Since inflation in China is perhaps the hottest topic in world political economy —

with the possible exception of the almost total collapse of governance in the US —

we thought this might be a good time to take a long, hard look at the dynamics of the luxury market in China —

especially if, as many people other than the long-time “China bust” folks are now starting to suspect,

inflation is going to require China’s national government to slam on the brakes — and do so with such force —

Since inflation in China is perhaps the hottest topic in world political economy —

with the possible exception of the almost total collapse of governance in the US —

we thought this might be a good time to take a long, hard look at the dynamics of the luxury market in China —

especially if, as many people other than the long-time “China bust” folks are now starting to suspect,

inflation is going to require China’s national government to slam on the brakes — and do so with such force —

that the world’s strongest economy since the Black September 2008 meltdown is — finally — going to

not just slow down, but is going to have to swerve  sharply in order to avoid a total crash.

So this MAY be the proverbial “last irony”, but, if so, at least we did it BEFORE everything in China came grinding to a halt .

Or not.

Assuming it isn’t, China will account for about 20%, or 180 billion renminbi, ~ $27 billion,

of global luxury sales in 2015, according to new research.

As we noted, even while other countries were collapsing in 2009, following Black September 2008, China continued to steam ahead,

under the leadership of the Great Helmsmen of the economically shrewd political leadership — no irony intended AT ALL —

and sales of luxury goods in the mainland rose by 16%, to about 64 billion renminbi—

down from the 20% growth of previous years, but far better than the performance of many other major luxury markets.

Why ???

At a time of

• rapidly rising incomes,
• widely available luxury products,
• information about those high-end baubles,
• and shifting attitudes toward the display of wealth,

more Chinese consumers than ever feel comfortable buying luxury goods.

As a result, China’s love for them is moving down the economic ladder,

creating opportunities and challenges for marketers who previously had only served the very rich.

While wealthy consumers — incomes above 300,000 renminbi, or about $46,000 — will continue to account for a majority of luxury consumption,

the 13 million households in China’s upper middle class — with incomes between 100,000 and 200,000 renminbi —

offer the biggest new growth opportunity.

They already account for about 12% of the market, and their numbers are growing rapidly:

barring the crash referred to above, of course,

some expect to see 76 million households in this income range by 2015,

accounting for 22% of luxury-goods purchases.

Interest among that segment is moving beyond handbags, jewelry, fashion, and the like.

A growing number of Chinese luxury consumers are also splurging on spas and other wellness activities.

Gee, it’s sounding more and more like Singapore with each new aspect .

Consumption is growing faster for such luxury services than luxury goods:

20% of these consumers said they were spending more on experiences, only 13% on products.

The Chinese are also increasingly exposed to luxury goods through

• the Internet,
• overseas travel, and
• first-hand experience.

As a result, they have become more discerning.

With the surge in the number of

• luxury stores,
• fashion magazines, and
•  Web sites

as well as the exploding percentages of social media users,

Chinese consumers are now familiar with nearly twice as many brands as they were in 2008.

Half of consumers surveyed in 2010, for instance, could name more than three ready-to-wear brands,

compared with only 23% two years before.

As Chinese consumers become more familiar with luxury goods,

they are becoming savvier about the relationship between quality and price.

In 2010, only about half of consumers equated the most expensive products with the best ones,

down from 66 percent in 2008.

Now that IS progress.

Price transparency contributes to this positive dynamic.

More than half of luxury consumers check product details and prices online,

compared with 13% of all urban dwellers.

Since two out of three luxury consumers have made at least one trip overseas,

they also have access to external benchmarks for comparing prices back home.

In 2008, only 40% people in China realized that in the mainland,

prices were at least 20% higher than they were in places such as Hong Kong.

By 2010, 66% did.

By the way, did YOU know that prices in China are HIGHER than in Hong Kong,

long considered the Manhattan of Asia for being over-priced and insanely expensive.

It really says something awfully important about the reality of inflation in China that prices there are 20% higher than Hong – f***ing – Kong … …

Luxury-goods companies have long waged a battle against counterfeit goods in China.

But there’s good news for marketers: consumers increasingly want the real thing.

The percentage of those who said they would buy fake jewelry, for example, dropped to 12% in 2010 from 31% in 2008.

Some luxury buyers said they felt sure that their friends would spot a counterfeit.

A woman who used her first salary check to reward herself with a luxury handbag said, “it would be meaningless if it was fake.”

What’s more, an internationally well-known brand has become one of the most important factors in making a purchase.

Really, this is sounding more and more like Singapore with each passing detail.

In addition, rapid urbanization and growing wealth beyond China’s largest cities

are creating a number of geographic markets with sizable pools of luxury-goods consumers.

More small cities will become large enough to justify the presence of stores catering to them;

some estimate luxury sales in urban areas such as Qingdao and Wuxi, for instance, will triple over the next five years.

By 2015 — again, barring the dramatic crash that so many China observers now feel is inevitable —

consumption in such cities will approach today’s levels in Hangzhou and Nanjing—

now two of China’s most developed luxury-goods markets—

and luxury consumption could pass 500 million renminbi in more than 60 cities,

compared with 30 urban centers today.

That said, the luxury-goods market will remain concentrated in the top 36,

which will account for 74% of the market’s growth and 76% of total luxury sales by 2015.

Most of the world’s luxury-goods companies are already in China or contemplating increased investment there.

They must tackle several big issues before making their next moves.

First, delivering exceptional service in stores is critical;

two out of three consumers are disappointed with the indifferent attitudes of salespeople.

Wow, they would be really bummed out by New York or Paris,

where even servers in the crappiest restaurants think you should kiss their ass to get them to bring you a glass of water.

While the in-store experience is by far the most important factor driving purchasing decisions,

the Internet has rapidly become the second-most-important consumer touch point for luxury categories such as fashion.

Marketers will need increasingly sophisticated Web strategies;

for example, they can work with social-media agencies to monitor and shape online conversations among consumers

or to identify influential bloggers and help educate them about brands.

In other words, get the Chinese cyber-sphere to be as fixed and commercialized as the ones in the West.

Not that they’re not already corrupt in some ways, of course —

it’s just that the Western way of doing it is so sleazy and insinuating —

remember, I DO come from California … …

Finally, much of luxury’s allure comes from the opportunity to share in the rich cultural heritage associated with a brand.

BARF !!!

This concept is rapidly catching on with Chinese luxury consumers —

somehow I’m NOT surprised at this, having had two girlfriends from China —

and many leading brands are promoting their history and craftsmanship.

But the picture isn’t totally straightforward — to say the least:

one-third of luxury consumers in China said

they would prefer to buy products that were designed specifically for the country and incorporated Chinese imagery.

Now if that isn’t the MOST perfect of the really deep, grass roots nationalism — both political AND cultural —

that is one of the KEY facts about the dynamics of mass Chinese politics —

then I don’t know what is.

As Hegel so wisely noted, esthetics — notions of beauty —

are by far the most politically telling of any cultural markers.

So let’s see what happens to the luxury market in China as this next period unfolds.

All these projections could totally collapse under the weight of a traumatic slowdown.

Or they could UNDER-state the extent of the growth of this market.

When it comes to China — just like global disasters — William Goldman’s about Hollywood rings ever true:

Nobody knows nuthin’.

David Caploe PhD

EconomyWatch.com

The post China Luxury Market appeared first on Economy Watch.

Webvan – Tech Favorite Crashed & Burned 10 Years Ago:
Lesson Learned or Shape of Things To Come ???
Credit: Thomas Hawk

14 April 2011.

Webvan – Tech Favorite Crashed & Burned 10 Years Ago:
Lesson Learned or Shape of Things To Come ???
Credit: Thomas Hawk

14 April 2011.

Banks pouring money into technology funds, wealthy clients and institutions clamoring to get pieces of start-ups, expectations of stock market debuts building —

as Wall Street’s machinery kicks into gear, some investors with memories of the Internet bust in the spring of 2000

are wondering whether this sudden burst of activity spells danger for someone — whether investors, the industry, or both.

With all the “irrational” [ ??? ] exuberance, valuations are soaring.

Investments in Facebook and Zynga have more than quintupled the implied worth of each company in the last two years.

The social shopping site Groupon is said to be considering an initial public offering that would value the company at $25 billion.

Less than a year ago, the company was valued at $1.4 billion.

