The Apprentice: Russian Style

Great essay from the London Review of books:

. . . .Putin’s PR men dress him like a crime boss (the black polo top underneath the black suit) and his soundbites come straight out of gangster movies (‘we’ll shoot the enemy while he’s on the sh*tter …’). . . .

So You Thought It Was Cold ?

Geoff Mackley throws a cup of boiling water into the air at Oymyakon, Siberia, the coldest permanently inhabited place on earth, on February 1, 2004 while the temperature stood at -53°F (-47°C). The water converted to ice crystals before reaching the ground. . . . . Where can I buy one of those suits ??  Ripped from WeatherUnderground:

Through Moscow on an R1

The fastest way through Moscow traffic. . . on an R1:

Diversions. . .

• The world's water shortage is becoming less of a forecast and more of a reality - especially in China. CNN reports on just how bad things have got. Perhaps one day water will be more valuable than oil - and countries like New Zealand, Canada, Peru and Russia with their low population to water reserve ratios will become the new petro-states;

• Salon has an excellent interview with Richard Dawkins as he prepares to tour the USA to promote his latest book. Here's a sample from the heated phone interview:

What is so bad about religion?

Well, it encourages you to believe falsehoods, to be satisfied with inadequate explanations which really aren't explanations at all. And this is particularly bad because the real explanations, the scientific explanations, are so beautiful and so elegant. Plenty of people never get exposed to the beauties of the scientific explanation for the world and for life. And that's very sad. But it's even sadder if they are actively discouraged from understanding by a systematic attempt in the opposite direction, which is what many religions actually are. But that's only the first of my many reasons for being hostile to religion.

My sense is that you don't just think religion is dishonest. There's something evil about it as well.

Well, yes. I think there's something very evil about faith, where faith means believing in something in the absence of evidence, and actually taking pride in believing in something in the absence of evidence. And the reason that's dangerous is that it justifies essentially anything. If you're taught in your holy book or by your priest that blasphemers should die or apostates should die -- anybody who once believed in the religion and no longer does needs to be killed -- that clearly is evil. And people don't have to justify it because it's their faith. They don't have to say, "Well, here's a very good reason for this." All they need to say is, "That's what my faith says." And we're all expected to back off and respect that. Whether or not we're actually faithful ourselves, we've been brought up to respect faith and to regard it as something that should not be challenged. And that can have extremely evil consequences. The consequences it's had historically -- the Crusades, the Inquisition, right up to the present time where you have suicide bombers and people flying planes into skyscrapers in New York -- all in the name of faith.

• Hugh Hendry and Linda Yueh discuss the importance of potash and how demand for the stuff is changing and how geo-politics are playing a part:

• A veganism advocate recants: Pinko-Greenie George Monbiot has an excellent article in The Guardian discussing Simon Fairlie's recently published Meat: A Benign Extravagance. He talks of the gross inefficiencies of intensive, confined farming of some animals, and that rearing animals for meat can become an efficient means of food production when the animals are pasture reared. He argues that increasing global meat consumption is sustainable, but not using the current farming model. The often cited 10:1 ratio of how much grain it takes to produce an equivalent weight of meat is more like 2:1 or even less, once the farming model is adjusted. He also debunks the argument that farming is killing water reserves to the extent it is and the high levels of greenhouse gases animals produce. The evidence has curious implications for low-cost meat and dairy producers like New Zealand, where ruminant farm animals largely eat pasture. Such low-cost production has been an enduring competitive advantage. But with Fairlie arguing that much of carbon generation from meat farming being generated further down the value chain in transportation, perhaps New Zealand's low-cost production advantage will whittle away once negative externalities like carbon generated from transportation are properly accounted for. I mentioned such a threat to New Zealand and its industries back in January in a post about Jeff Rubin. Well worth a read;

• Farm Geek has an interesting post on Peak Phosphate and whether New Zealand should get all protectionist about its phosphate supplies. Governments act in strange ways once a resource is labelled a "strategic resource";

• Wall Street and hedge funds using satellite surveillance to gather market-moving information? Yes, really;

