reconstruction and Development amid efforts to secure a euro500 million investment package to rescue this ex-Soviet republic`s devastated economy, AP reported.

The bank is considering investing the money into recapitalizing some Ukrainian banks, shaken by the global credit crunch and a confidence crisis. Three Ukrainian banks have been put in receivership and another one has been sold to a Russian institution after being taken over by the central bank.

The economy is struggling to stay afloat after the International Monetary Fund withheld a key second tranche of a $16.4 loan over a failure to meet loan obligations earlier this month, prompting Kiev to turn to G-7 members and Russia for aid.

The loan problems led the international rating agency Fitch to downgrade Ukraine`s ratings, while another agency, Standard and Poor`s, threatened a similar move.

The IMF said Ukraine had failed to cut government spending and reconsidering this year`s budget, as had been agreed on. Finance Minister Viktor Pynzenyk resigned last week in a row with Prime Minister Yulia Tymoshenko over the same concerns.

Yushchenko told EBRD President Thomas Mirow that a failure to receive the expected $12 bln in aid from the IMF this year could severely hurt the economy and that is why Ukraine was turning to the EBRD for help.

“The situation is complicated,” Yushchenko told Mirow, according to the Interfax news agency.

Industrial output slumped by a staggering 34.1 percent in January, year-over-year, in what officials said was the biggest fall in the country`s history.

The national currency, the hryvna, has lost 40 percent of its value since last fall, due to a drastic fall in exports.

The crisis, coupled with a higher gas bill from Russia has also led to gas shortages in the eastern city of Dnipropetrovsk and the southern Crimea peninsula. Officials said, however, that hot water and heating supplies had been restored in most households in those regions by Wednesday morning.

Technorati Tags: capital, loans, Europe, Ukraine, Russia, Anton Olff, MBS Ltd., Eastern Europe, Central Europe, Associated Press, President Viktor Yushchenko, European Bank for Reconstruction and Development, EBRD, Soviet Union, recapitalization, global credit crunch, International Monetary Fund, Kiev, G-7, Fitch, Standard & Poors, Yulia Tymoshenko, Viktor Pynzenyk, Thomas Mirow, industrial ouput, hryvna, exports, gas shortages, Dnipropetrovsk, Crimea

I don’t agree entirely with this article from russiaprofile.org, though I think the author does make some very valid points applicable to both Russia and Ukraine.

The current economic crisis has caused a great deal of hardship and uncertainly for which the respective governments of Russia and Ukraine seem ill equiped to deal with.  The real question will be how people cope? What will they do in the absence of effective actions by their governments?

Revolution is no stranger in Russian history, nor for Ukrainians. However, apathy is also ingrained to a fair degree in the culture as well. Without a fully developed political structure or the means to redress problems, it may only be a matter of how bad things get before apathy is replaced by outrage.

The same could also apply to Europe as the protests in orderly, peaceful Iceland indicate. Indeed the United States may not be immune to radical change if the political process fails to bring about relief.

The soaring rhetoric of newly elected President Obama is already at odds with some of his actions…as the words spoken by Ukrainian leaders during the Orange Revolution days were not matched by deeds.  Apathy may wither rather quickly and replaced with a fervor that will be difficult to supress.