“I worry that investors think every social company will be as good as Facebook,”

said Roger McNamee, a managing director of Elevation Partners and an investor in Facebook,

who co-founded the private equity fund Silver Lake Partners in 1999 at the height of the boom.

“You have an attractive set of companies right now, but it would be surprising if the next wave of social companies had as much impact as the first.”

Funds set up by Goldman and JPMorgan Chase have invested in Internet start-ups like Facebook and Twitter or funds with stakes in those start-ups.

Even the mutual fund giants Fidelity Investments and T. Rowe Price have stepped up their efforts, placing large bets on companies like Groupon and Zynga.

Thomas Weisel, founder of an investment bank called the Thomas Weisel Partners Group that prospered in the first Internet boom,

says he is “astounded” by the amount of money now flooding the markets.

“I think it’s much greater today,” he said.

“The pools of capital that are looking at these Internet companies are far greater today than what you had in 2000.”

Yet there are notable differences between the turn-of-the-century dot-com boom and now.

For one, the stock market is not glutted with offerings.

In 1999, there were 308 technology I.P.O.’s, making up about half of that year’s offerings, according to data from Morgan Stanley.

In 2010, there were just 20 technology I.P.O.’s, based on Thomson Reuters data.

More important, the tech start-ups that have attracted so much interest from investors have real businesses — not just eyeballs and clicks.

Companies like Facebook have fast-growing revenue.

Groupon, which has been profitable since June 2009, is on track to take in billions in revenue this year.

And since 1999, when 248 million people were online — less than 5 percent of the world’s population —

broadband Internet and personal computing have become mainstream.

Today, about one in three people are online, or roughly two billion users,

according to data from Internet World Stats, a Web site that compiles such numbers.

“In those days, you had tiny, little companies going public that hardly had a business plan,”

Stefan Nagel, associate finance professor at Stanford University, said.

Global Companies – With Revenue

“And now you’re talking about only a few companies — companies that are already global and with revenue.”

With such a small, elite group, the potential fallout if things go badly would be limited, some investors say.

“Yes, we have a frenzy again,” said Lise Buyer, a principal of the Class V Group, an advisory firm for companies considering initial public offerings.

“But the frenzy is on a very select group of companies.

Facebook is clearly Secretariat, but there are a few other championship horses they are looking to bet on.”

For Wall Street, the initial attraction to Internet start-ups in the 1990s was the opportunity to earn fees from taking the companies to market.

At its peak in 1999, the industry made $1.3 billion in underwriting fees, according to data from Thomson Reuters.

But as enthusiasm surged, many firms also rushed to make investments for their clients and themselves through special-purpose funds and direct investments.

And in many cases the banks got burned just as ordinary investors did.

“The investment pools that we did back in 2000 did extremely poorly,

because many of those companies went from filing an I.P.O. to bankruptcy courts in a matter of months,”

said Weisel, whose firm was acquired by Stifel Financial last year.

In 1998, Goldman Sachs Capital Partners, the bank’s private equity arm, began a new, $2.8 billion fund largely geared toward Internet stocks.

Before that fund, the group had made fewer than three dozen investments in the technology and communications sectors from 1992 to mid-1998,

according to Goldman Sachs documents about the fund.

But between 1999 and 2000, the new fund made 56 technology-related investments, of about $27 million on average.

In aggregate, the fund made $1.7 billion in technology investments — and lost about 40 percent of that after the bubble burst.

Interestingly enough, the group, which manages the money of pensions, sovereign wealth funds and other prominent clients,

declined the opportunity to invest in Facebook early this year.

Philip A. Cooper, who in 1999 was head of a separate Goldman Sachs group that managed fund of funds and other investments,

recalled that investors were clamoring, “We want more tech, we want more.”

Bowing to pressure, he created a $900 million technology-centric fund in 1999,

and within eight weeks he had nearly $2 billion in orders.

Despite the frenzy, he kept the cap at $900 million.

“There was a lot of demand, but we couldn’t see any way we could prudently put that much capital to work,” said Cooper, who has since left Goldman.

Other Wall Street firms, including JPMorgan Chase and Morgan Stanley, also made a number of small to midsize investments during the period.

In 1999, for instance, Morgan Stanley joined Goldman Sachs and others in a $280 million investment in CarsDirect.com,

which scrapped its initial plans to go public when the market deteriorated.

“We thought we were going to double our money in just a couple of weeks,”

said Howard Lindzon, a hedge fund manager of Lindzon Capital Partners and former CarsDirect.com investor.

“No one did any due diligence.”

Lindzon lost more than $200,000 on his investment.

Also in 1999, Chase Capital Partners, which would later become part of JPMorgan Chase, invested in Kozmo.com —

an online delivery service that raised hundreds of millions in venture funding.

JPMorgan Chase, which just recently raised $1.2 billion for a new technology fund, at the time called Kozmo.com “an essential resource to consumers.”

At its height, the company’s sprawling network of orange bike messengers employed more than a thousand people.

Less than two years later, it ceased operations.

An online grocer, Webvan, was one of the most highly anticipated I.P.O.’s of the dot-com era.

The business had raised nearly $1 billion in start-up capital from institutions like Softbank of Japan, Sequoia Capital and Goldman Sachs.

Goldman, its lead underwriter, invested about $100 million.

On its first day, investors cheered as Webvan’s market value soared, rising 65 percent to about $8 billion at the close.

Less than two years later, Webvan was bankrupt.

About the same time, Internet-centric mutual funds burst onto the scene.

From just a handful in early 1999, there were more than 40 by the following year.

One fund, the Merrill Lynch Internet Strategies fund, made its debut in late March 2000 — at the market’s peak — with $1.1 billion in assets.

About one year later, the fund, with returns down about 70 percent, was closed and folded into another fund.

“We all piled into things that were considered hot and sexy,” said Paul Meeks, who was the fund’s portfolio manager.

Meeks started six tech funds for Merrill Lynch from 1998 to 2000.

Today, the collective amount of money that Wall Street banks are pumping into Internet start-ups,

on top of the surging cash piles from venture capital groups, hedge funds and private equity,

is a major concern for some investors.

Over the last five months, many venture capital players have raised giant amounts of capital.

One Facebook investor, Accel Partners, is about to raise $2 billion for investments in China and the United States,

while Bessemer Venture Partners is said to be closing in on $1.5 billion for a new fund.

Greylock Partners, Sequoia Capital, Andreessen Horowitz and Kleiner Perkins Caufield & Byers have collectively raised more than $3 billion in the last six months.

Weisel, who has also been tracking hedge fund activity, finds the numbers dizzying.

Countless hedge funds are investing in private placements — “dozens and dozens of hedge funds are doing the same thing,” he said.

As cash continues to pile up, the fear is that all this money cannot be put to work responsibly.

With only a few perceived “winners,” some investors must be choosing losers or paying too much, Meeks said to the New York Times.

“When you see the valuations being bandied about — I do think, boy, these better be really special companies.”

No shit, Sherlock.

David Caploe PhD

EconomyWatch.com

The post High-Tech Investment Frenzy, Then and Now appeared first on Economy Watch.

13 April 2011.

13 April 2011.

Last summer, we ran an item about a subject that, while surprising to many at the time, has since become well-known:

that huge deposits of natural gas had been found along Israel’s northern coastline.

As with almost everything having to do with that controversial country,

both Israelis and others found this “revelation” a mixed blessing, to say the least.

On the one hand, it certainly eases concerns about Israel’s energy viability,

with enough not just for its own needs, but sufficient quantities to become a major exporter as well.

At the same time, many Israelis feared the effect such “easy money” would have on the country’s already significant elite corruption problem,

and its proximity to Lebanese territorial waters raised once again the question of the wisdom of Israel’s 2006 invasion,

which alienated many previously pro-Israeli elements in Lebanon,

and seemed sure to fuel a national consensus to contest any easy access for which Israelis might be hoping.

Hmmmm … sounds a bit like BP and their Arctic drilling problems in Russia … …

Now, it turns out, even more fuel is being added to Israel’s energy fire — so to speak —

with the equally stunning news that the country may hold the world’s third largest quantities of shale oil —

meaning Israel could indeed become the world’s largest exporter of shale oil — hence the comparison to Saudi Arabia.

Israel a global super power in energy ???

The mind boggles.

But the same sort of technological revolution that has made previously inaccessible on-shore natural gas suddenly available —

via a process of hydraulic fracturing, or fracking, an environmentally destructive process whose impact on the global natural gas scene we discussed last week —

is now apparently transforming the extraction of shale oil as well —

and in so doing, shaking up the energy dynamics of the entire world, including Israel.

