Russia

After watching from the sidelines for nearly two years, many of the world’s political and opinion leaders are now calling for the West to supply arms to the Syrian rebels. British Prime Minister David Cameron has spoken  of a “strategic imperative” to act, at least in part to prevent extreme jihadist groups from eclipsing more moderate factions. Foreign Affairs  has published an article by Michael Bröning with the Orwellian subtitle  “Arms for Peace,” which similarly argues that the moderate rebel contingent is the only party to the conflict that does not have a reliable supply of arms and money from the outside, since the Russians continue to supply the Assad regime and most of the Qatari and Saudi funds go to more radical groups.

Although no Western power has yet – officially, at least – supplied arms to the rebels, the idea seems to be gaining currency in both Western and Arab capitals, especially in the wake of the December conference in Marrakech, which declared the Syrian National Coalition “the legitimate representative of the Syrian people.” For those who remember the U.N. declaration declaring the PLO as the sole legitimate representative of the Palestinian people, this too has an Orwellian tint. With the death toll in the conflict standing at an estimated 60,000 it is tempting to conclude that it is time for some kind of intervention: supplying arms at a minimum, but potentially declaring a no-fly zone over portions of the country to protect rebel-held territory from aerial attacks. But it would be a terrible mistake.   [click to continue…]

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Eurasia Group founder and emerging markets guru Ian Bremmer has come around to the view that the BRICS construct is nothing more than a bunch of countries “united by a catchy acronym” and little else. His op-ed piece in last Friday’s New York Times  notes that Brazil, Russia, India, and China “have formalized their club and extended their reach by inviting South Africa to join” – a development that occurred in December of 2010 and asks, “But do their meetings and joint statements really allow them to punch above their individual weight? What do these countries share beyond a common interest in bolstering their global clout?” Several hundred words later he concludes that these five countries “will sometimes use their collective weight to obstruct U.S. and European plans. But the BRICs have too little in common abroad and too much at stake at home to play a single coherent role on the global stage.” Has he been reading my blog? [click to continue…]

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The global bank HSBC, in its Business Without Borders newsletter,  tells us that while the past decade was all about the BRIC countries – Brazil, Russia, India, China – we are now in the decade of what it has dubbed the CIVETS, which stands for Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa, a set of countries “whose rising middle class, young populations and rapid growth rates make the BRICs look dull in comparison.” I have previously made the point – that BRIC, while a useful shorthand for a set of big emerging economies, makes no sense as an actual group, even as BRIC summits have taken place (in which South Africa was invited to join, adding the “s” to make up BRICS) and BRICS investment funds have been established. There is little, if anything in the way of common features or shared interests to unite the BRICs countries. Russia and China are authoritarian states, while Brazil and India are noisy democracies. Brazil and South Africa, both big agricultural exporters seeking freer trade, have little in common with India, which protects its farmers with high tariff barriers. Russia, whose economy is based largely on energy exports, has little in common with China, a net oil importer. China, with over 1.3 billion people, is more than 25 times bigger than South Africa, population 50 million.  But the BRICS are a model of solidarity when compared to the CIVETS.

Organizing the CIVETS into a coherent group could be as difficult as, well, herding cats. Not inappropriate, since the word civet is also used to refer imprecisely to a number of cat-like creatures of different genii and species. The more fundamental problem is that CIVETS by necessity excludes certain countries that should merit inclusion but which don’t fit the linguistic straitjacket. According to the HSBC article, “the six countries in the group are posting growth rates higher than 5% — with the exception of Egypt and South Africa – and are trending upwards.  Lacking the size and heft of the BRICs, these upstarts nevertheless offer a more dynamic population base, with the average age being 27, soaring domestic consumption and more diverse opportunities for businesses seeking international expansion.” So why is Thailand (population 69 million, forecast 2012 GDP growth of more than 6.0 percent, median age 34) excluded? Egypt’s poor economic performance can be considered temporary fallout from the Arab Spring upheavals, but what about South Africa, which in the nearly 18 years since the advent of majority rule has chalked up an average annual GDP growth of 3.3 percent? For that matter, why exclude Bangladesh (150 million people, median age 23, GDP growth averaging 6.0 to 8.0 percent)? Or Nigeria (140 million people, average 6.9 percent GDP growth since 2005, median age 19)?

One problem with the CIVETS designation, which almost guarantees that it will never catch on, is that it’s hard to add new countries or eliminate laggards from the group without ruining the catchy acronym. This is why over a year ago I suggested replacing BRICS, CIVETS, and other similar groupings with a more flexible term, which allows for countries to be added or taken out as they fall behind or graduate, namely, BEEs, for Big Emerging Economies. The real standouts in that group could be called Killer BEEs. I’m still waiting for it to catch on.

