World Economic Journal #1

WEj#1 (23) January 2013

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WEj#1 (23) INSIDE

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MANAGING EDITORSUSA Cynthia Blanco Russia Irina KostromichevaItaly Mira RestelliSpain Valentina RinconGermany Maximillian HamburgCzech Republic Catalina KochkinaIsrael Ludmila TsibulevskayaStaff Writers: Anastasia Yakovleva, Daria Getmanova, Anna Kim, Sofia PonomarevaContributing Staff: Valeria Labuznaya, Elena Shesternina Art Director: Alexander Ardabiev Cover Design: Oleg Babkin

Translation: Lizz Dorovitsine, Jeffrey Mason, Susan WelshEditorial Director: Oleg OvchinnikovHead of Distribution and Promotional Services: Natalia Starkova

Editorial Office's Address in Russia: Business-Center “Viktoria-Plaza”, 6/2, Baumanskaya str. Moscow, Russia, 105066Tel./ fax: +7 (495) 644-46-99; e-mail: [email protected]

The magazine is distributed in USA, Europe, Brazil, Russia, Kazakhstan

Fonts: Paratype, Corki by Typedepot

Printers: RR Donnelly111 South Wacker DriveChicago, Illinois 60606-4301Total worldwide circulation: 57 000 copiesApproved for publishing 2012.12.20ISSN №2219-6374The recommended price is $7,99. The journal is registered in the Federal Supervision Agency for Information Technologies and Communications. The journal is published from 2009.

All the photos taken from flickr.com are placed under the Creative Commons license or with permission from the author. The opinions of the authors of the articles may not agree with the opinion of the editors. No part of this publication may be reproduced or used in any form without prior permission in writing from the editor. No responsibility for the content of the advertising materials can be accepted by the editors. All the enclosures to the journal are made for publicity purposes.

Establisher Louery Financial Inc., UK

Editor-in-Chief Robert Abdullin

Robert Abdullin

The statistics are relentless, and very clear: investors do not trust Russia. They often treat those attached to money in Russian business approximately the same way as money in one of Las Vegas’ gambling casinos – you put in as much as you’re willing to lose, while secretly hoping that your bet will crack the bank. Instead of remaining objective, this lack of trust is much more subjective and, more often than not, is a result of the strong emotions associated with the raw material sectors of the econ-omy. Investors’ fear collides with known Russian corruption and its politics, or the “block principles”. After all, when speaking frankly, putting money into the Georgian economy is much more riskier, and they have no lack of investors, mostly because investing in Georgia was almost considered fashionable. At the same time, people have time for reservations during business negotiations with Russians, because it won’t bring them quick profits and it takes a deliberate strategy.

Despite all this, it has to be said that Russian businessmen are able to support themselves during bad times, preferring their capital to work outside Russian borders. Nearly every single one of them, however, refers to a lack of mechanisms designed to protect investors. Simple laws like these now appear to be active in most developing countries, such as Russia’s neighbors in the CIS, South America, and Africa. This type of legislation could, if not create an atmosphere of investments within Russia, at least reassure any disbelievers of Russia’s status as an investment-friendly country. But as of now, unfortunately, the money is continuing to flow out of Russia.

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NotaBene

Facts, news, statistics

Cover Story

Why Money Is Leaving Russia

Affairs

The Palestinian Economy Won’t Sustain Independence The UN General Assembly has recognized Palestine as an observer state

Sometimes They Come Back… But not This Time 76-year old Silvio Berlusconi hinted that he wouldn’t mind running for the post of prime minister for the sixth time

Trends

The Insurance Market Becomes More LivelyThe United States government will soon implement a new law regarding insurance for chronic patients

From Nooses to Workouts: The Effects of the CrisisThe infamous recession caused terrible consequences that have little to do with money, such as the increasing rate of women refusing to have children and suicides among people living in bankruptcy

Opportunities

Don't Hurry Into the Crisis It is expected that next year, the European economy will start to grow once again. Special attention is being right now to the recessions in the countries of Central and South Europe

Hungary’s Dance with Taxes The Hungarian government, in its attempt to decrease the budget deficit, has come very close to strangling the national market

THREATS

Europe is Scared Again The recovery of the global economy is at risk once again

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Despite the awakening of investor interest in emerging markets following the crisis,

russia can't boast of investment inflows from abroaD; in fact, capital continues to flow

out of the country page 10

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How Long Will the Georgian Miracle Last?Who is investing in Georgia’s economy and what is on Prime Minister Ivanishvili’s agenda

The Continent

The Norwegian Ketchup BottleFinancing for Norway’s petroleum sector is increasing, and analysts attribute this to the discovery of new deposits. The economic stability of the country today is based on “black gold,” thanks to which Norway doesn’t fear strikes or the crisis in Europe

Champions in Debt For the Spanish, soccer, like bullfighting and flamenco, is a national sport. They talk about the “Barcelona” players or the Madrid “Real” team more than about the royal family or the financial crisis

Finance

The Canadian Bank is Exporting the “Know-How”

Investment

Peter Löescher: “The Global Importance of Emerging Economies is Changing”

Maria Pinelli: "You Can’t Pinch Pennies on the Road to Growth"

Power Industry

Against the WindCould alternative types of energy completely replace coal, gas, and peat, which have long been the standard? Experts are in no hurry to give a positive answer

Hi-Tech

Hewlett-Packard is in Need of Repair

Car Industry

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WEj#1 (23)

Lexus is Not Afraid of Taxes

The Toyota Motor Cooperation is plan-ning on increase its volume of sales for the luxury Lexus car brand in the upcoming new year. The head of the American office of Toyota Motors is po-sitive that they can increase their num-ber of sales by 10% in the span of one year, as a minimum. The company’s leaders say that they can achieve the goals they set even if America contin-ues to increase taxes on luxury items in its markets, because the demand for the automobile luxury class is continuing to grow at a faster tempo than the rest of the auto industry. On top of that, the Lexus brand in particular is very popu-lar in the American market.

iPhone 5 Turned Out Not to Be So Progressive

The long-awaited smartphone, the iPhone 5 from Apple, has already received a fair amount of criticism from industry experts. Their one major flaw, according to these experts, is the absence of a new NFC chip (near field communication) for the de-vice, which allows consumers to make mo-bile payments. NFC-technology allows for high-frequency, short-range communica-tions for the purpose of instantly making payments for goods and services, simply by waving your phone near an ATM or other payment device. Smartphones from HTC, Nokia, RIM, and Samsung already have these chips, while Apple continues to force their clients to make payments from separate apps, such as Passbook.

The Future of Digital Media

The modern media environment is po-sing new difficulties to major manufac-turing companies, and to be success-ful, it is first important to make their content available on a digital platform. Walt Disney, the film company, was one of the first to realize this important fact and drew up an agreement that allowed all Disney, Pixar, and Marvel movies to be posted to Netflix. This is one of the biggest deals Netflix, which streams live video from the Internet, has ever reached. Walt Disney gave up their long-term cooperation with the cable channel, Starz, and starting from 2016, all new Disney movies will be released on the Internet immediately.

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Technology for TWo yeArs

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January 2013

Festive Advertising

The period right before New Years is the perfect time for most companies to launch massive advertising cam-paigns. Coca-Cola, the world’s largest soft drink company, signed a season advertising agreement with the cable network HSN. Under the terms of this agreement, HSN will advertise Cola-Cola products not just on its cable channel, but on its website, mobile apps, and so-cial networks as well. In turn, Coca-Cola will also promote HSN products under their own resources, such as My Coke Rewards. The partners hope to work together for many years.

News Corp Says Goodbye to Another Manager

The Execute Officer of Rupert Mur-doch’s media company, News Interna-tional, has left his position. The compa-ny’s former executive, Tom Mockridge, has stated that his resignation was completely voluntary and practical. Mockridge was appointed very recent-ly, in July of 2011, after the phone hack-ing scandal that rocked the company – in its aftermath, News International’s management fired then-CEO Rebekah Brooks and Rupert Murdoch stopped leading News International.

New Year, New Leaders

The Head of Strategic Planning at HSBC, John Flint, will be in charge of all of the retail banking services start-ing next year. HSBC, one of the largest financial conglomerates in the world, focuses its activities on four global as-pects, and one of these is providing retail banking services and making its asset management company (RBWM) available to the public. John Flint’s ap-pointment is a direct result of the for-mer head’s resignation, Paul Thurston, who wanted to leave two years ago, but decided to stay until the reorgan-ization of RBWM started.

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WEj#1 (23)

The Nobel Foundation Deals with the Crisis

The Nobel Foundation is no longer able to award its winners with monetary bo-nuses. Because the European debt cri-sis negatively impacted the fund’s fi-nancial transactions, which was unable to successfully manage its assets, the size of the cash awards decreased, and the fund’s leaders had to start thinking about raising funds using other means. For now, a solution was found: part of the premium will be paid for by private equity funds, even though this directly contradicts the Nobel Foundation’s in-tentions. But the current economic situ-ation has forced some changes, making hedge funds necessary.

Businessmen Need to Reade

The latest edition of the Business Insi-der has put together a list of 26 books that every entrepreneur and business-man should read. The collection of books suggests that the most important eco-nomic topics today are consumer behav-ior, business start-ups, social responsi-bility, making corporate strategy more efficient, and innovation. On top of this, it is recommended that businessmen learn the psychology of relationships and some philosophical concepts. Some of the “business sharks” who mastered these topics include Richard Branson, Steve Jobs, and Muhtar Kent.

Investors Should Look Toward Jakarta

The consultant company, PriceWater-houseCoopers, has reported that Jakar-ta, the capital of Indonesia and its largest city, will be the most appealing market for real estate investments next year. The city’s GDP growth has averaged 6.5% per year, both inflation and inter-est rates are under government control, and the increasing volume of foreign investments and growing demand for real estate show significant and steady growth. However, experts warn poten-tial customers that reasonable banking credit is hard to find in Jakarta, as well as reliable partners, and land can only legally be owned by one person.

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January 2013

Greece is the Most Corrupt Country in Europe

Transparency International, an in-ternational organization designed to fight corruption, has once again rat-ed countries on its famous “Corrup-tion Perceptions Index”, an index that evaluates corrupt countries based on the perceptions of its population. This year, the most “transparent” coun-tries were Denmark, New Zealand, and Finland, and the most corrupt were Uzbekistan, Turkmenistan, and Iraq. Greece, which was listed as 94th on the list, is not as clear, given that it is in the arms of European countries. Other members of the European Union that were suspicious were Italy, Serbia, and Bulgaria.

In a Crisis, Act Like Everyone Else

New disputes between the politicians of the European Union have resulted in London becoming a major European financial capital. In an economic crisis, the status of the British capital and its legisla-tion get in the way of regulatory measures and do not allow for the implementation of capital controls, according to senior of-ficials from continental Europe. Christian Noyer, the Governor of the Central Bank of France, sees London as an “offshore com-pany” for Europe, which allows its financial companies to escape the attention of certain authorities. This means that the European Union does not have access to British funds that they could use to stimulate the econo-my and help solve the crisis.

University Diplomas are in Demand

The research-consulting firm, McKinsey & Company, predicted that by the year 2020, the world may face a shortage of professional specialists with university diplomas. In that same time frame, the number of people with only secondary education will reach 288 million people, and the market will need 253–256 mil-lion of such workers. Unfortunately, the current conditions of the labor market do not motivate high school students to continue onto higher education – the unemployment rate among young adults is still the highest in the world.

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WEj#1 (23) cover story

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In the Red

Having more or less recovered from the consequences of the global financial cri-sis in 2008, most countries faced a tough battle for investment. But after four post-crisis years, the top countries in restoring and increasing the amount of direct fo-reign capital are China, Hong Kong, Singapore, and Brazil.

At the beginning of the 2000s, a shift towards investment flows began: Interest in developed countries is falling, while the role of emerging markets is growing. By the mid 2000s, there was investment activity in practically every country, and by 2007–2008, foreign direct investment (FDI) reached its maximum. Then the global financial crisis took its toll and sustainable growth was adjusted.

At the end of 2011, the top three leaders in terms of FDI inflows were the U.S.A. with $227 billion, China with $124 billion, and Belgium with $89 billion. Russia ranks 9th among counties with the highest FDI inflows, with $53 billion in 2011. However, it is es-timated that in the first half of 2012, only China was able to maintain its high rates of FDI – in six months, cash inflows were $118 billion, or 95% of 2011 levels. Brazil is also worth mentioning: It attracted $29.7 billion in FDI, or 45% of its 2011 levels. Most other countries are seeing a decline in investment activity, as in Russia, for example, where for the first six months of 2012, FDI was only $7.8 billion, or 15% of 2011 levels.

Why Money Is LeavIng RussIaDespite the awakening of investor interest in emerging markets following the crisis, Rus-sia can't boast of investment inflows from abroad; in fact, capital continues to flow out of the country. Experts attribute this not so much to image difficulties of the Russian au-

thorities, but rather to insufficient legal mechanisms for the protection of investors.

Text:

Oxana Chaika, Nadiya Aliullova, Daria Getmanova, Anastasiya Yakovleva

# CountRy 2008 201 1

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306 366108 312193 95059 62045 05811 79791 48951 72275 00247 217

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souRCe: unCtad,

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dataBase, IMF

peRCentage oF voL. In 2011

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cover story January 2013

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Among the most important components of FDI are “from scratch” projects, when foreign investors don’t buy existing businesses, but rather open new ones, which creates new jobs. The top three leaders in this indicator in 2011 were China ($100.7 billion), Brazil ($62.9 billion), and India ($58.3 billion). In Russia, the figure reached $22.5 billion.

Country 2006

BrAZILuKGErMAnyIndIAKAZAKhstAnCAnAdAChInArussIAsAudI ArABIAusA

15 45933 50018 02886 0284 17615 507127 32539 27120 20538 666

sourCE: unCtAd

2007 2008 2009 2010 2011

18 98827 32118 56254 0024 2518 632110 41950 14426 63050 094

46 99468 22436 87180 58820 46820 541130 51861 60742 31894 039

44 51552 00820 03957 1701 94914 084116 76531 29814 86073 529

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The outflow of foreign direct investment created the following situation by the end of 2011–2012.

The largest outflow of foreign funds in 2011 was from the United States ($396.7 billion), followed, by a wide margin, by Japan ($114.4 billion), the United Kingdom ($107.1 billion), and France ($90.1 billion). Russia is listed in eighth place, with FDI outflows for 2011 of $67.3 billion, which is $14.4 billion less than inflows for 2011.

sourCE: unCtAd, oECd

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According to FDI estimates for the first half of 2012, FDI outflow from Russia was $16.5 billion, which is $8.7 billion more than the FDI inflow for the same period. You could, of course, cite the growing interest of Russian companies in investment pro-jects outside the country, but these figures really say more about “capital flight” and the decline in investment activity due to increased nervousness in the global markets. Looking at other countries, there was more FDI outflow compared

Dr. Ros Altmann, Director General of the Saga Group, economics policy expert:“It’s difficult to give exact reasons since you can find many factors. Sometimes the whims of the market have an impact on investors. Sometimes investors get nervous about the political risks and market sales ahead of elections. Sometimes they simply run with their profits and redirect them into new areas. High yields and guarantees – those are what investors are looking for. Overall, the peculiarities of the market go in and out of fashion. Investors have a kind of ‘herd mentality,’ where some start selling stocks because others are doing the same thing.”

pErCEntAGE oF voL. In 2011

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to total inflow for the first half of 2012 in the U.S. also, although the reverse is true in most of the countries that were reviewed. FDI inflow in the first half of 2012 was higher than outflow in China, the UK, France, Canada, and others.

Where Are We Drifting To?

According to various estimates, the net capital outflow from Russia for the last four years amounts to $250–300 billion. This, despite the launch of a program during this period to improve the country’s investment climate. Admittedly, they realized this rather late in the day. And you don’t have to look far for examples of that – the consequences of the crisis for the BRIC “comrades” were much less serious than for the Russian economy, which saw a drop in GDP in 2009 of 7.8%. At that time, China and India had GDP growth of 9.2% and 5.9%, respectively. The Brazilian economy lost about 0.3%, but the following year they made up for two years with +7.5%.

Overall, it’s clear that investors have left the assets that they consider risky and have remained where there aren’t any threats to their capital. It became clear during this period that vague promises to allure major funding into Russia’s econo-my were not successful and it would be necessary to create competitive conditions. That meant changing investment policies.

