Russia's Price for Buying Off Ukraine: $15B

Put 'er there, Vlad, my country's yours for $15 billion

Let us update this strange tale of Ukraine. Having told his opponents to in effect get lost since they didn't win any elections or succeed in gaining a vote of no-confidence, President Viktor Yanukovych headed to the Kremlin to speak to his Russian counterpart Vladimir Putin. What is the price of fealty to Russia? Gulf Cooperation Council bigwigs bought off Egypt for $9.9 billion (so far)--$5B from the Saudis and $4.9B from the Emiratis to wean it off the upstart Qataris. Meanwhile, Yanukovych was able to wangle a $15B bailout from Russia to buy that much worth of Ukrainian sovereign debt over the next two years. Not bad, eh?

Ukraine sealed $15 billion of Russian financing and a one-third discount on energy imports from its neighbor as anti-government protesters in Kiev demanded to know what President Viktor Yanukovych had ceded in return. Russia will buy government debt this year and next and will cut the price it charges for natural gas to $268.5 per 1,000 cubic meters, President Vladimir Putin said today after meeting Yanukovych in Moscow. 

Ukrainian debt--certainly more than mildly distressed at this point--is slightly more relaxed as a result:

The yield on Ukrainian dollar bonds due 2023 plunged more than 1 percentage point to 8.833 percent as of 7:11 p.m. in Kiev, the lowest since June 17, data compiled by Bloomberg show. The yield on government debt due 2014 fell more than 6 percentage points to 15.193 percent. Putin said the financing is being provided in light of “the problems of the Ukrainian economy linked to the world financial crisis, and to support the budget of the Ukrainian government.” Trade restrictions on Ukrainian goods will also be lifted. 

However, the opposition may be further inflamed by the Russian bailout. Alike Saudi Arabia and the UAE lending, Russia lending is not exactly a "seal of good housekeeping" alike that granted by the IMF which opens doors to unbiased lending from more impartial sources:

“The shift towards Moscow risks inflaming the anti-government protests,” Capital’s Chief Emerging Markets Economist Neil Shearing said by e-mail. “While a deal with Russia was always likely to offer the best terms on short-term financing, closer ties with the EU were more likely to provide an anchor for the structural reforms needed to reinvigorate Ukraine’s faltering economy.”

Ukraine’s opposition had planned a rally for this evening and protesters flocked to Independence Square on hearing news of the Russian agreements. There were about 30,000 people there as of 7:30 p.m., according to The RBC-Ukraine news service. The Interior Ministry put the turnout at about 8,000.

“What did Yanukovych promise in exchange?” said 57-year-old Vera from Kiev, who declined to give her last name. “Nobody gives anything without a reason. Now we have only questions.” Opposition leaders addressing the crowds, who’ve blocked central Kiev since the government pulled out of a planned European Union association agreement, were similarly skeptical.  “I know only one place where there’s free cheese -- a mouse trap,” said Arseniy Yatsenyuk, head of jailed ex-Prime Minister Yulia Tymoshenko’s party. “We want to hear what he gave in return.” 

Your country's been sold, my friend. Collusion between Yanukovych and Putin reminds me of a gangster movie (not "gangsta," homey) with a dodgy plot and poor acting. Except in this case it's true-to-life. Most importantly, I hardly think it's solved its balance-of-payments issues by getting into bed with the country that's done quite a lot to exacerbate its situation by blocking trade and threatening to cut off gas supplies during winter. First, there's no guarantee this lifeline will be continued if Ukraine shows signs of disobedience. Second, Ukraine's habit of burning foreign exchange is hardly stopped by a lender with many strings attached showing up.

But hey, they voted for this guy, right?

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Boxers-Turned-Politicians: Pacquiao vs Klitschko

Fighting Russkies, Striking a Blow for the EU

If this were an actual fight, it would be a grossly unfair one since Manny Pacquiao stands 1.69m tall and weighs 65kg whereas Vitali Klitschko--older brother of fellow heavyweight champion Wladimir of Hayden-Panettiere-is-my-girl fame--is 2.01m tall and weighs 110kg. However, this comparison is grossly unfair in other respects of political consequence. In terms of celebrity, the Filipino boxer is far better known competing in the welterweight division where the glamor, money and attention in prizefighting is now concentrated, whereas the heavyweight division lacks compelling personalities. Yet, Vitali Klitschko makes up for the lack of star power with brain power since, like his brother, he has a PhD. Manny Pacquiao famously dropped high school to start fighting since his family needed the money.

I bring up this comparison because the Klitschko brothers are among the most prominent figures in the current campaign to force Ukranian President Viktor Yanukovych to ink a free trade deal with the European Union. Problematically for the brothers and their prospects for Ukraine politics, both have lived virtually all their professional lives outside their homeland in Hamburg, Germany then La La Land, California. Unlike Congressman Manny Pacquiao, they do not simply go abroad to ply their trade and then return home. Nevertheless, the WSJ op-ed pages recently ran a rather fawning feature on Klitschko the Elder as a champion of freedom and free markets (hey, would you expect anything else given the source?)

Yet Mr. Klitschko stands out among the opposition, and not just because of his breathtaking physical size. He's the one new face in a crowd of familiar political mediocrities. He has a Ph.D. in physical sciences, hence his nickname, Dr. Ironfist. His considerable fortune earned from boxing reassures people about the sincerity of his commitment to fight corruption and resist temptation...

He has broken out in the polls, leading Mr. Yanukovych in a head-to-head match, which may come sooner than the presidential election due in early 2015. The government fears him enough that earlier this fall it fiddled with the residency requirement for the presidency, patently to stop him, since he had trained and lived in Germany for most of the previous decade. Mr. Klitschko says the retroactive legal change won't hold up in court, but in another context notes that the judges are in Mr. Yanukovych's pocket.

"In these hard days, the moral support from friends of democracy is very important," says Mr. Klitschko. While the nationalists in Maidan [Square--protest site] play up Russian meddling, he is always careful to insist that the fight isn't so much about personalities or geopolitics as about values—democracy, human rights, the rule of law. In short, Europe.

It's all very anti-Russian if that's your sort of thing and imagine the Iron Curtain still hangs across Eastern Europe. As the proprietor of the IPE Zone, however, I am more interested in how these two pugilistic politicians regard trade. As I mentioned before, Manny Pacquiao sponsored the passage of trade exemptions for Philippine textile exports to the US that would have likely violated WTO strictures [1, 2]. Meanwhile, Klitschko is championing a preferential trade agreement with the EU. It's not necessarily trade-positive--trade diversion and all that--but the sentiment is there. Who wins in this respect? I'd say Klitschko by a technical knock-out since the Philippine congressman's proposed deal never made it off the ground.

At any rate, we'll probably have more time to learn about both fighters' views on trade since Vitali Klitschko now suggests he will run for the presidency in 2015. Pacquiao meanwhile has long set his sights on the Philippines' highest office.

On education grounds, I prefer the guy with the PhD, but I'm stuck being in the country with the high school dropout.

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Lenin's Tomb? More Like His Louis Vuitton Trunk

Talk about a marketing ploy gone bad: you are looking at a giant Louis Vuitton monogram-patterned building that was supposed to house an exhibition dedicated to the famous brand in Red Square. Say what you will about Vladimir Lenin, but his mausoleum featuring his embalmed remains has been there since 1924. In a way, it continues the Russian's morbid fascination with the communist legend. Sure the ultra-nationalists and old-style communists will of course venerate him, but even those who believe times have moved on retain affection for the human who put Russia on the course of being a superpower--at least for a handful of decades.