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I will give Jim O’Neill, the Goldman Sachs banker who in 2001 coined the term “BRICs”, the benefit of the doubt. I suspect he meant to create a simple shorthand to refer to the big emerging economies likely to matter most over the next 10 years or so, which at the time seemed to be Brazil, Russia, India, and China. But as often happens, the thing took on a life of its own and became reified to the extent that a year or two ago there was talk of convening a BRICs summit, and in 2007 iShares, the fund management company, set up an exchange-traded BRICs fund (BKF), which has returned an impressive -3.11% annually since its inception.  A fund that includes Russia, a huge energy exporter and China, soon to become the world’s largest oil importer, may provide some diversification benefits but probably not the kind of outsized returns investors tend to seek from emerging markets.

I have argued on this blog and elsewhere that the notion of the BRICs – Brazil, Russia, India, China – as a group never had a coherent meaning, especially since Russia, whose economy is nearly as dependent on oil and gas as Nigeria’s and whose governance is arguably more dysfunctional than Nigeria’s, and which is suffering catastrophic population decline, has little in common with the other three. The recent kangaroo court judgment and sentence against former oligarch Mikhail Khodorkovsky only confirms this. Even though the Russian stock market grew by a dynamic 22.5% in 2010 and is predicted by none other than Jim O’Neill to be the star performer of 2011, the longer-term trend points clearly in the opposite direction.

Still, there may be some use for a term that distinguishes big, important, and growing emerging economies, but the term needs to become more elastic as new countries qualify and others fall by the wayside. New candidates for BRIC membership continue to surface, as much as they wreak havoc with the catchy acronym. Indonesia, for certain; with over 250 million people, GDP growth of around 6% and a stock market that rose 44% last year it can hardly be ignored. The next candidate in my view is Turkey. With a population of nearly 78 million – likely to grow to 100 million by 2030 – GDP growth of 6.8% in 2010, a dynamic stock market (25.8% return in 2010), and a growing cadre of domestic companies that are expanding their footprint throughout the Middle East and Central Asia, Turkey is growing in importance as a regional political and economic power, and it also serves as a bridge between Europe and the Middle East and Central Asia. An article in today’s New York Times highlights Turkey’s political and commercial prominence in Iraq, where it is building power plants, pipelines, hotels, and a stadium, but this is only part of the story. Ever since the breakup of the Soviet Union, Turkish diplomats and companies have made a concerted effort to bring the former Soviet republics in the Caucasus and Central Asia, many of which speak Turkic languages, into Turkey’s commercial and political orbit. Turkish construction firms are prominent on big building sites all over the region, while the markets are full of Turkish medicines and consumer products. The Arab countries of the region, nervous about Iran’s power and its unpredictability, see Turkey as a potential counterweight. The relationship is not perfect – Arabs retain a historical memory of their struggle against Ottoman rule – and Turkey has its own problems, many of which are rooted with an internal struggle between the political heirs of Mustafa Kemal (Atatürk) and his transformation of Turkey into a modern, secular society following World War I, and the  Islamists, represented by the government of Recep Tayyip Erdogan and his Justice and Development party, who promote greater religious expression in public life. But Turkey, which has still not abandoned its long quest for full membership of the European Union, and which already enjoys free access to the EU market, seems certain to become an even more prominent player in the region and even globally. [click to continue…]

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My most recent blog post, discussing whether Barack Obama is good or bad for business, attracted more, and more vociferous, comments than anything else I have ever posted, apart from one article I wrote expressing mild skepticism about the utility of Apple’s new iPad (lesson: don’t criticize cultish dogma of any kind). Most of those who commented, some of them using noms de blog like “John Galt,” attacked me for peddling “pure propaganda” in favor of the President’s policies, while others, also missing the point, congratulated me for standing up in favor of the President. My point, however, was neither to praise the President nor to attack him, but to point out how much he resembles his predecessors as President and other senior elected officials, regardless of party affiliation. He and they are keen to show their pro-business bona fides by granting subsidies and protection to corporations, some of which may – directly or via their industry lobbies – contribute to their campaigns. At the same time, the President and Members of Congress are not at all eager to prune back the thicket of regulation that makes it increasingly difficult for many American companies, especially small businesses, to prosper and grow. The people who govern us act favorably towards specific companies and industries, but show little fondness for free markets, which favor all comers equally.

Though many companies benefit from government largesse, none has mastered the game of turning government policy to its advantage better than Archer Daniels Midland, the world’s largest corn processor based in Decatur, Illinois. ADM, with $69 billion in 2009 revenue, ranks 27th in the Fortune 500 and is the second largest U.S. agro-processing firm after Cargill, the privately owned Minneapolis company, which pulled in an estimated $110 billion in 2009 revenue.

