MBS Blog

The economic policies described below should do wonders for the Russian economy.  Sarcasm aside, Putin’s well intentioned (whatever one thinks of Putin, he believes he is a Russian patriot) restrictions-like all protectionist policies designed to help domestic industry-will backfire as the productivity that technology provides will not be available. That will be the effect of tariffs.

It is no surprise that xenophobic Russia employs protectionism. This fits into a historical pattern of encouraging development periodically, and then squashing it just as it bears fruit. A vast nation like Russia with an incredible array of resources should be the richest nation in the World, but protectionist and other anti-growth policies keep it underdeveloped. The excuse of protecting domestic companies and jobs is always used, though an examination of nations that allow competition shows that it increases wealth, tax revenues, and creates a greater numbers of jobs.

Our hope is that Ukraine does not adopt these restrictions. Given the cultural similarities between Russia and Ukraine, as well as the shared oligarchic influences in both governments, we would not be at all surprised if Ukraine went down the same road. It would be even more damaging to Ukraine since it does not have the same resources of Russia and must rely more on the industrial, service and consumer sectors of the economy.

 Restrictions and tariffs on farm equipment and machinery in a nation sitting on an under-utilized agricultural sector with the best farm land in the World, would damage a nation that has already suffered through ill conceived socialist collectivization decades ago.

Putin’s Tariffs Stall Russian Growth for Caterpillar

By Melita Marie Garza and Paul Abelsky

April 20 (Bloomberg) — Prime Minister Vladimir Putin’s trade measures are starting to keep Deere & Co. combines and Caterpillar Inc. trucks out of Russian wheat fields and coal mines, dimming the companies’ prospects for expansion abroad.

Deere and Caterpillar, reeling from the longest U.S. recession in a quarter century, were the companies most affected by loan restrictions and tariffs of as much as 25 percent that Putin imposed this year, according to a U.S. Chamber of Commerce survey of the top 50 American businesses operating in Russia.

Putin is trying to boost Russian industries with tariffs on everything from drugs to farm equipment as declining oil revenue saps the nation’s economy. The policies are hurting sales by Caterpillar, Deere and Agco Corp. in a market where revenue was forecast to rise as much as sixfold in the next decade.

“The new tariffs kicked these guys in the knees when they were down,” Larry De Maria, a New York-based analyst with Sterne, Agee & Leach Inc., said in a telephone interview. “Russia was supposed to be a $3 billion market in 2008 with potential to grow to $20 billion, possibly in as little as a decade.”

Emerging-market sales likely fell so far this year for Deere and Caterpillar, which reports first-quarter earnings tomorrow, De Maria said. Caterpillar is expected to report profit excluding certain items of 5 cents a share, the average estimate of 20 analysts surveyed by Bloomberg. The company earned $1.45 a share a year earlier.

“We are really going to struggle this year in Russia,” Ken Harding, Caterpillar’s regional execution manager for the Commonwealth of Independent States, said in a telephone interview.

‘Low’ Expectations

Caterpillar’s “expectation is low” that it will sell any of its 60-ton trucks, used for quarry and construction work, in Russia this year after selling eight last year, Harding said.

Starting in January, Peoria, Illinois-based Caterpillar and other foreign makers of off-highway trucks faced duties of 25 percent, an increase from 5 percent last year. BelAZ, a Belarusian equipment producer that dominates the region’s truck industry, isn’t subject to the tariff and will benefit, Harding said.

Caterpillar declined 59 percent on the New York Stock Exchange in the 12 months through April 17. Deere fell 56 percent, and Agco dropped 64 percent.

Deere, the world’s largest maker of agricultural equipment, and Duluth, Georgia-based Agco are being hurt by a program that gives Russian farmers a 20 percent discount on loans from Russia’s Central Bank if they buy domestic machines.

Loan Program

The deal is for loans made through OAO Sberbank, Russia’s largest lender, and Rosselkhozbank, the Russian Agricultural Bank, which both have local offices that farmers rely on for financing, Michael Considine, director of EurAsia issues for the Washington-based Chamber of Commerce, said in an interview.

“If a Russian farmer had the cash to buy a Deere combine, it would cost substantially more because of the tariff increase,” Considine said. “And if you didn’t have the money, you could just forget about it because you’d only be able to get the money to buy something made in Russia.”

Putin undertook the measures after a December visit to Rostov, Russia-based Rostselmash, the country’s leading combine maker.