Apathy Rules Comment by Shaun Walker Special to Russia Profile

Monogorods are Bearing the Brunt of the Financial Crisis in Russia, but They are Unlikely to Become the Focal Point for Massed Political Protests As the economic crisis takes a toll on most of Russia’s industries, the lives of many people who live and work in small towns that support these industries take a turn for the worse. Theoretically, these would be the first places to look for social unrest, as more workers lose their jobs with no other employers to turn to. But in Russia, this is not the case. Since studying history at the university and reading “Magnet Mountain,” Stephen Kotkin’s phenomenal tome on the founding of the city of Magnitogorsk in the 1930s, I’ve been fascinated by monogorods. They’re not a uniquely Soviet phenomenon, of course. There are plenty of towns and cities in countries across the world that are dependent on a single industry, or a single factory. But there’s something extreme about the Russian version – entire settlements, like Magnitogorsk, named after the single industry that is based there and built entirely around it. As so often in Russian, there’s even a cool word for it – monogorod. I was in the Urals last week and decided to make a trip to one of these settlements. After all, if there is going to be social unrest in this time of financial crisis, then monogorods seemed like the first place to look. Many of the monogorods deal in industries that have taken a major battering over the past few months. The automobile cities, where the production lines have ground to a halt, or – in the Urals, where I was – the metals plants are suffering as Russia’s construction boom has stopped dead in its tracks and demand is down. In places where there is only one factory that employs half or more of the working-age population, when the factory gets into trouble, so does the town. In many of the industrial cities in the Urals, workers had been sent home on compulsory long holidays, receiving only two thirds of their pay in accordance with Russian law. This also has an effect on the parts of the city not directly linked to the factory. In one town, several kindergartens had been forced to close – parents had no need to send their children there because they now spent all day at home. I plumped for Asbest as my monogorod of choice. Partly because I was curious to find out what a town of 76,000 inhabitants named after and based on a substance that I thought to be highly dangerous was like, and partly because Uralasbest, the factory that employs nearly half of the population, was in a bad way. It had been suffering for years due to the fact that asbestos is banned in many countries, but it’s taken a further hit with the crisis and the slackening of demand for construction materials. The factory was now only working on weekends, when electricity is cheaper, and several thousand workers had been laid off and put on the two thirds pay. If I was going to find the beginnings of massed social unrest anywhere, surely this was it. On my rounds of the mayor’s office, the Asbest TV studios (oh yes, Asbestos TV does indeed exist), and various other officials, the mood was upbeat. Yes, it was a bit difficult at the moment, but that has more to do with the evil Western anti-asbestos plot rather than the financial crisis. Asbestos was always a seasonal industry anyway, and orders had come in for March which would mean the plant should get back to full volume soon. There would be no unrest here. I wasn’t convinced, and went to talk to some locals. They weren’t happy, many of them were boozing when they should have been working, and wondering how they would feed their families if they didn’t get their jobs back. They hoped that the news of the March move to full working weeks was true, but weren’t sure they could fully trust it. But when I asked them what they would do if things got really bad, and they looked at me blankly. “What do you mean, what would we do?” they asked. “Would you protest?” “Against who?” “The mayor? The regional government? Putin? Medvedev?” They laughed. “What would be the point of that?” With everyone I got the same response. People were worried and unhappy, but didn’t believe that their voice mattered to anyone, and didn’t believe that protests would solve anything. I asked Garry Kasparov what he thought about this – after all, his movement and the other opposition movements surely feel that the financial crisis will merely precipitate what they predicted all along – the demise of the Putin/Medvedev regime. “You went too early,” said Kasparov. He thinks that the first real protests will come late in the spring, when the people realize that things aren’t going to get better after all. “Maybe these protests will be put down violently when they do come, and if they are, it will send waves all across Russia,” said Kasparov. “I don’t know what will happen but I can be certain that by the end of the year the status quo will have changed.” He may be right, but after my trip to Asbest, I can’t see monogorods becoming the focal point of public unrest. In fact, in this notoriously apolitical society, I can’t see massive popular protests breaking out at all. The opposition might get a few more people to their protests, but on the whole, a mixture of apathy, a sense of powerlessness, and a lack of viable organizational structures seem to doom any opposition before it starts. It’s possible, of course, that there really could be a change of mood if things get really bad. But I feel much more inclined to agree with the opinion of a newspaper editor whom I met in Ekaterinburg. “Protests! What on earth are you talking about?” he said, laughing. “You don’t realize how much Russian people can put up with before they start protesting. There won’t be protests. The women will grow potatoes to see them through the hard times, and the men will drink more vodka, and that’ll be the end of it.” Shaun Walker is the Moscow Correspondent of The Independent.

Technorati Tags: apathy, Russia, Ukraine, MBS Ltd., Anton Olff, economic crisis, revolution, protest, culture, Europe, President Obama, Orange Revolution, Shaun Walker, russiaprofile.org, Russian industry, Magnet Mountain, Stephen Kotkin, Magnitogorsk, Soviet Union, monogorod, Urals, Uralasbest, Asbest, asbestos, Vladimir Putin, President Medvedev, Gary Kasparov, The Independent

From www.reuters.com:

Fitch sees more E.Europe downgrades

Ratings agency Fitch expects more downgrades in emerging Europe after cutting Russia`s rating this week, it said on Thursday, warning political risk was a mounting threat to creditworthiness in the region, Reuters reported.