ADM has exerted a strong influence on U.S. agricultural policy for at least 40 years. In  1973 Earl Butz, President Nixon’s Agriculture Secretary, engineered a shift away from the New Deal policies of farm price supports, which included limiting production of corn and other major commodities, to encouraging farmers to produce as much as they could, regardless of price. The government henceforth would pay direct subsidies to farmers to make up the difference between the market price and what it considered an appropriate floor price. Naturally, this sharply drove down the price of corn, providing a windfall to major corn processors. Michael Pollan describes this phenomenon in detail in his excellent book, The Omnivore’s Dilemma.

Except it wasn’t precisely a windfall, since ADM had done a great deal to engineer this outcome. During the Watergate investigation, Special Prosecutor Archibald Cox indicted then-ADM CEO Dwayne Andreas for giving $100,000 in illegal contributions to Hubert Humphrey’s 1968 Presidential campaign. But Andreas was nothing if not bipartisan. Richard Nixon’s secretary Rose Mary Woods, testified that during Nixon’s 1972 campaign Andreas handed her an envelope containing $100,000 in $100 bills. Between 1975 and 1977 Andreas gave $72,000 in ADM stock to the children of David Gartner, senator Humphrey’s chief of staff at the time, whom President Jimmy Carter in 1977 named to head the Commodity Futures Trading Commission (he was later forced to resign when the details of the ADM gift came to light).

ADM continues to lavish huge sums on candidates for high office. During the 1996 Presidential campaign ADM gave $100,000 to Bob Dole’s Better America Foundation, provided numerous free rides on ADM’s corporate jets to Senator and Mrs. Dole, and gave over $1.5m in soft money to the Republican National Committee. Though Bob Dole lost his Presidential race he remained highly influential as a Senator and helped arrange the 54-cent per gallon ethanol tax credit of which ADM, producer of more than 60% of America’s corn-based ethanol, is the main beneficiary. ADM also contributed to Clinton’s and George W. Bush’s campaigns. Although Barack Obama apparently has received no direct campaign contributions from ADM – ADM was, however, a major sponsor of the 2008 Democratic National Convention – as a Senator from ADM’s home state of Illinois Mr. Obama was one of several farm-state Senators who staunchly opposed a Bush Administration proposal to lower the prohibitively high import duties on Brazilian ethanol made from sugar cane. During his Presidential campaign Mr. Obama vigorously defended the corn ethanol subsidy, and as President he has kept the policy firmly in place.

ADM’s own corporate website has this to say about its political contributions:

“As a global agricultural leader, Archer Daniels Midland Company connects the harvest to the home and serves growing global demand for food and energy.   Our ability to fulfill this vital purpose is enhanced when government policies impacting our operations promote growth — growth that facilitates job creation as well as ongoing investment in our business, our employees and the communities where we live and work.

“For this reason, ADM and ADMPAC, our political action committee, support candidates for political office and organizations that share our pro-growth vision, our aspirations for the future of global agriculture, and our commitment to the people who depend on it for their lives and livelihoods.  All ADM and ADMPAC political contributions are made in strict accordance with applicable federal, state and local laws.”

In 2009, not an election year, ADM gave $197,575 in political contributions while its political action committee, ADMPAC, gave another $134,500.

If rigging U.S. agriculture, trade, and energy policies to its advantage weren’t enough, ADM has also conspired with other agro-processing giants such as Cargill and Ajinomoto to fix prices for lysine, citric acid, and corn syrup. It paid a $100m fine in 1996 for lysine price-fixing in a plea bargain that led to two-year prison sentences and $350,000 fines for Michael Andreas, Dwayne’s son and heir apparent, and Terence Watson, another ADM executive. At around the same time, ADM, Cargill, and the British sugar company Tate & Lyle were indicted by the U.S. government for  conspiring to fix the price of high-fructose corn syrup. Though they were cleared of criminal charges in 1999, they subsequently settled a lawsuit brought by U.S. food and beverage manufacturers, Cargill paying $24m, Tate & Lyle $100m, and ADM $400m.

According to a 1995 article by James Bovard of the Cato Institute, ADM heavily bankrolled the American Sugar Alliance, which successfully lobbied for high tariffs and quantitative restrictions on sugar imports, raising the domestic sugar price to a substantial multiple of the world market price and ensuring that ADM could profitably produce high fructose corn syrup at a substantial discount to the cost of sugar. According to Bovard’s article, “At least 43 percent of ADM’s annual profits are from products heavily subsidized or protected by the American government. Moreover, every $1 of profits earned by ADM’s corn sweetener operation costs consumers $10, and every $1 of profits earned by its ethanol operation costs taxpayers $30.” The numbers have no doubt changed over the past 15 years, but the underlying practice has not.