Putin’s press secretary Dmitry Peskov wasn’t available for comment. Valeriy Khromthenkov, a Russian official in Washington with oversight of agricultural issues, declined to comment. A spokesman for Finance Minister Alexei Kudrin, who also is deputy prime minister, wasn’t available to comment.

‘Dramatically Reduced’

Agco’s sales are “dramatically reduced” in the region, because borrowing for a foreign tractor is now almost impossible, Greg Peterson, Agco’s head of investor relations, said in a telephone interview.

In its first-quarter earnings announcement in February, Moline, Illinois-based Deere said sales will decline in Central Europe and the Commonwealth of Independent States for the year. Ken Golden, a spokesman for Deere, declined to comment.

“Our main problems have been the lack of state subsidies on loans combined with insufficient operating cash and the general economic downturn, not the import tariffs,” Alexander Altynov, the general director of AgroSnab, an official John Deere dealer in Russia, said in a telephone interview.

Market Decline

Altynov predicted the foreign machinery market in Russia will decline as much as 75 percent this year.

Deere was expected to post second-quarter profit excluding certain items of $1.08 a share, the average estimate of 17 analysts in a Bloomberg survey.

The U.S. Trade Representative has worked with the U.S. combine harvester industry and at a meeting in Moscow in March expressed concern about the tariff, Nefeterius McPherson, a spokeswoman for the trade representative, said in an e-mail.

The tariff runs counter to Russia’s G20 pledge to avoid protectionist measures and is contrary to a November 2006 bilateral agreement that Russia will maintain a 5 percent tariff on combines until it joins the World Trade Organization, McPherson said.

The ruble’s 31 percent decline against the dollar since July also has made foreign products more expensive. Russia’s Economy Ministry estimates that imports have tumbled more than 30 percent in the first quarter of this year.

Last month, Russia allocated 25 billion rubles ($746.7 million) to OAO Rosagroleasing, the nation’s largest farm- equipment leasing company, and 45 billion rubles to state-run Rosselkhozbank as part of a 3 trillion-ruble stimulus package.

Rosagroleasing spent the money on Russian-made equipment, including 5 billion rubles on OAO KamAZ trucks, Agriculture Minister Yelena Skrynnik told Putin during a meeting on April 17, according to a transcript on the government’s Web site.

Farm Equipment

Russia’s Union of Farm-Equipment Producers, known as Soyuzagromash, asked the government last week to extend the 15 percent import duty on combines to all farm equipment. The tariffs may boost domestic market share for farm machines to 60 percent, the union said.

“The government wants both to help the domestic producers and keep the state funds allocated to the agricultural sector inside Russia,” said Mikhail Pak, an analyst with IFC Metropol in Moscow.

Putin’s efforts may hurt U.S. companies’ operations in the rest of the world, said De Maria, of Sterne Agee.

“There is a worry that these measures could spread to China and other emerging-market countries,” De Maria said. That “would be a blow to the Deere brand and others, stifling their growth strategy as local companies build share.”

(from www.bloomberg.com)

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.

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

Russia’s economy is captive to oil & gas prices. If the price of crude continues to decline-and there is sufficient reason that it will continue to do so-then the prospects for Russia’s economy must also be adjusted.

Most Russians have painful memories of the 1998 financial crisis. It is one of prime motivations behind the Russian Government’s aggressive stance regarding the ruble. The political backlash of a currency rout could be devastating.

 As this article from the Financial Times (www.ft.com) states, Russia is now in a much better financial position compared with the 1990s. However, at the rate that the Russian reserves are being utilized, the Russian Government may not have sufficient ammunition to counter any new economic shocks.

At some point, the Russian Government might consider even closer ties with cash rich China.  These might include the sale or long term leasing of strategic assets located in Siberia.

Rouble exodus hits Russia credit rating

By Catherine Belton in Moscow

Published: December 8 2008

Russia on Monday became the first G8 country since the start of the financial crisis to have its credit rating downgraded after Standard and Poor’s took fright at the recent exodus from the rouble and sharp drop in oil prices.

S&P said it had lowered Russia’s foreign currency credit rating by one notch from BBB+ to BBB because of the “rapid depletion” of the country’s foreign exchange reserves and the “difficulty of meeting the country’s external financing needs”. It said the outlook for the rating was negative.