Head of emerging European sovereigns Edward Parker said that with nine countries in the region on negative outlook and the financial crisis deepening, creditworthiness in a string of countries was deteriorating.

“I would expect that we would see more negative ratings actions,” he told Reuters in a telephone interview.

Parker said deepening economic pain and rising unemployment across the region heightened the risk of political instability and governments failing to take austerity measures out of fear of rising unrest.

“Clearly, there is going to be a rise in political risk,” he said. “Obviously, political shocks by their nature are often unpredictable but as well as that we would be particularly concerned over the risk of governments failing to pursue prudent and responsible policies.”

He would not say which country would likely be next to follow Russia, which on Wednesday suffered its first rating cut from Fitch in a decade on slumping reserves, corporate and banking problems and economic contraction.

But he said Fitch was watching the upcoming review of Ukraine`s International Monetary Fund deal particularly carefully.

Fitch has said previously that any failure of that deal would lead to a further negative move on Ukraine, which has suffered a currency slump and deep recession as its steel industry and banking sector suffered from the global financial crisis.

In contrast, he said that Turkey might be able to survive without an IMF deal with its current rating intact. Turkey has held back from concluding an IMF deal ahead of local elections.

“We would see an IMF deal as a positive development for Turkey,” he said. “But if one was not agreed they might be able to find other financing and it would not alone be enough for negative ratings action.”

Parker said Fitch was continuing to watch Russia closely in the aftermath of its downgrade, with ongoing low oil prices, any further loss of reserves, worsening of corporate balance sheets or difficulty refinancing debt or rising political risk potentially prompting further action.

Both Russia and Kazakhstan have allowed their currencies to depreciate after spending considerable reserves defending them. Parker said those devaluations had been necessary to take into account the drastic fall in oil prices.

With the Baltic states also entering deep recessions, some analysts believe their currencies — either pegged or trading in narrow bands — might also be forced to devalue.

Parker said this would potentially be negative for their ratings.

“It would make it more difficult for companies and others to repay foreign currency debt and it would undermine balance sheets,” he said.

Currency falls in Central and Eastern Europe were already having a similar effect, he said, with the high proportion of foreign currency loans in Hungary making it more vulnerable than other regional economies such as Poland and the Czech Republic.Technorati

Tags: www.reuters.com, Anton Olff, MBS Ltd., Fitch, Europe, Russia, credit rating, unemployment, austerity, oil reserves, International Monetary Fund, steel industry, Ukraine, Turkey, Kazakhstan, Baltic States, Eastern Europe, Czech Republic

OK…here is a bit of gratuitous sex from the bloggers at MBS. Of course, we could tell you that our interest in the subject is strictly from a business standpoint and how prostitution is affected by the global financial crisis, blah, blah, blah.

Anyway, there are no photos (disappointed?) in this article from the International Herald Tribune (www.iht.com). Hey…isn’t the Tribune owned by the verging on bankruptcy  New York Times? Maybe if their columnists would write more articles like this one they would be doing better……..

World’s oldest profession, too, feels crisis

By Dan Bilefsky

Monday, December 8, 2008

PRAGUE: On a recent night at Big Sister, which calls itself the world’s biggest Internet brothel, a middle-aged man selected a prostitute from an electronic menu on a flat-screen television, pressing his index finger against it to review the age, hair color, weight and languages spoken by the women on offer.

Once he had chosen an 18-year-old brunette, he put on a mandatory burgundy terry cloth robe and proceeded to one of the brothel’s luridly-lit theme rooms, an Alpine suite decorated with foam rubber mountains covered with fake snow.

Nearby, in the brothel’s cramped control room, two young technicians used joysticks to control the dozens of hidden cameras that would film his performance and stream it, live, on Big Sister’s Internet site.

Sex is free at Big Sister, but that is not cheap enough for some men. Customers get the cut rate in return for signing a release form that allows the brothel to film their sexual exploits.

Even with this financial incentive, Big Sister’s marketing manager, Carl Borowitz, 26, a Moravian computer engineer, lamented that the global financial crisis had diminished the number of sex tourists in Prague.

“Sex is a steady demand, because everyone needs it, and it used to be taboo, which made a service like ours all the more attractive,” said Borowitz, who looks more like Harry Potter than a Czech Larry Flynt. “But the problem today is that there is too much competition, too many free pornography sites and people are thinking twice before making impulse purchases, including paying for sex.”