How did all this come to be ???

The most recent developments in this story start with Dr Harold Vinegar, the former chief scientist of Royal Dutch Shell,

who is at the center of an ambitious project to turn Israel into one of the world’s leading oil producers.

Israel Energy Initiatives, or IEI, where Vinegar is chief scientist, is working on projects to extract

oil and natural gas from oil shale from a 238sq km area of the Shfela Basin, to the south and west of Jerusalem.

Oil shale mining is often frowned upon by environmentalists for many of the same reasons as fracking:

it’s a dirty process that is both energy and water-intensive.

IEI, which is owned by the American telecom group IDT Corp,

believes its technique will be cleaner than that of other operators

because the oil will be separated from the shale rock up to 300m beneath the ground.

Water will be a by-product of the process, rather than being consumed by it in large volumes.

Vinegar says Israel has the third-biggest oil shale deposits in the world, outside the US and China:

“We estimate there is the equivalent of 250 billion barrels of oil here.

To put that in context, there are proven reserves of 260 billion barrels of oil in Saudi Arabia.”

And not to upset too many people, but we also ran an item earlier this year about Arab scientists working for ARAMCO

who argue that the Saudis have, in fact, systematically OVER-estimated their proven reserves.

IEI estimates the marginal cost of production will be between $US35 – 40 per barrel.

This, Vinegar points out, is cheaper than the $US60 or so per barrel

that it costs to extract crude from inhospitable locations such as the Arctic —

wow, if BP CEO Dudley isn’t gnashing his teeth when he reads this —

and compares with $US30 – 40 per barrel in some of the deepwater oilfields off the coast of Brazil.

“These Israeli deposits have been known about, but have never been listed before.

It was previously assumed there was not the technology to deal with it.”

IEI hopes to begin production on a commercial basis by the end of the decade, with a view to producing 50,000 barrels per day at the outset.

This would be a fraction of the 270,000bpd consumed daily by Israel, but would be a significant step towards making the country energy-independent.

With one barrel of oil comprising 42 gallons, Vinegar estimates each ton of oil shale contains approximately 25 gallons.

The extraction process involves heating the rock underground, using electric heaters,

to approximately 325C, the level at which the carbon-carbon bonds in the rock start to “crack”.

Wow, this really DOES sound like the shale oil equivalent of “fracking”.

The oil produced by the process is light and easily refined to a range of products, including naphtha, jet fuel and diesel.

This is significant, since light oil — like that produced in Libya — is considered “sweet”

and much less costly to refine than the heavier crude found in Saudi Arabia.

Given the importance of political receptivity to outside investors in the energy business,

it’s not surprising the project is attracting serious interest from outside investors.

In November, 2010, an 11% stake in Genie Oil & Gas, the division of IDC that is the parent company of IEI,

was acquired for $US11m by Jacob Rothschild, the banker,

and Rupert Murdoch, chairman of News Corporation and promoter of right-wing lunacy throughout the English-speaking world.

Genie’s advisory board includes impressive figures such as Michael Steinhardt, the hedge fund investor,

and more frightening ones, like Dick Cheney, former US vice-president, and co-founder of the Shiite Islamic Republic of Iraq, along with his running buddy George W Bush.

An appraisal is now under way that would be followed by an 18-month pilot stage, according to Vinegar.

Among the issues this will address will be concerns raised by environmental groups,

including an examination of IEI’s claims that the process does not require excessive use of water or energy.

Reassurance will also be sought that a local aquifer, which is several hundred metres below the shale deposits, will not be contaminated by the work.

This is key, because, while the Middle East may have an abundance of fossil-fuel energy, it has a decided shortage of water,

so any process that is a major net consumer of water may not be cost-effective from an overall point of view.

Assuming these early stages are completed successfully, a demonstration phase would then take place over three to four years,

during which the work completed in the pilot phase would be continued on a larger scale.

Only then would the commercial operations begin.

By that time, up to 1000 people would be employed on the project, many of them specialist engineers from outside Israel, says Vinegar, who adds:

“Funding is not needed for the pilot and demonstration,

although once we get to 50,000 barrels per day, we would want to have a partner.

We have been approached by all the majors.”

Not surprisingly, the project still faced a number of significant issues, as Vinegar points out:

“There is a geological risk:

• Is the resource there?
• What is the risk to the aquifer?
• We have no doubts here, in particular that the resource is there and is of good quality,
• but the pilot can prove these things.

“Then there is the technological risk:

• Can we drill long horizontal wells?
• Can the heaters be placed in them? 
• And can they last?

“And finally there is the economic risk, what the price of oil does.

But I think the price is going to continue rising, to the extent that, by 2030, we will be at around $US200 per barrel.”

And while this seems to have escaped Vinegar’s attention, which is not a great sign, there is a fourth potential risk for the project:

whether it is capable of sufficiently overcoming substantive objections from environmentalists to win popular support —

perhaps the most important challenge facing him and his colleagues.

If they are successful, though, it will probably mean an end to one of the most humorous stories in Jewish culture about fossil-fuel energy:

During a crowded Passover service, a rabbi telling the story of the Exodus from Egypt

was interrupted by an old man, who kept shouting, “Moses was a schmuck, Moses was a schmuck.”

Of course, the congregation was shocked, and the stunned rabbi finally asked the old man why he was criticizing the great hero of Judaism / Christianity / Islam.

The old man replied without hesitation:

“He said when they come out of Sinai, turn left.

If he had any brains, he should have told them, “Turn right.'”

With thanks to our constant and energetic reader Jonathan Baral.

David Caploe PhD

EconomyWatch.com

The post Israel: The Saudi Arabia of Shale Oil ??? appeared first on Economy Watch.

12 April 2011.

12 April 2011.

Last week, we ran an item about how BP has made a deal with India’s largest company, Reliance,

to buy into that country’s fast-growing oil and gas industry.

We noted the India deal was BP’s second major move in trying to recover from the financial and reputational debacle of last year’s Gulf of Mexico explosion,

the first one being a deal for an almost equal amount — ~ $7 billion — to drill in Russia’s forbidding Arctic waters.

At the time THAT investment with Russia’s national oil company, Rosneft, was announced in January,

it was generally seen as a coup, giving BP access to exploration licenses in one of the world’s last unexplored basins.

We made it a special point to observe that “a seal of approval from the Russian government for the deal

also guaranteed some safety to operate in what has proved in the past to be a challenging country for BP and other oil majors.”

Well, guess what ???

It now seems that seal of approval from the Putin regime is worth a little less than it originally seemed,

and Russia, once again, seems like not the easiest place in the world for BP and other oil majors in which to operate.

What happened ???

Last week, a Swedish arbitration tribunal upheld an injunction that indefinitely blocks its share-swap agreement with the state-owned oil company Rosneft.

BP’s chief executive, Robert W. Dudley, might still be able to salvage the approximately $7.8 billion Rosneft deal.

But the ruling may indicate how seriously Dudley misread Russian politics in striking that agreement.

The key is the fact that, before striking the deal with Rosneft, BP had a separate and private joint venture with ANOTHER group of Russian billionaires.

And apparently they didn’t find the prospect of their erstwhile partner BP making time with their hated state-owned competitor in the oil game, Rosneft.

So they went to an arbitration tribunal in Sweden once the Rosneft deal was announced,

arguing that deal breached their own shareholder agreement with BP in their partnership, called TNK-BP.

What a surprise — NOT !!!

BP tried to cover up their shock by saying the ruling was simply a deferral

and the company would continue with arbitration hoping for a favorable final ruling.

But they also said, “we will now also be exploring possibilities for a reasonable commercial solution with all parties.”

The Russian billionaires in TNK-BP, who do business as a group known as AAR,

issued a statement on Friday calling the tribunal’s ruling “fair, balanced and thoughtful.”

What a surprise – NOT !!!

Prospects looked decidedly better for BP when Prime Minister Vladimir V. Putin of Russia presided over the signing ceremony for the Rosneft agreement.

The deal called for the companies to invest in each other through a stock swap representing about 5% of BP and 9.8% of Rosneft,

and jointly explore new oil fields in the Russian Arctic.

It seemed a strategic victory for Dudley, the American who rose to the top post at BP after the Deepwater Horizon spill in the Gulf of Mexico last year.