While various (usually high-end) retailers now ply their wares in Red Square, the giant Louis Vuitton trunk was apparently the last straw. Eventually, even its promoters decried the desecration wrought on this Russian landmark:

Suddenly, the enormous Louis Vuitton suitcase was just there, standing opposite Lenin's tomb and about the same size. Muscovites wondered why, then got angry. Patriots were insulted because Louis Vuitton is a foreign brand. "An alien, foreign firm's chest" is "blocking the view of Savior Tower and St. Basil's cathedral," ultra-nationalist politician Vladimir Zhirinovsky complained.

Communists were mad because of its proximity to Lenin's mausoleum, whose facade is only 78 feet wide, compared to the 100 feet-long, 30 feet-wide suitcase. Communist Party legislator Sergei Obukhov called the over-sized piece of luggage an "indecent" intrusion into a "sacred place." And liberals took offense on aesthetic grounds. "The LV suitcase in Red Square is a very honest statement, I think," actor Maxim Vitorgan wrote on Facebook. "LV has become a symbol of bad taste ... So everything is logical. Here it is, the goal, the dream ... And who cares if the view of the square is ruined and the architectural ensemble is broken up."

In the end, both the Kremlin and GUM, the upmarket department store that helped the French luxury conglomerate LVMH erect the monstrosity today demanded its removal.

Even the most jaded of Muscovites know that prices for luxury goods there exorbitant, so I don't quite get the point in mounting this exhibit aside from, indeed, making Louis Vuitton "a symbol of bad taste." Not that preserving a long-dead communist pioneer is the height of taste but...it's almost bad enough to make you want to staple your private parts to the cobblestone.

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Spain, 'Russian Galacticos' & Soccer (Un-)Economics

I nearly forgot to make this post as the transfer deadline for trading players has ended, but as they say, better late than never. So, there are two parts to this story dealing with the economics of soccer in relation to the "real economy": Spain's Real Madrid and the dismantling of the "Russian galacticos." Never heard of them? Well, read on...

First, I am astounded by the spending of Spain's largest football team Real Madrid considering that there are now "financial fair play" regulations that are supposed to limit what teams spend relative to what they earn. They are supposed to be penalized for spending more than what they earn, but Madrid is supposedly the world's largest football club in terms of revenues. So, Real Madrid may actually afford their latest star signing, Gareth Bale, formerly of Tottenham Hotspur, for an astronomical (and unprecedented) EUR 100 million. Legendary French player Zinedine Zidane has even said that no player is worth that much money.

More importantly, the optics of Bale's transfer do not favor Real Madrid. After all, the unemployment rate in Spain is 26.3%. Also consider that the youth unemployment rate in Spain is at a similarly inconceivable 56.1%. At age 24, Bale would still belong in the "youth" age group (15-24). What exactly does his signing say to an increasingly inequitable society beset by very limited employment opportunities for Spain's young people due to structural factors? Let me put it to you this way: the transfer fee excludes wages, but EUR 100 million alone would be the equivalent annual household income for 4,376 Spanish households. As I said, the optics are quite bad in recession-hit Spain. That he's even a "migrant worker" of sorts makes things worse since there are so many jobless at home.

*** 
Next, did you hear the one about the Russian galacticos? Real Madrid popularized the term when they had stars such as Zinedine Zidane, Luis Figo, Ronaldo (de Lima), Roberto Carlos (the only Brazilian player of note using his surname?), David Beckham, Raul, and Iker Casillas in the early Noughties. Unbeknownst to many, Russian club Anhzi Makhachkala recently spent a similar fortune attempting to assemble a team for the age that is now disposing of in a fire sale. I am not making a specious analogy: Roberto Carlos himself played for Anzhi for a while. during his twilight years. Mind you, there were marquee players in their prime as well in the  $400M spending spree including 3-time Champions League winner Samuel Eto'o and Christopher Samba.

Never heard of Anzhi Makhachkala? It is owned by Russian billionaire Suleyman Kerimov who made his fortune through his participation in the phosphate cartel (phosphate is a key component of fertilizer). With the recent demise of this cartel, let's just say Kerimov's future revenue streams to fund his dream team have disappeared. With this team underperforming by its own admission in the Russian league, there was no reason to keep it intact besides:

But this was no joke. In the hours that followed a series of announcements, each more puzzling than the other, confirmed "The Anzhi Project", at least as we previously knew it, was coming to an end. Suleyman Kerimov, Anzhi's billionaire backer since January 2011, was no longer happy to finance a gravy train. The club's budget, officially quoted at an extravagant £116m per season (second only to Zenit St Petersburg in Russia), was to be reduced to between £32m and £45m.

There have also been comic signings of buying and selling players for the same amount in quick succession as the phosphate cartel and a large part of Kerimov's fortune went away:

On July 4, Anzhi sign Russian starlet Aleksandr Kokorin from Dynamo Moscow for $25 million. Thirty-three days later, he's sold back to Dynamo for the exact same amount. On July 15, Anzhi buys veteran midfielder Igor Denisov from Zenit St Petersburg for $20m. A month later, he goes to Dynamo Moscow for ... exactly $20m.

This after hiring and firing coaches Roman Abramovich-style and the rest of that circus. They say that the best way to make a small fortune in football is to start with a big one, and that joke apparently holds in Russia. Simply put, the economics were dubious from the start. Not only is Kerimov trying to unload football players but even the potash business as prices drop. As for Real Madrid, even if Gareth Bale's signing does not impose significant financial hardships on the club, the very act of signing him does not bode well in a most austerity-hit nation.

But then again, whoever said that football finances had anything to do with economic reality?

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'Like Saudi Leaving OPEC': Russians Ditch Potash Cartel

Potash Corp of Saskatchewan Share Price

Fertilizer may not be the sexiest of industries, but make no mistake: Given its widespread agricultural applications which span virtually the entire globe, nearly every nation with such industries need the stuff. In the past few years, a duopoly has emerged between Russian/Belarusian firms on one hand and US/Canadian firms on the other represented by BPC and Canoptex, respectively. Until recently, both were actually successful in cornering the global market and jacking up prices. However, with the Russian BPC partner Uralkali defecting from its Belarusian one, commodity markets for potash have been rocked hard:

Russia's Uralkali quit one of the world's two big potash cartels on Tuesday, heralding a price war for the key crop nutrient and pummeling the shares of companies that produce it. The break-up of the Belarusian Potash Company (BPC), a joint venture with Belarussian partner Belaruskali, leaves North America's Canpotex as the dominant potash export venture.

It could lead to cancellations of projects by rivals as the industry weighs the effect of lower prices, but may bring better deals for farmers. "It is as if Saudi Arabia decided to leave OPEC - oil prices would fall immediately," said Dmitry Ryzhkov, equity sales trader at Renaissance Capital. In negotiations with big buyers like India and China, BPC and Canpotex usually settled for deals at similar prices, and they had no qualms about turning off the supply spigot when the buyers looked likely to gain the upper hand. Together the two accounted for almost 70 percent of global potash sales.