Big Sister is not the only brothel suffering the effects of a battered global economy. While the world’s oldest profession may also be one of its most recession-proof businesses, brothel owners in Europe and the United States say belt-tightening caused by the global financial crisis is undermining a once-lucrative industry.

Egbert Krumeich, manager of Artemis, the largest brothel in Berlin, said that the recession had helped dent revenue by 20 percent in November, which is usually peak season for the sex trade. Meanwhile, in Reno, Nevada, the multimillion-dollar Mustang Ranch recently laid off 30 percent of its staff, citing a decline in high-spending clients.

Big Sister is not struggling as much as some of its more traditional rivals; its revenue is largely derived from the €30, or $40 monthly fee each of the company’s 10,000 clients pay to gain access to its Web site.

But Borowitz said Big Sister hoped to offset a 15 percent drop in revenue over the past quarter by expanding into the United States. Big Sister also produces cable TV shows that air on Sky Italia and Television X in Britain, as well as DVDs like “World Cup Love Truck” and “Extremely Perverted.”

Ester, an 18-year-old prostitute at Big Sister who declined to give her last name, said that big-spending clients had diminished, but noted that she was still earning nearly €3,000 a month, enough to pay rent and to pay for her favorite Louis Vuitton purses.

“The reason I do this is for the money,” she said, after gyrating half-naked around a pole. Being filmed, she added, made her feel more like an actress than a sex object.

In the Czech Republic, where prostitution operates in a gray zone but is largely tolerated, the sex industry is big business, generating nearly €400 million in annual revenues, 60 percent of which is derived from foreign visitors, according to Mag Consulting, a tourism research company in Prague that also studies the sex industry.

Since the fall of Communism in 1989, the Czech Republic has become a major transit and destination country for women and girls trafficked from countries farther east, including Ukraine, Russia, Belarus and Moldova, the police say. Czechs and those transiting the country are most often sent to Western Europe or the United States.

Since 1989, tens of thousands of sex tourists have streamed into Prague, the pristinely beautiful Czech capital, drawn by inexpensive erotic services, an atmosphere of anonymity for customers and a liberal population tolerant of adultery.

Mag Consulting said 14 percent of Czech men admit to having had sex with prostitutes, compared with an EU-wide average of 10 percent.

Dozens of cheap flights to Prague have also ensured a steady flow of bachelor parties from across Europe. In 2005, an average of 30 flights arrived in Prague every day from Britain alone, a figure that analysts said has dropped by a third.

Jaromir Beranek, the director of Mag, said that when Germany and Britain - the two countries that send the most tourists to Prague - began to stagnate, sexual tourism suffered too.

The strength of the Czech crown against the euro, lower spending power and competition from even lower-cost sex capitals like Riga, Latvia, and Krakow, Poland, were threatening one of the country’s most thriving sectors, he said. “If you ski and there is no snow, you stay home. The same applies to sex.”

Many Czechs are more than happy to see Prague shrug off its reputation as one of the world’s top-20 sex destinations, but some in the hotel industry are so alarmed by the drop in tourists that they are lobbying the government to legalize the trade, in hope that it will help lure more clients.

Jiri Gajdosik, the manager of Le Palais, one of Prague’s top hotels, argues that regulating prostitution would help attract business by making prostitution safer. “We must ensure that the city loses its bad reputation of a city where foreigners are afraid that they will be robbed,” he said in an interview with Hospodarske noviny, a Czech financial daily.

While some critics have warned that legalization would effectively transform the Czech state into the country’s biggest pimp, the government is considering whether to emulate the Netherlands and Germany by regulating prostitution, just as it would any other industry. It is considering passing legislation by the end of this year that would require the Czech Republic’s estimated 10,000 prostitutes to register with the local authorities.

Dzamila Stehlikova, the Green Party minister for minorities and human rights who is shepherding the bill through Parliament, said that forcing the business out into the open would make it harder for human traffickers to thrive, while also helping to assure mandatory health check-ups for prostitutes. Other advocates argue that legalization would generate millions of euros in tax revenue from an industry that now largely operates underground.

Not everyone is enthusiastic, including the prostitutes themselves, who warn that being issued prostitution identification cards would further stigmatize them.

Hana Malinova, director of Bliss Without Risk, a prostitution outreach group, said she feared the current credit crunch was pushing more poor women into prostitution, since they could make more money selling their bodies - about €120 for a half-hour session at some upmarket sex clubs in Prague - than flipping burgers at McDonalds.