On taking that job in October, he quickly sold more than $22 billion of BP assets to help pay claims and cleanup costs and to focus on the company’s most lucrative operations.

Then came the deal with Rosneft, which as we pointed out was considered Dudley’s first bold move to help the company expand in new directions.

But now, with the suspended Rosneft deal having cost the company more time and investor support than planned,

Dudley will no doubt find himself facing hard questions when BP holds its annual shareholder meeting in London on Thursday.

Especially difficult for him to be able to justify is how he could have so badly mis-read the Russian scene,

having spent five years in Moscow running the TNK-BP joint venture from 2003 to 2008.

he failed to think ahead of time about about the rather obvious possibility his erstwhile pals might be ready and willing to play hardball.

After all, Dudley’s previous Russian experience led to his being forced into hiding in 2008

when disputes with the government and those same partners led to the revocation of his work visa !!!

I mean, dude, what did you think AAR was going to do — cry and moan and just sit there ???

This is Russia, man — and you SHOULD have known what was coming.

Perhaps he thought having Putin “godfather” the deal —

and the fact that Rosneft’s chairman, Igor I. Sechin, is a powerful deputy prime minister —

would shield him from what otherwise seems like an easily predictable reaction.

A senior BP official with knowledge of the company’s work in Russia said

BP lawyers had ALWAYS understood the Rosneft deal was “on the edge” of violating the TNK-BP shareholder agreement. 

And this is all the stranger because, Dudley’s own tempestuous history with the TNK-BP partners aside,

that partnership has been an unalloyed financial success for BP to date.

Indeed, BP’s operations in Russia are now as important to the company’s bottom line as those in the US.

For a founding stake of $6 billion in cash and assets to the TNK-BP venture in 2003,

BP has since made $14.3 billion in dividends — and still holds 50% of the assets.

So even as BP fights with AAR over Rosneft deal, the TNK-BP joint venture is itself an important part of the British company’s portfolio.

“There’s hardly a day when we don’t have to remind ourselves how valuable this business is,”

said a senior BP employee who declined to be identified because the company does not officially comment on its disagreements with the TNK-BP shareholders.

So what WERE they thinking ???

Apparently they assumed the Kremlin would muscle the Russian shareholders in TNK-BP away from making trouble.

But that seems spectacularly short-sighted, since, according to one witness to the January 14 signing ceremony,

Putin mentioned in a quiet aside that the AAR group was known to be litigious.

Sorry, Mr. Dudley, but LOLLLLL … …

And, sure enough, the AAR billionaires began threatening to sue almost immediately.

“BP assumed any difficulties with the local shareholders would be resolved at a local level,”

Christopher Weafer, the chief analyst at Uralsib bank, said in an interview.

“That hasn’t happened. At least it hasn’t happened yet.”

Oil analysts, too, say BP’s patron Sechin may not have been as powerful as the company had hoped —

or, more likely, that if he was sufficiently powerful in January, he no longer is.

Part of the reason is a recent order by Dmitri A. Medvedev, the president of Russia,

that ministers to step down from the boards of state-controlled companies, citing conflicts of interest. 

Good thing they’re not indulging in any such foolishness in China .

So Sechin now seems to have a choice of resigning one of his two powerful positions — head of Rosneft or deputy Prime Minister.

What do you think Mrs. Sechina will say ???

Not only that, the ever-wily Putin now seems to be backing away from his endorsement of the deal.

In March, he told Russian journalists at a news conference Dudley had not warned him of the possible legal challenge from the Russian oligarchs.

Uhhh, wait a second, Vladimir — wasn’t it YOU who noted how litigious the AAR guys are ???

Good thing everyone in Russia is so drunk they can’t remember more than two weeks back.

“I was completely in the dark,” he allegedly told the newspaper Vedemosti. 

As if Putin is in the dark about ANYTHING big that goes on in Russia.

Come on, man, get real.

The AAR partners, for their part, argued the deal with Rosneft would significantly impinge on their rights

because the TNK-BP venture would be sidelined from future growth opportunities in Russia.

And while we have no particular horse in this race, you can’t help but think the AAR guys DO have a good point.

That said, some say the AAR partners could be positioning themselves to sell their stakes in TNK-BP, possibly to Rosneft.

That would effectively nationalize TNK-BP, which is Russia’s third-largest oil company after Lukoil and Rosneft.

Although the AAR partners have denied using the legal challenge to try to negotiate a sale of their shares,

that’s NOT an unrealistic scenario.

Some BP investors apparently still welcome the Rosneft deal despite its problems,

since any link with Rosneft would make it easier for BP to win future exploration contracts in Russia,

the world’s largest oil-producing — though not exporting — country.

Still, the Rosneft deal, hanging in the balance, is all about future growth through new oil exploration.

Which is why it probably remains as important to BP and Dudley as it was in January.

Especially given the questions that remain for BP given the still-unresolved mess they made in the Gulf of Mexico.

The only thing I don’t get is how an arbitration tribunal in SWEDEN has jurisdiction over a deal between the RUSSIAN government and a BRITISH multinational.

That make any sense to you ???

The only way I can figure is BP wanted to make sure they avoided a Russian legal setting,

and insisted on some sort of framework outside the ex-Iron Curtain.

If that’s indeed the case, it seems to have backfired — yet ANOTHER thing Dudley will have to explain .

David Caploe PhD

EconomyWatch.com

The post BP’s Dudley Screws Up Russian Arctic Oil Deal appeared first on Economy Watch.

11 April 2011.

As Wall Street banks successfully mobilize their lobbying muscle with both Congress and the Obama regime

to fight to fight off both further regulation AND any real implementation of what weak regulations DO exist,

in Britain the battle is just beginning over how best to manage financial institutions considered too big to fail, aka TBTF.

Today, a volley will be fired at the country’s politically and economically powerful financial sector by a government-backed commission,

11 April 2011.

As Wall Street banks successfully mobilize their lobbying muscle with both Congress and the Obama regime

to fight to fight off both further regulation AND any real implementation of what weak regulations DO exist,

in Britain the battle is just beginning over how best to manage financial institutions considered too big to fail, aka TBTF.

Today, a volley will be fired at the country’s politically and economically powerful financial sector by a government-backed commission,

which is expected to propose that Britain’s largest banks take steps to separate their trading and deposit-taking functions.

which — typically and predictably — do not draw as clear a line between speculative trading and more traditional banking services.

The proposals from the UK panel, the Independent Commission on Banking, will not be definitive —

the commission is to produce a final recommendation to the government in September.

But its expected recommendations on how to handle the systemic risks that large banks pose to the health of the economy

represent a far more direct challenge for British banks than the Dodd-Frank financial “reform” rules have been for American institutions,

which have basically continued “business as usual” despite their braying cries of interference.

While British regulators are expected to propose that banks make structural changes to defuse the threat from institutions considered too big to fail,

their counterparts in Washington have focused on putting in place shock absorbers to mitigate the effects of another — totally foreseeable — financial crisis.

Typically, the British are looking to make structural changes that will strengthen the system as a whole,

while the bought-and-paid-for American political elite is doing everything it can to help TBTF banks profit their way into another Black September 2008 meltdown.

These American “rules” include making banks hold more capital to cushion unexpected losses

and giving new legal powers for regulators to help failing financial institutions unwind in a way that does not threaten the entire system.

Which, of course, has yet to happen in the aftermath of the 2008 meltdown — but who’s paying attention ???

Despite the utterly disingenuous and not-credible complaints from Wall Street about Dodd-Frank,

several British institutions have hinted that they might move their base of operations to New York from London. 

Which, if you believe the time-honored maxim, “follow the money”, indicates just how weak and easily manipulable the TBTF banks see the so-called US “rules”.

By contrast, the completely non-believable threats by American banks that they might go elsewhere,

voiced when the Dodd-Frank legislation was being debated, never went anywhere — so to speak.

What a surprise.

Last week, Robert E. Diamond Jr., the chief executive of Barclays, issued the usual nonsensical defense

of keeping risky investment banking and safe deposit-taking under the same roof.

“It’s the model,” he chundered, “that’s enabled us to build a bank that’s diversified by business, by geography, by customers and by funding sources.”

Okay, dude, whatever.

But leaders of the UK commission have already called into question the argument — a core maxim of international banking —

that universal banks like Barclays in Britain and Bank of America in the United States provide a public benefit

because of their size, diverse range of services and ability to attract low-cost capital.