Divvy up two-thirds of the global market and the world's your oyster. Alike in a "stag hunt" game, though, the defection of a major player from the cartelized duopoly is wreaking havoc on the expected profits of the would-be profiteers as the fallout from Russia reaches Canada and the US:

That clubby system is now under threat after a falling out between BPC's members. Uralkali promised to bolster production and sales, even as potash prices are already in decline. U.S.-listed shares of the Canpotex owners - Potash Corp of Saskatchewan, Mosaic Co and Agrium Inc - plummeted, cutting their market value by nearly $12 billion by early afternoon [see chart above]. In the last few years, BPC and Canpotex raised potash prices well above their production cost, a senior official at a major Indian potash firm said, asking not to be identified because of the sensitivity of the matter.

There are broader geopolitical questions at stake here since Russia and Belarus are (were?) the closest of authoritarian allies. Does this indicate a wider split between the two nations? With potash being the main export earner of Belarus, this move by a Russian company to dissolve their cartel and try to make it up through volume will surely have negative effects on the Belarusians as prices normalize. Belarus has experienced economic difficulties in recent years, and this event is not a good omen:

Potash is the main export product for Belarus, Russia's staunchest ally among the former Soviet republics whose economy is stagnating after a financial crisis in 2011. Belaruskali was a partner to Uralkali for eight years in BPC, which once held 43 percent of the global potash export market. Uralkali was at one point rumoured to be interested in buying a stake in Belaruskali - which now looks unlikely.

Their joint venture started to crumble this year as rumors emerged that both were selling potash outside the partnership. The two firms previously denied those rumors. Uralkali said it pulled out because Belaruskali had made key fertilizer ingredient deliveries outside the partnership.

Me? I'm rather glad about the welfare effects of potash prices dropping worldwide for LDC farmers who've been victimized by the major producers' shenanigans these past few years. While the $20B potash market will not entirely be "freely traded" for the first time in eight years as some headlines suggest--there's the matter of the other cartel--things are definitely headed in a better direction.

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Island Lovin': Chasing Revenue in Cyprus, Falklands

No pina coladas for you I'm afraid. On today's blogging menu are--can you believe it--tax cheats and squid. In the past I've enumerated the generic ways island nations or protectorates generate revenues:

1. tourism
2. tax havens (paradis fiscaux)
3. offshore gambling sites
4. flags of convenience
5. nationality for sale

How it managed to get into the EU despite unresolved conflicts between its Greek and Turkish parts aside, there is not much of a mystery about what is happening in Cyprus. Like that of Greece which it highly resembles, Cyprus has few competitive advantages. What's more, after the global financial crisis, it has not been able to take much advantage of traditional revenue-generating measures listed above. End result? Ho-hum, another Eurozone banking crisis.

What is notable here however is the EU's apparent willingness to destroy a pillar of the Cypriot, erm, "economy": its status as a tax haven for wealthy Russians. Alike Iceland, the creation of an outsized financial industry relative to the "real" economy did not bode well when global economic conditions turned sour. Sure it does the touristy and shipping stuff as well, but its bread and butter has really been (dodgy?) finance. With the EU-IMF bailout in place, things will change drastically in this respect:

The overall impact will be a dramatic change for Cyprus’s economy. Over the past 30 years, since the fall of the Berlin Wall, the island has banked on its ability to attract money from Russia and elsewhere as an offshore center. Oversight has been tightened up since Cyprus joined the E.U. in 2004, but it remains relatively lax by international standards, and foreign companies pay a flat tax rate of just 10%. For a while the strategy seemed to work well; Cyprus built up a gargantuan banking industry, which is currently about five times the size of its total economy, according to Standard & Poor’s.

About one-third of the $88 billion in deposits in those banks are from Russians, who have increasingly used the island’s banking system as a tax-sheltered conduit for their financial transactions worldwide. Indeed, Cyprus shows up in international statistics as a huge investor in Russia itself, as a result of “round-tripping” by Russians who didn’t entrust their money to their own national banking system. According to European Central Bank statistics, more than 40% of the deposits in Cyprus banks are in excess of $650,000

Estimates vary as to the Russian portion of deposits in Cyprus; another source says it's more like 40% for a total of $32 billion. Whatever the source, the EU-IMF brokered deal is going to inflict a massive haircut on deposits over EUR 100,000 not covered by insurance since (a) the losers are not EU citizens anyway and (b) the European Union has been cracking down hard on tax havens anyway after the global financial crisis to shore up member states' revenue losses. There was some loose talk about how Russia might offer an alternative (read: more attractive) bailout package to the Cypriots, but it has not materialized.

So, to pile on more woes, Cyprus needs to find another way to make ends meet now that the EU has effectively scuttled its status as a tax haven.

---------------------------

Another island economy which is having some challenges making ends meet are the Falklands. Obviously, it does not have many natural trade partners in South America since it's not only the Argentines who regard its British rule as an imperial-era throwback but nearly everyone else in the Southern hemisphere. Apparently, the list I prepared above was incomplete since the Falklands have been relying on fishing licenses for squid for revenues:

Squid licenses have provided about half the Falklands government's revenues over the years, ever since it showed it meant business by chasing an unlicensed Vietnamese shrimper all the way to South African waters, and firing into its hull along the way.  

That said, the Falkands conflict has created difficulties for this potentially lucrative activity insofar as both the British and the Argentines are suffering from the presence of a huge flotilla of illegal fishing vessels in search of squid that is said to be of largely Chinese origin. And speaking of their conflict, Argentina's navy hasn't fully recovered from the Falklands War, making it even more difficult to deter poachers:

Argentina pulled out of a fisheries management organization it had shared with Falklands in 2005. The lack of cooperation has left both sides ill-equipped to deal with the fleet scooping up squid just beyond their maritime boundaries, and sometimes within. "It's like the Wild West out there," said Milko Schvartzman, who campaigns against overfishing for Greenpeace International. "There are more than 200 boats out there all the time," and many routinely follow squid into Argentina's economic exclusion zone, he added. "Unfortunately the Argentine government doesn't have the naval capacity to continually control this area."

The Falklands are defended by British warships, planes and submarines, giving the fisheries agency considerable muscle to enforce licenses in its waters. But Argentina's navy has never recovered from its 1982 war against Britain for the islands, and its coast guard has just eight ships to cover more than 1 million square miles (2,800,000 square kilometers) of ocean, said its chief of maritime traffic, Mario Farinon.

Farinon says the lack of seizures doesn't mean Argentina isn't trying. The coast guard always has at least one enforcement boat monitoring the squid fleet," he said, and "the important thing is not capturing them, but preventing them from coming in." Still, the problem is so big that it can be seen from space: Images of the Earth at night, taken by a NASA satellite last year, show darkness at sea the world over, except for this spot in the South Atlantic. There, 200 miles from the nearest coasts, the lights of this renegade fleet shine as brilliantly as a city.

As literally a common pool resource, both the Falklands and Argentina are harmed by the latter's inability to prevent overfishing as squid stocks diminish. After all, why pay for a fishing license what you can get for free in Argentina's supposed area of jurisdiction? It's interesting how formal Argentina-China economic cooperation in currencies is set against the backdrop of the latter being unwilling to discourage this kind of rampant poaching.

Make no mistake: island life ain't one of permanent vacation. Go ask the Cypriots or the Falklanders.

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2014 Sochi Winter Games = 1936 Berlin + Oligarchs?

A vainglorious leader with an authoritarian streak; a country with a chip on its shoulder against Anglophone powers; and massive Olympic spending to burnish a national reputation--where did we see all these things before? The parallels are not exactly edifying, but they're there nonetheless.