Even with the economic downturn, she added, prostitution was far more resilient than other industries, though the downturn was discouraging adultery.

“An Austrian farmer from a remote area who is not married will still cross the border to the Czech Republic looking for sex,” Malinova said. “On the other hand, the recession is helping to keep husbands at home who might otherwise be cheating on their wives.”

Near the border with Germany, in towns in northern Bohemia that were long blighted by a daily influx of sex tourists seeking cheap thrills, many are rejoicing in the decline.

Only a few years ago, the town of Dubi was so overrun by prostitution that a nearby orphanage was opened to provide refuge for dozens of unwanted babies of prostitutes and their German clients. Sex could be purchased for as little as €5 - the price of a hamburger in nearby Dresden - drawing a daily influx of more than 1,000 sex tourists.

The more than three dozen brothels that once operated in Dubi have been winnowed down to four, with several of the former brothels having transformed into goulash restaurants or golf clubs.

Petr Pipal, the conservative mayor of Dubi whose zero-tolerance policy is largely responsible for the change, said that installing surveillance cameras and police officers at the entrance of brothels had deterred sex tourists by depriving them of their anonymity. Rising prices for sexual services and the global financial crisis, he added, were also helping to tame demand.

“Two or three years ago, we would get 1,000 men coming here for sex on a Friday night, which is a lot for a town of 8,000 people,” Pipal said from police headquarters, where members of the anti-prostitution squad sat in a surveillance room, controlling outdoor cameras filming 13 now mostly deserted streets.

“The one good thing about the economic crisis is that it is helping to keep sex tourists away.”

Even brothels in areas of the Czech capital most popular with tourists complain that they are suffering from economic hardship. On a recent night near Wenceslas Square in Prague, dozens of young men outside a row of neon-lit sex clubs beckoned tourists with offers of complimentary alcohol and racy strip shows.

Inside Darling, a giant multifloor cabaret famous for cancan shows modeled on the Moulin Rouge in Paris, scantily clad young women stripped on a stage surrounded by leopard skin couches, flashing disco balls and French impressionist paintings of naked women.

Suzana Brezinova, the club’s marketing director, said sex tourism to Prague had been hit because prices had risen nearly to the levels of Rome. But she added that some high-spending businessmen still came to Darling to shrug off the economic doldrums, thinking nothing of splurging €1200 for a night of sexual pleasure and escapism.

“People have less money,” she said. “But hard times also mean that people want to be cheered up.”

Jan Krcmar contributed reporting from Prague and Victor Homola from Berlin.

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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 unwritten rule regarding the blog here at MBS, Ltd., was that we would focus on macro & micro economic and business issues ONLY. We would not stray into the murky and dangerous waters of politics.

Having stated such, we decided to dive into the political pool (or cesspool?) with this entry. The motivation for this diversion is the topicality and relationship of the subject matter to BUSINESS in emerging markets like Eastern Europe, Russia, Georgia and Ukraine. The subject is NATO.

Nick Witney’s article in the Moscow Times (www.moscowtimes.ru) captures, dissects and congeals the truth like few others have recently.  The fact is, NATO in its current form is an obsolete, expensive and largely political club, where military and security matters are of primary importance mainly to its newest members and aspirants.

The subject of NATO is a divisive issue here in Ukraine, as well as further east.  The inclusion or exclusion of Ukraine and Georgia into the current NATO organization, will affect the economic direction of these nations.

Some argue very coherently, that a byproduct of NATO inclusion is the acceleration of political-or what we could call “philosophic integration” between new members and “the West,” as well as increased trade. The hope among the practitioners of “realpolitik” in the West, is that an expanded NATO will act as a check on Russian, as well as Asian influence and ambitions in Europe.

The main problem with this thesis is that it ignores the weakness of NATO and the shifting alliances that have resulted.