• Paul Kedrosky on TechCrunch in a series of mini interviews talking about how we're now in a depression, the death of big VC, how airlines suck, and clean tech;

• Back on August 29 a guy disappeared off the beach in the Bahamas where parts of Jaws were shot. On September 4, a local investment banker caught a 4m shark near the same spot. When it was being landed, who popped out but parts of the guy that went missing the week before. Check it out;

• A great article from the New York Review of Books on how things are now in Dubai and how things have changed. Here's a paragraph:

During the past few months, I was told, Sheikh Mohammed has been trying to confront his dream’s collapse. He has said little publicly about the economic meltdown, other than issuing a handful of sunny pronouncements about Dubai. “Sheikh Mo is an angry man,” I was told by a source who knows him well; he feels “betrayed” by the real estate promoters who had assured him to the end that their ventures were healthy. According to my source, the sheikh has been taking long solo drives in his Mercedes at night, stopping in front of construction sites, and gazing pensively at the many vacant and half-built skyscrapers. Mohammed recently completed his autobiography for a US publisher with the assistance of a ghostwriter, but, a source in publishing said, he had refused to add a chapter about the bursting of the real estate bubble, the debt crisis, and the bailout by Abu Dhabi. He saw no reason to discuss these sources of humiliation. As a result, I was told, the book will never see the light of day.

• Ruth Richardson, former Finance Minister of New Zealand, was recently on CNBC arguing for a bit of Austrian Ruthanasia for near bankrupt Western states:

• And finally, from Wired: Why Russians Don't Get Depressed.

Taken In Red Square This Morning. . .

This photo was taken and emailed to me this morning with the following note. Be glad you're not near this:

It's plus 41 in Moscow (all-time-high), zero visibility due to smoke from forest fires (see photo below). It literally feels like we are all sitting in a smoke-lounge of an airport. Anyone in the right mind (and with some money) is getting out of here – good for Aeroflot?


I have not had a drink in a week...have a hang-over every morning regardless. Short vodka/beer makers, Long Pharmstandard?


Give us some business so we don't feel like sitting here for no reason...

And for those of you that haven't seen it - this vid was shot from a car inside the fire zone several days ago:



HT - MGJ

Sasha Litvinenko & Polonium 210: Beyond the Bullshiitake - What Really Happened

Alexander Litvinenko in hospital in November 2006, three days before he died

Borris Volodarsky, a former GRU officer, has just released his latest book The KGB's Poison Factory: From Lenin to Litvinenko. Volodarsky is fairly well known from his previous works on Russian government agency and arms-length state-backed espionage and assassinations.

Volodarsky's latest book reveals a lot more detail on what (supposedly) really happened in the lead-up to November 2006, Litvinenko's death and events that followed.

The Telegraph has published an excerpt from the book - it is a fascinating read and cuts through the misinformation and propaganda.

Volodarsky reaches the same conclusion that every other journalist and investigation not under the thumb of the Kremlin has reached - that Andrei Lugovoy and his two buddies are as guilty as hell beyond any reasonable doubt and that such an operation must have had Putin's blessing or was executed upon his orders.

The story is one David Cornwell would be proud to author. The Rule of Law is clearly alive and well in Russia - as the Telegraph excerpt conclusion illustrates:

Throughout 2007 a media war raged. On one side there was the Kremlin propaganda facility pulling its punches. On the other, a group of people in different countries did their best to learn and tell the world what happened to Colonel Alexander Litvinenko.

The conclusion of the CPS, based on a meticulous police investigation, was unequivocal – it was a murder and Lugovoy was charged with this crime. It was clearly 'Made in Russia’ but Russia refused - and still refuses - to extradite him. Instead, he was rewarded by being elected to the Federal Assembly and promoted. He is now Colonel Andrei Lugovoy.

Hermitage Capital: Update - Death of a Lawyer

Back in October I wrote a post on FDI into Russia & Hermitage Capital, where I discussed the risks foreigners faced when investing in Russia. I also put forth the stranger-than-fiction story of Hermitage Capital and the systematic harassment that fund has faced in Russia.