The effectiveness of the government’s investment policy may be judged based on the ratio of net FDI inflow (or outflow) to the national GDP. Here Kazakhstan takes first place with an index value of 4.7%, followed by a wide margin by Brazil (2.8%) and Saudi Arabia (2.3%). The maximum FDI outflow/GDP value belongs to the UK (−2.2% in 2011), France (−1.8%), and the U.S. (−1.1%). In Russia, the index value of FDI outflow/GDP in 2011 was 0.8%, while over the past 11 years, the best figure was recorded in 2008, when the FDI inflow to GDP ratio was 1.2%.

Country 2006

BrAZILuKGErMAnyIndIAKAZAKhstAnCAnAdAChInArussIAsAudI ArABIAusAFrAnCE

20.346.620.47.540.629.310.526.914.224.649

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17.437.218.49.844.229.98.31323.117.431.9

25.248.621.312.762.340.99.43138.221.539.5

32.351.621.311.955.737.110.233.139.223.440.8

27.749.82010.452.534.310.124.833.623.234.7

The ratio of accumulated FDI inflow to GDP shows the result of foreign investment in the country over the long term. The table shows that the maximum index values belong to Kazakhstan (52.5%), the UK (49.8%), and Canada (34.3%). China and India show low values of accumulated FDI inflow/GDP – 10.1% and 10.4%, respectively – which shows, on the one hand, the substantial size of these countries’ GDP, and on the other hand that only recently have foreigners sought to make major investments in, for example, Indian projects. In Russia, the index value is 24.8%. The FDI Attraction Index, which

Tim Campbell, Advisor to the Mayor of London on training and enterprise, UK:“After 1991, when the federal government broke up, people wanted to achieve the prosperity they saw in other countries. As soon as training centers developed outside of Russia and financial and commercial opportuni-ties developed, capital and brains flowed over to these new centers. If we look at the changes over the past 20 years, I would rather settle in Moscow than try to leave there. Russia has intellectual potential, unique specialists, and most importantly, natural resources, which will play an important role in the future.”

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Country 2006

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characterizes the success of various countries’ economies in attracting foreign invest-ment, shows that among the top 10 countries, 8 are emerging or transitional economies and 2 have developed economies. Ten years ago, only 4 countries with emerging or tran-sitional economies were on the top 10 list of countries most attractive for investment.

Russia steadily improved its position in the ratings between 2002 and 2010, rising from 95th place to 17th! But in 2011, it fell to 19th. Countries with better placement in the ratings than Russia included Kazakhstan (7th place in 2011) and Saudi Arabia (12th place in 2011).

Leading in the ratings are Hong Kong, Belgium, Singapore, and Luxembourg – and these governments consistently occupy the top places in terms of attracting foreign funds, in light of their favorable investment climates.

The success of emerging countries in improving the investment climate and in-creasing the amount of foreign investment has not just been noticed by UNCTAD analysts. The World Bank’s Doing Business – 2013 report states that in the last year alone, 108 countries introduced more than 200 institutional reforms aimed at making it easier to do business. And most of the reform work is being done in emerging countries, although even in the context of financial instability, de-veloped countries continue to improve the basis for reviving and strengthening economic growth.

In 2012, Russia occupied 112th place which is 12 positions better than even just two years ago. And although Russia is among the 30 countries that have made the greatest progress over the past seven years in regulating its business climate, attitudes of foreign investors are slow to change towards our country.

Paul Ostergaard, Senior Vice-President of Urban Design Associates (UDA), former president of the Pittsburgh Chapter of the American Institute of Architects, member of the Urban Land Institute:“In order for capital not to flow out and for the protection of investments, the situation with private property rights needs to be improved. But most importantly, transpar-ency of legislation should be improved and modernized. Businessmen withdraw their funds primarily because they do not feel safe investing in Russia.”

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Nonetheless, since 2005, experts from the World Bank have recorded 15 positive changes in 9 out of 10 possible indicators. The weak link is still inves-tor protection – Russia has a “dash” for this indicator. For the past three years procedures have been simplified in the construction industry, but decisions can still take up to three years in some regions. Laws were passed aimed at improv-ing customs administration, but current approaches still require overhaul and revision “on the ground.”

Federal authorizes aren’t in the position to control the implementation of each investment project – this is more in the scope of regional authorities, who are often not interested in attracting investors and don’t try to implement federal legislation at the local level. Or rather they take the initiative if it sat-isfies their personal interests. Hence, the second major problem is adminis-trative barriers, or put more simply, corruption. In a report published at the end of 2012 that ranks corrupt countries, Russia was ranked 133rd, earning 28 out of a possible 100 points on the “corruption perception index.” Analysts at Transparency International suggest that any result under 30 points be treated as a “disgrace to the nation.” You can react however you want to the ratings, but Russia’s image as a corrupt country has already been formed and it will be very difficult to change.

Although it seems that work in this direction has been going on for many years, the percentage of kickbacks is growing and only federal officials are talking about the increased transparency in concluding transactions. Thus, solving this second problem can only happen if the mentality of civil servants is changes. There can’t be any discussion of improving the investment climate in this area until officials begin solving problems with businesses that don’t become incen-tives in their work.

The Neighbor’s Affairs

It becomes clear that besides the BRIC “frenemies,” Russia has another seri-ous competitor in the battle for foreign capital – Kazakhstan. Net FDI inflow to GDP in recent years in this country hasn’t fallen below 2% and in good years was 12–13%. That means that the investment policy of Kazakh authori-ties is regarded as effective, as reflected in its high 7th place rating in the at-tracting FDI index.

But what could the government of Kazakhstan offer investors? Work to improve the country’s attractiveness in the eyes of potential investors was started by Kazakh officials back in the 90’s by adopting laws to protect foreign invest-ment. The consistent implementation of investment strategies, numerous eco-

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nomic reforms (including simplifying procedures for starting new companies and getting loans), improvement of the overall legal and regulatory frameworks and specifically taxation, privatization, the transition of accounting and reporting to international standards – all of this led to the creation of a favorable business environment and is confirmed by experts from the World Bank. In their Doing Business – 2013 report, Kazakhstan is ranked 49th (Russia is 112). But this “fly in the ointment” is vital. There is a problem that can’t yet be conquered and which worries foreign investors – the corruption of officials and the arbitrariness of local authorities. In the same rating of corrupt countries prepared by Transpa-rency International, Kazakhstan, like Russia, was in 133rd place with 28 out of a maximum 100 points.

Russia’s potential is very attractive to foreign investors. This can be judged based on the potential FDI index, in which it ranks 6th.

It should be noted that in 6th place, Russia led such indicators as natural resources while in other indicators, Russia is much weaker. For example, Russia is ranked 31st in availability of infrastructure and 24th in availability of labor. As for comparing the attracting FDI index and potential, the amount of attracted foreign funds by the State is generally in line with expectations.

Russian authorities should continue to work to establish improved and effective rules for regulation, which are an integral part for enabling favorable conditions for business. But in addition to carrying out a wide range of policy reforms aimed at simplifying the business environment, increasing competition, and supporting innovation, it is important not to forget that all efforts fall apart because of massive structural and administrative barriers “on the ground.”

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Torberg Falch, Professor at the Department of Economics at the Norwegian University of Science and Technology (NTNU) in Trondheim, Norway, the Chairman of the Department of Economics at NTNU: “First of all, investment activity is in general is less today than before the financial crisis. Secondly, with regards to the Russian authorities there is a certain bias. All of this creates uncertainty that investors don’t like. But Russia’s accession to the WTO is a positive fact.”

rank

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WEj#1 (23) Affairs

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The PalesTinian economy Won’T susTain indePendence

Palestina.indd 16 21.12.2012 12:45:11

Affairs January 2013

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Until recently, Palestine had only observer status at the UN. Its new status, which was vigorous-ly rejected by Israel and the United States, gives Palestine the right to participate in discussions of the General Assembly but not to vote. In does, however, open up the possibility to take legal re-course at the International Criminal Court and to file numerous suits against Israel.

“The General Assembly reaffirms the right of the Palestinian people to self-determina-tion and to independence in their State of Pales-tine on the Palestinian territory occupied since 1967,” states the resolution adopted by the General Assembly. The document also expresses the hope “that the Security Council will consider favorably the application submitted on 23 September 2011 by the State of Palestine for admission to full membership in the United Nations.”

However, placing any hopes on the last point would be in vain; the U.S., which has the right to veto, will not allow such a resolution to pass. Their argument is that in order for Palestin-ians to gain statehood, they first need to reach an agreement in the negotiations with Israel.

But does Palestine really need statehood? Let’s say that in a few years, the dream that has oc-cupied the minds of the Palestinians for the past six and a half decades and on the altar of which hun-dreds, thousands of people have died, does come true. Then what? How can such a state survive?

Politics aside, at the end of day, complete Palestinian independence would take many years. It is better to talk about numbers. What is the chance of Palestine surviving from an economic point of view?

At the end of last year, the Palestinian National Authority (PNA) commissioned

The UN General Assembly has recognized Palestine as an observer state. A resolu-tion was approved by 138 of the 193 UN member states, while 9 countries were op-

posed, 41 countries abstained, and the other countries did not vote.

Text: Robert Abdullin

There is poverTy, chronic food shorTages, and an average income of $2,900 per capiTa -a Third of The world average. fifTy-seven percenT of The populaTion lives below The poverTy line, wiTh The worsT siTuaTion in easT Jerusalem, wiTh poverTy raTes near 80%

Palestina.indd 17 21.12.2012 12:45:19

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a study to demonstrate how, if the occupa-tion were ended and an independent economy established, a Palestinian state could fully sup-port itself and eliminate the enormous depend-ence on donor countries (international aid is cur-rently 30% of GDP).

The experts calculated the amount of da-mage that, in their view, the occupation is caus-ing the Autonomy: In 2010 alone, the PNA failed to receive $7 billion that was its due. That, by the way, is actually more financial aid than was allo-cated by donor countries in 2010. But is this re-ally the case?

In 2011, Palestine saw decent economic growth, allowing the advocates of independence to talk about the wonderful prospects of autonomy. But it didn’t last long. The United Nations Conference on Trade and Development (UNCTAD) announced that economic growth has been slowing since Spring 2012. While Palestinian economic growth was 9.9% in 2011, such indicators are nowhere to be found this year. Moreover, it has become ap-parent that all the hoo-ha about the excellent eco-nomic prospects is little more than self-deception by the local authorities. Indeed, growth was only possible on the back of restoring infrastructure destroyed by the fighting in December 2008-Janu-

ary 2009 (the “Cast Lead” Israeli military opera-tion in Gaza). Once restoration was completed, the source of growth dried up.

It is possible that after the next Israeli mili-tary operation in the Gaza Strip in November of this year, which destroyed part of the infrastruc-ture, the economy will once again recover for a while. But what state promotes economic growth by engaging in military action?

There is poverty, chron-ic food shortages, and an aver-age income of $2,900 per capita – a third of the world average. Fifty-seven percent of the population lives below the poverty line, with the worst situation in East Jerusa-lem, with poverty rates near 80%. For comparison, in 1980 there was only 5% unemployment in the West Bank, and now that num-ber is 26%. And these are just the official figures.

“The trade deficit is about 36% of GDP, or $3.2 billion. More than 80% of this deficit is because of trade with Israel. The Palestin-ians’ main problem is their eco-nomic dependence on Israel,” says Mahmoud Elkhafif, Coordinator of Assistance to the Palestinians at UNCTAD. The main buyers of Palestinian goods are Israel and Jordan, which account for 98% of total Palestinian exports.

Palestina.indd 18 21.12.2012 12:45:26


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Palestine is using only a quarter of its agricultur-al capacity (agriculture as a percentage of GDP declined from 12% in 1995 to 5.5% in 2011), even though agriculture together with textiles are their main exports. Industry isn’t doing any better – just 13% of GDP. More than 80% of income comes from the service sector.

Real gross domestic product growth for 2011 was 5.8%, a very respectable figure which even permitted the IMF to say that the Palestinian economy is stable and therefore the Autonomy is ready for statehood. But how are the Palestinians reacting to these statements?

This autumn, anti-government protests be-gan in the West Bank (which, by the way, is stable according to the Palestinian territory’s indicators), which fit quite easily into the concept of the Arab Spring. And there is much to be unhappy about – there are jobs for less than 40% of men, just over 20% of women, and 28% of youth; about 20% of those with higher education are unemployed. And so Palestinians are taking to the streets to burn portraits of Prime Minister Salam Fayyad and PNA President Mahmoud Abbas.

Such sentiments on the West Bank are also disturbing to Israel. The collapse of a stable Palestinian Authority, which lost the Gaza Strip but still retains the West Bank, is heading towards the need to take urgent military actions. Tel Aviv is trying as hard as possible to prevent the econo-mic collapse of the West Bank and even requested a loan from the IMF for a billion dollars for the Palestinians. But the IMF did not grant the money.

As for the long-awaited economic inde-pendence, the latest verdict was handed down by the World Bank. Their report states that the Pales-tinian Authority’s economy is not stable enough for an independent state, mainly because of the dependence on foreign aid.

Only a strong private sector can provide the Autonomy with jobs and reduce unemploy-ment. Experts with the bank talk about the need to integrate the Palestinian economy into the global system. But, they say, “Israeli restrictions remain a serious obstacle for the development of the PA’s economy,” yet even in such circumstances, the Palestinian leadership “can take measures and lay the foundations for economic growth.”

Only a strOng private sectOr can prOvide the autOnOmy with jObs and reduce unemplOyment. experts talk abOut the need tO integrate the palestinian ecOnOmy intO the glObal system. but, they say, “israeli restrictiOns remain a seriOus Obstacle fOr the develOpment Of the pa’s ecOnOmy,” yet even in such circumstances, the palestinian leadership “can take measures and lay the fOundatiOns fOr ecOnOmic grOwth

Palestina.indd 19 21.12.2012 12:45:33

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SometimeS they Come BaCk.. . But not thiS time

Illustrations by Alexander Ardabiev

Berlu.indd 20 21.12.2012 12:44:11


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External Control

Former European Commissioner Mario Monti took control of the highest political office in Italy in No-vember 2011, though to call a spade a spade, the EU practically imposed this trusted crisis-manager on the debt-ridden country. Soon thereafter, a package of tough anti-crisis measures was adopted – fol-lowing the European Union’s recipe, of course. It was initially suggested that the Monti government would be a technocratic one and new elections would be held before the appointed time. And so it was: In early December, the Prime Minister an-nounced that he would resign immediately after the 2013 budget was approved by the Italian par-liament. Of course, nothing prevents Monti from not leaving politics at once, in order to participate in the election as the leader of one of the centrist electoral blocs. However, the technocratic govern-ment, which forced Italians to tighten their belts to the max, does not enjoy the warm support from voters needed to ensure a victory. Perhaps the role of crisis manager who temporarily stepped off to the side in order to make way for professional poli-ticians might not be such a bad thing for Monti.

What suits Italy in the new elections? In mid-December, statistical data were released show-ing that the national debt for the first time in his-tory exceeded €2 trillion, and that could increase 8-10% by the end of the year. Opponents from the right accuse Monti of following instructions from Germany to a T – instructions that lead not to re-covery, but deeper into crisis. Unemployment data is also disappointing, placing the Prime Minister under fire from left-wing parties and trade unions. It was amidst this situation that Berlusconi, out of the blue, made a statement about his intent to re-turn to the big game.

Rough Days for the Cavalier

It should be said that the former Prime Minister’s last few months have been a real test of strength. Two con-current court cases on allegations of sexual crimes and tax crimes are the first in a long time not to turn out in his favor. In late October, the Cavalier (Italian journa-lists’ nickname for Berlusconi) was sentenced to four years in prison for large-scale tax evasion, but during sentencing, the judge said that, in view of the country’s amnesty rules, Berlusconi should not be imprisoned for more than a year. Few in Italy, however, believe that it will come to that – by law, the Cavalier still has the right to two appeals, and a reduction of the sentence within that time is quite likely. There is yet another, more graceful was of escaping punishment: to invoke immunity as Prime Minister.

Immediately after Italian Prime Minister Mario Monti announced that he would resign after parliament approved the national budget for 2013, 76-year old Silvio Berlusconi hinted that he wouldn't mind running for the post of prime minister for the sixth time. This statement provoked a strong reaction from the European Union - Berlusconi's depar-

ture was one of the EU's main conditions for helping Italy out of the crisis.