Russia’s reserves have fallen by $128bn since August to $455bn, as the country battles the capital flight that began following the war with Georgia and escalated as the oil price fell and the global crisis worsened.

S&P said Russia could be forced to spend all $200bn now parked in its two sovereign wealth funds on recapitalising the banking system and covering fiscal deficits in 2009 and 2010.

The agency expects Russia to run a current account deficit next year of 2.6 per cent of gross domestic product due to the oil price fall, putting further pressure on the balance of payments.

“There are a lot of layers of concern,” said Frank Gill, primary credit analyst at Standard and Poor’s. “There are macroeconomic and political risks . . . and Russia has not operated a current account deficit since 1997 and that was less than 1 per cent of GDP.”

Vladimir Putin, Russia’s prime minister, has staked his political credibility on avoiding a sharp rouble depreciation.

The thought of devaluation raises the spectre of the 1998 rouble crash that wiped out Russians’ savings, although economists say any devaluation this time.

Technorati Tags: Russian, ruble, Georgia, Vladimir Putin, current account deficit, Frank Gill, political risks, capital flight, credit rating, G8, Catherine Belton, Moscow, Standard and Poors, Financial Times, GDP, www.ft.com, Anton Olff, Russian Government, Russian economy, oil prices, 1998 financial crisis, currency devaluation

Someone in Russia understands a thing or two about the benefits of competition. As this article from the Wall Street Journal (www.wsj.com) indicates, the privatization of one of Moscow’s airports, has been positive.

As a frequent traveler to Moscow , the privatized Domodedovo Airport is the preferred choice.  Modern, clean and efficient…with decent food for the international traveler, it is a stark contrast to the international terminal at Sheremetyevo Airport. The dark brown paint at Sheremetyevo may have been whitewashed, but the depressing feeling lingers for travelers and airport workers there.

 While government investment in Sheremetyevo Airport will certainly improve the overall quality, the privatized Domodedovo Airport will have the edge with travelers, vendors and airlines. It is simply more responsive to the needs of the market.

 Privatization of airports is growing. According to Robert W. Poole, Jr. of the Reason Foundation (www. reason.org), “15 major airports were privatized in 2006, the second-highest annual total ever (there were 21 airport privatization deals in 1998).

Despite recent political setbacks, privatizations could continue. Unlike China,  Russia and Ukraine lack sufficient resources to fully modernize their infrastructure.  Privatization or partial privatization remain the most viable options. The investment, technology and management that foreign companies would bring, could go very far in raising the living standard in these emerging economies.  

 Moscow Points the Way With Airport Competition

While Most Nations Sport Monopolies, Rivalry Between Two Russian Gateways Ushers in Improvements for Carriers, Travelers

By DANIEL MICHAELS

MOSCOW — A heated battle for passengers between the Russian capital’s main airports offers an unlikely model of competition for the aviation industry.

In most cities, airports are monopolies. Even in cities that have more than one, including New York, Paris and Tokyo, airports are usually owned by the same operator. That means airlines can rarely make the kind of choices passengers take for granted, such as choosing an airport for its efficiency, shopping or lounges.

Not so in Moscow, where two international airports, Domodedovo and Sheremetyevo, owned by rival organizations, battle for business. The result is lower fees, better service and fast-improving facilities all around.

Domodedovo Airport, for example, recently convinced several top airlines to make it their Russian base, thanks to a major modernization that added more than 20 new restaurants, jewelry boutiques and a shop where passengers can rent DVDs to watch in booths.

Sheremetyevo Airport responded by building a fast rail link to Moscow, complete with a Starbucks at the airport station.

Moscow’s airport rivalry highlights a paradox of the global aviation industry: Airlines compete fiercely with each other for customers, but they face many monopolist suppliers, such as air-traffic control systems, fuel distributors and airports. Resulting costs and poor services get passed on to travelers.

Regulators world-wide are starting to tackle the issue — and some see Moscow as a paradigm.

Britain’s competition authority, for example, last year considered breaking up BAA, the company that runs London’s three big airports. In testimony before the regulator, officials from the International Air Transport Association, a trade group, cited Moscow as evidence of the benefits that competition could bring London’s airport system. IATA testified that fees at Moscow’s fast-growing, privately owned Domodedovo Airport are as much as 20% lower than at Sheremetyevo, the state-owned hub of flag carrier Aeroflot.