The Death of NATO 02 December 2008 By Nick Witney NATO, whose foreign ministers will meet Tuesday and Wednesday, is dying. Death, of course, comes to all living things. And, as NATO approaches its 60th birthday next spring, there seems no immediate urgency about writing its obituary; 60-year-olds may reasonably look forward to another decade — perhaps two or even three — of active and productive life. But perhaps it is now time for some discrete reflection on the fact that “the old man” will not always be with us. Human institutions, like human beings, can collapse with surprising speed once they have outlived their usefulness. The dramatic dissolution of the Soviet Union stands as a reminder of what can happen to organizations when doubts take hold as to whether they still serve any real interests other than those of their own apparatchiks — and how suddenly such doubts can grow when they attempt to convert themselves into something they are not.  NATO has, of course, shown remarkable tenacity. It should have disappeared when the Soviet Union collapsed and the Warsaw Pact evaporated because its job was done. But then came the Balkan crises of the 1990s, culminating in the realization that only U.S. military power could put a stop to Serbian President Slobodan Milosevic’s ethnic cleansing of Kosovo. And then came the terrorist attacks of Sept. 11, 2001, and this kept NATO in business, spreading its activities to Afghanistan.  But NATO’s repeated demonstrations of resilience should not blind us to the fact that it no longer provides a healthy basis for the transatlantic security relationship. As long as NATO’s raison d’etre was to keep the Russians out and the United States in, NATO’s internal dynamic of U.S. leadership and European obeisance was both inevitable and appropriate.  This unbalanced relationship still has advantages for both parties. Americans may find their European allies less pliable than before, but they can at least count on the absence of any serious alternatives for what NATO should become or what it should do. Europeans can continue to avoid responsibility for their own security and to invoke the catechism of “NATO — the cornerstone of our security” as a substitute for serious strategic thought.  But each now resents the behavior of the other. Americans find their patience tried by Europeans who are free with their advice and criticism, yet reluctant to shoulder risks. Moreover, the United States learned from the Kosovo experience of “war by committee” to distrust NATO as a place to run operations, and now Afghanistan highlights the organization’s limitations as a mechanism for generating force contributions.  As for Europeans, they are unhappy about pressure to participate in a U.S.-led “global war on terror” that they regard as dangerous and misconceived. They are also averse to policies seemingly designed to antagonize their more difficult neighbors like Russia and the Islamic world.  So what is to be done? None of the ideas for another dose of NATO rejuvenation looks like the answer. All the talk of an improved NATO-European Union partnership is mainly wasted breath. “Intensified strategic dialogue in Brussels,” in practice, boils down to the chilling specter of interminable joint committee meetings at which one nation’s ambassador to NATO explains his government’s position to a compatriot diplomat who is accredited to the EU and vice-versa.  The problem is not institutional relationships between the two organizations — except in the important but narrow case of Turkey and Cyprus, which remain bent on pursuing their bilateral feud without regard to the real risks to the personnel of their allies and partners deployed in Afghanistan and Kosovo. The real problem is relations between the United States and European countries, 21 of which belong to both organizations.  Nor does the answer lie in developing an EU “caucus” within NATO. The 1990s concept of a “European Defense Identity” within NATO proved to be unviable. Since then, expansion of the alliance and proliferation of NATO “partners” has made the idea of a special collective role for EU members all the more improbable. A double layer of decision-making would only cause an already ponderous organization to seize up.  There is nothing more dramatic to be done than to focus on upgrading the EU-U.S. strategic dialogue. The annual summits need to be made more substantial, and their focus needs to shift from transatlantic, bilateral issues to aligning EU and U.S. global policies and actions. President-elect Barack Obama should keep an eye on the calendar of the European Council, which brings the EU presidents and prime ministers together four times a year, and solicit an occasional invitation. The U.S. mission to the EU should be scaled up, and the EU representation in Washington needs to become a proper embassy. The more seriously the Americans show that they are willing to take the EU collectively, the more seriously the Europeans will take themselves.  Winston Churchill once remarked that you could always count on the Americans to do the right thing — after having tried all the alternatives. In the same way, the Europeans will eventually find themselves having to speak with one voice and act as one body in the wider world, if only because a globalized world will not allow them the luxury of doing anything else. As Charles de Gaulle forecasted: “It is not any European statesman who will unite Europe. Europe will be united by the Chinese.” Only collectively can Europeans be effective contributors to global security or achieve a robust transatlantic security partnership.  As NATO enters its twilight years, the United States should encourage the EU to grow into its global responsibilities. Despite all their differences and mutual dissatisfactions, Europe and the United States know that their relationship is as close to being best friends as they are likely to see for the foreseeable future.  Nick Witney, former chief executive of the European Defense Agency, is a senior policy fellow with the European Council on Foreign Relations. © Project Syndicate

 

 

 

Anton Olff

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