Text: Ekaterina Tikhomirova

ExpErts sEEm to havE no doubts about bErlusconi’s ability to takE thE most drastic populist stEps, which will bE immEdiatEly dEstructivE, not just for italy’s Economy but for all of EuropE

Berlu.indd 21 21.12.2012 12:44:17

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Berlusconi has been very cautious, however, in voicing criticism of Monti. “As a person who feels personally responsible for the country, I cannot not allow Italy to once again spiral into a reces-sion,” said the former Prime Minister, explaining his intention to return to the Palazzo Chigi (resi-dence of the Prime Minister). The first to react to the Cavalier’s announcements were the financial markets: The euro went down and Italian stocks fell. The potential return of Berlusconi delighted his loyalists and cheered his party’s inner circle. But the decision caused extreme disapproval, bor-dering on outrage, from former allies of the Na-tional Alliance. According to Italy’s political estab-lishment, Berlusconi broke the unspoken contract mandating that he stay out of politics.

The Cavalier won a little bit back by saying that he would not contend in the elections against the current Prime Minister if the latter headed the centrist forces. But he has begun developing a plan for a grand battle, which will apparently continue until the parliamentary elections.

European Union Against Voldemort

“The technocrats have tormented the country,” say Italian political analysts in unison, mean-ing that Berlusconi can most likely count on the support of those most affected by the anti-crisis measures. Yet recent scandals seem to have shak-en the undying love Italians had for the Cavalier not so long ago. “I’m looking for a suitable reason not to run. Because then I could also avoid a dan-gerous exit from the arena after a devastating de-feat,” said Berlusconi with surprising frankness, in an interview with a TV station that he owns. “Look at how things ended with Nicolas Sarkozy…” Indeed, the campaign launched against him in Italy, and more importantly in Europe, makes it extremely difficult for him to win reelection.

“Mario Monti has made impressive pro-gress in restoring the financial welfare of Italy,

which has high debt and is in a deep recession,” says German political analyst Gerd Appenzeller. “The EU countries and the financial markets felt confidence in the country and its Prime Minis-ter, reflected in decreased interest rates on Italian government bonds. Monti’s resignation is there-fore logical, since it allows for early elections. But the very idea that Berlusconi, the Lord Voldemort of European politics, could come to power again, will drive up the cost for Italy to procure loans and thus drive up the debt.”

Comparisons with French President Fran-çois Hollande, who made a multitude of populist promises during the campaign, are in this case most likely inappropriate: It seems that nobody in Europe really does not admit that Hollande will suddenly start keeping his commitments to vot-ers. But experts seem to have no doubts about Berlusconi’s ability to take the most drastic popu-list steps, which will be immediately destructive, not just for Italy’s economy but for all of Europe. “No one is expecting reasonable solutions from him,” says Appenzeller with evident agitation. “We can expect that Berlusconi will admire the ruins of Rome burning like a late-Roman dictator.”

Perhaps this is why EU leaders have, contra-ry to usual diplomatic practice, allowed themselves to direct rather sharp statements at the Cavalier. “I don’t think Berlusconi has very good prospects in the elections. Though it seems he himself has ruled out candidacy, with him everything changes with from one day to the next,” said François Hollande. President of the European Commission José Manuel Barroso even met with Berlusconi in Brussels and made it unequivocally clear that a return is highly undesirable. “You can guess what I told him and what I am telling you,” Barroso said the next day in a conversation with Monti. “First and foremost, it is imperative that Italy take the chosen path of stabi-lity and reform. This is very important for Italy, and of course, for the European Union.”

Berlu.indd 22 21.12.2012 12:44:24

AD

Содержание.indd 1 24.12.2012 16:14:39

WEj#1 (23) trends

24

The Insurance MarkeT BecoMes M re LIveLy

Страховое.indd 24 21.12.2012 12:46:13

trends January 2013

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In 2014, U.S. health care reform laws, enacted by president Barack Obama, will come into force, es-pecially legislation regarding health insurance. These new laws will allow people with chronic con-ditions to receive health insurance without pre-judice, a necessary provision that has been long overdue in the States. According to statistics, the number of people diagnosed with chronic illnesses increases every year. Over the past ten years, for example, the percentage of adults over 65 with hy-pertension and diabetes increased from 9% to 15%, and the number of people exposed to high blood pressure and heart disease grew from 18% to 21%, according to the National Center for Health Statis-tics. On top of that, data from recent cases shows that in 2000, about 125 million Americans, or 45% of the population, suffered from chronic illnesses – in 2004, that figure reached 133 million, which is nearly half of the US population.

Because of all this, the U.S. government is in desperate need of providing security for these people. Many experts support the president’s ini-tiative, such as Gerald F. Kominski, a Professor for the Department of Health Policy and Management and the Director of Health Research at the Univer-sity of California in Los Angeles. “There are too many uninsured people today who are seriously ill and have to wait to receive medical attention. And these are the people that need to be taken care of – they suffer chronic diseases, but even that it can help stop their disease’s development, they simply cannot afford it,” he says. Profes-sor Linda Bergthold, a Health Policy Consultant, agrees, and adds, “The law prohibiting insurance providers from denying car to people with pre-existing conditions is a very important change. Before this new law, it was extremely difficult

The United States government will soon implement a new law regarding insurance for chronic patients. According to experts in America, this is a step towards creating a better health system. However, these steps are only the first on the road to recovery for the

health care system.

Text: Daria Getmanova

for these people to get insurance, and they were often deprived of coverage. Now, starting in 2014, sick people will finally be able to buy health in-surance in the commercial market.”

Denied!

According to various surveys, many peoples’ ap-plications for insurance today are denied because of their chronic conditions, and very often, they lack adequate medical care because of run-ins with insurance companies. Last year, for example, the number of people, with two or more chronic conditions between 45 and 64, who were not given medication increased from 17% to 23%.

Increase In value of health Insurance(for a famIly per year)

2010

2011

2012

as compared wIth 2010

as compared wIth 2011

+18%

+9%

+8.5%

source: the new york times

Страховое.indd 25 21.12.2012 12:46:18

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If people cannot participate in public programs and employers do not provide insure, there is no guarantee that they will be able to get insur-ance, according to Linda J. Blumberg, a senior fel-low with the Urban Institute at the Health Policy Center. Researchers believe that until the law takes effect, people who have had health problems previ-ously or those who have health issues today may face insurance providers who will try and exclude them from the industry, either directly or indirect-ly. For example, some sick people can be scared away by the prices or offered insurance only on certain parts of the body or particular organs. Blumberg’s colleague, Robert Berenson, agrees, adding that over the years, the increase in pri-ces has mainly been driven by a growth in spend-ing, despite the fact that the quality of service has stayed the same. According to him, people need to find a solution to fix the tariff rates and then work on the balance of market power.

Timothy Jost, a professor of health care, added his own opinion to that of the researchers. “One of the goals with our recent reforms is to slow the growing costs of health care in govern-ment programs and force insurance companies to compete with each other to keep prices level,” he

says. Studies are showing that the cost of health insurance each year is still rising – in 2011, for example, the average annual consumption for an American family was $15,073, 9% higher than the previous year. And preliminary estimates show that in 2012, that number will jump up another 8.5%. According to analysts, staff salaries are one of the reasons for increasing prices shown in re-cent data, and according to the Hays study, these high salaries are also draining America.

Expensive Health

In addition to rising prices and other difficul-ties in health care, though, Americans are fac-ing other drawbacks. The expensive, yet tax-de-ductible health care plan is one of them, which provides employers with a lower premium and pushes higher out-of-pocket costs onto employ-ees. A report published in “Kaiser Health News” further exemplifies how the program works. In the article, Angela Werner from Wisconsin explains how her husband’s employers refused to pay for his increasing health insurance costs, because of terms that specified that employers may only cover costs only up to certain value. And the costs for their daughter, Emma, who was diagnosed with juvenile arthritis, has in-creased 10 times – from a few hundred dollars to $7,000. Because of these provisions, the family is forced to pay for these costs themselves, and

Number of employers offeriNg HigH DeDuctible HealtH iNsuraNce programs

2010

2011

2012

23%

32%

36%

tHe cost of Disease treatmeNt (aNNually)

Heart Disease

$432blN

Diabetes

$174blN

pulmoNary Disease

$154blN

alzHeimer's

$148blN

source: www.forahealthieramerica,com

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trends January 2013

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with no change in their family’s income, these health costs have hit their budget hard and put their child’s life at risk.

Hopefully when the new health care re-form laws come into effect in 2014, life for peo-ple in these types of situations will become a lit-tle easier. Some European analysts believe that the American health care system is in need of reform to-day – reports from the Organization for Economic Cooperation and Development, for example, say that the United States has far fewer doctors per person than the OECD countries. According to their statis-tics, the U.S. had about 2.6 hospital beds for every 1,000 people in 2009, and that number has been stead-ily decreasing since then.

American experts, however, explain that they are deliberately trying to reduce the number of beds available per capita and applying outpatient treatments as little as possible, according to Linda Blumberg. Their primary reason for doing so is to minimize costs and save money in maintaining hos-pitals and paying physicians’ salaries. According to U.S. analysts, it is important to encourage profes-sionals to do their jobs and focus their efforts on helping patients recover, rather than maintaining chronic diseases. OECD experts, however, do not see

this as an efficient system and believe that it is the most expensive in the world today. The Americans argue that some operations are more expensive in other countries, such as the stenting, among others, says Robert Berenson.

Another expert talked about the high prices of the American system as compared with other countries. According to Robert Kirsch, a Senior Fellow at the Roosevelt Institute, the United States has the most expensive health care system, because, in addition to staff salaries, a large part of their expenditures goes towards prescription medicine, whose prices increase every year.

Despite the fact that some experts in health insurance remain skeptical, people in America have shown more loyalty this year. One study conducted by Gallup showed that 41% of Americans believe their health insurance system is good, and even excellent. This is a big jump from 2001, when the percentage of people who approved of the system was not above 21%.

Robert Berenson is also optimistic for the future of the health insurance system. According to him, the results of the last presidential elec-tion showed that affordable health insurance will continue to develop. Reforms like this will help contribute and improve the insurance market – competition between different companies will in-crease, and the market will separate into catego-ries, such as “low cost” and “high quality”.

The percenTage of

children wiTh chronic

diseases increased

To 26.6% in 2006 from

12.8% in 1994.

in 2012

22% of americans are saTisfied

wiTh The healTh care

sysTem, and

77% are noT saTisfied

source: gallup

Страховое.indd 27 21.12.2012 12:46:31

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From Nooses to Workouts: the eFFects oF the crisis

Illustrations by Anna Demidova

The effects of the crisis.indd 28 21.12.2012 12:49:13

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Fewer Children

In 2011, the American birthrate fell to its lowest point since the beginning of its statistical histo-ry: preliminary estimates show that for every 1,000 women between the ages of 15 and 44, only 63.2 babies were born. Prior to 2005, the indicator had been rising, but it peaked in 2007 and started falling again. Data from the Pew Research Center shows that one of the largest contributing fac-tors to this trend was the sharp decline in fertil-ity among U.S. immigrants.

The rate of birth among American natives fell by 6% from 2007 to 2010, but among women of international origin, the same indicator fell by 14%, more than twice as much. Immigrants from Mexico experienced the largest drop in birthrate – almost 23%. One study has shown no obvious indications that could explain this phenomenon. But analysts at the Pew Research Center believe this trend is loosely connected with problems in the economy. An early analysis showed that in states where eco-nomic growth slowed the most between 2007 and 2008, the potential for a reduced rate of birth was clearly pronounced. Furthermore, researchers not-ed that the recession had the most negative impact on families of Hispanic origin, and the population drop in that group specifically was most directly linked to a drop in fertility.

For now, Americans can only hope that the decreasing birth rates are temporary, and once the global economic situation stabilizes, the recover-ing economy will help fertility rates bounce back up, as it was in the past. But this demographic shift poses a greater threat to institutions such as Social Security than ever before. Fewer births means that in a few decades, the country will have

a smaller number of workers to support the eco-nomy, which is especially bad news for the United States, given that its era of “baby boomers” is al-ready past working age and there are fewer tax-payers to fund the country’s pension system and Medicare program.

Living Without Happiness

Unfortunately, the aftermath of the crisis can cause even more dire situations. Recent-ly, according to data from the Office for Na-tional Statistics in the United Kingdom, there has been a sharp increase in the amount

The infamous recession caused terrible consequences that have little to do with money, such as the increasing rate of women refusing to have children and suicides among people living in bankruptcy. But the impact that the recent economic turmoil has had on peoples’

physical health, according to scientists, is yet to be determined.

Text: Anna Kim

A study of consumer behAvior published in “the GuArdiAn” concluded thAt the diets of people with lower incomes hAve siGnificAntly more fAt And suGAr in them And they eAt more semi-fAst food, fried food, And other “junk food”, but fewer fruits And veGetAbles


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of suicides among full-time students from England and Wales. The number of sui-cides among male students from 2007 to 2011 increased by almost 50%, as compared to women of the same age. This trend is unsurprising, given that students are already under constant stress and often feel isolated from their families and friends. If financial troubles are added to this al-ready delicate situation, such as losing a job or accumulating excessive debt, the situation could spiral out of control. Earlier this year, the British Medical Journal published a study confirmed an important theory: that the rising rate of suicide, which has steadily increased since 2008, is di-rectly related to the deteriorating economic situ-ation. People who live in areas of England with higher unemployment rates are much more like-ly to commit suicide, especially men. “Our esti-mates show that with for every time the number of unemployed men increases by 10%, there is an approximate 1.4% increase in the number of suicides in that same category,” says the author.

A similar study, published by “The Lan-cet” journal, showed that the annual number of suicides from 2008 to 2010 in the United States was, on average, higher than what was predict-ed before the crisis. From 1999 to 2007, statistics revealed that there were 0.12 suicides for every

hundred thousand Americans every year – that figure rose to 0.51 from 2008 to 2010.The situation is even grimmer in Greece, where the unemployment rate has reached 25% of the population and social programs are on the brink of elimination. Before the first economic crisis, Greece had one of the lowest suicide rates in Europe. But the Head of the Greek Ministry of Health, Andreas Loverdo, announced in mid-2011 that in just 12 months, the country’s sui-cide rate grew by 40%. A wave of suicides also swept through Spain from 2011 to 2012, when many mortgage borrowers were evicted from their apartments and houses en masse. The gov-ernment adopted new legislation to protect the country’s most vulnerable debtors and over-see the eviction process after public pressure, threatening the stability of the banking system at the same time.

On the Couch with a Chocolate Bar

The current economic situation’s impact, beyond increasing suicide and decreasing fertility, is hard to say. On one hand, there are many negatives – for example, it is becoming more clear that the in-creasing number of suicides has a lot to do with the


TRENDS January 2013

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deterioration of the psyche of healthy people. Re-ductions in the cost of medicine are also leading to catastrophic results. Estimates from the European Centre for Disease Prevention and Control show that over the past two years, the number of HIV cases among frequent drug users in Greece has increased by 20 times. Even though researchers did not directly link this increase to the declining economy, denying its role in the growing trend is counterproductive.

Additional negative effects can mani-fest themselves in more subtle forms as well. A study of consumer behavior published in “The Guardian”, a British newspaper, concluded that the diets of people with lower incomes have significantly more fat and sugar in them and eat more semi-fast food, fried food, and other “junk food”, but fewer fruits and vegetables. One rea-son for these trends is because food products continue to rise while wages stay the same or decline, which makes consumers more likely to choose cheaper, high-calorie foods because they feel poorer. People also tend to work more to earn some extra money, which means they have less time to spend on cooking homemade meals.

U.S. researchers Gregory Coleman, from Pace University, and Dhawan Dave, from Bent-ley University, took a closer look at the lives of Americans who lost their jobs and conclud-ed that unemployed people do not use their time to work out or be more physically active. At face value, unemployed citizens should have more time for sports and fitness, which they somewhat take advantage of. But physical activ-ity is still declining on average, as people start sleeping more, watch more TV, and do house-hold chores. The gap between physical activity and non-physical activity is especially notice-able because most of the layoffs during the re-cession were from professions using physical labor, such as construction workers, industrial workers, and so on.

Could the Crisis Be Good?

Other studies are suggesting that these economic problems could have a positive effect on peoples’ health and lifestyle choices. When an economy prospers, it usually leads to the deterioration of disease and mortality statistics. Christopher Room, from the University of Virginia, has ex-amined this trend in a series of publications, even before the recession hit. In one work, for exam-

ple, Room shows that when GDP grows, people, especially employed men that are of “working” age, lead less healthy lives. The author also con-cluded that mental health deteriorates when there are downturns in the economy (which has been confirmed by recent statistics) and physical health deteriorates when markets expand – more often than not, people suffer from heart disease.

There is a lot of ambiguity concerning the relationship between economic cycles and health in later works. Researchers from Iceland and the U.S., for example, studied peoples’ behavior in Iceland after the banking system collapsed in October of 2008. They found that because of the crisis, the unemployment rate increased four times, which caused islanders to smoke less and reduce their consumption of alcohol and sugary beverages. Those positive and healthy changes were somewhat counteracted when people start-ed eating fewer fruits and vegetables, but they also ate more fish, which has essential fats, and slept better.