The U.K. listened. Bowing to government pressure, BAA’s Spanish ownerFerrovial SA now plans to sell London’s second-biggest airport, Gatwick. British Airways PLC and other big customers are too entrenched at Heathrow to switch to Gatwick, but airlines say competition could prompt airport managers to trim fees and start to resolve problems such as chronic fuel-supply shortages.

“I’d love to have competing airports everywhere in the world,” says Bruno Matheu, executive vice president for marketing at Franco-Dutch carrier Air France-KLM SA, an Aeroflot partner in the SkyTeam airline alliance. Air France-KLM uses Sheremetyevo in Moscow.

Moscow’s airport market didn’t develop overnight.

Until recently, few big airports world-wide were worse than Sheremetyevo, the Soviet Union’s international gateway, built for the 1980 Olympics. Checking in for a flight could take hours. So could driving jammed roads to the airport, which lacked rail connection.

During Russia’s privatization drive of the 1990s, local investors bought Domodedovo, which was previously Moscow’s airport serving Soviet Central Asia. The investors, grouped into an upstart charter-airline operator, East Line Group, renovated a terminal at Domodedovo and oversaw construction of a train line to Moscow.

East Line charged airlines landing and operating fees that undercut Sheremetyevo by around 30%. For passengers, Domodedovo’s rail link guaranteed a 40-minute trip to downtown Moscow. Private Russian carriers, largely frozen out of Aeroflot’s base at Sheremetyevo, expanded quickly at the spacious Domodedovo.

East Line’s big break came in 2003, when British Airways announced it would switch from Sheremetyevo to Domodedovo.

“The authorities were shocked that a major airline would leave the government airport,” recalls Daniel Burkard, BA’s former country manager for Russia. He says a big factor was that East Line offered a big business-class lounge.

Mr. Burkard, a 41-year-old German, says he was so impressed by Domodedovo’s management that when his BA contract in Moscow ended in 2005, he joined East Line as its business development manager and started wooing other airlines to Domodedovo.

He promoted the airport’s many domestic airlines, which allow foreign carriers to reach small cities across the former Soviet Union, and in 2005 catapulted Domodedovo over Sheremetyevo as Moscow’s biggest airport in terms of passenger traffic. Other attractions include a children’s area staffed with nurses, fast immigration lines for Westerners, and competing vending machines, operated by rival suppliers.

In 2006 Mr. Burkard convinced up-market Austrian Airlines AG to switch from Sheremetyevo. The move prompted other carriers in the Star Alliance to rethink their choice in Moscow. Last year Deutsche Lufthansa AG, one of the biggest foreign carriers in Russia, also made the jump.

When AMR Corp.’s American Airlines decided last year to enter the Moscow market, managers visited both international airports. They were impressed by Domodedovo.

The airport’s executives “were a bit more aware of how we do business,” says Craig Kreeger, American’s senior vice president for international operations. Since flights began this June, Mr. Kreeger says, Domodedovo has fulfilled its commitments better than many airports in more developed markets.

Over the past three years, 28 carriers have either shifted to Domodedovo or started new Moscow service there.

Domodedovo’s success brought it unwanted attention, however. During Vladimir Putin’s recent presidency, many of Russia’s 1990s privatizations were reversed.

At East Line, government security officials repeatedly searched facilities and confiscated property. Government lawsuits against East Line yielded court rulings that threatened the company’s control of the airport. The Kremlin’s objective wasn’t clear, but appeared to be related to battles between powerful clans for control over the lucrative airport business, according to people close to the conflict. Recent appeals-court decisions supporting East Line seem to have ended the problem, although political shifts might prompt new challenges.

Two years ago, Sheremetyevo started to fight back, as a new management team began redeveloping the airport. In June, Sheremetyevo got a 30-minute rail link to Moscow. One new terminal recently opened and two more are slated for completion by 2010. In the old terminal, workers are now repainting brown walls white, modernizing check-in desks and installing more shops.

Anton Olff

Technorati Tags: Aeroflot, Air France-KLM, American Airlines, Austrian Airlines, BAA, British Airways, Domodedovo Airport, East Line Group, Ferrovial SA, Gatwick, IATA, Lufthansa, Moscow, Privatization, Reason Foundation, Robert W. Poole Jr., Russia, Sheremetyevo Airport, SkyTeam, Soviet Union, Ukraine, Vladimir Putin, Wall Street Journal