The funneling of taxpayer dollars into ADM’s bottom line continues unabated. The Des Moines Register reports today that the EPA is about to issue an approval for 15% ethanol blends to be sold as automotive fuel (the current standard is 10%), almost certain to be a bullish indicator for ethanol futures prices.

Apart from the obvious cost to taxpayers, what are the wider effects of the subsidies and other market distortions that favor ADM?

The current controversy over New York City Mayor Michael Bloomberg’s proposal to ban the use of food stamps for purchases of soft drinks on the grounds that such products contribute to obesity is a case in point. I am not going to wade into the debate over the health effects of high fructose corn syrup (HFCS), except to note that the Corn Refiners Association (principal members ADM, Cargill, and Tate & Lyle) have recently launched a huge campaign to rebrand HFCS as “corn sugar” and to convince consumers that “sugar is sugar,” whatever its source. Even if the association’s claim is true, HCFS has had a hugely adverse effect on public health, mainly because it is so cheap. It has become almost impossible to find a 12-ounce bottle of Coke or Pepsi anymore. Go into any convenience store and the minimum size is now 20 oz., while two-liter bottles, which cost only pennies more than their smaller cousins, appear to dominate the market. As one of the cheapest items on supermarket shelves, soft drinks laden with HFCS are a popular choice for people whose grocery budgets don’t stretch very far, and if you can get two liters for only slightly more than the price of one, why wouldn’t you?

Rather than robbing food stamp recipients of their dignity by telling them what they can and can’t buy, I’d rather see comprehensive reform of our agricultural policies, which would include abolishing food stamps, another form of agricultural subsidy, in favor of cash grants.

Then there is the effect of ethanol subsidies on world hunger. You may remember the commodities price boom in the first half of 2008, before the housing market crash, when the oil price hit $147 a barrel, the corn price went to $7.65 a bushel, and more than 30 countries, including Bangladesh, Cameroon, Egypt, Haiti, India, Indonesia, Mozambique, and Senegal, suffered widespread and deadly food riots. The spike in the corn price was caused largely by the diversion of roughly a third of America’s corn crop to ethanol production. This had a knock-on effect on wheat and rice prices. Numerous grain exporting countries, including Argentina, India, Vietnam, and Russia, imposed export bans, which contributed to shortages and price rises in countries dependent on food imports

The same phenomenon may be about to repeat itself. On Monday, corn prices gained 8.5% on the Chicago Board of Trade, the biggest rise since 1973, and it followed a substantial gain on Friday, both resulting from Friday’s release of a U.S. Department of Agriculture report, which sharply cut the outlook for U.S. corn yields. These developments had a knock-on effect on wheat prices, which rose 2.8% before falling back, and soybean prices, which gained 1.5%. Cotton futures hit a 15-year high on the New York market. Russia, suffering its hottest-ever summer, in August imposed a ban on wheat exports, which it subsequently extended to the 2011 harvest as well.

A lot of things contributed to the 2008 panic and are contributing to the current panic in the making. People in places like China are growing wealthier and want to consume more meat, which increases the demand for grain. Rapid urbanization, especially in China, is forcing the conversion of farmland to industrial, commercial and residential use. Higher oil prices raise the cost of fertilizer, which in turn causes food prices to rise. The planet’s population continues to grow, with much of the growth coming in countries that can’t grow enough food to feed themselves.

You can’t blame ADM for hot weather in Russia. But if you had to identify one principal cause of what seem to be recurring food shortages and price shocks, you’d have to look at U.S. agricultural policy, and if you look at U.S. agricultural policy you have to look at ADM. Ethanol subsidies and tariff protection divert cropland from food production to energy production. It’s as if you cut down a corn field to put in a power plant, except a power plant has a much smaller footprint than the thousands of acres of corn fields needed to produce an equivalent amount of energy. The competition for cropland intensifies, food prices shoot up, and the world becomes much less stable. Starvation abroad and obesity at home, ADM is one corporation with a lot to answer for.

Back to my original point, then. Barack Obama, like all of his predecessors for at least the past 40 years and like most of his former Congressional colleagues, Democrats and Republicans alike, is quite happy to grant hugely expensive favors to ADM and to scores of other big companies. In this he, and they, can be considered highly business-friendly. But this doesn’t translate into enthusiastic support for free markets. Quite the opposite, in fact. It might be appropriate to leave the last word to former ADM Chairman Dwayne Andreas, who told a reporter, “There isn’t one grain of anything in the world that is sold in a free market. Not one! The only place you see a free market is in the speeches of politicians. People who are not in the Midwest do not understand that this is a socialist country.” Even though they would never admit it publicly, a majority of our elected officials – and that includes Presidents Obama and Bush and a majority of senators and representatives from both parties – agree. You can quibble about the details, but President Obama is firmly in the political mainstream: friendly to big companies but distrustful of free markets.

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