All women women born in the U.S women born oUtSide the U.S.

1990 2007 2010

the nUmber of children born in the U.S., one thoUSAnd women Aged 15-44 yeArS

0

20

40

60

80

100

120


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Don't Hurry Into tHe CrIsIs

crisis.indd 32 21.12.2012 12:50:31

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The recession in the Eurozone and the European Union will continue until the end of this year, according to the European Commission. It is expected that next year, the European economy will start to grow once again. Special attention is being right now to the reces-sions in the countries of Central and South Europe, especially those that have not yet accepted the Euro as part of their national economies. Most predictions agree with the gloomy forecast made by the Ministry of Finance in the Czech Republic - in 2012, the GDP

of the republic fell by 1.3%, but in 2013, it is already predicted to rise by 0.8% once again.

Text: Catalina Kochkina

It was assumed that of the countries in the European Union, those not in the Eurozone are more strongly affected than others by the recessions, especially the Czech Republic. The situation in Hungary is not much better either – the country’s GDP is expected to fall by 1.2%. In fact, the problems in Hungary go much deeper than that. The current recession is the second in the country over the last four years. Last month, the gov-ernment refused to change its previous decision and cut special taxes for banks next year, which was part of a package deal designed to cut back on the budget deficit so as to meet the European Union’s limit (3%). In the meantime, the value of the Hungarian forint, compared to the Euro, fell by 1.1% as a result of the country’s BB ratings assignment by the international rating agency, Standard & Poor’s. Hungary’s statistics back those ratings – the country is known for dilut-ing its money, but the adverse economic situation may negatively affect its ability to make payments.

A year ago, when the forint’s value was falling at record highs, the Hungarian govern-ment turned to the European Union and the In-ternational Monetary Fund for financial help. But their negotiations for a loan amounting to 15 mil-lion Euros were put aside when the Prime Minis-ter of Hungary, Viktor Orbán, refused to accept the terms put up by the creditors. Economists believe that the drop in Hungary’s ratings on the Standard & Poor’s scale is tied to the fact that the market grew tired of waiting for said transaction to take place. And right now, there is no possibility of the forint replacing the Euro – Hungary’s path into the Eurozone will be lengthy and difficult.

The opposite is happening in Poland. At the mo-ment, the Czech Republic is fighting to save its na-tional currency – and recently, Czech Prime Min-ister Petr Nečas revealed, that in connection to the crisis of the Eurozone, the republic is considering introducing the Euro no sooner than 8 to 10 years from now. On the other hand, Poland is working on meeting all of the necessary requirements by next year so that it can become a member of the Eurozone in 2013. The Agence France-Presse (AFP) reported that Francois Hollande, in comparison to his predecessor Nikolas Sarkozy, wants to help fa-cilitate Poland’s early entry into the Eurozone. The French president revealed his intentions during a recent trip to Warsaw. In conjunction with his an-nouncement, the Polish Prime Minister, Donald Tusk, relayed to the agency that Poland will

Don't Hurry Into tHe CrIsIs

crisis.indd 33 21.12.2012 12:50:38


34

enter the Eurozone as soon as everything is 100% ready. The Polish Prime Minister hopes that all the necessary economic and other terms will be fulfilled in 2012, but right now, they cannot name a specific date. And one of the terms essential for Poland’s entry into the Eurozone is for the crisis to stabilize.

Poland is firmly determined to become one of the flagships of the European economies. Even now, the country is already sixth in terms of value within the European Union and it has demonstrated annual growth over the last twenty years. On the 20th of November, the Polish gov-ernment approved a European financial agree-ment that mandates countries with high debts to keep their structural deficit at less than 0.5% of its gross domestic product. Another one of the re-quirements, designed to increase the competitive-ness of Eurozone, is that a country’s national debt cannot exceed 60 percent of GDP, a condition that Poland also meets. Supporting this agreement will accelerate Poland’s accession into the Eurozone.

While Hungary isn’t considering replac-ing the forint for the Euro, the government of the Czech Republic is trying to, as much as pos-sible, delay its moment of entry. The president of the republic, Václav Klaus, was determined to veto the Czech Republic’s entry into the Euro-zone since its initial accession to the EU. Now, the rest of the government has realized that he is correct. Last week, Prime Minister Petr Ne-cas said that the question of whether or not the Czech Republic will join the Euro countries will be decided at the national level. But before any discussions regarding the Euro begin, the coun-try must hold a referendum. “The situation has changed since the last referendum we held, dur-ing which we voted to join the European Union. We voted for the Eurozone, but at that point, it was only a monetary union, without any debt at-tached.” The Czech Prime Minister also said that the government is not on board with the new fi-nancial agreement.

Of all the countries in the Eurozone, Slova-kia is actually in the most stable position. The Eu-ropean Commission predicts that the GDP growth in Slovakia this year will reach 2.6%, although forecasts at the beginning of the years predict-ed only 1.8%. And among the Eastern European countries, Slovakia is showing the best economic performance. It is expected that the center-left winged Slovakian Democratic Party, which won

the country’s parliamentary elections in March of 2012, will focus on balancing the budget and enacting reforms in Slovakia’s social programs, such as health care, pensions, and tax reforms. With these reforms, and assuming the economy’s growth continues as predicted, the Slovak gov-ernment will be able to reduce its budget deficit to 3%, which was the limit set by the Maastricht Treaty, and it will become one of the few Euro-pean countries to meet that limit.

The national economies of Central and Eastern Europe differ drastically from one an-other – some blame the Euro and the leadership within the European Union for the ongoing re-cession while others hang onto individual cur-rencies and their own regional economies. Still others, however, realize that they have no choice but to “go with the flow.” And when Croatia joins the European Union in 2013, it will also have to make this important decision.

The naTional economies of cenTral and easTern europe differ drasTically from one anoTher. some blame The euro and The european union leadership, while oThers hang onTo Their individual currencies and regional economies

crisis.indd 34 21.12.2012 12:50:45

AD

Содержание.indd 1 24.12.2012 16:14:39


36

Hungary’s Dance witH

taxes

Photos: deposotphotos.com

HyngDance.indd 36 21.12.2012 12:52:44


37

At the end of November, Hungary revealed that the temporary taxes it placed on banks would become permanent, while corporations and companies grow by 50%. The original bank tax was instated back in 2010, and it was assumed that by 2012, its time would almost be up. In fact, the tax was supposed to be taken back by 2013. But Hungary’s economic situation introduced a new measure. In light of the Hungarian budget deficit and the economic recession, the latter of which has been going on for the past for years, the country was forced to resort to unpopular measures. “The tax is part of a wider set of economic policies, which includes some unorthodox measures, such as dipping into the national pension funds in 2011. But the financial sector carries most of the burden for these new economic measures, such as the “crisis taxes” and new taxes placed on financial transactions,” says Dragana Ignjatovic, an analyst for Grayling, a global commu-nications network company. On top of the new taxes, the government is allowing domestic households to pay off their mortgage loans in one sum that is below the market rates. According to the analysts, this is just one way for Hungary to survive the crisis.

The Eurozone Protests

But several of the desperate attempts that the country is employing to minimize the budget deficit did not receive approval from the Eurozone countries. And the chances that Hungary won’t get help from the IMF and the EU when it needs it ranges from between 30% to a high of 50% last month. “From what I can tell, get-ting authorization from the IMF will be much more difficult now than it would have been one year ago,” remarks András Simor, the current governor of the Hungarian Central Bank. According to analysts, the EU is most concerned with the outflow of foreign capital that Hungary is experiencing, which started because of the rising taxes. The volume of investments in the country today is lower than the deprecia-tion of working capital, analysts note. And even foreign borrowers are leaving the country. “While banks are being forced to cut interest rates, the tax burden is ac-celerating foreign liabilities, which is leading to the emergence of so-called “zombie banks”, based on old loans from borrowers in the private sector of Hungary,” says Professor Zoltàn Schepp, an Assistant Professor for the Department of Econom-ics and Business at the University of Pecs. The main objective of a “zombie bank” is to maintain the bank’s most vital functions without external help. They do not provide new loans, but they also don’t go bankrupt. And according to experts, the situation in the banking sector will continue as is for now.

The Hungarian government, in its attempt to decrease the budget deficit, has come very close to strangling the national market. Raising its tax rates, instead of fostering positive change, has caused an outflow of international capital. Today, the country is faced with

a difficult economic puzzle: how long should they wait for things to get better?


HyngDance.indd 37 21.12.2012 12:52:53


38

From the perspective of 2013, the Eurozone be-lieves that the budget deficit will increase by more than 3.9% in Hungary. The home of world-famous George Soros, however, does not accept “pessimistic forecasts” easily. According to the Government of Hungary, the predictions made by various analysts are unjustified and the EU is wrong from both professional and eco-nomic points of view, as Gyorgy Matolcsy, the Minister of Economy, said at a press confer-ence. But the value of the Hungarian currency – the forint – is plummeting, which further high-lights the decline of the country’s financial sit-uation. At the start of December, for example, 1 Euro could purchase 279.3 HUF. And in Octo-ber, the Cabinet stated that they would be freez-ing 133 billion forints within the 2012 budget (or close to half a million Euros), and that for next year, they already planned on freezing 397 billion forints (approximately 1.4 million Euros).

In these times of economic instability, Hungary is grabbing at straws. Its primary in-stinct was to resort to new taxes – so in 2010, along with other similar measures, the govern-ment introduced a new program called “Tel-enalog”, which taxes every minute of phone use and every text message. For individuals, the cu-mulative fee amounts to 700 HUF per month, and it is 500 for organizations. Despite the fact

that the tax itself is small (about 2.5 Euros for individuals and 2 Euros for businesses), the top three telecom companies – Magyar Telekom, Telenor, and Vodafone – have decided to appeal this new tax. And despite assurances from the Hungarian government, which claims that the tax does not violate any rules set by the EU, the European Commission asked the Court to ex-amine the fairness of “telenalog” in late March. In November, reports from the European Com-mission came back, and according to the EU, “telenalog” shows no discrimination against Hungarian operators.

The Winds of Change

Today, in connection with several unpopular measures, the taxing of the commerce sector has lead to another difficulty: the market is still not fully recovered after the economic re-cession, and the question to deal with now is whether or not to increase the volume of taxes already instated as part of the “crisis program”. In the same train of thought, leaders now are trying to maximize the savings on the govern-ment’s expenditures so as not to go bankrupt. The majority of the blow has fallen on per-sonnel as a result – managers are deciding to reduce their staff. According to re-search, 4% of companies are planning to reduce their staff by 29%.

Several analysts now are saying that at this moment in time, the new government measures are very difficult to analyze fully. This means that only time will whether or not these mea-sures will be effective. “Many measures taken by the government are used to help strengthen the small and medium-sized sectors of business. But for now, we cannot see any tangible results from the new legislation,” says Dr. István Csendes, an expert in management.

It is also possible that, on top of the already existing measures, another one will be implement-ed to push out of the crisis once and for all. Not long ago, it became clear that the government is preparing to transfer its municipal debt onto the fragile shoulders of the banks. In the words of the government, it is possible that the banking sec-tor will take on damages from restructuring the debt, amounting to 612 billion forints (or close to 2 billion Euros).

AnAlysts expect positive chAnges in no hurry, And if there Are chAnges, they will only tAke plAce After the elections for the nAtionAl Assembly in 2014, And then only if the “fides” does not return to power

HyngDance.indd 38 21.12.2012 12:53:01


39

Because of the rise in tax rates contributed to a cooling in the relations between the banks and the state, it is more important now than ever for confidential professionals to build trust to build trust among all market participants. “In my opinion, trust and cooperation between the market players – the government, banks, and debtors – are incredibly important to help find new paths of sustain-able growth and increase the growth of loans,” said Zoltàn Schepp. But there are currently opportunities to change the situation – according to the expert, the private sector has used up almost all its savings.

Therefore, analysts expect positive changes in no hurry, and if there are changes, they will only take place after the elections for the National Assembly in 2014, and then only if the “Fides” (one of the current parties in charge, former-ly known as the “Hungarian Civic Union”) does not return to power. Even in the most favorable scenario, financial improvements can only come about in a few years, when the economy starts to revive. And given the many aspects necessary for that growth, one can only assume that it will start in only two to three years, according to Dr. István Csendes.

Unemployment

year rate amendment

1990

1991

1992

1994

1996

1998

1993

1995

1997

1999

2000

2001

2003

2005

2007

2002

2004

2006

2009

2008

2010

G d p

BUdGet deficit

frozen fUnds in the BUdGet

2.082

8.415

9.303

11.29

10.118

10.17

9.886

8.731

7.1

6.5

6

5.6

5.9

5.5

6.3

7.3

7.5

7.7

8

10.075

11.243

292%

304%

11%

21%

- 10%

0.5%

- 3%

- 12%

- 19%

- 9%

- 8%

- 7%

5%

- 7%

15%

16%

3%

3%

4%

26%

12%

2011 -1.3%

2012 -1.5%redUction

2011 1.73trl forints

2012 404Bln forints in early JanUary

2012 133Bln forints

2013 397Bln forints

SourceS: indexmundi.com, bloomberg.com, buSineSSweek.com, bbj.hu

HyngDance.indd 39 21.12.2012 12:53:09

WEj#1 (23) THREAtS

40

EuropE is scarEd againAccording to an updated forecast from the Organization for Economic Cooperation and Development (OECD), the recovery of the global economy is at risk once again. The May prediction showed that the economic growth of 34 countries within the OECD has

fallen to 1.4% from 2.2% in 2013.

Text: Elizaveta Kotova

Europe is Scared.indd 40 21.12.2012 12:53:45

THREAtS January 2013

41

It came as a surprise to many people when the Organization of Economic Cooperation and Development released a statement stating that they did not exclude the possibility of another economic crisis. As for the current issues in Europe, they will be even more severe than expected, experts say. The economic downturn will affect all of the EU countries, and Greece most of all, whose economy fell by 4.5%.

The OECD says that the Eurozone crisis is becoming a much great-er threat to the world economy. According to Angel Gurria, the OECD Sec-retary General, the inability to resolve the European debt problems can lead to “serious financial turmoil around the globe and effectively stop economic development.”

But in the words of Richard Daley – a member of the Board of Direc-tors of the Coca-Cola Company, Managing Director of the investment firm Tur Partners, LLC, and the former mayor of Chicago – Europe is still coming out of the crisis. “The crisis is not a problem specific to Europe; it is global. The economy is a global structure. Earlier, when there was no European Union, the European countries were dependent on each other, as they are now, and the same applies to China and the United States as well. It is just not possible to escape the international financial system,” said the former mayor. Accord-ing to Daley’s projections, economic leaders can come from countries such as Russia, Brazil, China, Indonesia, Singapore, and Mexico in the coming years.

Tim Campbell, the Advisor to the Mayor of London in training young professionals and businesses and the owner of Blight Ideas Trust (an estate office), believes that the European project is in a very unstable situation. “The success of the EU in the future will depend on key decisions taken by European leaders now. There are two ways this can happen – either one country is established as dominant, or an unbiased situation is created from which every country can benefit,” says Campbell. According to experts, if Germany is in the strongest and most stable position of the European coun-tries, it should bury the competition and take control, which is one way of solv-ing the situation. But another way is not to have one single leader and have all the countries benefit as a result. In the first version, many of the countries currently in the Eurozone may have an incentive to leave, making the Ger-mans the victors in this situation. Otherwise, steps would be taken to ensure that all countries evolve equally and are responsible for a specific area of de-velopment. This, in general, would help create a stable economic structure. “The second version would form a very different future – we could use the beneficial implications of collaborating and cooperating with China, the U.S., and other countries to our advantage,” said Campbell.

“The German economy is currently struggling with weak global growth. Because exports are traditionally the main driving force of the econ-omy, the slowing growth in China and the economic recession on the outskirts of the Eurozone have left their mark on Germany,” says Joost van Lenders, the CFA and a specialist for Investment Allocation Strategy for BNP Paribas. In his opinion, the labor market is holding its own, but there is virtually no growth in consumer growth.

Consumers have paid attention to the global economic slowdown and the financial tensions rocking the Eurozone, causing them to stop spending as much money. But the most significant decline was experienced in the in-dustrial production and export sectors.