Reuters has a very interesting take on this latest Olympic boondoggle. Despite what the article mentions, I honestly doubt whether the Russians are pouring an unprecedented $50 billion into the 2014 Sochi Winter Olympics. Still, even if they spent even half that much it would be an astounding amount given that (a) it isn't the Summer Olympics which is a far more watched event and (b) Sochi isn't even a second-tier Russian city with a population of under 350,000.

There is a twist to this story, however: The Russian government, likely being ever-so-wise as to the financial calamities that have befallen any number of previous Olympic hosts, is making the Russian oligarchs foot the bill in a big way. As far as Russian politics go, we have a perverted if still comprehensible form of justice here. For, the guy who handpicked Vladimir Putin from obscurity, Boris Yeltsin, also oversaw the fire sale of various Soviet-era natural resource empires (that still dominate Russian industry) at a time when the West was foisting then-fashionable privatization of the commanding heights. It's only "fair" that the Yeltsin's main political benefactor be able to, ah, extract privileges from Yeltsin's economic benefactors.

In other words, part of the quid pro pro from all those years ago when the oligarchs were made very wealthy men out of a select few is footing the Sochi Olympics bill. It's not easy falling politically afoul of Putin as some oligarchs have found. That said, do not think the oligarchs are opening their pocketbooks willingly to the extent Putin expects them to for his pet project:

Above the Black Sea city of Sochi, one of Russia's richest men is spending billions of roubles to turn a patch of mountainside into a global showpiece. Metals magnate Vladimir Potanin has paid for new buildings, new lifts and hundreds of snow canons in the hope of transforming slopes not far from sub-tropical Sochi into a world-class ski resort. Like most of the plans to host the Winter Olympic Games next year, Russia's ambitions for the ski village and other venues are outsized in scale and ambition. Total investment to make the sleepy region fit to welcome thousands of competitors and the world's media is expected to exceed $50 billion, according to Russia's international news agency RIA Novosti. That would make it the most expensive games, summer or winter, ever staged. The 2010 Winter Olympics in Vancouver, Canada, cost a mere $3.6 billion, according to an estimate by PricewaterhouseCoopers, though others put the bill closer to $6 billion.

While Russia's President Vladimir Putin has not flinched at Sochi's eye-popping expense, some private investors and wealthy oligarchs, recruited by Putin to help foot the bill, are chafing at how much they are expected to do. In a rare challenge to the Kremlin they are demanding that the state help with the rising costs. Though precise figures on who is paying for what in Sochi are hard to obtain, RIA Novosti says private investors have spent nearly $25 billion. Federal and regional budgets have accounted for some $13 billion of the costs incurred to date, according to Deputy Prime Minister Dmitry Kozak.

The amounts we are talking about here are staggering. Q: When does a guy reportedly worth $14.5 billion complain about money? A: When the task he is asked to help complete will supposedly total $50 billion...

Potanin, whose estimated fortune of $14.5 billion makes him Russia's fourth richest man, according to Forbes, is complaining of at least $530 million of extra work his company was required to do. Now he wants the government to boost its contribution to his projects by cutting interest rates on his debt, which includes money borrowed through a line of credit with state bank Vnesheconombank of up to $750 million. "We are carrying out talks with the government on the compensation of a part of these expenditures through interest rate subsidies," said Potanin, speaking to Reuters. "Many see this as a form of government support. But actually it is only compensation for expenditures, which are not characteristic of ... commercial projects."

Oleg Deripaska, another billionaire oligarch [his boat is pretty nice I gather], has similar complaints, reflecting the complex, symbiotic relationship Putin has with Russia's rich elite. "The bargaining power is with the oligarchs until 2014, because they can come to the state for money or threaten that the construction won't get done in time," said Bruce Bower, a partner at the investment firm Verno Capital, who has lived in Russia since 2005. Putin wants the Games to project a positive image of Russia to the world and may endure the rising bills with a fixed smile, said Bower. The Russian president may hope to recoup a return on the investment later. Whether the oligarchs will as well is far from clear.

I honestly cannot see any of the participants gaining financially from this spectacle of trying to make a Potemkin Village of Sochi for international consumption. Not that many of us should be duped so easily.

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Will US Honour Its WTO Obligations to Russia?

To be honest, American hypocrisy over human rights is appalling. Not only are they fond of linking these issues to unrelated ones, but they also do not respect steps other countries have made to address them. You would also have expected Americans to clean up their act with respect to human rights violations of their own alike their Guantanamo Ghraibing activities, but they still continue with practices alike indefinite detention and drone strikes. Both of the latter have received deservedly withering criticism from former US President Jimmy Carter as blatant human rights violations.

Even with Russia acceding to the WTO, the US has so far failed to extend most-favoured nation status (MFN) over the USSR--not Russia, mind you--not allowing free emigration in the early seventies. It's antiquated geopolitics. Obviously, Russians have been able to go wherever they damn please since the collapse of the Iron Curtain. But, hypocritical American lawmakers have not done away with the Jackson-Vanik amendment yet. Worse, American lawmakers have made an issue about granting WTO MFN status on resolving another unrelated human rights issue to their satisfaction. The utter stupidity of this legislative move arises not only from maintaining vastly outmoded rules but also not honouring trade-related MFN due to all other WTO members. The US ambassador to Russia thus tries to do some damage control while being placed in a tight spot:

The Cold-War era Jackson-Vanik Amendment, which imposes trade restrictions on Russia, could be abolished by January 2013 as more and more US politicians realize the importance of this step, US Ambassador to Russia Michael McFaul said. “More and more people in the United States agree that this must be done,” McFaul said in an interview with Ekho Moskvy radio on Wednesday. “Let’s hope it will happen before January [2013]. However, there is still a big group of people who would like to link the scrapping of Jackson-Vanik issue with the adoption of the Magnitsky list,” the diplomat said.

This latest bout of incredulity began midyear when some American senators with nothing better to do thought of a ridiculous gambit:

In July, the United States Senate Finance Committee approved a bill linking the abolishment of the Jackson-Vanik Amendment and a measure aiming to punish Russian officials involved in the death of Russian lawyer Sergei Magnitsky. A probe into his death revealed that the lawyer, who was suffering from untreated pancreatitis and a heart condition, did not receive proper medical treatment in prison. Rights activists pointed to multiple violations of his rights during his arrest and in detention, including signs that he was beaten by prison guards hours before his death. Russia insists that the two issues must not be tied together.

At any rate, this week will see whether (a) the Magnitsky law supersedes the Jackson-Vanik agreement and (b) MFN status is granted to Russia. If worse comes to worst and MFN status is not granted, then Russia will have the right to slap tariffs on American products. In other words, Russian WTO accession would have actually worsened US-Russia trade relations due to inane lawmaking:

The House Rules Committee is scheduled to vote on a rule regarding H.R. 6156, “the Russia and Moldova Jackson-Vanik Repeal Act of 2012,” on Tuesday afternoon, with a vote to approve permanent normal trade relations (PNTR) with Russia expected later this week. The bill would then be sent to the Senate, where the Finance Committee approved a different version of the measure in July.

Farm organizations and business groups hoped Congress would have acted shortly after Russia joined the World Trade Organization three months ago. Under World Trade Organization (WTO) rules, Russia could raise tariffs on U.S. exports to Russia if Congress does not approve PNTR.

