A great thing about capitalism is that people pay for the consequences of their own stupidity. So staying on the topic of Russia as per my last article, I have no sympathy with Shell Oil now that they are getting shafted by the Russian state after making vast investments in that country. The word of the Russia government (even more so than most governments) is worth less than nothing. As a result, anyone who makes agreements with that government and puts big money into a place which has for years clearly been a kleptocratic sink hole is the author of their own misfortune when things inevitably go pear-shaped.
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A great thing about capitalism is…December 12th, 2006 |
 29 comments to A great thing about capitalism is… |
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Hey! Another interesting English expression to add to my long list! I had to look up that one up though I guessed the meaning from how it was used 🙂
Quite so Perry.
Although it is a pity about the shareholders, employees and pensioners of Shell. The company will most likely survive this and other blunders – but a lot of people will be hit.
I do not know what the ownership structure of Shell is, but my guess is that individual shareholders own only a minority of the stock. So even if they said “we want a management that does not make stupid deals with evil regimes” they would not get one.
Of course the pension funds and other institutions that own shares are supposed to try and get the best managers in charge that they can – but as the fund managers are not investing their own money they tend to only care about the end of year returns (not how investments will turn out).
It was a similar story with the banks. “Why are you lending money to X government – when they are bound to default in the end?” – “Ah, but the interest rates are wonderful – and by the time they default I will not be here any more, or everyone will have forgotten it was my judgement to lend to them”.
What to do? Not hitting the pension funds with extra taxes (as Mr Brown did in 1997 – which has cost pensions 100 billion Pounds in lost returns over the past decade or so). High rates of income tax (which are self defeating in revenue terms anyway) must be got rid of – and inheritance tax and capital gains tax must be abolished.
If this was done individual shareholders would be in charge again within a few years. After all as late as the 1960’s individual shareholders still owned a majority of stock in Britain.
Paul,
Not sure individuals would make better investment decisions than fund managers. Is DIY better than hiring someone?
By and large the world economy runs on contract. America, the West, places where a deal is a deal, has lower transaction costs; business moves at higher velocity, long term and higher risk technical enterprises can be undertaken. Putin and Russia seem to reverting to form. A low tech, resource exporting thugocracy with a population well more than willing to cast its liberties at the strong mans’ feet for petty security. Good luck to them.
Point well made Paul. Countries/leaders who sh!t upon contracts, seize ownership of foreign investment, flout the rule of law (at least commercial law) may be trolling for a short term gain but it hurts them most in the long run, because of the track record of untrustworthiness.
I can’t think of any country that has done these sorts of things and still attracted foreign investment. It’s usually part of a process of isolation and downward spiral.
The only thing Russia has to offer the world right now is foreign mail order brides.
… and oil, gas and other natural resources. My (non-Russian, non-mail-order) wife translates Russian amongst other things and always groans when Putin does something like this because it means less work for her in her preferred language. She’s seen a steady decline in Russian work due to the lack of investment as Putin tries to relive the glory days of the CCCP.
Yes well some people never learn.
When my grandfather died in the 50s
they found, in an old tin box,
a tidy amount of shares in the Trans Siberian Railway.
Our family has been circumspect in our dealings with Russia, ever since.
As I said(Link) back in September 2005:
However, Russia is an excellent place to make money at the moment, you just need to go in with your guard up, find a local you can trust, and be quicker on your feet than the government is. And never ever enter into a direct contract with the government.
The only thing Russia has to offer the world right now is foreign mail order brides.
Not quite true. There are some wonderful non-mail order Russian brides, the people are generally wonderful, the nature is lovely, and it is one of the few places in the world where you can live a little adventure every day, in stark contrast to the increasingly sterile existance that life in Europe is becoming. In many ways, life is much less regulated here than in the UK.
Have a look at some of the posts under here(Link) for an idea of what life is like in Russia.
Don’t think for one minute I am defending the Russian government, because I’m not. I’m just pointing out that there is more to Russia than mail-order brides (and yes, I appreciate the comment was tongue in cheek).
Paul,
What to do? Not hitting the pension funds with extra taxes…
Well, no. But aren’t pension funds, or, more precisely, insitutionanl shareholders, part of the problem you identify? Maintaining or increasing the tax advantages and security of pension funds (that is, funds committed to state-approved collective pension schemes) merely encourages manager upon manager upon manager between investors and their money.
In a ‘normal’ society, where the president of the country is not some kleptomaniac thug with a taste for theatrical assassination involving Polonium 210, I might certainly agree with that. In the case of the Sakhalin Island project I would strongly have to disagree. Russia is very much a xenophobic society and it seems its just as easy to blame ‘malign foreign influences’ for Russia’s problems now as it was under the Soviet era. The absolute joke has to be of country known for just about being the definition of the absolute extreme opposite of environment care blaming a highly responsible company like Shell.
I’d advise Shell’s engineers to get a few geiger counters in now while they’re still cheap.
Paul says
“Why are you lending money to X government – when they are bound to default in the end?” – “Ah, but the interest rates are wonderful – and by the time they default I will not be here any more, or everyone will have forgotten it was my judgement to lend to them”
but I think you are failing to understand the risk-return trade off. It’s entirely proper that bad-risk borrowers are forced to offer a higher interest rate, and for lenders to make risk-return decisions. If no one lent any money to high risks we’d be in a very stagnant economy.
Is this an appropriate time for a plug for my favourite book of all time?
Regulations, Institutions, and Commitment: Comparative Studies of Telecommunications (Political Economy of Institutions & Decisions)
A fantastic analysis not only of how expropriatory policies harm investment in industries with large sunk costs and with high asset specificity, but also of how appropriate institutions can restrain governments from acting opportunistically.