Experts predicted that in 2013, BNP Paribas will be slightly more sta-ble. The Eurozone crisis will also affect the UK because of slowing caused by

international factors, such as the tighten-ing of fiscal policy in the domestic mar-ket. This means that even the UK economy could remain weak for some time. “OECD forecasts tend to be quite accurate – they are put together with a variety of methods, including the help of simulation and evalu-ation experts. But like any forecasts, they too can be reviewed. One of the drawbacks to the OECD, as well as with many other official financial predictions, is the fact that they are published several times a year. This puts them behind private forecasts, which can change at any time, especially when the changes are often progressive in nature,” says Joost van Lenders.

As for the possibility of weaker countries leaving the Eurozone, the ex-pert maintains that it would be contrary to the interests of the country and the interests of the entire economic union. “There are both economic and geopoliti-cal incentives to keep Greece in the Eu-rozone, but at the same time, we realize that Greece now is associated with a lot of risk,” Lenders said. Considering how quickly these reforms are taking place in some of the outlying Eurozone countries, experts believe that by 2020, the coun-tries will become more competitive and dynamic, which in turn will lead to more balanced growth in the Eurozone.

Europe is Scared.indd 41 21.12.2012 12:53:51

WEj#1 (23) THREATS

42

How Long wiLL tHe georgian MiracLe Last?

Georgia.indd 42 21.12.2012 12:54:45

THREATS January 2013

43

The biggest investors in Georgia today are the Netherlands, the United States, and Azerbaijan. According to Gruzstat, the national statistics agency, foreign direct investments (FDI) for the first half of 2012 are $488 million, up 29% from the same period last year.

While first-quarter investments were $269.4 million, the second quarter has attracted a bit less, $219.4 million. According to Oleg Dushin, Senior Analyst for Zerich Capital Management, this is mainly because of the crisis in Europe. “The to-tal volume of global foreign investment in the first half of 2012 declined 8%, so Georgia is looking bet-ter compared to others,” the expert notes. None-theless, year on year investment will inevitably decline in the third quarter and also in the fourth quarter. FDI for the year will be $1-1.2 billion (it was $1,117.2 million in 2011). In addition, Georgia took 34th place out of 184 in the Index of Economic Free-dom, losing one place from the previous year.

Whereas previously investors were interested in real estate, energy, the finance sector, transporta-tion, and processing industries, now businessmen are increasingly looking at construction and agriculture.

One of the most talked-about investments in the construction industry was the signing by American investor Donald Trump of a letter of intent at the end of September with the multinational de-veloper Silk Road Group for construction of a resi-dential building in Tbilisi. Now Georgian authorities hope that others will follow the famous billionaire’s example. In order to attract investors to its construc-tion industry, the government is offering plots of land along the Black Sea coast for just $1 to developers who invest a minimum of $1.1 million. Among other benefits, investors will be exempt from sales tax and income tax for 15 years.

Such benefits from Georgia’s government have taken effect. Michael Rasmussen, the cousin of the NATO Secretary General Anders Fogh Ras-mussen, announced his intention to invest in the country, in an exclusive interview with the news-paper Kviris Palitra. The investments will be in Georgia’s oil, tourism, energy, and agricultural industries, he said (Palitra Nedeli). Rasmussen noted that he hopes “the newly elected officials’ principles and ways of operating will bring suc-cess to Georgia.”

The most ambitious project is the con-struction of Lazika, a planned city. In December 2011, President Mikheil Saakashvili announced the project, saying it would be the second largest city after Tbilisi, with a special status and sepa-rate legislation. Over the next ten years, Geor-gia plans to attract private investors for Lazika who will develop the infrastructure. The city will have its own laws, but the Georgian Constitution will take precedence. In the event disputes arise, the Constitutional Court will have the final word. Experts’ opinions are mixed on this project – some say it is a utopian idea, while others are convinced of its potential.

In 2012, Georgia took 34th place out of 184 in the Index of Economic Freedom, losing one place from the previous year, while the October elections had foreign investors holding their breaths. Who is investing in Georgia's economy and what is on Prime Minister Ivanish-

vili's agenda?

Text: Anastasia Yakovleva

Georgia.indd 43 21.12.2012 12:54:55

WEj#1 (23) THREATS

44

Georgia’s new govern-ment has big plans for agriculture. The author-ities are trying to interest South African Boer farmers in investing in Georgia. In April, Tbilisi held the first confe-rence for South African farmers. As a result, the Boers are now buying land in Adjara and Kakheti.

In addition, the Swiss Agency for Develop-ment and Cooperation and the Danish Neighbour-hood Programme, together with the Georgian Mi-nistry of Agriculture, have announced a four-year program to develop agriculture and the economy in the south of Georgia. The budget is $11 million. Ac-cording to the Georgian Ministry of Agriculture, the project will contribute to increasing the potential of farmers, entrepreneurs, and service providers, includ-ing for production of potatoes and dairy products, raising their productivity and competitiveness.

In November, Georgian Minister of Agri-culture David Kirvalidze met with U.S. Ambas-sador Richard Norland and USAID representa-tives to inform them about the priorities of the new Georgian government. These include the creation of agricultural coops, restoration of ir-

rigation canals, land registration, and the creation of in-coun-

try consultation centers. At a press conference in Tbilisi, Kirvalidze stressed that the strategic partnership with the U.S. remains a top priority for Georgia.

Oleg Dushin, Senior Analyst for Zerich Capi-tal Management (Russia), notes that agriculture is just a small part of the overall cooperation the U.S. and Georgia have shared for many years. In the second quarter of 2012, 11.3% of foreign investment came from American companies. This is in a wide variety of sectors – real estate, energy, transport, etc. The U.S.-Georgia Bilateral Investment Treaty has been in force since 1994. After the 2008 war, the United States gave Georgia $1 billion for recon-struction of infrastructure and economic growth. But although Georgia has implemented many en-ergy projects, Dushin says that only one of them is Georgian-American: the hydropower project with Dariali Energy on the Russian border. It is aimed at increasing the export potential of Georgian elec-tricity. In addition, an English-American company

Georgia.indd 44 21.12.2012 12:55:03

THREATS January 2013

45

is constructing a huge fountain in Tbilisi (180 meters high). The main contractor for the Baku-Tbilisi-Ceyhan oil pipeline (2004–2005) was the American company Bechtel, Dushin notes.

Besides the U.S., Georgia is also interested in European investors. Thus, the European Development and Investment Fund for Eastern Europe announced the allocation of funds for developing Georgia’s envi-ronmental and energy sectors. The priorities will be in-frastructure as well as renewable energy projects. The Fund’s decision to invest in Georgia, as well as in Arme-nia and Azerbaijan (a total of €470 million), was adopted following successful investment in waste management plants in Moldova.

Among the CIS countries, Georgia has identified Kazakhstan as a promising trade partner with which the country has positive experience. Kazakhstan was the first country to invest seriously in Georgia. The gross amount of direct investment from Kazakhstan in Geor-gia is more than $200 million. There is a lot of interest in the transit of Kazakhstan’s goods through Georgia to world markets.

Georgia’s relationship with Russia has been uneasy in recent years,

but the new government plans to eventually restore trade and subsequently diplomatic cooperation.

Speaking on how to attract investors, Geor-gian Prime Minister Bidzina Ivanishvili noted that the planned investment fund in Georgia will assist inves-tors in promising projects. If an investor is prepared to invest 25%, the Fund will provide the remaining 75%. The Prime Minister also has plans to create a working group to improve the attractiveness of potential areas of investment and create a database of potential projects. Ivanishvili said that he sees “the development of the Georgian economy as coming from private investors and reforms in anti-monopoly legislation.”

Experts’ opinions vary greatly about how fo-reign investors in Georgia will respond to the election of Ivanishvili as the new Prime Minister. Some analysts believe that investors will observe the country’s new economic policies for about six months, while others are sure that investors will plunge in at the beginning of 2013. For now, though, the general view is that inves-tors are in stand-by mode.

Georgia.indd 45 21.12.2012 12:55:11

WEj#1 (23) THE CONTINENT

46

The NorwegiaN KeTchup BoTTle

Illustrations by Anna Demidova

oil.indd 46 21.12.2012 12:56:21

THE CONTINENT January 2013

47

By 2013, the petroleum sector in Norway is ex-pecting record levels of investment. According to forecasts from Statistics Norway, NOK 204 million (approximately $35 million) will be put into oil. Scheduled infusions will exceed the 1985 record levels: “Larger investments are due to the recent discoveries of oil reserves. The certainty that oil prices will remain high is also playing a role,” says ErlingSteigum, Professor at BI Norwegian School of Management.

TorbjørnEika, head of the macroeconomic research unit at Statistics Norway, also associates revival in the oil market with the new resour-ces: “Oil was discovered in geological structures which were previously believed to have no oil. This is encouraging and gives us hope that there might be more new discoveries.” In early January 2012, the state oil company Statoil announced the opening of a new field in the Barents Sea. Various data show that the field contains between 200 and 300 million barrels of oil equivalent. Helge Lund, CEO of Statoil, compared the unexpected disco-very after several fruitless years with a bottle of ketchup:Sometimes large amounts of ketchup come gushing out of the bottle unexpectedly. He says the company plans to significantly expand the processing of oil drilled on Norway’s conti-nental shelf by 2020.

Financing for Norway's petroleum sector is increasing, and analysts attribute this to the discovery of new deposits. The economic stability of the country today is based on "black

gold", thanks to which Norway doesn't fear strikes or the crisis in Europe.


A year earlier, in December 2011, Lundin Petroleum and Statoil jointly discovered one of the largest deposits ever found in the North Sea, The Aldous Major South. Reserves of recov-erable oil from its various sources range between 1.7 and 3.3 billion barrels. In 2010, experts put this figure at slightly less at between 800 million to 1.8 billion barrels.

New technologies used in the extraction and refin-ing of oil are playing an important role in the petroleum sector today, analysts say. That is why Statoil announced at the beginning of last year that it had increased investments in research and development by 27%, putting about NOK 3 billion (about $500 million) into this sector.

Experts expect that mining the “black gold” will in-crease in the near future. But last year the sector also saw decent growth. Based on data from a joint report issued by the Ministry of Petroleum and Energy together with the Norwegian Petroleum Directorate, entitled “Facts 2012 – The Norwegian Petroleum Sector,” oil production hasincreased 38 times since 2010 and the number of discoveries 20 times. “The high level of investment in the oil sector is also impor-tant for the strengthening of aggregate demand and employ-ment,” says ErlingSteigum.

Refined oil

2010 2011

98 3723

oil.indd 47 21.12.2012 12:56:24

WEj#1 (23) THE CONTINENT

48

Give us a Boost!

However, the strikes of oil workers that swept the country in the summer made company executives and government officials a little jittery. The workers’ discontent, which last-ed 16 days, was aimed at increasing wages, restoring ben-efits, and reducing the retirement age for oil workers from 65 to 62. The driving force of the strikes were the trade unions, which made the demands. European analysts noted that the strikes affected a short-term drop in prices, which fell below $100 a barrel. It was feared that the unrest could lead to an overall decline in the petroleum sector. In light of these concerns, the government put an end to the strike. But Norwegian analysts believe that the unions had little chance of making serious changes in any case. Experts be-lieve that worker strikes are a small nuisance that could not lead to serious consequences for the sector. Even if the government had met all the demands for a pay increase, it would not be reflected across the petroleum industry, since workers’wages are only a small fraction of the total costs, notes Professor TorbergFalch of the Department of Eco-nomics, Norwegian University of Science and Technology.

The strikes didn’t particularly have so much effect on the petroleum sector as they did on the overall labor market, experts believe. “Today, only a little more than one percent of Norway’s working population is directly involved in oil and natural gas production. If we take into account the professionals engaged in supplying intermediary goods,

we estimate that they account for 8% of Norway’s total work force,” says TorbjørnEika.

Professor Falch agrees, but adds that sat-isfying the demands of the trade unions to in-crease wages could wreak havoc with the mood of society: “For the rest of the labor market, it could have negative external effects, because of a generous union that seeks higher wages for low-skilled workers in the petroleum industry.” Among these “external effects” could be dis-turbances in the labor market and pessimism among workers who don’t contribute to the em-ployment records at all.

Speaking of unrest, experts note that this was caused by an increase in the amount of work, which arose from the growth in the petroleum sector. However, as to the level of social protection

2010 2011

Remaining oil ReseRves

823-5

PRosPective oil ResouRces in dePosits numbeR of udiscoveRed

dePosits

2010 2011

356-54

PRosPecting ResouRce discoveRies

2010 2011

574319 2010

2011

-60

1140

Data from the report “NorwegiaN oil Sector”

oil.indd 48 21.12.2012 12:56:33

THE CONTINENT January 2013

49

for specialists, all agree that they are quite high. The average salary in the oil production division is approximately twice the national average, notes TorbjørnEika. A constant shortage of oil workers was one of the reasons that salaries for workers in this sector in the country of the fjords are to-day the highest in the world, analysts say. Accord-ing to a study by the recruiting company Hays, oil workers make on average $180,300 a year.

The Economy’s Driving Force

After the workers’ passions simmered down a bit, analysts chimed in about the stability of the petroleum industry in Norway, which will con-tinue long-term. According to data from environ-ment.no, this sector will demonstrate relative sta-bility until 2030, with the volume of oil increasing year over year. Experts forecast that new, larger fields may be discovered in the near future;it is

assumed that about 16.4 billion barrels of oil equivalent will be found in the foreseeable future. Perhaps the new fields will be found close to the Lofoten Islands, which, accord-ing to different sources, contain up to 20% of unaccounted stocks, or 1.3 billion barrels of “black gold.”

“The oil and gas industry is the largest sector in Norway and high prices on the global market offer signifi-cant advantages to the entire Norwegian economy,” says Laurence Westerlund, Press Officer for SEB Group com-munications.

Today, the country of fjords, with its rich resourc-es and promising production outlooks, looks like a solid house that isn’t worried about the European Union’s eco-nomic storms.

oil.indd 49 21.12.2012 12:56:41

WEj#1 (23) the continent

50

C h a m p i o n sin

Debt

footb.indd 50 21.12.2012 12:57:26

the continent January 2013

51

What It Means To Be First

José Luis Astiazarán, President of the Liga de Fútbol Profesional (Professional Football League), remained upbeat even after the financial results of the operation under his supervision were di-vulged. “I was in Istanbul at a meeting with col-leagues from the European League and was pleas-antly surprised at the number of people, not just tourists, wearing the Spanish national team’s jer-sey. I thought this popularity must be of some use,” he said.

In Spain, soccer accounts for 1% of GDP – €10 billion and 85,000 jobs. Spain’s victory in Kiev was watched by 700 million people, which is re-flected in these figures. Spanish businesses made more money during the European Championship just from the sale of t-shirts, flags, and beer in bars, than they did the whole past year.

This soccer euphoria must be of some use. “Success in sports will affect the country’s econo-my only if the Spanish brand is used in an intel-ligent way,” says ESADE Professor Gerard Costa. “That includes attracting tourists, increasing foreign investments and exports. Otherwise we get a passing effect with temporary jobs and nothing to show except pride in the country.” He emphasizes that the effect can be both external and domestic: “Once the consumer demand in-creases in a country, people tend to join in with the sporting successes. The Real Madrid Museum is the most visited place after the Prado. It is re-ally positive that the ‘Spanish’ brand is gaining fame, but we need to show that Spain isn’t just a Mediterranean country, but a country of emo-tions, faith, and development.”

For the Spanish, soccer, like bullfighting and flamenco, is a national sport. They talk about the “Barcelona“ players or the Madrid “Real“ team more than about the royal fami-ly or the financial crisis. The crisis, however, isn't just reflected in the cost of bread but in entertainment as well. One look at unsophisticated soccer accounting and it becomes

clear that the Spanish League, in its current form, will not last for long.

Text: Valentina Rinkon

The fact is that so far no one has made use of this success – neither for displaying emo-tions nor for improving the financial situa-tion. Spain is strong in soccer, but has a weak economy. No amount of sports victories will help to achieve a stable economic effect. That the whole world is talking about Spain is very powerful advertising, but it’s fleeting. “We have to add other values to these successes, like in-novation, technology, design, and ecology, in order to convince investors of our own im-portance,” says Professor Costa. In 2010, after Spain’s victory in the World Cup, the number of tourists increased dramatically, but Spani-ards were unable to identify the true value in this influx of funds.

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WEj#1 (23) the continent

52

Aboard the Gravy Train

The Deloitte company’s research confirms that the Spanish League is third in Europe, with its revenues beat only by the English Premium League and the German Bundesliga. At first glance, it would seem that the soccer market has resisted the crisis: In the 2010-2011 season, club revenues went up 4% to €16.9 billion. The “Big Five” (UK, Germany, Spain, Italy, and France) brought in €8.6 billion, more than half of which came from television and advertising. Ticket sales for matches fell 2%.