“In this regard,” John Vickers, a former chief economist for the Bank of England who is chairman of the banking commission, said during a speech this year,

“it seems quite hard to identify and quantify real efficiencies as distinct from purely private gains.”

Get that ???

“It seems quite hard to identify and quantify real efficiencies as distinct from purely private gains.”

So much for concern for the public benefit.

Vickers’s tone may be more subtle than the one used by the country’s chief bank critic, the Bank of England governor, Mervyn A. King,

in arguing that banks in Britain are still too large for the country’s good.

But the broader message is clear:

the drive for profits in large banks surpasses the drive for efficiencies,

resulting in actions that continue to pose a systemic risk to the national and global economy.

With the British banking sector much larger as a share of the national economy than its United States counterpart —

hence giving political leaders there a real interest in confronting the TBTF menace —

it is no surprise that the debate has been more pointed in Britain than in Washington.

The three largest British diversified banks — HSBC, Barclays and Royal Bank of Scotland — have assets that exceed Britain’s total economic output.

At the same time, the government has majority stakes in R.B.S., and Lloyd’s, another large financial institution.

“This is a midsize country with an oversized bank system,”

said Peter Hahn, a former investment banker at Citigroup who teaches finance at the Cass Business School in London.

“We need to figure out a scalable bank system for the taxpayer to back.”

Gee, imagine that — guess he learned SOMETHING at Citibank.

The most far-reaching proposal under consideration by Mr. Vickers’s panel would

separate, or ring fence, the deposit-taking areas of the banks from their investment banking activities.

Wow, sounds like the old Glass – Steagall Act,

which the ever-agreeable-to-corporate America Clinton administration —

in the person of hacks-in-chief Larry Summers and his faithful companion Tim Geithner —

joined with the even more corrupt Republicans in the late 1990s to “take care of” — in the Mafia sense.

The commission is not considering requiring banks to separate into independent companies, as happened in the United States in the Depression —

guess that would be too much even for the UK —

but to operate as distinct subsidiaries, with their own balance sheets belonging to a broader holding company.

That proposal, which allegedly would make it considerably more expensive to raise capital for investment banking,

would supposedly be much more inconvenient for Britain’s banks than the so-called Volcker Rule in the United States.

Under the United States approach, originally advocated in a stronger form by Paul A. Volcker,

the former Federal Reserve chairman who served as an adviser to President Obama —

which was, of course, watered down by the even-more-eager-to-please-than-Clinton Obama regime —

banks’ freedom to trade with their own capital and manage hedge funds would be SLIGHTLY limited.

But they would still be able to borrow money cheaply,

and without much oversight or accountability,

because their balance sheets would remain unified.

American regulators have been grappling with how to apply the Volcker Rule, and intense lobbying has been taking place. 

Don’t worry, folks — by the time the lobbyists are done, the “captured” regulators will be giving the TBTF sector whatever it wants.

Banks would still be allowed to trade to serve customers — but not to speculate. 

Yeah, right.

Telling the two apart can be difficult, and banks have been hoping to blur the lines as much as possible

so they will have maximum room for maneuver to be able to approach, but not go over, whatever close-to-nonexistent line is finally established.

Not surprisingly, given this, some banks have spun off large trading operations,

and American regulators have cravenly accepted that there will still be banks that are too large to fail.

Again, what a shock.

Efforts to define just what additional rules they MAY face are still in their infancy — and are excellent candidates for SIDS.

For most experts in Britain, the approach in the United States is laughably inadequate.

“In the end, you just can’t regulate these banks — they have too much money and too many lawyers,”

said Andrew Hilton, the director of CSFI in London, a financial services research group.

“We should be prepared to split the casino bank from the utility bank.”

An un-American attitude if we’ve ever heard one — casino banking is what BUILT the US !!!

After successfully diluting the toughest elements of the Volcker Rule before it passed,

the banking lobbyists are now putting their effort into other parts of the Dodd-Frank law

that they unconvincingly argue might / possibly / conceivably / someday cut into profits at their lucrative consumer banking businesses.

Banks want to reverse, or at least delay, the adoption of new interchange regulations,

which would cap what banks charge retailers to process debit card transactions.

Last year, those fees totaled more than $20 billion.

The secondary target of banks is the new Consumer Financial Protection Bureau,

an “independent” agency that will oversee nearly all consumer financial activity once it is up and running in July —

if, that is, “President” Obama has the guts to override the strident objections of the finance business,

and appoint as its head Betsy Warren, the current “interim” chief, whose idea the Protection Bureau was in the first place.

But I don’t think the banks are too worried that he’s going to go against them on such a — potentially — key appointment.

If he did, it would be at RADICAL variance with his “performance” in this area so far.

Republicans in the House — whose most prominent local constituents are often community bankers —

have introduced bills to cut back the bureau’s authority over mortgage loans and other consumer products.

Can’t imagine why …

No, really, since it’s precisely these smaller banks that remain in trouble, because the TBTF boys won’t lend them any money —

despite getting it from the Bernanke Federal Reserve at essentially negative interest rates.

So good luck to the UK regulators in trying to bring SOME sanity into the financial sector there.

At least they can look at the US to get a good idea of what NOT to do.

David Caploe PhD

EconomyWatch.com

The post New UK Bank Rules: US Looks Even More Pathetic appeared first on Economy Watch.

7 April 2011.

7 April 2011.

• many canned vegetables dropped to 13 or 14 ounces from 16;
• boxes of baby wipes went to 72 from 80; and
• sugar was stacked in 4-pound, not 5-pound, bags.

• “greener” (packages good for the environment) or
• more “portable” (little carry bags for the takeout lifestyle) or
• “healthier” (fewer calories).

EconomyWatch.com

The post Trying to “Hide” Food Stagflation appeared first on Economy Watch.

6 April 2011.

While no one can tell what the impact of the inter-locking Japan disasters is going to be on China,

the latter’s new five-year economic blueprint sets ambitious goals:

•    to raise ordinary people’s incomes,
•    rein in pollution and energy use, and
•    build advanced-science industries in fields like biotechnology and environmental protection.

6 April 2011.

While no one can tell what the impact of the inter-locking Japan disasters is going to be on China,

the latter’s new five-year economic blueprint sets ambitious goals:

•    to raise ordinary people’s incomes,
•    rein in pollution and energy use, and
•    build advanced-science industries in fields like biotechnology and environmental protection.

After five years of scorching growth, averaging 11.2 percent a year,

the plan projected an average 7 percent annual rise in the gross domestic product through 2015.

The government also pledged a war on inflation, officially pegged at 4.9 percent in both January and February,

but believed by experts to be considerably higher.

The moves are crucial to shifting China’s economic base away from factory exports

toward one rooted in demand for goods and services by increasingly affluent consumers.

And that is crucial to the Communist Party’s central aim:

keeping the allegiance of a society that wants a bigger share of the nation’s prosperity.

The new plan was the centerpiece of an annual report on the government’s work that Prime Minister Wen Jiabao

presented last month to the National People’s Congress, China’s quasi-legislature.

Past reports have set broadly similar targets for China’s development, which the report frankly acknowledged had not always been met.

“We are keenly aware that we still have a serious problem in that our development is not yet well-balanced, coordinated or sustainable,” the report said.

Among the shortcomings it cited were

•    a widening gap between the rich and poor,
•    an “irrational industrial structure,”
•    sharply rising land and housing prices,
•    illegal seizures of people’s land and
•    the demolition of homes by state-backed developers.

Some main economic goals may be especially hard to attain.

Wen set an 8 percent target for gross domestic product growth this year, implying slower growth in succeeding years.

But many economists believe the economy will grow faster, just as growth in 2010 exceeded the government’s target.

Soaring land and home prices have also proved difficult to curb.

But the report claimed impressive gains on other important fronts that are at the head of plans for the next five years,

including a 19.1 percent cut in the amount of energy used per unit of economic growth,

a rapidly expanding service economy and a boom in the high-technology sector.

The government opened a national nanotechnology research center and is building

•    50 engineering centers,
•    32 national engineering laboratories and
•    56 other labs focusing on technologies like digital television and high-speed Internet

Software sales, integrated circuit production and other advanced products like microcomputers all logged double-digit increases last year.

In the next five years, raising standards of living appears to be perhaps the government’s main priority.

The government pledged to keep prices “basically stable” through 2015, limiting inflation to 4 percent this year,

and to raise household income by an annual average of 7 percent, roughly in line with economic growth.