The case studies are all telecommunications, but one can easily see how the analysis might apply to oil, etc.
I do hope Shell has time to delete all control software from the project before pulling 100% of their people out of the country.
Russia seems to have failed in its post Soviet attempt to democratize. 90% of the fault is theirs, but some of it is ours. The US (and the West) could have been far more generous in the critical years 1992-1994, when a few gestures such as providing quality temporary housing for displaced Red Army officers and some US VA hospital beds for WW II veterans might have paid big dividends.
From now on Poland is the geopolitical flash point and we should be ready for trouble on the Polish Belorussian border. Historiucally whenever Russia is in the mood for some ‘aggro’ , the Poles are always the first (Europeans) to get some.
I think that we, libertarian ideologists and armchair philosophers don’t really understand how the world works, especially the “third” world (Russia and it’s buddies included).
There is no such thing as a “contract” there (except as a piece of wallpaper). You get in, take your risks, bribe all the thugs in your way and cash your profits. You win some, lose some, but mostly you win.
These international big corporations have plenty of experience at it. They know what they are doing. There’s enough money in there to buy off seven Russian governments and still make a profit. Don’t worry.
It seems to me that the oil companies and others have been remarkably sanguine about the risks of the Russian mafia-influenced state in recent years. After 1998 there was a brief period of doubt but then a rush developed in the last two or three years, fuelled by rising oil and gas prices. The various acts of theft and violence in Russia seem to have taken a long time to change attitudes.
I now think that any fund manager or investors worth his salt should require a high risk premium for investing in Russia. There are a lot of so-called BRIC funds – holding Brazilian, Russian, Indian and Chinese investments – and the Russian elements of those are likely to suffer.
I find Jacob’s barbed remark about “libertarian ideologues” to be out of order. A person with a keen appreciation of freedom and its threats is highly likely to be aware of the dangers of doing business in Russia.
“… the dangers of doing business in Russia.”
Those dangers are not unique. Doing business in Saudi Arabia, Iran, Iraq, Nigeria or Venezuela (all oil rich) is risky too. Nowhere are contracts enforced like in the US or UK. What happened to Shell is nothing extraordinary, nothing unanticipated…
As to investing is “BRIC” funds – there is no need to be an expert in political science for that, you just study a graph of their performance up to now.
It is irritating to have to repeat myself, which is why on the Ludwig Von Mises blog I limit myself to one comment on a post (deleting the post from my e.mail box after I have posted the comment).
However, on this blog I have not followed this practice – so it is my duty to explain again.
No I did not say that individual shareholders should not hire managers – I pointed that the individual shareholders do NOT hire the managers presently (because in most large limited companies they do not own a majorit of stock). I am not a foe of the division of labour (although I have nothing against owner managers).
No I have nothing against high rates of interest for risky borrowers (of for non risky borrowers if they agree to them – time preference rules O.K.), – I am against lending other people’s money out when you know the borrower is not going to pay back the money.
“But we really thought X government was going to pay back the money” – pull the other one, it has got bells on.
And – Yes I do believe that individuals should not be at a disadvanture compared to pension funds (and other institutions) when it comes to investment (I said this).
However, (as I also said) this should NOT be done the Gordon Brown way by loading taxes on pension funds and other insitutions (thus sending their pensions to Hell and pushing them into depending on the Welfare State – which is bound to collapse) – the high rates of indivdual income tax should be done away with (they are counter productive in terms of revenue anyway), and such taxes as inheritance tax and capital gains tax should be ABOLISHED.
The time I have just spent repeating myself is a bit of my life I will never get back – but, no doubt, I would just have wasted it in some other way.
Not to be a band-wagoneer, but agreed with Tim: in many ways, so long as you can keep invisible to the All-Seeing Eye, Eastern Europe is, to Texan eyes, much more free and less robotic than Western Europe’s big cities have a tendency to be.
But you know, tyranny AND anarchy benefit the rule of the strong…
If Shell is lucky, they can get some of it back in international claims court. But it’s a long and expensive process.
– Josh
Jacob, I entirely agree and I did not say the dangers of doing business in Russia were unique. The world is full of thuggish regimes and that is why emerging market equities and bonds issues in such countries carry a higher risk premium than say, a bond issued by the government of Switzerland.
Josh,
“If Shell is lucky, they can get some of it back in international claims court. ”
Are you a lawyer ?
In the “third” world things are “arranged” by other means, not by claims courts.
Regardless of how things are arranged in Russia, the existence of an international court of civil claims is news to me. There are an astonishing number of people out there who are under the mistaken impression that “international law” is the same sort of thing as domestic law, and has settled and enforceble norms. (OK there are some international lawyers who are agitating for it to be the case, and as part of that negotiating position assert that it is.)
I could see the US doing the same sort of theft if the dollar goes pear-shaped, as well.
When dealing with a kleptocracy, mortgage your in country asset to the hilt, preferably using local banks, and invest the proceeds outside the country.
If the kleptocracy threatens to grab the assets, threaten to default on the loans. All of the local banks will go bankrupt …
Anybody interetsed in Foreign brides should be aware of Russian dating scams. I would recommend to use unique Russian scammers search engine to find information regarding the presence or location of a specific Russian lady on dating scammers blacklists and anti-scam sites.
Given what has now happened to Sergei Magnitsky I think the days of investing in Russia are long over. Perhaps it is best to leave this country as a source of Russian women for international catwalks, vodka and snow.
The comment above is obviously spam but the accurate contextual remark and not *entirely* off topic payload link made me laugh so hard I am not going to delete it 🙂 Yes, Russia does still have one truly delightful ‘natural resource’ that even the state cannot tarnish, haha
The only good investment in Russia = to get yourself a nice looking Russian girl.