What appetite does the US have for a trade row that hurts US businesses too? While you hope trade creation occurs, remember that you're talking about a bunch of folks hellbent on flushing the US down the toilet of history with extreme prejudice--American lawmakers.

 November 17 UPDATE: It has come to pass that Jackson-Vanik will likely be dismantled at long last as the House has made a move to given Russia MFN status or PNTR in American trade lingo. However, as the bill moves to the Senate, the Magnitsky law has unfortunately been tied to it:

The bill, which the House approved 365 to 43 and which now goes to the Senate, did accomplish a goal that Russia has long sought. It repeals the Cold War-era Jackson-Vanik Amendment, which tied trade relations to the free immigration of persecuted religious minorities, principally Jews. Since the fall of the Soviet Union more than 20 years ago, Russia has had no exit restrictions, and the amendment has been a source of constant irritation...

 But the Magnitsky Act was tied to it. It requires the United States to place financial and visa restrictions on a list of officials associated with the torture and death, three years ago Friday, of Sergei Magnitsky, a whistleblower who uncovered a $230 million tax refund fraud. Russian officials have denounced the act as interference in domestic affairs.

So it's not quite the outcome the Russians were hoping for--or American exporters to Russia for that matter.

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Vladimir Putin Tells USAID to Beat It (Just Beat It)

Let me preface this blog post by saying I don't want to see no blood, so there's no point in USAID acting like a macho man. It doesn't matter who's wrong or who's right--just beat it.

I believe that I have been fair in criticizing the US development agency USAID on two main grounds. First and foremost, they remain one of the most egregious offenders in the "tied aid" sweepstakes. That is, they only allow aid monies to be spent on American products and services in several categories until now. This practice is most offensive when it comes to food aid. Instead of helping build up the capacity of aid recipient countries to provide food for their populations, self-interested Americans dump their (heavily subsidized) agricultural surplus, adding insult to injury by unjustly undercutting domestic producers.

Second, it is somewhat of a misnomer that this agency is "aiding" other countries. Given that the United States borrows somewhere between 41 to 43 cents for every dollar it spends, the honest truth is that it merely reycles other peoples' money in "aiding" poor countries. Given that China is the United States' largest creditor, for instance, it would not be inaccurate to say that all the Americans are doing is attaching all sorts of strings to money the Chinese give while claiming to aid other developing countries. What a deal. We are so touched by your generosity...to wealthy American farmers, Sammy. [Someone, get me a handkerchief quick...sniff.]

It seems that in today's case though that the Russians have their own particular hang-ups and grievances. Russian President Vladimir Putin famously stating that the collapse of the Soviet Union was the "worst geopolitical catastrophe" of the last century" prefigures resentment of Russia's diminished status. From being a (nominal) superpower less than a quarter of a century ago, it became a mere developing nation. Adding to the humiliation, it became an aid recipient whereas it was once competing with the US for global influence by also providing aid. So, the loss of face from the US providing it aid was too much to bear. Not exactly strapped for cash in this day and age when commodities are dear, we get this result:

Matthew Rojanksy, an expert on Russia at the Carnegie Endowment for International Peace, said in an e-mail that he thought this decision had been brewing for a while. “Russian authorities have made clear for the better part of a decade that they see Russia as a great power, and a provider of assistance, not a recipient,” he wrote. “Add to that tension over the pre- and post-election protests, which the Kremlin alleges were orchestrated by U.S.-funded NGOs, plus the deep disagreement over U.S. democracy promotion activities in the Middle East, and you can see why this decision may have come now.”

And so there's the not-insignificant matter of democracy promotion which has messed up USAID in places like Egypt. Logically, I believe that aid agencies should concern themselves more with helping alleviate poverty than promoting democracy since there is no direct relationship between the two. However, with USAID in Russia, the distinction has not always been that clear. With the Kremlin becoming increasingly antsy about the matter, it was probably only a matter of time before Russia gave it the ol' heave-ho:

USAID, which has been working in Russia since shortly after the fall of the Soviet Union, had budgeted $49.47 million for Russian programs for fiscal 2012, with 59 percent of that directed for programs supporting democracy and civil society, 37 percent designated for health projects and 4 percent for environmental programs. It had 13 American employees, supported by Russian staffers.

The fire's in Putin's eyes and his words are really clear, so beat it--just beat it. 

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Patrice Lumumba Friendship University Revisited

Younger readers probably don't know what the USSR's Patrice Lumumba Friendship University was, so a short introduction is required. Having spent a while in Western academic circles, I can assure you that although many instructors have leftist sympathies--they know their Antonio Gramsci and Karl Kautsky by heart--they simply don't live the communist lifestyle, preferring the petit bourgeoisie sort of existence. British and American academia have more than their fair share of champagne socialists and the gauche caviar. Call it an inherent contradiction of leftish Western academia.

However, during the cold war (LSE IDEAS used to be the Cold War Studies Centre, mind you), the Soviets actually had an educational institution dedicated to spreading the revolution to other parts of the world instead of wallowing in faux-socialist stylings as many Western academics still do. The People's Friendship University of Russia was established in 1960 at the height of the aforementioned ideological conflict. A year later, it acquired the even more grandiose full name of the Patrice Lumumba Friendship University of the Peoples to symbolize the struggle of oppressed people all over the world for freedom and independence. I have not yet visited the LSE registrar to confirm whether Carlos the Jackal studied at the LSE as some claim, but rest assured that the self-styled professional revolutionary Ilich Ramirez Sanchez did study in Russia. (Talk about famous, world-changing alumni.)

Westerners usually prefer not to dwell on their complicity in anti-American and anti-European sentiment, but the name Patrice Lumumba remains evocative. The CIA openly acknowledges having orchestrated the demise of Iran's democratically-elected Mohammed Mossadeq to return the more pliable Shah of Iran to power (and set the stage for today's fundamentalists and other blowhards in the process). In what was then the Belgian Congo, however, the similarly democratically-elected Patrice Lumumba was also removed due to Western insecurities--especially about his purported Communist sympathies. Mossadeq lived a few more years after being eased out, but Lumumba was executed under Belgian instruction. American complicity in Lumumba's death is still debated, but the larger point is that Westerners need not wonder why us coloured peoples remain wary about their endless harangues about democracy when they have a long history of forcing out third world leaders they found, well, inconvenient.

It was in this spirit that Patrice Lumumba Friendship University operated as the USSR styled him as a martyr. While Westerners branded him a communist in order to get rid of him, the Soviets embraced this categorization to make him a martyr (see the commemorative stamp). The interesting thing though is that while Lumumba was certainly a nationalist, there is no consensus that he was a communist (although Americans of the time reflexively made the connection more often than not). At any rate, the university's goal was very much similar to that of Western academic institutions in training young professionals sympathetic to the USSR instead of the USA.

The end of the cold war was something of a shock to the (academic) system. What would Patrice Lumumba Friendship University be without the goal of world revolution? Worse yet, this university has actually been subject to market forces arguably even more than British academic institutions insofar as its stipend from the Russian government has been markedly reduced in the wake of 1991:

The university opened its doors in 1960, at the height of the Cold War, providing a training ground for young communists from developing countries. The terrorist Carlos the Jackal studied at this university, along with guerrillas and revolutionaries from Latin America, Africa and Asia. It was called Patrice Lumumba University, in honor of a first prime minister of the former Zaire, who was killed in a coup blamed on the United States. Now, with the Cold War over and Russian communism in tatters, the institution has a new name Russian Peoples Friendship University [actually, that's the old school name before Lumumba was killed]. And students who once were schooled in Marxist philosophy now take courses in capitalist business.