That would break from the past 20 years, in which the growth of ordinary workers’ income

has regularly lagged behind the growth in gross domestic product,

and consumer spending as a share of the economy has dropped to a record low.

The report called expanding domestic demand “a long-term strategic principle” and pledged to

•    increase subsidies to low-income households,
•    extend broadband Internet to rural areas and smaller cities, and
•    expand retail sectors like chain stores and online commerce.

Retail sales of consumer goods should grow 16 percent in 2011 alone, it stated.

Environmental protection, energy conservation and technology also are allotted ambitious goals: in technology, for example,

•    laying a million kilometers, or 621,000 miles, of new fiber optic cable;
•    adding 35 million new broadband internet ports, to a total of 223 million; and
•     drafting a plan to support emerging high-technology industries.

The report pledges to further reduce energy consumption per unit of G.D.P. by 16 percent,

and carbon dioxide emissions per unit by 17 percent.

For the first time, the state-run Xinhua news agency reported, the government will place a cap on total energy use,

limiting consumption to the equivalent of four billion tons of coal by 2015.

The government also promised to

•    build “well-equipped statistical and monitoring systems” to gauge greenhouse gas emissions,
•    accelerate construction of sewage treatment plants,
•    retrofit coal-fired power plants with pollution controls and
•    continue a pilot program to develop low-carbon cities.

China’s military spending will rise 12.6 percent in 2011 to 583.6 billion renminbi, or about $88.6 billion, a separate Finance Ministry report stated,

slightly less than the 12.7 percent increase announced previously by a legislative spokesman.

That resumes a long string of double-digit annual increases in military spending that was interrupted in 2010,

when spending rose only 7.5 percent, perhaps, analysts said,

because money was diverted to address the global economic crisis.

Since 1989, the budget has risen by an average of 12.9 percent per year,

according to GlobalSecurity.org, a private organization that maintains an online database of military-related information.

Many analysts, including those in the Pentagon, say that China’s actual military spending is probably considerably greater than the reported sums.

The resumption of rapid growth follows a year in which China’s neighbors have expressed concern

about the military’s increasingly muscular behavior in waters off its Pacific coast and along the tense border with India.

But the spokesman, Li Zhaoxing, repeated China’s longstanding position that the military is a defensive force and that it “will not pose a threat to any country.”

Wen’s annual report, like those before it, offered a sheaf of paeans to the Communist Party’s stewardship of the nation, with staggering statistics to support them.

China’s international prestige “grew significantly”; its “brilliant achievements” in economics “clearly show the advantages of socialism with Chinese characteristics.”

The state
•    opened 4,986 kilometers, or 3,100 miles, or new railroads and
•    120,000 kilometers, or nearly 74,600 miles, of highways;
•    completed 230,000 sports and fitness projects for rural residents;
•    built or renovated 891 hospitals and 1,228 health clinics.

And while Western economies still struggle to recover from the 2008 global economic collapse, China has moved on, according to the New York Times.

“All the measures we took,” Wen’s report said, “have proven to be entirely correct.”

A conclusion that, frankly, we here find hard to dispute.

David Caploe PhD
EconomyWatch.com

The post China 5-Year Plan: All Prosperity to the People !!! appeared first on Economy Watch.

5 April 2011.

5 April 2011.

• shale (shale gas),
• sandstone (tight gas)
• or coal seams,

• Australia,
• China,
• India,
• Indonesia,
• Latin America and even
• Europe.

• drive their wells thousands of meters beneath the surface,
• divert the drill heads and
• even continue drilling horizontally.

EconomyWatch.com

The post Global Natural Gas Explosion: Clean, Cheap Product / Costly, Destructive Process appeared first on Economy Watch.

4 April 2011.

The 1986 nuclear meltdown at Chernobyl was truly a trial by fire —

and one that has now a key part of Russia’s nuclear marketing message — cynical as that might seem.

In April that year, as workers and engineers scrambled to keep the plant’s molten radioactive uranium from burrowing into the earth —

the so-called China syndrome —

a Soviet physicist on the scene devised a makeshift solution for containing remnants of the liquefied core.

4 April 2011.

The 1986 nuclear meltdown at Chernobyl was truly a trial by fire —

and one that has now a key part of Russia’s nuclear marketing message — cynical as that might seem.

In April that year, as workers and engineers scrambled to keep the plant’s molten radioactive uranium from burrowing into the earth —

the so-called China syndrome —

a Soviet physicist on the scene devised a makeshift solution for containing remnants of the liquefied core.

Teams of coal miners working in shifts tunneled underneath the smoldering reactor and built a platform of steel and concrete,
cooled by water piped in from outside the plant’s perimeter.

In the end the improvised maneuver — a so-called core-catcher — was not needed.

The melted fuel burned through three stories of the reactor’s basement but stopped at the foundation —

where the mass remains so highly radioactive that scientists still cannot approach it,

but have walled it off as much as possible in the sarcophagus pictured above.

Although 25 years later Chernobyl remains the radiation calamity by which all subsequent nuclear accidents will be measured,

core-catchers are now a design feature of the newest reactors that

Russia’s state-owned nuclear power company, Rosatom, is selling around the world.

That includes a contract the company signed with Belarus last month,

even as radioactive steam was rising from the Fukushima Daiichi plant in Japan.

Meanwhile that inventive physicist, Leonid A. Bolshov, who was awarded a Soviet hero’s medal for his efforts at Chernobyl,

is now the director of the Institute for Nuclear Safety and Development, formed in 1988 in the wake of that disaster.

Like many others involved in his country’s nuclear power industry, Mr. Bolshov, 64,

expresses what to some ears may sound like a jarringly opportunistic sales pitch:

that Chernobyl was the hard-earned experience that made Russia the world’s most safety-conscious nuclear proponent.

“The Japanese disaster will give the whole world a lesson,” Mr. Bolshov said in an interview last month.

“After a disaster, a burst of attention to safety follows.”

Opportunistic or not, in recent years the Russian nuclear industry has profited handsomely

by selling reactors abroad, mostly to developing countries.

That includes China and India — whose insatiable energy appetites are keeping them wedded to nuclear power,

despite their vows to proceed even more cautiously in light of Japan’s disaster.

And though Fukushima Daiichi provides a new opportunity to stress the message,

Rosatom has long been marketing its reactors as safe — not despite Chernobyl, but because of it.

The Russians say they are now building more nuclear power plants globally than anyone,

15 of the 60 new reactors under construction today.

Rosatom says it has an additional 30 firm orders for reactors and plans to sell more.

Late last year, the company has set a goal of tripling worldwide sales by 2030, to $50 billion annually — a goal that might seem much more doubtful

now that Japan’s crisis is making many countries think twice about building plants any time soon.

And yet, while stocks of publicly traded companies in the nuclear industry have been falling around the world,

Russian officials were persistently staying on message with their safety assurances.

The Russian prime minister, Vladimir V. Putin, himself flew to Belarus last month to sign the contract to build a plant in that country, worth $9 billion.

“I want to stress that we possess a whole arsenal of advanced technical resources to ensure stable, accident-free performance for nuclear plants,”

Putin told journalists in Minsk, the Belarusian capital.

And the Russian president, Dmitri A. Medvedev, used the occasion of a visit by Turkey’s prime minister, Recep Erdogan,
to praise the safety of Russian nuclear designs.

“Even in connection with what has happened in Japan, no radical reconsideration of safety standards is needed,”

he said, referring to a four-reactor plant the Russians have contracted to build in a seismically active region of southern Turkey.
That deal is worth $20 billion.

Sergei G. Novikov, a spokesman for Rosatom, declined to be interviewed.

Rosatom now charges $2 billion to $5 billion for a reactor, depending on its size and other factors.

And despite the claimed safety premium, the Russians still win some business by underbidding competitors

that include General Electric and Westinghouse Electric, a division of Toshiba of Japan,

according to Marina V. Alekseyenkova, an industrial analyst at the state-owned Gazprombank.

Independent nuclear safety experts say Russia’s reactors for export are as safe as those of their international peers.

But that has not insulated the Russian industry from criticism,

including the rate of deal-making and the endorsement of nuclear safety

to an almost unseemly degree in light of the crisis in Japan.

Igor V. Kudrik, an authority on Russia’s nuclear industry at the Bellona Foundation, a Norwegian environmental group, said
Russian reactor designs had indeed improved greatly since Chernobyl,

which was built without a containment vessel.