The tale has taken another grim turn, only further exposing the Russian non-judiciary, the corrupt police force, and the void that exists where the Rule of Law should. Last week Sergei Magnitsky died whilst incarcerated at Moscow's Matrosskaya Tishina prison. Magnitsky was a key figure and instrumental in uncovering the largest ever tax repayment fraud in Russia.

Magnitsky refused to leave Russia, despite the strong encouragement of Hermitage management and his colleagues. As he had committed no crime, he maintained he had no reason to run; implicitly he put is faith in the non-judiciary. His choice killed him almost a year later.

The Telegraph has the story here. Here's a sample:

. . ."He said: 'I have nothing to fear. I have done nothing wrong. I haven't even signed any documents. What have I got to be scared of?'" said Mr Browder. "He was the hero who uncovered the fraud.". . . .

. . .In an emotional outpouring at his final public appearance before his death, Mr Magnitsky accused the authorities of turning his trial into a sham, complaining he was denied his most basic human rights. . . .

. . ."Magnitsky did not die by chance. He died because corrupt Interior Ministry officers killed him. They knowingly imprisoned an innocent man, destroyed his health and denied him access to medical treatment. . . .

. . .In court, after being held for much of the day in what Mr Magnitsky described as "a cage similar to the cages used to keep wild animals", the prosecution served late new evidence to the judge as it sought again to extend his detention. . . .

. . .His cell floor was sometimes flooded with sewage, the toilet was simply an open hole in the corner of the room, the squeak of rats kept him awake at night, he was rarely allowed to shower and was for a long time denied any visits by his wife, sons aged 17 and eight, or mother.

"Isolation from the outside world exceeds all reasonable limits," he wrote.

Sergei Magnitsky

Tasty Kebabs in Russia. . .

Scalped from ABC Australia:

'Body sold' to kebab shop

Posted Sun Nov 15, 2009 8:45am AEDT

Russian police have arrested three homeless people suspected of eating a 25-year-old man they had butchered and selling other bits of the corpse to a local kebab house.

Suspicions were raised when dismembered parts of a human body were found near a bus stop in the outskirts of the Russian city of Perm, 1,150 kilometres east of Moscow.

Three homeless men with previous criminal records have been arrested on suspicion of setting upon a foe with knives and a hammer before chopping up his corpse to eat, local investigators said in a statement on their website.

"After carrying out the crime, the corpse was divided up: part was eaten and part was also sold to a kiosk selling kebabs and pies," the Prosecutor-General's main investigative unit for the Perm region said in a statement issued on Friday.

It was not immediately clear from the statement if any of the corpse had been sold to customers.

- Reuters

FDI into Russia & Hermitage Capital

Email subscribers will have to follow the title link to the web to see the media content in this post.

It's well known that deploying capital in Russia presents a range of difficulties to be overcome and threats to be thwarted to achieve investment success. Regulatory, legal and bureaucratic hassles, and sometimes corrupt officials, are just part of the landscape. Expropriation of control and/ or equity by dubious judicial means and other quasi-state backed strong arm tactics are rarer. They are however still pulled from the quiver when a particularly obstinate investor, Russian or foreign, won't acquiesce to their partners wishes. Prospective investors need look no further than the experiences of Yukos, Telenor, Shell, TNK-BP, and Exxon to realise they can be parted from their equity with a nod from the Kremlin.

Apparently the Kremlin has turned a new leaf and PM Putin is now spreading the love for some new FDI into Russia. In the last week of September, Putin spoke at length at two different forums to reassure prospective foreign investors that Russia was a fine destination for their capital. From the first outing he stated:

"We would like you to consider yourselves participants in our undertaking," Putin told a meeting in Salekhard, the capital of the Yamalo-Nenets region. "The main condition from our side is that partnerships should be stable and long-term."

Yes, he really said this. Of course the problem is precisely that previous partnerships didn't end up being "stable and long-term" because the foreign investors involved were forced to accept 'renegotiated terms' or have their equity expropriated.