The university is now forced to survive in a free market economy. And since it gets only about a third of its budget from the government, most of the rest comes from student tuition fees, which run about 2,000 a year for international students. In order to attract students, the university added new courses and spent [$]350,000 on new equipment, including computers. "We've learned the rules of the market economy and adapted as much as you can in Russia, and were doing quite well, especially when compared to other colleges I've seen," said the university's Vice Rector Dimitri Bilibin.

And that's what has become of this legendary educational institution--famed less for its academics and more for its aims and roster of students from a bygone era. Is this progress? In certain senses yes, but it's also lost a lot of its notoriety as current students now come more from Russia than from abroad. Then there are those business courses. To be fair, a lot of course offerings sound more like IPE than International Business, but I digress...

[The] Institute of World Economy and Business (IWEB) qualifies top specialists, capable of efficient business and management activity in the context of the modern market economy. Being one of the first educational institutions in business not only in Moscow but in Russia as well, today IWEB is a major international study center. The Institute has been member of the Russian Business Education Association practically since the very moment of its creation and a member of the Business School Association of Central and Eastern Europe.

One of the principal features of IWEB is its commitment to the needs of business education not only in Russia, but in CIS countries, Asia, Africa and Latin America. Multiple contacts with PFUR [People's Friendship University of Russia] graduates working in the majority of countries around the world are a big advantage of the Institute. PFUR IWEB pursues wide international policy. It actively develops collaboration with universities of the USA, France, Great Britain, Mexico, Chile, Brazil, Spain etc.

Aside from business courses, it now collaborates with American and British universities [!?] What would Patrice Lumumba do about loss of authenticity? I'll make a plug here and say that you might as well study in our dual degree with Columbia in International and World History or with Peking University in International Affairs. They may be less retro-cool, but prestige matters in this day and age when there is no longer a real alternative to "mainstream" Western education that Patrice Lumumba Friendship University represented way back when. Go ask Carlos.

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Cold War Still Rages...In US Trade Policy on Russia

Remember the time before China joined the WTO when it was annually subjected to congressional dog-and-pony shows concerning whether a country that did not respect human rights deserved most-favoured nation (MFN) trade status with the US? Just as Americans from various walks of life still have a hankering for the good ol' days when Reagan was in office, so do there remain representatives who cannot let go of the Iron Curtain glory days.

While Russia already acceded to the WTO late last year, the United States still requires its lawmakers to sign off annually on Russia not disallowing emigration of its Jewish citizens--the obscure and quite frankly antiquated reason why Jackson-Vanik was established to stick it to the Soviets in 1974. In American trade lingo, Russia still does not have permanent normal trade relation status (PNTR)--what we know as MFN--alike China, and so most-favoured nation status must be re-approved annually ostensibly based on the appraisal of Russia's human rights practices. The main source of trouble for the United States now is that WTO members are in principle obligated to grant each other MFN status, which is clearly violated by Jackson-Vanik requiring annual re-approvals.

To be sure, the Obama administration has already told congress that Jackson-Vanik must be lifted so that the United States may meet its obligations to its fellow WTO member. That said, there again remain certain holdouts among American lawmakers (dreaming of Pershing missiles and Star Wars missile defence shields, no doubt).

Indeed, there even are legislative proposals to further play up links between human rights and trade with Russia than under Jackson-Vanik. In a Bloomberg editorial:

Some U.S. lawmakers want to combine the repeal of Jackson- Vanik with a punitive measure aimed at pressuring Russia for human-rights violations. The Sergei Magnitsky Rule of Law Accountability Act [text here], which was approved June 26 by the Senate Foreign Relations Committee, would name and sanction Russian officials thought to be responsible for the 2009 death in a Moscow prison of Sergei Magnitsky, a lawyer who disclosed evidence that government officials had embezzled $230 million. The scope of the act has been broadened from its initial focus on Russia and now requires the U.S. to seize the assets of and deny visas to any official deemed to be involved in any human- rights violations. 

(There is more on the politicking behind efforts to pass the Magnitsky Rule, which Russia has said it would retaliate against if passed.) This being Bloomberg--a business news organization--the emphasis is less on continuing human rights violations and more on how not giving Russia its due in the trade realm as a WTO member makes it less likely to follow global regimes and disadvantages American firms wishing to do business there in the process:

The Magnitsky case is just one of many reasons for grave concern over the Russian government’s repeated repression of democratic freedoms and human-rights violations. Yet combining the two pieces of legislation would do more harm than good. WTO membership will further bind Russia and President Vladimir Putin to a global regime of rules and laws and also open opportunities for U.S. companies. Those are important goals in their own right. Failure to repeal Jackson-Vanik would just give Russia free rein to punish U.S. companies. 

The latter point is similar to that made by the US Chamber of Commerce which has been lobbying for granting Russia MFN (PNTR). If Russia does not receive it from the US, then it has the right to suspend granting US firms PNTR--and disadvantages American firms in the process vis-a-vis those of other WTO member countries:

Under WTO rules, every WTO member must grant all other members unconditional Permanent Normal Trade Relations (also known as Most-Favored Nation status). This WTO rule mandates that any advantage granted to one WTO member by another member must be accorded unconditionally to all other members. The United States will be in clear violation of this rule if Congress fails to graduate Russia from Jackson-Vanik. Russia would thus be fully within its rights to withhold the benefits of its accession-related reforms from U.S. companies.

A newer Agence France-Presse article also cites the economic losses which may accrue if Jackson-Vanik is not dealt away with immediately:

The US Chamber of Commerce, the world's largest business organization, warned that Russia could retaliate if Congress fails to normalize trade relations. "Until Congress approves PNTR with Russia, Moscow will be free to deny the United States the full benefits of its reforms," Chamber president and chief executive Thomas Donohue said.

Under Russia's accession to the WTO, Moscow agreed to apply a final tariff ceiling of 7.8 percent for goods, compared with a 2011 average of 10 percent. "The United States gives up nothing -- not a single tariff -- in approving" normal trade relations, Donohue said. "It's a true jobs bill, and won't cost taxpayers one penny. Because of our inaction on PNTR, European and Asian companies have won a head start in the Russian market."

Russia, which became the 156th WTO member Wednesday after 18 years of negotiation, was the United States's 14th largest supplier of goods imports in 2011, led by oil imports.US goods exports to Russia have climbed steadily in recent years, and jumped almost 40 percent from 2010 to $8.3 billion last year.

How does the saying go? Give peace a chance. Last I checked, Russians could freely emigrate starting in 1991--a long time ago in a political economy far, far away from today's WTO member state--even if certain holdout Cold Warriors dream otherwise. 

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Bremmer and Roubini's Faulty Russia Analysis

It's nice to find new blogging talent every once in a while, and boy this fellow is impressive. I had never heard of Mark Adomanis before coming across his neat riposte to famous political risk analyst Ian Bremmer and economist Nouriel Roubini on why the West should "blackball Russia." Partly it's because his The Russia Hand blog is country-specific and its host Forbes isn't quite the first name you think of in terms of geopolitics. But don't be fooled: his wide-ranging analysis that considers much beyond that goes on in Russia is spot-on and I find very little to disagree with in his commentary. Here, he takes exception to rather lazy characterizations of Russia as (a) exceptionally authoritarian, (b) having doomed demographics when authorities have actually succeeded in boosting its population as of late and (c) a development laggard compared to other BRICs.