But the industry lacks independent oversight in Russia’s politically centralized system, he said,

leaving profit motive alone to guide development.

“They promote this technology only because it engages the enormous military nuclear industry left over from Soviet times,” he said.

Pressurized water reactors, like the Rosatom VVER that is the company’s current standard,

and the 40-year-old General Electric Mark I boiling water reactor at the Fukushima plant,

are inherently safer than Chernobyl-style reactors.

In both boiling water and pressurized water reactors, water cools the fuel and sustains the nuclear reaction.

The water that floods the spaces between fuel rods slows neutrons, necessary for the reaction.

Thus, in both designs, if the coolant is lost the reaction will stop, following the laws of physics —

though, as the disaster-management team in Japan knows all too well,

the shutdown does nothing to dissipate still-dangerous residual heat.

So, despite Rosatom’s core-catcher feature for arresting meltdowns,

its reactors may be as potentially vulnerable to release of radioactive material if the water-cooling system fails —

as happened at Fukushima Daiichi.

But whatever the reactor design, operational safety procedures are crucial.

And the Russians contend that their industry and engineers benefited more than others from the lessons of Chernobyl,

including the stark reality that most reactors are STILL poorly equipped to contain a full core meltdown.

Rosatom says a reactor it completed in 2007 in Tianwan, China, is the first in the world with what the Russians call a core-catcher built in.

It was partly designed by Mr. Bolshov, the physicist who jury-rigged the barrier under Chernobyl.

The contemporary Rosatom core-catcher is a pool in the basement of a reactor filled not with water, but a metallic alloy.

Solid under normal circumstances, it is designed to liquefy if the hot, melted-down core drops into it after burrowing through the floors above.

Once the whole metallic pool liquefied, Mr. Bolshov said, heat from the continuing nuclear reaction

would create currents, swirling the mixture against water-cooled steel walls.

The Russians market it as a final safety net in the last stages of a nuclear catastrophe.

And they say it is a solution to the problem of a China syndrome.

It has not, of course, yet been subjected to real-world testing.

Russia is heavily invested in convincing other countries that these systems can make nuclear power safe.

As a legacy of the cold war, Russia possesses about 40 percent of the world’s uranium enrichment capacity.

Enrichment refers to raising the level of the uranium isotope 235 from about 0.7 percent in natural uranium to 3 percent to 5 percent for civilian reactor fuel.

That enrichment capacity is much more than it needs to service its domestic reactors,

meaning the industry relies on exports.

Russia exports about $3 billion worth of fuel a year.

Rosatom says it intends to increase its share of the global nuclear fuel market to 25 percent by 2025, from 17 percent today.

The strategy is to make money, but also to offer fuel at a discount to customers who buy Russian-made reactors.

The current threat to the market, for the Russians and others in the industry, is real.

In the short term, Germany’s decision last month to close seven of its 17 nuclear plants,

and the probable delays of planned reactors elsewhere,

will diminish demand for uranium fuel.

The McIlvaine Company, a Northfield, Ill.-based energy consultancy, estimated last month that

two-thirds of all new reactor projects will be delayed after the Fukushima Daiichi disaster,

and over five years $200 billion in energy investment globally will be redirected from nuclear to coal, petroleum or other alternatives.

Shares in publicly traded companies in the Russian nuclear power industry have plummeted in the wake of the disaster,

as have shares in uranium mines and nuclear companies elsewhere.

And even as Russia seeks to export reactors backed by Rosatom’s safety assurances,

back home tight money has delayed plans for replacing some aging nuclear plants.

That includes 11 Chernobyl-style reactors — the ones without containment vessels.

Or core-catchers, as the New York Times noted.

David Caploe PhD
EconomyWatch.com

The post Fukushima Highlights Russia “Safe Nuclear” Marketing appeared first on Economy Watch.

1 April 2011.
 
In 2010, General Electric reported worldwide profits of $14.2 billion,
 
and said $5.1 billion of the total came from its operations in the United States.

Its American tax bill?

ZERO.

In fact, G.E. claimed a tax benefit of $3.2 billion.

Low taxes are nothing new for G.E.

The company has been cutting the percentage of its American profits paid to the Internal Revenue Service for years,

resulting in a far lower rate than even most multinational companies.

1 April 2011.
 
In 2010, General Electric reported worldwide profits of $14.2 billion,
 
and said $5.1 billion of the total came from its operations in the United States.

Its American tax bill?

ZERO.

In fact, G.E. claimed a tax benefit of $3.2 billion.

Low taxes are nothing new for G.E.

The company has been cutting the percentage of its American profits paid to the Internal Revenue Service for years,

resulting in a far lower rate than even most multinational companies.

Its extraordinary success is based on an aggressive strategy that mixes fierce lobbying for tax breaks

and innovative accounting that enables it to concentrate its profits offshore.

G.E.’s giant tax department, led by a bow-tied former Treasury official named John Samuels,

is often referred to as the world’s best tax law firm.

Indeed, the company’s slogan “Imagination at Work” fits this department well.

The team includes former officials not just from the Treasury,

but also from the I.R.S. and virtually all the tax-writing committees in Congress.

While General Electric is one of the most skilled at reducing its tax burden,

many other companies have become better at this as well.

Although the top corporate tax rate in the United States is 35 percent, one of the highest in the world,

companies have been increasingly using a maze of shelters, tax credits and subsidies to pay far less.

In a regulatory filing just a week before the Japanese disaster put a spotlight on the company’s nuclear reactor business,

G.E. reported that its tax burden was 7.4 percent of its American profits,

about a third of the average reported by other American multinationals.

Even those figures are overstated, because they include taxes that will be paid

only if the company brings its overseas profits back to the United States.

With those profits still offshore, G.E. is effectively getting money back.

Such strategies, as well as changes in tax laws that encouraged some businesses and professionals to file as individuals,

have pushed down the corporate share of the nation’s tax receipts —

from 30 percent of all federal revenue in the mid-1950s to 6.6 percent in 2009.

Despite this, many companies say the current level is so high it hobbles them in competing with foreign rivals.

Even as the government faces a mounting budget deficit, the talk in Washington is about lower rates.

President Obama has said he is considering an overhaul of the corporate tax system, with an eye to

• lowering the top rate,
• ending some tax subsidies and loopholes and
• generating the same amount of revenue.

In his typically pathetic way, he has designated G.E.’s chief executive, Jeffrey R. Immelt, as his liaison to the business community,

and chairman of the President’s Council on Jobs and Competitiveness, which is expected to discuss corporate taxes.

“He understands what it takes for America to compete in the global economy,” Obama obsequiously said of Immelt,

after touring a G.E. factory in upstate New York that makes turbines and generators for sale around the world.

A review of company filings and Congressional records shows that

one of the most striking advantages of General Electric is its ability to lobby for, win and take advantage of tax breaks.

Over the last decade, G.E. has spent tens of millions of dollars to push for changes in tax law,

from more generous depreciation schedules on jet engines to “green energy” credits for its wind turbines.

But the most lucrative of these measures allows G.E. to operate a vast leasing and lending business abroad,

with profits that face little foreign taxes and no American taxes as long as the money remains overseas.

The assortment of tax breaks G.E. has won in Washington has provided a significant short-term gain for the company’s executives and shareholders.

While the financial crisis led G.E. to post a loss in the United States in 2009, regulatory filings show that

in the last five years, G.E. has accumulated $26 billion in American profits,

and received a net tax benefit from the I.R.S. of $4.1 billion.

But critics say the use of so many shelters amounts to corporate welfare,

allowing G.E. not just to avoid taxes on profitable overseas lending

but also to amass tax credits and write-offs that can be used to reduce taxes on billions of dollars of profit from domestic manufacturing.

They say that the assertive tax avoidance of multinationals like G.E. not only shortchanges the Treasury,

but also harms the economy by discouraging investment and hiring in the United States.

“In a rational system, a corporation’s tax department would be there to make sure a company complied with the law,”

said Len Burman, a former Treasury official who now is a scholar at the nonpartisan Tax Policy Center.

“But in our system, there are corporations that view their tax departments as a profit center, and the effects on public policy can be negative.”

The shelters are so crucial to G.E.’s bottom line that when Congress threatened to let the most lucrative one expire in 2008, the company came out in full force.

G.E. officials worked with dozens of financial companies to send letters to Congress and hired a bevy of outside lobbyists.