In his later outing of last month, Putin stated:

“We will continue the line of encouraging private initiative, integration into the global economy and the creation of a favorable investment climate”

There is a reason Russia is lagging far behind the performance of its fellow BRIC members: foreign investment. The way the Russian state and agents of the state have treated foreign investors, Putin's ongoing geopolitical rhetoric with The West, and the invasion of Georgia, have all persuaded foreign investors to look elsewhere and that Russia is not worth the trouble.

Russia desperately needs more FDI to grow. Infrastructure and large commodity assets (oil wells/ mines) are in urgent need of technological upgrade and fresh development. Hence Putin's siren call for new foreign investment - he knows it can't be done without foreign equity.

So have things really changed? Is Russia really now less risky for foreigners to invest in and the aforementioned threats reduced? It doesn't seem like it. A mere few days after he was wooing foreign investors with the words above, Putin gave the following ultimatum to Renault regarding their investment partnership in Russian auto maker Avtovaz:

“Either they (Renault) participate in funding the enterprise or we will have to agree with them on dividing up our stakes”

Which leads me to the ongoing saga of Hermitage Capital and the systematic harassment they have suffered by apparent agents of the Russian state. Hermitage Capital is an active investment manager co-founded by William Browder. Their first fund, "The Hermitage Fund", founded in 1996 was at one time the largest foreign investor in Russia. The story of Hermitage is remarkable. And one where reality really is stranger than fiction. The following three pages published in the July 2008 Hermitage investors newsletter make fascinating reading:

Hermitage Investor Letter July 23rd


But matters have progressed from over a year ago and the plot has thickened - all whilst Putin has been declaring Russia a great place for foreigners to invest. I was reminded of the Hermitage saga by a recent post over at Zero Hedge. This is what Tyler Durden had to say:

Additionally, after a protracted fight with the Russian government, today an arrest warrant was issued against co-founder William Browder under the pretext of the ever prevalent and Russian favorite allegation of "tax fraud." Recall this is precisely the reason why Yukos founder Mikhail Khodorkovsky is currently serving jail time. Hermitage has prepared the following video explaining the series of fascinating events that have led to the current fallout and today's arrest warrant. And for a more extensive overview of Hermitage's travails under Putin and now Medvedev, these two profiles by the Economist and the NYT are an entertaining read.

Despite the setbacks and the apparent state-backed harassment, Hermitage continue to fight. Clearly this isn't easy in a country with little rule of law and a corrupt judiciary - as the video shows:




So considering returns in Russia are typically a lot less than in other large emerging markets where investing is easier and less risky, does Russia offer risk premia commensurate to the real risks entailed? Probably not. Putin is going to have to do much more than offer words before FDI into Russia returns to levels last seen in 2007.

“China Isn’t Conquering Russia, It’s Just Leasing It.”

This was said by geopolitical expert Parag Khanna during his spot at TED, July, 2009. Khanna was speaking about sovereign borders and how they evolve.

Now I'm not so sure about the "leasing" theory. Ironically, like the Russians, when the Chinese want something, it's often merely expropriated. I've written before about Russia's dramatic population decline and related headaches with territorial integrity. The Kremlin regularly gets upset about The West not meddling in its so-called Sphere of Influence and having a pathological need for a buffer between it and Europe. But this supposed territorial threat is at least secondary to the one posed by the Chinese in South-East Russia. Putin surely realises now that the Chinese don't play as nice in the sandpit as The West. Alarmingly (for the Russians), Russia desperately lacks the population, (non-nuclear) military, internal infrastructure and other resources to do much about all of this than put on a good show of plugging the holes as they appear. As Khanna says, "independence without infrastructure is futile".

The "lease" he speaks of is much more a very long leasehold. And as any property valuer knows, in practice a very long leasehold is analogous to a freehold.

BMD and the Post-Post-Cold War World

An old Soviet map of Europe - de ja voodoo ?

Yesterday George Friedman of STRATFOR published an excellent post on Obama's decision to withdraw the planned ballistic missile defense shield installations in Poland and Czech Republic, and what it now means for the US, Russia, CEE, Israel and Iran.

George explains in detail how this decision flows through the geopolitical landscape between these players and how we now exist in a post-post-Cold War era. Of particular interest, he explains the faults in the US thinking on Russia and what motivates the Kremlin. For those regular readers who don't much care for the bent of STRATFOR's analysis, you too may find the piece a worthy and insightful read.