To be honest, I find navigation of Forbes blogs leaves much to be desired. This is a real shame since Adomanis is a really prolific blogger who makes long, detailed posts nearly daily. I hope Forbes pays him well for this kind of output! Again, he's a real up-and-coming talent not afraid to take on much more ballyhooed figures.

On the basis of their FT article, I doubt whether many will be encouraged to solicit political risk analysis from Bremmer's Eurasia Group--or economic analysis from Roubini's RGE Monitor, for that matter. While conducting political risk analysis, your job is to tell clients about prevailing risks to investment and how to address them should they decide to enter Russia, not to increase such hazards by inviting a "blackball" of the nation. What an attitude. Meanwhile, misstating trends alike demographics isn't the sort of thing that produces top-notch economics monitoring.

It really is a devastating but spot-on critique. And no, I certainly don't think blindly applying standards of Western capitalist democracy to others is going to cut it in this day and age when most OECD nations are in varying stages of distress.

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Tired of the World Bank? Enter BRICS Dev't Bank

You hoped that the IMF and the World Bank would reflect more of the changes in the world economy by giving more input and leadership to major emerging economies. But, as the IMF succession process proved and the current World Bank "search" (stitch-up is the more accurate term) is proving, Western dominance is still on the cards at these institutions. What can I say? Some people resist change. There has been much lip service from them about including new voices, but at the end of the day, nothing's really changed.

So, if you're tired of poor countries lending to rich countries for things other than what institutions like the IMF were designed for, what we may have here is a "league of their very own" solution. You can be sure that LDC observers with any awareness are unhappy about the IMF currently lending a majority of its funds to Europe. As it so happens, something on the agenda of the ongoing BRICS meetings in New Delhi concerns the creation of a development bank by developing nations for developing nations. (Note that it's the BRICS summit not just the BRICs summit after the inclusion of South Africa in 2010 in addition to Brazil, Russia, India and China.) From the Indo-Asian News Service:

A BRICs development bank will be very useful, particularly to Africa, but a major challenge that may come on its way is aligning the interest of the member countries, said experts. "Within the BRICS group, governments are seeking tangible areas of collaboration, clearly one is [a] development bank. The point of BRICS bank is a very noble venture," said Martyn Davies, CEO of the market research firm Frontier Advisory. "It will be very beneficial, particularly to the sub-Saharan Africa," Davies said at a seminar organised by his company in partnership with Johannesburg Stock Exchange.

The matter is on the agenda of the BRICS' -- Brazil, Russia, India, China and South Africa -- two-day summit in Delhi starting Wednesday. Davies said the main challenges in setting up a BRICS bank will be risk management and aligning the respective interest of the member countries. "Cash is not a problem," he added. State Bank of India's (SBI) Africa head Mathai Vaidyan said the idea is good, but it will be very difficult to arrive at a consensus.

It's a continuation of dicussions by various industry representatives about how investment among LDCs can be enhanced:

Tuesday's seminar themed "The Commercial Strategies of Emerging Markets and New Emerging Multinationals in Africa" was attended by senior bankers and business representatives from the BRICS nations.The meeting shared the experiences and challenges faced by companies from BRICS countries, as well as ideas on how the emerging markets can boost investment in Africa. "I think the challenge is the creation of efficient bureaucracy through which capital will be deployed into infrastructure development, particularly in Africa," Davies told Xinhua. The Africa head of a Brazilian company added: "If it matches the interests of all members, let's go for it."

There is a massive literature on Western nations using Bretton Woods institutions for their own objectives rather than development per se. Given that Western nations helped set them up, regional development banks alike the Asian Development Bank, Inter-American Development Bank and African Development Bank are not entirely free from this criticism either. So, why not an LDC development lender? Certainly these countries do not lack for investible funds at this point in time given that most are running sizable external surpluses.

That said, the political obstacles are formidable in terms of siting, coordination and supervision and so forth were they to push through with the BRICS Development Bank [BDB--you heard it here first; Jim O'Neill, eat your heart out!--or probably not]. Who's to say that these countries will by themselves be free from the bickering at the IMF and World Bank which is driving them to set up shop elsewhere?

I must also note that such plans are hardly unique. Witness the still missing in action Banco del Sur. Ah well, I suppose it's a start. May it lead to something concrete and useful--something noticeably lacking in the history of South-South cooperation.

UPDATE: Also see an earlier al-Jazeera article on the purported BRICS Development Bank.

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Jackson-Vanik, Cold War US-Russia Trade Irritant

I recently visited Singapore and was given a quaint reminder of days gone by when, while checking into my hotel, I noticed a separate registration section needed to be filled by unmarried guests sharing the same room. Quibble if you will with the moralistic tone of this practice, but it's definitely not in tune with the times. In a similar vein, I came across yet another practice that seems to have been lifted from antiquity concerning the application of the Jackson-Vanik amendment against Russia which dates from the heyday of one Leonid Brezhnev.

In 1974, Senator Henry Jackson (D-WA) and Congressman Charles Vanik (D-OH) introduced the eponymous amendment which forbids the US from granting most-favoured nation (MFN) status or permanent normalized trade relations (PNTR) in American trade legalese to nations that restricted emigration of their citizens. The Soviet Union had effectively put into place severe limits on emigration to Western nations--especially its most skilled including Jewish citizens. Call it the totalitarian, zero tolerance approach to brain drain. In turn, I assume that the US found this practice to be a gross violation of human rights based on the Universal Declaration of Human Rights wherein Article 13 (2) states "Everyone has the right to leave any country, including his own, and to return to his country."

But that was a long time ago in a political context far, far away. While Jackson-Vanik has become an all-purpose American cudgel against Russia, the honest truth is that the Sov...I mean, Russians have long since relented on such limits to emigration. Nearly all mainstream media commentators have missed this important point that they are now "in compliance" with Jackson-Vanik. Inter alia, over a million Jews have emigrated from the USS...I mean, Russia to Israel. Nowadays, Israelis are instead complaining of integration issues arising from too much emigration from Russia:

Twenty years after Russia opened its doors to mass emigration, the number of immigrants choosing to move to Israel has stagnated. Since 1989, over one million Russians have immigrated to Israel. In the past few years, Israel has seen an average of between five and six thousand Russian immigrants per year.

Professor Eliezer Leshem, a former Hebrew University professor and current Professor Emeritus at Ariel University Center of Samaria, believes that the current cessation of immigration may have something to do with discrimination many Russians felt while being absorbed into Israeli society.

Russians have long been able to settle wherever they want--including the United States as I myself remember from my MBA days when many American classmates had Russian wives. Yet the US has found it politically expedient to continue applying Jackson-Vanik against Russia. A few months ago I relayed the much-anticipated news that Russia would at last join the WTO. The problem here with regard to Jackson-Vanik is that the WTO requires that its members extend MFN treatment to one another. Hence, the Obama administration's recognition of this basic understanding is behind its argument to lift Jackson-Vanik against Russia.

Speaking of Cold War remnants, though, it is unsurprising that it's the neoconservative wing of American politics that is most fervently opposed to removing Jackson-Vanik (which is doubly odd in that Democrats authored this legislation long ago.) For instance, that bastion of right-leaning thought the WSJ op-ed pages says a repeal of the amendment would come "From Obama With Love" by effectively approving of Vladimir Putin's suspect election victory (among other nefarious practices).