The Spanish League, which consists of 42 first and second division clubs, had revenues of €2.1 billion in 2011 and expenses of €1.9 billion. Twenty clubs of the first division got €1.7 billion for the period, 54% of which went to Real and Bar-celona. Total growth for the two clubs was 11%, while the remaining 18 clubs lost 2%.

The Spanish League professes to be first in the world. But behind the successful facades of the two main clubs, the rest of the League is practically coming under the hammer. The soccer clubs’ total debt is €670 million in taxes plus €3.6 billion in social contributions. Real and Barcelona are also leading the ranks of debtors, with €660 and €548 million in debt, respectively. To date, their income and the rapid growth of the “business” allows them to keep the situation under control.

When satellite TV came to Spain, soccer clubs were divided into provisional categories. TV stations paid enormous sums for the broadcast-ing rights to matches and teams ran into debt, betting on future big returns that eventually failed to materialize. Of the €560 million earned from the sale of broadcast rights in 2011, €144 million went to Real and €135 million to Barcelona. Of the remaining clubs, only Valencia exceeded the €30 million mark.

Depleted Credit

Spanish soccer has already evolved. In recent years there had not been equality of investments, and soc-cer clubs have evolved into joint stock companies. Most investors were hoping for high returns, but never received them. The first debt crisis emerged back in 1992, when sports clubs were sanctioned by the State for their existing debts and the default claims against them. In the mid-’80s, a special eco-

nomic program to control costs was created for soc-cer as the people’s favorite leisure activity. Sports teams rejected these controls and as a result, at the end of the reporting period, ended up in debt. In contrast to the other European leagues, the Spa-nish teams were not protected by the law in this situation. As a quick fix to the problem, a cost opti-mization agreement was drawn up which accepted all but four clubs: Real Madrid, Barcelona, Athletic Bilbao, and Osasuna. The “Big Four” had had no financial losses for the preceding five years. The others had to either unite and turn over a new leaf or switch divisions from first to second. This hap-pened to the Málaga and Real Murcia clubs, which ceased to exist, not having found financial support from investors.

José Luis Cano, a consultant for KPMG, says: “There is an urgent need for reforming the soccer clubs. They have to stop spending more than they earn and finally start planning a budget. Getting out of such a si-tuation would be aided by distributing television profits. In other countries, the League acts as a unified whole, whereas in Spain it’s every club for itself. Clubs bring in huge revenues, but they are growing poorer because their individual players are getting richer. At the end of the month, not a single club can pay its debts.”

The soccer business is The nexT overblown bubble afTer real esTaTe in The spanish economy. while large numbers of small and medium-sized businesses are closing because of The inabiliTy To pay bank loans, soccer preserves iTs iconic sTaTus

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the continent January 2013

53

Analyst José Maria Gay de Liébana predicts a quick death for Spanish soccer if its administrators don’t do something. He holds them responsible for this situation. “Only Madrid and Barcelona are improv-ing their positions, while the others are at the same level as five years ago. Spanish soccer is dying. It has five years left, and the empty stadiums only back up my words,” says Gay de Liébana.

In addition to the unequal distribution of the funds received thanks to television, and the bad administration, the finances of the Spanish teams are damaged by the “cult” surrounding several players. While the team is dealing with creditors, its stars go shopping for Ferraris and buy up man-sions in the United States. Last season, Spanish clubs spent €400 million to buy players. Through the fault of one of the banks that gave out loans without hesitation for purchases like Cristiano Ronaldo for Real Madrid, Spanish authorities were literally forced to beg the European Union for financial assistance.

The soccer business is the next overblown bubble after real estate in the Spanish economy. While large numbers of small and medium-sized businesses are closing because of the inability to pay bank loans, soccer preserves its iconic status. Neither banks nor the government are deciding on radical measures. Nevertheless, as the analysts say, it is a vivid reflection of the economic situation in the country.

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Finance

54

WEj#1 (23)

America's neighbor, which the global arena barely notices, has recently been attracting a lot of attention to itself ever since exporting the head of its central bank to the world's leading financial center. As it turns out, Canada has something more valuable to offer the world than just oil and hockey - namely, successful experience in economic management

and their regulation of the banking sector.

Text: Robert Grant

The Canadian Bank is exporTing The “know-how” of Banking

Illustration: depositphotos.com

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Finance

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January 2013

On the other side of the world, Great Britain is continuing to deny being conservative. But the British need to be more open-minded and less prejudiced so as to trust foreign methods – spe-cifically, foreign macroeconomic policy, which can fix oversights in the centuries-old bank-ing system. On July 1st of this year, Canadian Mark Carney is set to replace the current head of the Bank of England, Governor Meryyn King. Carney reacted to the new turn in his career and to the UK with great enthusiasm, and while he is proud, he is not without regret entirely for leaving Canada, where he still maintains the same position. “Carney represents a new gene-ration of leadership for the Bank of England – he was the perfect choice,” said Meryyn King on Carney’s appointment. “Since Mark became governor of the Bank of Canada, I have worked closely with him, and I greatly admire the many contributions he has made to central banks around the world, all of which have respect him.” In this context, “new generation” is an en-tirely accurate reflection of the appointment – Mark Carney will not only become the first non-British citizen to be in charge of the Central Bank’s finances, he will also be the youngest at just 48. While the Head of the Bank of Canada, he was also the youngest out of his counterparts in the G8 countries.

High Hopes

With any luck, the moment Carney officially steps into his new role will become known as a turning point for the British banking system. The country is in the midst of huge financial regulation reform, and the Bank of England’s powers will be significantly enhanced when the Financial Regulation and Supervision branch of the Financial Services Authority (FSA) is abol-ished and its responsibilities transferred over. Of the upcoming changes, perhaps the most significant is the addition of a new office in the structure of the Central Bank – namely, the Office of Sensible Regulation, which will be responsible for maintaining the security of the bank and decreasing the amount of risk in the country’s financial system. Major players in the system will include not just banks, but investment and insurance companies, as well as businesses that run in large part because of contributions from the public.

In this type of financial situation, Carney has a wide amount of experience. He did more than just lead the Bank of Canada – he also created the G20 Financial Stability Board. And across the board, he is known for his advocacy of strict regulation in the sector as well as his ability to withstand lobbying on the behalf of the world’s most powerful bankers. One of his most well-known moments is his argument with Jamie Dimon, the CEO of JP Morgan, concerning their differing opinions on re-forms for the global financial sector – and it showed the world that, with 13 years of works experience at Goldman Sachs be-hind him, Mark Carney is able to see the world of finance as more than just a politician.

While it is never officially mentioned, appointing a new head from outside the existing British system was an-other important motive for Carney’s selection. After Meryyn King stepped down as Deputy Governor, Paul Tucker was the first choice as his successor, a name that has since become famous in the scandals surrounding the corruption of the Libor rate. During the case, the Bank of England’s deputy listened to allegations saying Tucker ignored information showing the manipulations, and there were even suspicions that he encouraged the underreporting going on at Barclays bank, which is the main party involved in the scandal.

At this time, Paul Tucker gave explanations that hu-miliated the parliamentary committee. Even though no con-clusions were drawn regarding Tucker’s guilt, however, the scandal cast a shadow on his reputation, which ruined his chances of becoming a candidate for the position. Mark Carney’s history has no such slights.

Setting an Example in Other Fields

On the more traditional macroeconomic side of things, the Bank of England is far from calm. The country finally emerged from the recession in the third quarter of last year, largely be-cause of the positive effect the London Olympic Games

0

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2012201120102009

CANADA UK USA EUROZONE

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Finance

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WEj#1 (23)

had on the economy. By the end of 2012, un-fortunately, the national GDP declined by 0.1%, ac-cording to estimates from the OECD, and its rate of growth has not yet reached pre-crisis levels. The current head of the British Central Bank also warned his successor that the likelihood of a high rate of economic recovery within the next couple of years is very low. But one aspect of the Bank of England’s leadership is that it does not exclude ad-ditional measures of quantitative easing.

Looking at the British situation, it be-comes easer to see why the stability of the Canadian economy makes most developed coun-tries jealous, including Albion. The financial cri-sis, and subsequent recession, did not cause much damage to Canada’s economy, mainly be-cause of its close connection with the American economy. At the same time, however, Canada did not experience the same decline as the U.S. and the U.K. did back in 2009, and its financial rebound was far more pronounced. None of the Canadian banks went bankrupt, and none need-

ed special operations to rescue the state, despite the fact that the Bank of Canada was reduced to record-low inte-rest rates and had to resort to infusions of cheap liquidity to maintain some of its financial institutions.

So what is Canada’s secret? The answer was a “blessing in disguise”. The financial sector went through a severe crisis in the 1980s, and had to go through a com-plete reformation as a result. Canadian banks had to deal with higher capital requirements because of this, and they enforced strict rules for risk insurance on mortgage loans. Because of the severity of regulations at the time, the regulatory system continued to be conservative through-out the 2000s, which allowed them to stay away from new innovations that later turned out to be “toxic assets”. A similar situation occurred with the public finances – in the early 1990s, Canada suffered from chronic budget deficits and a growing public debt, forcing them to take “austerity measures”. It was a hard lesson for the country to learn, but the authorities since then have followed fis-cal discipline strictly (with help from the financial boost in the 2000s, and the rising price of oil). But in the midst of the 2008–2009 financial crisis, the government was able to support its economy using fiscal levers without any fear of serious consequences.

It would be unfair and childish to attribute the coun-try’s success entirely to Canada’s Mark Carney, when he had a solid foundation laid out before him. But the future head of the Bank of England also carries “know-how” with him, which can provide the UK and the rest of the world a great service.

In the mIdst of the 2008-2009 fInancIal crIsIs, the government was able to support Its economy usIng fIscal levers wIthout any fear of serIous consequences

2008-2009

Canada.indd 56 21.12.2012 12:59:03

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Содержание.indd 1 24.12.2012 16:14:39

INVESTMENT

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WEj#1 (23)

Siemens AG, one of the biggest corporate players in the BRICS markets, is planning on building a stronger presence in developing countries in the "second wave" of develop-ment since they were first formed. The WEJ talked to Peter Löescher, President and CEO of Siemens AG, about the "correct" way to do business and how, in 2012, it allowed the com-

pany to achieve some of its best operational results in the history of its development.

“The Global ImporTance of emerGInG economIes Is chanGInG”

Peter Loescher is the

President and Chief

Executive Officer

of Siemens AG. He

studied economics

at Vienna Univer-

sity of Economics

and Business and

at the Chinese

University of Hong

Kong. In 2004 Peter

Loescher worked

for General Electric

Company as the

President and CEO

of GE Healthcare

Bio-Sciences. In 2006

he was the President

of Global Human

Health of Merck &

Co., Inc. And in 2007

Mr. Loescher joined

Siemens AG.

Text: Elizaveta Kotova

Photo from press archive

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January 2013

Despite the global economic slowdown, your company has managed to sustain a good posi-tion, which gives you reasons to expect a mod-erate revenue increase in 2012. What will be the drivers behind this increase? What are your current financial results (profit, revenue)? Siemens always wanted to be a strong and re-liable partner for its customers worldwide – that is our aspiration for 165 years now. As our 370 000 employees operate in about 190 countries on innovative products, we can offer customized solutions and buffer regional and temporary dif-ficulties at least slightly. With that competitive advantage, we achieved one of the best oper-ating results in our history in fiscal 2012 – de-spite a challenging economic environment. In figures, we achieved an income from continuing operations of €5.2 billion. And thanks to a sus-tained strong order backlog our revenue rose seven percent company-wide up to more than €78 billion. For the next year, we are expecting moderate organic growth of our order intake and sales should come close to about last year’s level. But we want more. With the latest implementa-tion of the “Siemens 2014” program, we aim to in-crease the Total Sectors profit margin to at least 12 percent by fiscal 2014.

In what regions does the company have the biggest market share? In what regions are you planning to strengthen your positions? In what regions do you have the highest sales figures? What regions have experienced the biggest de-cline, what are the reasons behind it? What are your forecasts – what regions may be expected to demonstrate a considerable increase? The difficult economic situation in Europe burdens development worldwide. In fiscal 2012, we saw or-der declines in almost all regions of the world and a decrease of 10% in total – the only exception was the region America. And although there was a little slowdown in emerging countries, they will still have a large weight in economy: accounting for 60% of world growth by 2017. Thus we are proud to be al-ready a big player in emerging markets. And we are investing consistently and continuously in Emerg-ing Markets such as Russia for more than 150 years now. And we aim to continue our strong growth rates year by year! But the map of the world’s most important economies continues to change signifi-cantly over the next 20 years. And we intend to be part of this development from the outset. Especially

Second Wave Emerging Countries (SEWEC) are crucial areas of growth and will play an important role in the future. Therefore we are continuing to strengthen our position in second wave countries such as Indonesia, Turkey, Colombia, Mexico, South Africa, Thailand and Vietnam.

What are the specific features of different mar-kets (e.g. the USA, the EU and BRICS)? How ma-ture these markets are? What are their devel-opment trends?In general, all regions of the world face similar challenges such as climate change, globalization, the demographic change and a lack of resources. Of course, they have different priorities. In fast-growing populations for example, we need to cre-ate jobs, while at the same time having to build up infrastructure in healthcare, transportation, ener-gy and automation, to name just a few. But with our widespread portfolio, we’re well positioned to be a key driver towards and partner in achieving the region’s ambitious goals. It involves complex infrastructure projects, providing state-of-the art healthcare products as well as wind solutions.

Russia’s entRy into the WoRld tRade oRganization in fall 2011 sent a signal that foReign investoRs can count on legal guaRantees and the pRotection of theiR intellectual pRopeRty Rights in the countRy

siemens.indd 59 21.12.2012 13:01:02

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WEj#1 (23)

And concerning the current development: economic growth in the BRIC countries has clear-ly cooled off. But Russia’s entry into the World Trade Organization (WTO) in fall 2011 sent a signal that foreign investors can count on legal guaran-tees and the protection of their intellectual property rights in the country. So they will definitely remain very important drivers of the worldwide economy and they are still important for us, too. Therefore I don’t anticipate more drastic declines in growth in this region. The same applies for Europe. Due to drastic declines in the crisis countries, indus-trial production has dropped since mid-2011. But the European Union has taken important and far-reaching steps to overcome the crisis. So things are on the right track, but without a doubt 2013 will be a year of transition for Siemens.

Do you feel any competition from Korean and Chinese manufacturers of cheaper equipment? Are you planning to do something to improve your competitive performance?We do not fear competition. But we didn’t fully succeed in significantly boosting our performance vis-à-vis competitors, as we did in recent years. So Siemens kind of lagged behind its own high objectives. To get back to reaching our own goals, we’ve launched our two year company-wide pro-gram “Siemens 2014”. Its goal is to raise our Total Sectors profit margin from 9.5 percent last fiscal year to at least 12 percent by fiscal 2014. In total, we are aiming to reduce costs by €6 billion, increase our competitiveness, and become faster and less bureaucratic. So we know what we have to do – and we are doing it!

Could you please tell more about your compa-ny’s M&A policy? What companies has Siemens acquired lately? What companies are appeal-ing for your company acquisition-wise?As a part of our company program “Siemens 2014”, we are achieving to strengthen our core activities. This includes both: reinforcements through acquisi-tions as well as the divestment of businesses whose profits remain below company’s expectations over a certain period. For example, we expanded late-ly our portfolio of industry software by acquiring LMS International NV, a leading provider of test and mechatronic simulation for complex products. The business activities of LMS are to be integrated into the product lifecycle management – PLM – soft-

ware portfolio within the Siemens Industry Auto-mation Division. Industry software is clearly a field where we see growth opportunities for the future. PLM software is already internationally used by over 70,000 companies in automotive production, mechanical engineering, and others. And the market in the area of industrial processes is yearly growing around 8%. We expect an increase from €17 billion in 2012 up to €28 billion in 2018.

What segments are the most profitable? How much did the crisis affect consumer demand in different segments? What segments do you ‘bank on’ right now? In 2012, we had a very positive development of the Healthcare Sector, which substantiates the Sector’s success in rigorously implementing our Agenda 2013 program launched last year. The Sector increased new orders by 5 percent to roughly €14 billion and thus profit even grew by more than one-third to near-ly €2 billion. That is a profit margin of almost 17% – way more than the margin of our other Sectors. But we continue to focus on all our sectors: Energy, Healthcare, Industry an Infrastructure & Cities. And that’s where we will put our efforts in. Lately with the launch of our company program “Siemens 2014”.