Inefficient Capital Allocation

In my last Russia Reading List I bemoaned Putin dictating how banks should operate and their lending policies. There are a number of problems with this sort of state meddling, but one I did not touch on in this post was the resulting inefficient capital allocation. Over at SA, Peter Fuhrman has authored a cut-to-the-chase post on how state meddling in banks' lending policies can skew the efficiencies of the free market - in a China context. Now obviously Russia and China are different beasts - but there is an uncanny correlation in how state authorities in both countries apply pressure to banks resulting in how debt is deployed to who for how much. I misquote Peter Fuhrman: Capital is not a problem in Russia. Capital allocation is.

Russia Reading List

After almost a month, I am back online.

Much has happened with Russia the last few weeks. . . .

Back on the 25th of July Joe Bidden, US VP, was interviewed by the WSJ. Biden said that “Russia has to make some very difficult, calculated decisions. They have a shrinking population base, they have a withering economy, they have a banking sector and structure that is not likely to be able to withstand the next 15 years, they’re in a situation where the world is changing before them and they’re clinging to something in the past that is not sustainable”. Whether this eventuates will remain to be seen. But Biden echoes what has been written on this blog in the past - that the Russian Federation has a serious and perhaps terminal population problem. Obviously for such a xenophobic and anti-immigration government and society, immigration isn't going to provide a solution without a structural shift in attitudes. And the secondary problems that arise from a shrinking and horridly aging population trickle down to become territorial, fiscal and economic growth based too. It's difficult to have a sustainable growth economy without a growing or at least stable population base and all that comes with it. The long run outlook could be better. Much better. But we don't live in the long run. Can Russia (read: Putin) turn this party around? Watch this space. Giving an opposing view, there is a good piece over at Seeking Alpha on why Biden is wrong. Seeking Alpha also curiously points out that the state of California is a more risky investment proposition than the Russian Federation - at least measured by CDS pricing. And Time points out Medvedev's latest initiative to reverse the shrinking Russian population - stop them boozing. Obviously Mr Medvedev has not come across the Borg or he would already know that with such matters resistance is futile.

Two Russian Akula class fast-attack hunter-killer submarines have been tracked on patrol off the Eastern seaboard of the USA. The NYT reports that such activity has not been reported for about 15 years. Writing on matter, STRATFOR stated (05.AUG.2009) "These are the most modern and capable attack submarines in the Russian fleet, often compared to the U.S. Los Angeles class". Russia continues to ensure its power projection efforts are not missed. But as STRATFOR has more recently noted (10.AUG.2009), this was an interesting event and perhaps part of some form of wider Maskirovka strategy, but ultimately of little importance.

STRATFOR also wrote (10.AUG.2009) that most of Russia's other sabre rattling was ultimately of little consequence to the US too. However, two potential events present potential global geopolitical structural breaks of the highest order. Firstly, if Germany were to ally itself with Russia, rather than the Europe/ US. This is not entirely out of the question considering the increasing cosiness of the Merkel government with that of Putin's, largely and at least initially predicated on energy trade. Secondly, if tensions with Iran escalated to a serious level. STRATFOR on this second scenario states "If the Iranians were to successfully mine these waters [Strait of Hormuz], the disruption to 40 percent of the world’s oil flow would be immediate and dramatic. The nastiest part of the equation would be that in mine warfare, it is very hard to know when all the mines have been cleared. It is the risk, not the explosions, which causes insurance companies to withdraw insurance on vastly expensive tankers and their loads. It is insurance that allows the oil to flow". This reference to the importance insurance plays in the movement of petroleum products cannot be understated. The piracy situation off the coast of Somalia in the last 12 months has shown on a smaller scale how insurance and re-routing costs can rapidly spiral upwards and perhaps affect the end cost of the shipped goods. Interestingly this is a key reason encouraging Israel not to bomb Iran's nuclear facilities unilaterally - Iran would immediately respond by mining the Strait of Hormuz using small water craft, rendering the blame for the resultant global oil crisis firmly at Israel's feet.