To cut a long story short, the US has only two real options here regarding Russia's membership as a Congressional Report Service report anticipated in 2005. First, the US can do what it has done for several other nations it has applied Jackson-Vanik against by granting MFN status upon WTO accession. Which is what several Democratic lawmakers have been pushing for quite some time now. Second, the US can relive the Cold War by refusing to grant PNTR status to Russia, which violates its WTO MFN commitments. The only possible workaround is for the US (and by implication Russia) to pretend the WTO doesn't exist:

[I]nvoke the "non-application principle" of the WTO. For newly acceding countries, a member of the WTO can opt out of WTO commitments with respect to the newly acceding country if it invokes the “non-application” principle [Article XIII of the Marrakesh Agreement to be precise]. If the U.S. were to invoke the non-application principle against Russia, it means that the U.S. would refuse to honor its WTO obligations to Russia. But non-application is reciprocal. So the U.S. would not have any assurance that its exporters or investors would be treated in Russia according to Russia's WTO commitments.

It would certainly have been a rather pointless process to extract all sorts of commitments from Russia to accede to the WTO only for its most influential member to ignore the fact that Russia is indeed a WTO member. But, that's world politics for you. Note however that business lobbies think it would be a daft idea not to repeal Jackson-Vanik after everything that's transpired:

The business community has also “come out in full force,” going on the Hill to make it clear Russia is a priority, said the Baucus aide. A business coalition–whose members include major groups such as the U.S. Chamber of Commerce and National Association of Manufacturers as well as multinationals such as Boeing Co. and General Electric Co., announced earlier this month that restoring trade relations with Russia will be the top trade priority this year.

If this is indeed what will occur, note that the only current WTO member with the dubious distinction of not being granted MFN status by the US is Moldova:

In practice, the U.S. has dropped Jackson-Vanik on all countries that have acceded to the WTO with one exception. In the cases of Albania, Bulgaria Cambodia, Estonia, Latvia and Lithuania, Jackson-Vanik was repealed prior to accession. In the cases of Mongolia, Armenia, Georgia, Kyrgyzstan it was repealed after accession, so the "non-application" principle was invoked, but eventually removed within a year or two. (In the case of Georgia, non-application was never invoked since Jackson-Vanik was removed soon enough after accession.) Only in the case of Moldova does Jackson-Vanik still apply to a country that acceded to the WTO.

Moldovans too have been freely emigrating for years, so their holdup must be for other reasons.

We'll see what happens as the US congress begins deliberations over the implications of Russian WTO membership later this week. Even Putin's opponents can agree that trade with Russia should not be curtailed via Jackson-Vanik (but rather economic ties with specific human rights offenders through separate legislation). Me? I'll be cueing up Springsteen's "Glory Days" as a backhanded salute to those poor souls who simply cannot accept that the world has moved on--in the wink of a young girl's eye.

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Axis of Upheaval: Iran-Russia Trade in Own Monies

Mahmoud Ahmadinejad: They get our oil and give us a worthless piece of paper.

Vladimir Putin: They are living like parasites off the global economy and their monopoly of the dollar.

Factually speaking, the ongoing long-term devaluation trend of the dollar is not in dispute. However, America #1 cheerleaders don't like hearing it from the likes of the folks mentioned above with their particular put-downs (however appropriate). The common refrain of "well, what are you gonna do about it?" referring to dollar hegemony is an important one. How do you escape being ripped off in advance by Uncle Sam? Already Japan is buying more RMB-denominated sovereign bonds.

In such a vein, I suppose this example is as straightforward an example of the principle of "the enemy of my enemy is my friend" as you can get. You see, the axis of upheaval of Iran and Russia--two countries currently in the Western doghouse over alleged nuclear weapons programmes and vote-rigging respectively are joining forces to defeat the need to use dollars in their trade activities with one another. The particular reason cited for this move is the imminent imposition of sundry Western sanctions on Iran designed to curtail its trade with the rest of the world:

Iran and Russia have started using their domestic rial and rouble currencies in bilateral trade instead of the U.S. dollar, Iran's envoy to Moscow said on Friday, after the United States imposed new sanctions on the Middle East state.

"(Trade) is based on our national currencies," said Iranian ambassador to Russia Seyed Sajjadi...We started this work long ago. Iranian businessmen are buying products in Russia and are using the rouble as (payment) currency ... The U.S. dollar has no (economic) support base," he said speaking at a news conference.

Iran is seeking to boost trade after the United States imposed additional sanctions in late December in a response to Teheran's refusal to abandon uranium enrichment. The European Union is expected to finalise the ban on imports of Iranian oil at a meeting next week.

Russia, opposing oil sanctions against Iran, has long promoted the rouble as an international currency which could be used in bilateral settlements. In 2010 Moscow began offering to exchange roubles for Chinese yuan as the two nations look to boost bilateral transactions in their own currencies and reduce their reliance on the dollar. China accounts for 10.1 percent of Russia's foreign trade and is its second-largest trading partner after the European Union, while Iran's share in Russia's trade in 2011 stood at 0.5 percent.

While I neither think the ruble is an ideal vehicle currency [!] nor view the rial as a viable currency at all given how I mostly used other denominations when I visited Iran, there may be something going on here worth emulating. As you probably expect, I will have more to say about Iran's persecution in the coming days. Stay tuned.

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Holy Guacamole, Russia Finally Joins WTO Today!

Yikes, it's finally happening: While the WTO ministerial meetings will almost certainly result in nothing substantial, Russia's road to WTO accession is finally over. As you've gathered through my posts over the years, it's been a long, circuitous process [1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11]. In latter times, the requirement that all WTO members assent to Russian membership has been delayed by Georgia naturally feeling aggrieved over border quarrels with Russia over breakaway provinces Abkhazia and South Ossetia. Think of being unfree to conduct trade with parts of your own country due to another's interference and you can begin to appreciate Georgia's apprehension.

Yet all things must come to pass. Tonight, a night to end all nights in the history of trade negotiations, Russia joins the WTO:

Russia is finally set to join the World Trade Organization (WTO) on Friday at a ceremony in Switzerland, after 18 years negotiating its membership. The Swiss brokered a deal between Russia and Georgia earlier this year that removed the last obstacle to Russia's accession. Georgia had tried to block Russia's WTO entry since the two countries fought a short war in 2008. Russia is by far the biggest economy yet to join the global trade body...

The deal with Georgia hinged on international monitoring of trade along the mutual borders of Abkhazia and South Ossetia. The two provinces have broken away from Georgia and are recognised as independent states by Russia. The formal signing ceremony has been added onto the end of a summit on Thursday between President Dmitry Medvedev and European Union officials in Brussels.

For the record, only Algeria's accession process outdoes Russia's in terms of being drawn out:

Russia’s 18-year path to the WTO was almost record-slow, with only Algeria’s negotiations taking longer at the moment. It was also the world’s largest non-member economy. The hurdle was caused by the principle of consensus the organization uses, which means each member can veto its enlargement.

So I suppose congratulations are obligatory all around to Russia, Georgia, Switzerland (brokers of the trade peace deal) and the WTO. The world's 12th largest trading nation will shortly be on board the multilateral institution that claims in its name to concern itself with world trade. May trade help bring peace on Earth and better shopping opportunities to all mankind. This is the Christmas season, after all.

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