What is your investment policy? Volume and areas of investment? (what do you invest in, when?) What we are aiming is profitable growth. And of course we’re only investing in areas with growth potential. One good example is our green portfolio. Green technology-based products and services be-came a central business area that already counts around €33 billion revenue today – that is €3 more billion than in 2011. With our portfolio, we are one of the biggest provider for environmental techno-logies worldwide: we have products, services and technologies that cover areas that correspond to 37% of the potential reduction in CO2 emissions. But newest marketable technologies require con-stantly investments in R&D. The intensity of our R&D work is for years more than 5 percent of re-venue. This year, our R&D expenditures were about €4.2 billion with approximately 30,000 employees working in this field. And with 60.000 patents from continued operations so far, that clearly is a very successful investment. But to point out once again: we take great care that we don’t skimp on the fu-ture even in times of crisis.

siemens.indd 60 21.12.2012 13:01:09

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Содержание.indd 1 24.12.2012 16:14:39

INVESTMENT

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WEj#1 (23)

By 2015 the emerging markets will have become large and important economies and will stimulate a large portion of the world's growth. The size of the BRICS economies could triple, reaching 60 trillion dollars. Maria Pinelli, Global Vice Chair Strategic Growth

Markets at Ernst & Young, discussed this in an interview with WEJ.

“You Can’t pinCh pennies on the Road to GRowth”

With more than

20 years of ex-

perience, Maria

Pinelli has in-depth

knowledge of the

needs and issues of

companies experi-

encing rapid growth.

Throughout her

career, she has sup-

ported clients with

acquisitions, due

diligence, financing

and IPOs. Maria has

acquired significant

knowledge of the

global capital mar-

kets, having led over

20 IPOs in Canada,

China, the United

Kingdom and the

United States.

Text: Anastasia Yakovleva

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January 2013

Ms. Pinelli, what is stimulating vigorous economic growth today in the emerging markets?Worldwide, the middle class is on the rise. In markets where the average consumer can spend $10–100 a day, we are observing a brisk turn-over of goods, which, of course, has a substantial growth effect on the economy. I don’t mean just China, Brazil and India, but Russia as well, which is still in the beginning stages of discovering its economic strength. We are very optimistic about the development of all the BRICS economies. We have invested more than $300 million in emerging markets over the past few years and are going to continue investing capital.

Nevertheless, China and India remain the key markets?Yes, these are the most rapidly growing markets. The business models of China and India are com-pletely different. China has become the second-largest economy in the world; it is continuing to grow and will eventually be the world’s leading economy. India, in terms of GDP at dollar parity, is the fourth-largest economy in the world. And by the way, recently there have been some important regulatory changes in the legislation there. We think that these economies will continue to grow.

Would you say these countries are fully integrated into the global economy?China and India are actively involved in the global economic cycle and are demonstrating their com-petitiveness. They are making changes to their tax regulations in order to attract more interest from investors worldwide. Today, China leads the world in IPO activity. Following in their footsteps, oth-er countries have begun increasing their capital, such as Malaysia, Indonesia, Singapore, and In-dia. In fact, their capital is growing, as is Russia’s. Unfortunately, the problem China and India are facing is a lack of qualified staff, although there is a huge demand for it.

So there is no one to develop a modern economy?The number of professionals per capita in these counties is much lower than in developed count-ries. Our goal is therefore to educate as many people as we can, as quickly as possible. Our partners in India and China are actually fund-ing educational programs for young people from

their own pockets, allocating funds to schools; in short, helping students any way they can to learn management skills and become highly qualified, in order to keep up with the modern economy and develop the future. Speak-ing of the future, I want to mention women as a separate market…

So women can be viewed as a separate market that will be extremely important for this new economy?Just as we think about markets in China and India, we can identify women in the same way. They control more than 85% of spending on non-essential goods. Women are dili-gently studying; 60% of them in the U.S. alone are college graduates. And thus they will be important for future eco-nomic reforms.

How are things in the Middle East?We view the development of markets in the Middle East, Turkey, and Vietnam optimistically. More than 50% of the population are youth under the age of 25, who are looking to the future, seeing the possibilities, and asking themselves “What will I become?” I think we will see more entrepreneur-ship in these countries in the near future. We also think Af-rica will be interesting for investors. It is rich in resources and has a strong work force. We are very optimistic about parts of Southeast Asia.

Is it possible that Mexico might become the 5th largest global economy?We are also observing growing markets like Mexico and In-donesia. Indonesia is the fourth most populous country in the world. These countries are investing capital and know how to properly operate in a difficult economic situation. Indonesia and Mexico may become among the ten best eco-nomic systems in the world. For example, Mexico has the goal of becoming the fifth-largest economy by 2020–2030. And it is completely possible.

What is your forecast for the eurozone’s economic recovery?Overall, the outlook is not optimistic and we see the second half of 2013 as the time for important decisions to be made. We see some clear signs of progress, such as increasing co-operation among EU member states. When there is close cooperation, we get a surge in the market; but once EU members descend to particulars at their meetings, the mar-ket falls, at least for a little while. A key barrier currently is an agreement between the financially distressed countries and the budgetary constraints that the capital-rich countries want to impose on the poorer ones. But I think you should not pinch pennies on the road to recovery. This could be said with respect to any company.

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POWER industry

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AgAinst the Wind

The renewable energy sector is growing with each passing year. Investors are increas-ing their influence and governments are planning their transition from fossil fuels to wind, water and, solar energies. Could alternative types of energy completely re-place coal, gas, and peat, which have long been the standard? Experts are in no hurry

to give a positive answer.


energo.indd 64 21.12.2012 13:02:55

POWER industry

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January 2013

Under conditions of environmental stress, there has been a significant-ly increased interest in renewable energy sources. Each year, global interest is growing in natural energy derived from the sun, water, and geothermal sources. According to a joint report from Bloomberg and the UNEP Collaborating Center, total investments last year in renew-able energy increased by 17% to $257 billion. The U.S. led with total in-vestments increasing 57% to $51 billion from 2010 to 2011.

Wind energy is also gaining popularity. The U.S., China, India, and other countries are increasingly turning to wind turbines, which convert wind energy into electricity.

China is the king of the wind market today. According to a study published by Global Data, a consulting company, in 2011 China’s share in the global market was 59%. From 2010 to 2011, investments in wind energy in China jumped 25%, according to the Bloomberg and UNEP Collaborating Center report. China plans to increase the amount of wind energy it uses for heating in the winter, for irrigation, and for household use, said Liu Qi, deputy director of the National Energy Bu-reau, at a conference in Beijing. Developing countries like China and India are currently investing heavily in wind and photoelectrical energy (technology that produces electricity using sunlight) because these in-vestments give them a guarantee of energy security, which they see as the path towards future development, says Philip Jennings, an expert on renewable sources and professor at Murdoch University (Australia).

The professor’s words are confirmed by a report prepared by an association of the group Greenpeace, the Global Wind Energy Council, and the European Renewable Energy Council. The study claims that by 2050, 74% of all energy sources in India will be replaced by solar and wind.

Nature Smiles on Europe’s Energy Sector

While some countries are only increasing their use of renewables, oth-ers are trying to switch completely, such as Germany and Denmark. The Danish government’s “Our Energy” plan, for example, aims to re-place fossil fuels with renewable sources by 2050. “The renewable en-ergy sector is popular among investors today, as many countries are seeking to increase their percentage of renewable sources,” says Edgar van der Meer, analyst for NRGexpert.com

The European Union’s “20–20–20” plan confirms this. It aims to reduce emissions by 20% by 2020 and to increase the production of renewable energy by 20%.

Energy technologies are developing rapidly today. According to R&Dmag.com, the U.S. spent about $6.7 billion on energy research in 2012, which is 23.1% more than the previous year. Though experts con-sider this investment insufficient, many of them agree that the amount will increase every year: “Renewables bring in good profits for investors. This is the primary reason that growth in this sector will continue,” ac-cording to Chris Varrone, President of Riverview Consulting, Inc.

SourceS of electricity in the u.S.

coal

5 5 . 1 %

nuclear

2 2 . 5 %

natural gaS

1 0 . 3 %

hydropower

9 . 8 %

oil

geothermal energy

2 . 0 %

0 . 2 %

0 . 1 %

Solar, wind, and biomaSS

source: new.wvic.com

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POWER industry

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Besides investments, analysts predict a rise in the number of scien-tists competing in ingenuity. In January 2011, Andrea A. Rossi and Professor Sergio Focardi of the University of Bologna announced that they had managed to create a special water-nickel reactor that can produce thermal energy. According to the developers, the reac-tor requires just 400 watts to operate, but can produce up to 150,000.

The revived interest in renewables has prompted many re-searchers to talk about what the prospects are in this fairly young sector. EU officials and scientists from member countries published a report entitled “Roadmap 2050,” which discusses the future of energy. In particular, the experts propose that in order to avoid any prob-lems with a lack of energy in Europe, new low-carbon technologies need to be developed, which themselves will use renewable resourc-es as their energy source. Interchangeability is yet another factor in their favor: “By 2050, Europe could be close to using 100% renewable sources, including biomass, hydro, wind, and solar,” suggests one of the report’s authors, Chris Varrone.

Economic Security or Useless Frugality?

Another attractive factor is safety. Renewables are safer than fossil fuels. Using these sources, the probability of recurrences of accidents

Global investmentin renewable enerGies

investments in new capacities of renewables

technoloGy

total amount of power (excludinG hydropower,

in GiGawatts)

water power capacity (Gw):

$ 1 6 1 bln

wind power capacity

solar enerGy as a source of hot water

$220bln

$257bln

photovoltaic systems

2 5 03 1 53 9 0

9 1 59 4 59 7 0

1 5 91 9 82 3 8

1 5 31 8 22 3 2

2 34 07 0

2 0 0 9

2 0 1 0

2 0 1 1

energo.indd 66 21.12.2012 13:03:08

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like those at Chernobyl or Fukushima is virtually zero, analysts say. “There are some hazards, such as electrical current, but they are the same at all power plants. Renewables typically do not pollute the water or air, unlike fossil fuels. And unlike fossil fuels, they do not emit large quantities of greenhouse gases,” says Professor Philip Jennings. Chris Varrone agrees: “Developers will always feel at ease, because working with renewable resources helps protect the envi-ronment from pollution on a local level, such as sulfur dioxide, and on a global level, from carbon dioxide.”

Another expert also sees a bright future for renewable re-sources. According to Lisa Frantzis, Managing Director of Renewa-ble Energy, wind has become an important part of the global energy structure over the past decade, and it is highly likely that this sector will continue to grow. “Wind and solar energy are undoubtedly play-ing a vital and growing role in the global structure, alongside con-ventional power sources,” she says. It is therefore no coincidence that more attention is today being given to developing wind power technology. In late November, one of the largest producers of wind energy in the world, Gamesa, received a €260 million loan from the European Investment Bank for the development of two platforms for wind turbines.

Analysts look with optimism to the future of solar energy. Experts believe that it will occupy a significant share of the market: The prices of this type of energy continue to decline, and it allows reduced costs, which, considering the Eurozone crisis, is quite rel-evant. In the UK, for example, research shows that solar energy can help save a family of four, on average, about $320 a year.

Not all experts agree, however, that renewables can fully re-place non-renewable sources. Of particular concern to them are solar and wind devices: “Wind and solar installations can, at best, provide only 30% of energy consumption. The demand for energy is growing at an astonishing pace and today’s technology isn’t efficient or reliable enough to cover this growth,” says Edgar van der Meer. Wind energy is increasingly subject to the skepticism of experts and some think that wind is unreliable, since its force is always changing and wind turbines cannot produce the same amount of constant energy. According to analyst Edgar van der Meer, hydro and geothermal are more effective sources of renewable energy. Many countries use hydro resources to generate electricity. Research suggests that about 20% of the world’s electricity is produced from hydropower. The leaders of hydropower are Canada and the United States. In addition, America also uses geo-thermal energy from the Earth’s interior. According to the annual “U.S. Geothermal Power Production and Development Report for 2012,” the United States is the global leader in “terrestrial” energy, with a capac-ity of about 3,187 MW annually. However, experts have found notable shortcomings in these resources: “The total capacity coefficient for renewable sources is too low to ensure a constant flow of basic, inter-mediate, and peak load energy,” says Edgar van der Meer.

ProPortion of renewable sources of energy

HydroPower

9 7 . 9 %

otHers

2 . 1 %

geotHermal

1 . 6 %

biomass

wind

solar

0 . 5 %

0 . 0 0 4 %

0 . 0 0 1 %

source: new.wvic.com

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Unluckily, the acquisition of the British software company Autonomy has become just an-other link in the chain of events that has led Hewlett-Packard to its current deplorable condition. Looking back over the company’s history, the past several years will probably go

down in the management books under the section titled, "How Not to Direct a Company".

Text: Anna Kim

Hewlett-Packardis in need of rePair

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The scandal involving $8.8 billion in losses, which HP incurred because of an unfortunate purchase, is threatening to stay in the headlines for many months. The plot is unfolding according to every rule in the playbook of corporate law dramas: mutual PR attacks from the protagonists (or, more appropriately, an-tagonists), administrations and criminal investigations from the side of the au-thorities are being launched, hearings are being scheduled – just like in the classic genre.

Buying Air

The deal with Autonomy was completed in August of 2011. Originally, the buy-ers didn’t agree with the set price – $11 billion – for what was considered to be a “global leader in infrastructure software solutions” and a “highly profitable and globally respected company whose management team deserves high recognition”, according to a press release by HP, which was released in honor of the absorp-tion and greatly flattered the software company.

Then-CEO Leo Apotheker and HP Autonomy founder Mike Lynch (who remained in charge of the business management, but on the American side of the corporation) were incredibly optimistic about the implications of the colla-boration. But in May of 2012, Meg Whitman, who replaced Apotheker, dismissed Lynch, citing the significant drop in license revenue in the company’s new di-vision as the deciding factor. And six months later, with 80% of the company’s “British” value paid for by HP, the former executives of Autonomy were accused of “purposefully incorrect accounting, misrepresentation, and concealment of in-formation”, all of artificially inflated the value of the company. According to the Americans, the result of Autonomy’s fraudulent behavior means HP overpaid at least $5 billion in the transaction.

Mike Lynch is denying all these charges. “Finance Autonomy, as a public company, which is the period in question, was following every relevant regula-tion and reporting its transactions accurately,” he said.

Meanwhile, investors are imploring members from both parties to fix the situation – understandably so, especially given that $8.8 billion is about a third of HP’s market capitalization. After the announcement confirming the write-off as a loss, HP shares fell to their lowest value in the past ten years, and just 15 months since absorbing Autonomy, the value of HP paper fell by more than half. Defendants in the oncoming lawsuit will include both Mike Lynch and Leo Apotheker, who was the predecessor of Meg Whitman and was a member of the Board of Directors during the decision, where he voted for the acquisition. On top of all this, the plaintiffs are demanding a response from the external auditors and consultants that worked to prepare Autonomy through the transaction. The list of the defendants includes Deloitte, KPMG, Barclays Bank and the Perella Weinberg Partners company, which allegedly “deliberately ignored numerous red flags” that pointed to inaccuracies in the company’s statements. In terms of government representatives, the UK

Stanford University

classmates Bill Hewl-

ett and Dave Packard

founded HP in 1939.

The company’s first

product, built in

a Palo Alto garage,

was an audio oscil-

lator – an electronic

test instrument used

by sound engineers.

One of HP’s first

customers was Walt

Disney Studios, which

purchased eight

oscillators to develop

and test an innova-

tive sound system for

the movie Fantasia.

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department that deals with large-scale fraud is getting involved, as is the U.S. Commission on Securities and Exchange Commission and the Federal Bureau of Investigation.

For right now, there are many more questions than answers. Did Auto-nomy adhere to its controversial methods of reporting fairly, and does that mean it is still protected under the law? Why couldn’t HP’s top management and the dozens of people involved in the audit and due diligence process correctly as-sess the value of the company before the deal took place? And is there reason to believe that when it comes to the rules of reporting within IT companies, there is not enough transparency?

While the parties involved in the conflict and the authorities look for who is to blame, businesses from both sides of the Atlantic are trying to understand what happened and learn a lesson. One lesson is that even when enlisting au-ditors and consultants to go over mergers and acquisitions, companies should trust them but verify the information. More likely than not, Autonomy’s story will support the preexisting trend – companies planning mergers and acquisi-tions are relying increasingly on internal resources, especially if the deal will not turn out to be that great.