It appears that Russia is also facing the possible beginnings of a grain crisis. Put in the context of the global financial problems, Russia's dramatic recent slowdown in mineral/ petroleum based revenue, the deepening of the global food shortages, and the slump in Russia's federal reserves, this is a real concern to the Kremlin. Circumstances have not yet begun to approach the fictional scenario laid out in Frederick Forsyth's "The Devil's Alternative", where almost all of the Soviet grain crop is decimated. But the butterfly effect can take hold and go the distance swiftly and without warning. Stranger things have happened. STRATFOR wrote (18.AUG.2009) "Several Russian grain-producing regions have suffered serious problems during the winter harvest, the period from June to August when grain crops planted during the previous winter are harvested. Severe drought and scorching hot temperatures have caused fires that have reduced the year’s wheat output, particularly in southern Siberia east of the Ural Mountains, on the eastern frontier of Russia’s grain belt. In particular, Chelyabinsk oblast (or district) has reported that 80 percent of its grain harvest has been burned away, Sverdlovsk oblast has lost 40 percent and Tyumen oblast 30 percent". Because of this, Russia faces at least an 12% grain deficit on this year's harvest. Historically Russia has exported 20% of its grain harvest to Europe on average, which constitutes a considerable 17% of global grain production. This will probably result in two things to varying degrees. Firstly, Russia will likely become, at least temporarily, a net importer of grain this year. This has implications for an already troubled Ruble. Secondly, if supply of grain for sale on world markets is reduced, all things being equal, equilibrium price will move North. Of course all things aren't equal - despite the general trend for demand across the board having decreased contemporaneously with the recent global economic downturn, demand-supply drivers are very firmly in place to fuel the soft commodity super cycle.

Last week the Russian Federal Statistics Service reported that foreign direct investment (FDI) into the Russian Federation for H109 had decreased year-on-year a whopping 45%. Obviously the massive capital flight following the Russian invasion of Georgia last year has not reversed. Interestingly in Q209 the RTS index recovered considerably from tumbling values of the previous 9 months. Prima facie it would appear that there is a weak correlation between the RTS and FDI. Certainly a number of prominent investors have recently opined that the Russian investment proposition is merely a beta-tracking play on oil & gas. Clearly such comments refer to investment in the Russian stock market and even the most superficial of analyses will reveal that (on a cap-weighted basis) this market is significantly driven by the fortunes of its oil & gas constituents, giving the thesis immediate merit. Seeking Alpha has yet another article on the Russian authorities bullying foreign investors. Not the smartest way to encourage fresh FDI and engender faith in the Rule of Law. The article states ". . . another cautionary tale for investors: what’s theirs is theirs, and what’s yours is theirs–if they want it. Given Russia’s dependence on foreign capital flows, this is a counterproductive attitude that will impede Russian progress for years to come". And if you thought that Medvedev was the vanguard of corruption fighting in Russia, a detailed article on the Medvedev-Putin show over at Seeking Alpha might change your mind.

Last week Business Week published an interesting article on Putin's statist and increasingly centralist moves to control how commercial banks lend to their customers. Namely he was dictating how interest rate levels were set. Hardly free price equilibrium and certainly not a mechanism central bankers/ democratic governments would use in influencing interest rates. The article states "In economic terms, this was an extremely debatable decision. Banks had been keeping interest rates high not only out of greed, but because the crisis makes it very difficult to distinguish between good and bad borrowers, i.e. those who are able to pay back their loans and those who will soon go bankrupt. So if the interest rate on loans is kept high, the inevitable losses from unpaid debts are to some extent covered". Putin's actions actively detract from any free market policy and at best muddy the waters of an efficient finance market. It will be interesting to see how this affects the interest rate swap market for longer dated terms vis-a-vis property debt. Sure, the big Russian banks are backed by one government hand while being told how to conduct commercial enterprise with the other. This set of affairs will continue to deliver as long as the government is a willing donor with its reserves and can garner international credit. The article goes on to discuss the congenital weakness of the Ruble, the lack of faith all parties have in the national currency and what it means for Russia. Well worth a read. (HT Mister Gupta).