Samuels, the head of its tax team, met with Representative Charles B. Rangel, then chairman of the Ways and Means Committee,
which would decide the fate of the tax break.

As he sat with the committee’s staff members outside Mr. Rangel’s office,

Samuels dropped to his knee and pretended to beg for the provision to be extended — a flourish made in jest, he said through a spokeswoman.

That day, Rangel reversed his opposition to the tax break, according to other Democrats on the committee.

The following month, Rangel and Immelt stood together at St. Nicholas Park in Harlem

as G.E. announced that its foundation had awarded $30 million to New York City schools,

including $11 million to benefit various schools in Mr. Rangel’s district.

Joel I. Klein, then the schools chancellor, and Mayor Michael R. Bloomberg, who presided, said it was the largest gift ever to the city’s schools.

G.E. officials say the donation was granted solely on the merit of the project.

Rangel, who was censured by Congress last year for soliciting donations from corporations and executives with business before his committee,

said this month that the donation was unrelated to his official actions.

General Electric has been a household name for generations, with light bulbs, electric fans, refrigerators and other appliances in millions of American homes.

But today the consumer appliance division accounts for less than 6 percent of revenue,

while lending accounts for more than 30 percent.

Industrial, commercial and medical equipment like power plant turbines and jet engines account for about 50 percent.

Its industrial work includes everything from wind farms to nuclear energy projects like the troubled Fukushima plant in Japan, built in the 1970s.

Because its lending division, GE Capital, has provided more than half of the company’s profit in some recent years,

many Wall Street analysts view G.E. not as a manufacturer

but as an unregulated lender that also makes dishwashers and M.R.I. machines.

As it has evolved, the company has used, and in some cases pioneered, aggressive strategies to lower its tax bill.

In the mid-1980s, President Ronald Reagan overhauled the tax system after learning that G.E. —

a company for which he had once worked as a commercial pitchman —

was among dozens of corporations that had used accounting gamesmanship to avoid paying any taxes.

That pendulum began to swing back in the late 1990s.

G.E. and other financial services firms won a change in tax law that would allow multinationals to avoid taxes on some kinds of banking and insurance income.

The change meant that if G.E. financed the sale of a jet engine or generator in Ireland, for example,

the company would no longer have to pay American tax on the interest income as long as the profits remained offshore.

Known as active financing, the tax break proved to be beneficial for

• investment banks,
• brokerage firms,
• auto and farm equipment companies,
• and lenders like GE Capital.

This tax break allowed G.E. to avoid taxes on lending income from abroad,

and permitted the company to amass tax credits, write-offs and depreciation.

Those benefits are then used to offset taxes on its American manufacturing profits.

G.E. subsequently ramped up its lending business.

As the company expanded abroad, the portion of its profits booked in low-tax countries such as Ireland and Singapore grew far faster.

From 1996 through 1998, its profits and revenue in the United States were in sync — 73 percent of the company’s total.

Over the last three years, though, 46 percent of the company’s revenue was in the United States, but just 18 percent of its profits.

Martin A. Sullivan, a tax economist for the trade publication Tax Analysts, said that

booking such a large percentage of its profits in low-tax countries

has “allowed G.E. to bring its U.S. effective tax rate to rock-bottom levels.”

The company does not specify how much of its global tax savings derive from active financing, but called it “significant” in its annual report.

Stock analysts estimate the tax benefit to G.E. to be hundreds of millions of dollars a year.

“Cracking down on offshore profit-shifting by financial companies like G.E. was one of the important achievements of President Reagan’s 1986 Tax Reform Act,”

said Robert S. McIntyre, director of the liberal group Citizens for Tax Justice, who played a key role in those changes.

“The fact that Congress was snookered into undermining that reform at the behest of companies like G.E. is an insult not just to Reagan,

but to all the ordinary American taxpayers who have to foot the bill for G.E.’s rampant tax sheltering.”

Minimizing taxes is so important at G.E. that Samuels has placed tax strategists

in decision-making positions in many major manufacturing facilities and businesses around the globe.

Company officials acknowledged that the tax department had expanded

since he joined the company in 1988, and said it now had 975 employees.

At a tax symposium in 2007, a G.E. tax official said the department’s “mission statement” consisted of 19 rules

and urged employees to divide their time evenly between ensuring compliance with the law and

“looking to exploit opportunities to reduce tax.”

Transforming the most creative strategies of the tax team into law is another extensive operation.

G.E. spends heavily on lobbying:

more than $200 million over the last decade,
 
according to the Center for Responsive Politics.

Records filed with election officials show a significant portion of that money was devoted to tax legislation.

G.E. has even turned setbacks into successes with Congressional help.

After the World Trade Organization forced the United States to halt $5 billion a year in export subsidies to G.E. and other manufacturers,
the company’s lawyers and lobbyists became deeply involved in rewriting a portion of the corporate tax code,

according to news reports after the 2002 decision and a Congressional staff member.

By the time the measure — the American Jobs Creation Act — was signed into law by President George W. Bush in 2004,

it contained more than $13 billion a year in tax breaks for corporations, many very beneficial to G.E.

One provision allowed companies to defer taxes on overseas profits from leasing planes to airlines.

It was so generous — and so tailored to G.E. and a handful of other companies — that

staff members on the House Ways and Means Committee publicly complained that

G.E. would reap “an overwhelming percentage” of the estimated $100 million in annual tax savings.

According to its 2007 regulatory filing, the company saved more than $1 billion in American taxes because of that law in the three years after it was enacted.

By 2008, however, concern over the growing cost of overseas tax loopholes put G.E. and other corporations on the defensive.

With Democrats in control of both houses of Congress, momentum was building to let the active financing exception expire.

Rangel of the Ways and Means Committee indicated that he favored letting it end

and directing the new revenue — an estimated $4 billion a year — to other priorities.

G.E. pushed back.

In addition to the $18 million allocated to its in-house lobbying department,

the company spent more than $3 million in 2008 on lobbying firms assigned to the task.

Rangel dropped his opposition to the tax break.

Representative Joseph Crowley, Democrat of New York, said he had helped sway Rangel

by arguing that the tax break would help Citigroup, a major employer in Crowley’s district.
 
G.E. officials say that neither Samuels nor any lobbyists working on behalf of the company

discussed the possibility of a charitable donation with Rangel.

The only contact was made in late 2007, a company spokesman said,

when Immelt called to inform Rangel that the foundation was giving money to schools in his district.

But in 2008, when Rangel was criticized for using Congressional stationery to solicit donations for a City College of New York school being built in his honor,

he said he had appealed to G.E. executives to make the $30 million donation to New York City schools.
 
G.E. had nothing to do with the City College project, he said at a July 2008 news conference in Washington.

“And I didn’t send them any letter,” Rangel said, adding that

he “leaned on them to help us out in the city of New York as they have throughout the country.

But my point there was that I do know that the C.E.O. there is connected with the foundation.”

In an interview this month, Rangel offered a different version of events —

saying he didn’t remember ever discussing it with Immelt and was unaware of the foundation’s donation

until the mayor’s office called him in June, before the announcement and after Rangel had dropped his opposition to the tax break.

Asked to explain the discrepancies between his accounts, Rangel replied, “I have no idea.”

While G.E.’s declining tax rates have bolstered profits,

and helped the company continue paying dividends to shareholders during the economic downturn,
 
some tax experts question what taxpayers are getting in return.

Since 2002, the company has eliminated a fifth of its work force in the United States while increasing overseas employment.

In that time, G.E.’s accumulated offshore profits have risen to $92 billion from $15 billion.

“That G.E. can almost set its own tax rate shows how very much we need reform,”

said Representative Lloyd Doggett, Democrat of Texas, who has proposed closing many corporate tax shelters.

“Our tax system should encourage job creation and investment in America

and end these tax incentives for exporting jobs and dodging responsibility for the cost of securing our country.”

As the Obama administration and leaders in Congress consider proposals to revamp the corporate tax code,

G.E. is well prepared to defend its interests — quite apart from its CEO’s presence at Obama’s elbow.

The company spent $4.1 million on outside lobbyists last year, including four boutique firms that specialize in tax policy.

“We are a diverse company, so there are a lot of issues that the government considers, that Congress considers, that affect our shareholders,” said Gary Sheffer, a G.E. spokesman.

“So we want to be sure our voice is heard”, he told the New York Times.

Doesn’t seem like they have much to worry about in that area.
 
David Caploe PhD

EconomyWatch.com

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