The Tip of the Iceberg

The failure of HP deserves special attention in and of itself. This is not the first time that something like this has happened – in the global corporate world, the larg-est write-off of goodwill was actually from AOL Time Warner ten years ago, for

2008.01.02

2008.05.02

2008.07.02

2008.11.02

2009.01.02

2009.05.02

2009.07.02

2009.11.02

2010.01.02

2010.05.02

2010.07.02

2010.11.02

2011.01.02

2011.05.02

2011.07.02

2011.11.02

2012.01.02

2012.05.02

2012.07.02

2012.11.02

0

10

20

30

40

50

60

Net INcome / Loss of HewLett-Packard, mLN of Us $

hp.indd 70 21.12.2012 13:04:45

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a total of $100 billion. But looking back at HP’s his-tory, it is impossible to overlook the fact that just last summer, HP wrote off a loss of $8 billion of the $13.9 billion invested into purchasing Electric Data Systems, a services company bought in 2008. And an acquisition in 2010, when the company pur-chased Palm, a manufacturer of smartphones and handhelds, for $1.2 billion in 2008, turned out to be a complete disaster as well – an entire unit had to shut down. All this, however, are just symptoms of a more permanent crisis that HP has been dealing with for the past seven years at least.

The market conditions in which the com-pany has to operate are not easy to call, especially in light of the recent consumer craze for smart-phones and tablets. HP continues to get a large portion of its revenue from the sale of “iron”: PCs and accessories, printers, and servers, segments that do not show any high profitability or growth. A recent series of acquisitions, both successful ones and complete flops, were aimed at diversify-ing the company into more profitable businesses (such as with Autonomy, for its production soft-ware). This type of strategy worked well for its competition, such as IBM. But HP and the assets it has bought in recent years seems less like a self-confident company management team that knows what it’s doing and more like a drowning man clutching at straws.

Since 2005, the company’s chief execu-tive officer was changed three times. Each of the CEOs accused tried restructuring the business in their own way, and many times, they made deci-sions contrary to the logical development started by their predecessors. In other words, finding a sustainable development strategy was not sim-ple. On top of that, HP has had to cut thousands of jobs as a result of its constant struggle to re-duce costs. This has caused employee morale to fall dramatically.

Meg Whitman, who is directly responsible for the success of the operator’s manual online auction eBay site, has been trying to clean up the backlog of problems for over a year now, a pro-ject that is no easy feat. According to forecasts, bringing HP back to life will take about 5 years, and in that time, it will have to refrain from any more acquisitions and focus instead of invest-ing in research and development. But arguably the most important task facing the company’s new leaders is giving its workforce faith in HP once again.

According to forecAsts, bringing HP bAck to life will tAke About 5 yeArs, And in tHAt time, it will HAve to refrAin from Any more Acquisitions And focus insteAd of investing in reseArcH And develoPment

hp.indd 71 21.12.2012 13:04:52

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The Island of auTomobIle sTabIlITy

In the background of the difficult crisis that severely hit the automobile industry in continental Europe, Great Britain appears to be a perfect oasis. Many billions of dol-lars of investments were pumped into the global auto-giant, which created thou-sands of jobs and caused production and exportation of the British market to grow.

So what is the secret to their success?

Text: Robert Abdullin

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While corporations struggle exhaustedly to reduce costs and get rid of excesses in France, Italy and even in the relative-ly prosperous Germany, countries on the other side of the English Channel are in a drastically different mood. Accord-ing to predictions from the Society of Motor Manufacturers and Traders (SMMT), the automobile industry in Great Brit-ain went up 10 places over the last year, or by 9.7% as com-pared with the level of the same period in 2011. “Although European car manufacturers still threaten demand levels in Great Britain, English plants are continuing to gain their share of the European market, despite the fact that produ-cers in the “premium automobile” segment still benefit from the strong demand coming in from developing countries,” says the Head the KPMG Operating Unit in Great Britain, John Lich. “We’re waiting for this trend to continue over the next few years.” Forecasts from KPMG agree, stating that the production of passenger cars will grow by an average of 9% annually Britain, and by 2016, their production rate is expected to reach 2.2 million vehicles.

KPMG’s optimism is shared by PricewaterhouseCoop-ers. “Recent investments in the British motor industry will ensure its revival for the next five years at least,” predicts Phil Harrold, an expert from the company. “I would say that by that time, we will see a gain in skills and an improvement in the quality of the workforce, and that, combined with our capabilities in research and development as well as a strong supply chain, will allow us to build on this success.”

Colossal Plans

According to estimates from SMMT, the vo-lume of money from European companies go-ing into conjoined projects with British compa-nies in the last two years alone amounted to 6 billion pounds ($9.6 billion). In November, the first Toyota Auris appeared from the assem-bly lines in Derbyshire, as a result of an 185 million Pound sterling Japanese investment. The Jaguar Land Rover, in comparison, invested 370 million pounds into the largest car produ-cer located in the West Midlands county. And the largest car factory in the country is located in Sunderland and owned by Nissan, which is also planning to expand – its new facilities will con-tinue to produce the improved “Note” cars and a newer model that will replace the current ver-sion of “Qashqai”. The project will require an investment of 250 million pounds. Honda also placed to construct facilities in Wiltshire worth 267 million pounds, and as companies continue to expand, the list moves onward.

The mosT dire predicTions came from The 1980s, when rover, mini, Jaguar, Land rover, and asTon marTin sTarTed To pass inTo The hands of american and german corporaTions

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

0

500

1000

1500

2000

2500

3000

car producTion in The uK, Thousands of cars

The number of new cars regisTered in The uK, Thousands of cars

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CAR Industry

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Why did all these car companies choose the UK as their production site? It is a good question, consider-ing that some analysts predicted the extinction of the local British automobile industry. The most dire pre-dictions came from the 1980s and 90s, when brands such as Rover, MINI, Jaguar, Land Rover, and Aston Martin started to pass into the hands of American and German corporations. It is also important to note that the changing of ownership continued after the millennium – the climax of the process was when India’s Tata Motors acquired the Jaguar Land Rover from Ford in 2008. And in the middle of the last dec-ade, the world’s automobile makers started to de-velop manufacturing sites in Eastern Europe, South America, and Asia, all of which saved them money. And at the same time, Nissan, which based its invest-ment decisions in Sunderland, rejected alternatives such as India and Mexico.

A Magnet for Investment

It s well know that England is not the cheapest place to do business. But when it comes to production effi-ciency, especially in automobile innovation, the coun-try has very little competition, given that they have no shortage of skilled engineers or blue-collar workers working at the highest levels. The local workforce is very flexible, however, and the country’s authorities are therefore reluctant to burden investors with “so-cial guarantees”, the way it’s done in Italy and France.

Great Britain is almost a paradise for companies that are looking to reduce their costs without cutting back on quality – they have a huge amount of suppli-ers with the right materials and components, and close to three thousand companies ready to fight for their business. The country itself pro-duces about 80% of the components need-ed to build cars, and a couple of years ago, the Council of Representatives discovered what automobile assembly plants they need most by having them place orders with Brit-ish suppliers and subcontractors. Without exception, all the companies asked by the Council found benefits in working with Eng-land’s lower costs – 73% said that the cost of labor was the same, as well as taxes and tariffs, and close to two-thirds cited the quality control as a huge plus. In other words, the “high cost” of manu-

facturing in England was all based on rumor, and its ratio of price to quality turned out to be more than acceptable.

During the difficulties of the recession, it is important to work with the right markets, and because of this, there is an ap-parent bias towards the premium British automobile segment, where the demand is most stable. And to a potential buyer of an expensive car, the words “British assembly” sound good! Not to mention 55% of British plant exports are not affected by the cri-sis in the European Union, which helps keep the industry afloat.

There is another very specific factor that is influ-encing investors’ activities – approximately half of the cars produced by the Japanese have caused concern, which has caused the price of the yen to rise during the crisis and

create even more problems. The pound sterling, compared to the yen, fell by about half over the past five years, which is more than enough in-centive for a car company to expand its produc-tion into the UK.

We also have to give credit to the government, which provides assistance to the industry in a timely manner and in the correct format – for example, it offers tax incentives for conducting research and fur-thering development, pushing companies to allocate grants for new projects. The Eurozone crisis revealed the weakness in the suppliers of the financial compo-

nent, and the Cabinet has also expounded on the problems of lend-ing, led by Prime Minister David Cameron. A specially designed model, called Supply Chain Finance (SCF), was already tested by companies such as Rolls Royce and the Jaguar Land Rover, and according to SMMT, it can provide members of the network with a supply of low-cost financing for up to 20 billion pounds.

2004 2005 2006 2007 2008 2009 2010 2011

0

10

20

30

40

50

60

70

80

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The share of exporT in car producTion, %

Island car.indd 74 21.12.2012 13:05:51

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Содержание.indd 1 24.12.2012 16:14:39

MOTOR

76

WEj#1 (23)

It's easy to understand enthusiasts who, despite the difficulties, continue making the le-gendary AC Cobra. Or those who recreate Doc's car from Back to the Future, or those who make replicas of the famous gull-winged Mercedes. It isn't painful to drop several hun-dred thousand dollars for these beautiful, legendary cars. An altogether different sto-ry, though, is the Peel, which has always been an odd thing on three wheels, making it the smallest and probably the most bizarre car ever. But some people have decided to breathe

new life into this strange project.

Text: Sofia Ponomareva

Playing with Cars

Photos from press archive

motor.indd 76 21.12.2012 13:07:20

MOTOR

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The Birth of the Tripod

The Isle of Man, located in the Irish Sea smack between England, Scotland and Ireland, is a strange place. A tailless breed of cat mutated and turned up here. They were the first in Eu-rope to move to a parliamentary government and the last to abolish flogging in 1993. During World War II, British fascists were held here. And the Isle of Man, not giving a hoot what any-one thought, did not join the European Union. Today, this piece of land is sustained by offshore companies and tourism. The only thing that has disturbed the everyday routine of the islan-ders for more than half a century is the Tourist Trophy race (TT). The Manx 60 kilometer course is notoriously deadly. But even this small island has its own car manufacturer.

Manx-based Peel Engineering, located on this patch of land about 50 kilometers long, was initially in a high-demand business making fiberglass boats and fairings for motorcycles. Then one day, they decided to produce their own car, and they quickly moved from word to deed. By 1955, they presented their first prototype, the Manxcar. It had a motorcycle engine and three wheels: two for steering in the front and a trac-tion wheel in the back. Amusingly enough, the coat of arms of the Isle of Man also depicts three legs. However, Peel Engineering was by no means guided by patriotism: Three-wheelers simply fell under the preferential tax bracket in the UK.

They’re Spreading!

The prototype would have been the only one if it hadn’t been for Chief Engineer Cyril Cannell. In 1961, he began promoting the microcar project with the phrase “one adult and a shopping bag.” The cost of this mode of transportation was sup-posed to be like that of a moped. A year later, he demonstrated his creation at an auto show in London. The odd little fiberglass body was slightly more than a meter high and 99 cm wide and could fit only one person. The first generation of Peel P50 had only one headlight, one windshield wiper, and a single driver’s seat set on a tubular frame. Cyril Cannell had to demonstrate miraculous dex-terity to climb into the car through the only door. As he did, the rickety, three-wheeled car swung away from the cart. Not that the former military bomber pilot was unaccustomed to cramped space.

The car rested upon the three wheels of a cart. The prototype had a single wheel in the front and two in the back, but the production model reversed everything. Using a chain belt, the rear wheel was powered by a 50-cc two-stroke DKW motor with just 4.2 hp. Gears on the three-speed manual transmission were shifted with a lever on the steering wheel. There was no reverse. Instead, a suitcase handle screwed in on the rear was used to turn the 61-kilogram car around or pull it onto the sidewalk. Advertising posters showed it being easily done by long-legged beauties.

The Peel P50 cost just £200 and used a lit-tle under three liters of gas to go 100 km. “Almost cheaper than walking,” said the advertisement. But walking was certainly more comfortable and less scary. In theory, the P50 could reach 60 km/h, but even at low speeds, the self-propelled travel bag, with its high center of gravity, would sway mercilessly. It would list dangerously on turns, testing the vestibular system of the driver, who was already having a tough time inside the procrustean cabin. When turning the wheel, the driver’s elbow would hit the cabin walls. On top of that, the motorcycle engine under the seat roared and vibrated deafeningly.

When vintage car collector gary hillman saW one of the surviving P50s at an auction, it Wasn’t by chance that he had the idea to bring the vintage brand back

motor.indd 77 21.12.2012 13:07:26

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The launch of microcars in those years in post-war Europe was nothing out of the ordinary. Gas was expensive and people’s income didn’t inspire opti-mism. But the P50 stood out among the other self-propelled, ugly microcars of that time. Owners of three-wheelers were laughed at even by pedestrians who attempted to turn parked P50s around. It’s clear that this car brought Peel nothing but frustration and dubious publicity. Production of the P50 began in autumn 1964 and continued throughout the fol-lowing year, but they produced fewer than 50 cars. Nonetheless, one P50 made it to Finland while another reached Canada.

Mini Two-seaters

Failure did not discourage Cyril Cannell, however. A year later, the Isle of Man was invaded by “aliens.” With their gleaming, transparent domes, they filed out from the gates of Peel Engineering Co. and crossed the bridge over the River Neb. They were then loaded onto a car carrier and taken to the port. From there, Cannell’s new brainchild went to the mainland. Two people could ride, jostling elbows,

under the transparent dome of the Peel Trident. To fit both of them, the front part and the dome were tilted forward. Vent windows were cut into the sides of the body. The heavier car (90 kg) was equipped with the same DKW motor. Later Tridents were outfitted with the more powerful 99-cc Triumph Tina motor. But despite the fact that the two-seater Peel sold for the same price as the one-seater, sales were slightly better. And over two years, from 1964-1966, a total of 82 cars was produced.

Peel had tried producing normal cars. Back in 1953, it introduced the fiberglass hull for a roadster on the Ford block. Later in 1967, the Peel Viking Sport coupe was developed, with a plastic monocoque body on a Mini assembly. In 1969 the company ceased production, and five years later they closed.

The Resurrection of Lilliput

But in the early 2000s, interest in the curious little P50 and Trident began growing, main-ly thanks to television. Remember Jeremy Clarkson who was cruising around the BBC office

motor.indd 78 21.12.2012 13:07:35

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in the P50? By then, only half of the three-whee-lers remained. However, replica Peel P50s and Tridents could be ordered from Andy’s Modern Microcards for £13,000. Customers could even choose a Peel Viking Sport replica.

The odd little Peel was by now a symbolic part of a British car industry that is now in ruins. This explains why attempts to revive this strange but distinctive brand continued. And the ’60s had stylish trends, like the popular Austin Powers. Not to mention the desire to save gas, which after the war was an unpleasant necessity, but is now con-sidered good form for people concerned with the environment. And everyone envies Peel drivers in traffic – just think about the suitcase handle.

So when vintage car collector Gary Hill-man saw one of the surviving P50s at an auc-tion, it wasn’t by chance that he had the idea to bring the vintage brand back. Some time later, he found an investor, Faizal Khan.

Further funding was found in a non-stan-dard way. In 2011, they took part in the BBC series “Dragon’s Den,” in which a person can present his idea to several millionaires and get investments

in exchange for a share of the future profits. One of the Den’s experts and famous British business-man and investor, James Caan, showed interest in reviving the lilliputian brand. He invested £80,000 in exchange for a 30% share in the company and two cars, a P50 and a Trident.

Once again, the Peel Engineering Compa-ny was registered. The production volume was meager – a series of 50 cars, most of which had been pre-paid. The new P50 and Trident don’t re-ally differ from the originals, and they are asking £6,995 for a car with a 50-cc four-stroke engine (3.35 hp) and an option for a reverse gear. It is capable of accelerating to 72 km/h, but there is also an electric version with a 4-kilowatt engine and a cruising range of 80 km/h.

Cyril Cannell himself worked on a four-wheeled electric Trident. The electric Peel was faster and could reach 80 km/h. The safe speed for the factory cars is limited to 45 km/h. They are also offering a FUN version, which is an elec-tric Peel not intended for roads. Its top speed is around 20 km/h. True, you can drive it without a driver’s license – but slowly and sadly.

motor.indd 79 21.12.2012 13:07:42

Words

80

WEj#1 (23)

“Autumn end November: The night has fallen

The bare branches can be seen Even more lonely”*

Herman van Rompuy,the European Council President

* The European Council President tweeted a haiku. In the wake of his failure to persuade EU leaders to agree to a budget, the former Belgian prime minister has expressed his mood in haiku poetry.

Illustration by Alexander Ardabiev

words.indd 80 21.12.2012 13:09:25

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Содержание.indd 1 24.12.2012 16:14:39

words.indd 83 21.12.2012 13:24:00

Documents

World Economic Journal #1