The August edition of the McKinsey Quarterly has an excellent piece on the state of Eastern European banking. This is a must read for anyone involved in any way in the CEE/ Russia/ CIS market space. Especially those in an asset-backed capacity. The whole article is worth quoting, though some choice bits are "Over the longer term. . . a reemphasis on careful [cost of debt] pricing, brought about by a higher cost of capital and liquidity, will actually help reinflate [banking] margins. We expect that banks will successfully pass on to customers their higher cost of funds; margins correlate well with funding costs". This is followed by an insightful graphic showing the uptrend in the risk free rate. Obviously this has ramifications for asset values. The article goes on to state "To reflect the higher cost of funding and the risk their clients face, banks must adopt a new pricing discipline. . . Many have already begun efforts to improve pricing but are stumbling because they lack capabilities. Specifically, they need to react quickly to market changes in funding costs. They will need the ability to calculate, in real time, a target credit margin for each customer, taking into account the up-to-the-minute cost of financing, the client’s business climate (its size, macroeconomic conditions prevalent in its geography and industry, and so on), and its risk exposure". Clearly there are opportunities for those with the expertise and market insight to position themselves to proactively provide this information to banks in the region. Perhaps even more so for asset-backed lending. Moving from solely a client instructed position providing the end product to the banks, to creating a true go-to/ supplier-partner of choice for the banks. For additional reading and for those who can't get MQ access, Seeking Alpha has a brief article with links to not so brief reports on the fast approach of the death spiral of CEE heavy lending banks.

Finally, two last articles from Seeking Alpha on the state of the Russian economy, consumer spending, consumer lending, inflation and the Ruble, here and here. Both well worth a sobering read - as the second article states "Russia faces extreme difficulties. Its political brittleness, and the rigidity of its labor market (due in large part to the monocities, the legal and institutional nihilism and state capitalism that stifle small business and encourage large, cumbersome enterprise, and other Soviet inheritances) make it very difficult to adjust to large economic shocks; in this system, large enterprises serve as welfare agencies. But this threatens to turn them into zombies–and take the rest of the Russian economy with it". Clearly, those who will make money in/ from Russia in the years to come will have true connectedness to those who can/ will pay for their offering and a clear understanding of why it will be demanded. Naturally for real assets, these factors will be key in ultimately driving income yield.

Reading List: Russia's Future

To anyone who follows Russia's plight, the country faces an increasing number of immediate and longer term economic, financial, geopolitical and social problems.

Two of the more serious longer term problems are demographic (which I mentioned in a recent post) and territorial. Both are becoming more of a threat to Russia's survival as time passes. And while both do not keep the average Russian from sleeping, both are at the forefront of worry for Prime Minister Putin. Both must also be a concern for any longer term investor in Russian capital assets. Especially of the illiquid sort.

Russia's demographic time bomb has been written about for many years. SA published an article last week putting this in an investment context. The article is sobering reading for anyone considering investing outside of St. Petersburg, Moscow or the larger/ more prosperous of the Millioniki. As investors become more aware of the depth of this problem, it will further swell an already bloated country risk premium.

For centuries Russia has faced the monumental task retaining territorial control and integrity. This task is becoming more difficult as both first and second derivative negative population growth increases, and the population centralises to core cities. Territorial threats from the West and the Caucasus have been widely reported in the media for some time. Not so widely reported is the threat posed by China to the East. The Telegraph has a good piece detailing this. It would appear that the population creep across the border has already begun.

Fear the Reaper. . . ?

Not so much in Russia they don't, according to new research published in the Lancet (subscription required):

More than half of all deaths in Russian 15 to 54-year-olds between 1990 and 2001 were due to excessive drinking, the authors say.

The research did source samples from Tomsk, Barnaul and Biysk. These aren't exactly run-of-the-mill millioniki. So whether the sample is representative of Moscow and St. Petersburg is debatable. What is self-evident however, is that the country as a whole has a ethanol/ methanol consumption habit that is doing the labour pool no favours.

Russia has some of the worst demographic refreshment and life expectancy rates outside of the true first-world. Perhaps this is one reason why.

There's a précis of this research here.