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The Essential Event in 2013 - Evacuation of the Schibsted Concern

The Essential Event in 2013 - Evacuation of the Schibsted Concern


Scandinavian media concerns' withdrawal from the Baltic states is an important indicator of the processes going on there. Therefore, it is necessary to describe these processes, while there is a possibility.


Scandinavian banks dominate the Baltic countries, using controlled capital and experience, while a high number of powerful media groups in Scandinavia and those controlling huge capital and having unique experience are abandoning positions in Latvia, Lithuania and Estonia one by one.


This trend is alarming, as the transparent media market is no less important than the transparent and competitive banking market. If the Nordic entities are leaving because of the negative perceptions being characterised in the media, in the long run this may have a negative impact on the economies and politics of the Baltic countries. Unfortunately, in order to grasp the nature of media processes in the Baltic countries, one must not focus on the information provided by Scandinavian entities about the market specifics and reasons for their withdrawal, as most comments are very brief. We should also remember that these large entities were entering Estonia, Latvia or Lithuania with their heads held high and had very ambitious goals, while their withdrawals were modest and quiet.


Orkla Media left in 2006


First to decide to withdraw from the Baltic media market over the past decade was a Norwegian concern, Orkla Media. In 2006 it sold 100 percent of its shares in the most solid and influential regional newspaper in Lithuania, Kauno diena, controlled since 1998, to the British investment fund Mecom. This withdrawal surprised many, because at the time, no one thought of the impending crisis and the years 2006, 2007 and even 2008 were the most successful for the Lithuanian media. So unexpected changes in the economy could not have been the reason for the withdrawal. In any case, you can agree with Assoc. Prof. Dr. Deimantas Jastramskis, director of the Institute of Journalism at Vilnius University, who says that purportedly, the sale of Kauno diena meant nothing for such a powerful concern as Orkla. But this is true only in terms of financial results and not strategy. When investing in the Baltic media market, Scandinavian concerns were perfectly aware that the turnover and profits here would be far lower than in the major markets. But they invested because it was a logical strategy of expansion to neighbouring markets. However, that suddenly changed. For as yet undisclosed reasons, instead of a desire to expand further, a desire to return home emerged.


When trying to understand the real causes of the withdrawal of the Nordic entities, we should not speculate on what factors led to such changes in strategy but instead consider who replaced them. After all, what replaces the Scandinavian media groups and takes over their newspapers points out the real forces, the development of which is one of the reasons why the Scandinavian concerns capitulated. Thus, the British investment fund Mecom was just an attractive cover because Kauno diena was fairly quickly passed on to the hands of Lithuanian businessmen. They played with it a little, separated the activities, disposed of the immovable property and sold the newspaper, now impoverished in terms of capital, to a company controlled by an even more distinguished businessman, the banker and Lithuanian People’s Party founder Vladimir Romanov. It was Ūkio Bankas, de facto owned by this businessman, which was suspended at the beginning of 2013 by the Central bank of Lithuania, and at the time of writing this article the banker had still not returned to Lithuania from Russia. Although Lithuanian prosecutors are eager to question him, as stated by representatives of the Lithuanian Prosecutor General’s Office, the former Ūkio Bankas owner is suspected of high-level embezzlement. Therefore the Orkla concern, after such a beautifully idyllic beginning, withdrew and today one of the major and once a very objective daily newspaper is weak, to say the least, while a fight is going on backstage for its control. According to sources close to the editorial board, the main fighting forces can be characterized as follows: the supporters of V. Romanov (hiding in Russia) and partners of the largest regional electricity supplier, Inter RAO.


Bonnier has an economic alibi


The Bonnier Group is a Swedish family business focused of the publication of books and magazines, business press, newspapers, broadcast operations, and other media. When Gerhard Bonnier opened a small bookstore in Copenhagen in 1804, he could not dream that after 200 years his small business would turn into an international corporation. In 2012, Bonnier employed 10,176 personnel, the group owned 175 companies operating in more than 17 countries, and their sales amounted to 29.176 billion Swedish crowns.


Bonnier is the only major Scandinavian media entity whose withdrawal can be justified in part by the crisis. In 2009, at the very peak of the crisis, it withdrew from Latvia. As was reported by the media at the time, the Swedish press publisher, Bonnier Business Press, sold its business in Latvia – Diena publishing group, publishing a daily newspaper under the same name, and the Dienas Bizness business newspaper. It was purchased by the Latvian company, Nedela S.A., for an undisclosed price. It was also announced that the Nedela Company is financed by Luxembourg Financial Services, established and managed by a group of wealthy businessmen in Estonia. Bonnier reportedly stated that the deal was initiated by Nedela. On this occasion, the board chairman of Bonnier, Casten Almqvist, said: “Nedela gave us an offer that satisfied us and was beneficial. This transaction will allow us to further consolidate our position in priority markets such as Scandinavia, Russia, Estonia, Lithuania, Poland, Bulgaria and Slovenia”. Therefore, according to this report, it is quite surprising that one of the most powerful Swedish concerns decided that Bulgaria and Slovenia are priority markets, but Latvia – no longer is. This evolution can only be explained by Bonnier’s desire to keep the positions achieved in the Latvian market significantly lower than the willingness of potential investors to take them over, at some point.


What has this meant to the Latvian media market and what impact has this had on Latvia as a state? From 1993 to 2009, Latvia's largest national daily, Diena, owned by Bonnier, earned the reputation of a prestigious, liberal and western-minded daily. After the change of shareholders, it quickly diminished, and its main editors and journalists left the newspaper. A mysterious transaction of an undisclosed amount, which, according to the Estonian portal aripaev.ee could have been as much as 44.9 million lats, fuelled speculation and rumours about where the shares of the daily newspaper ended up. An investigation of the Latvian Corruption Prevention Office revealed that the newspaper is controlled by three politicians. By the way, when we use the phrase “mysterious transaction”, we mean that in the beginning, as in the case of Kauno diena, the Brits were involved in the acquisition process. Because it was namely the Brits, Jonathan and David Rowland, that were named as the new owners of the newspaper. However, after a year, 51 percent of Diena shares were held by a Latvian businessman, Viesturs Koziol, and in 2012 he already owned 98.86 percent of the holding. Nevertheless, as mentioned above, the investigation of the Corruption Prevention Office found that the actual owners of the newspaper are three politicians.


So, based on this information, it can be assumed that the Scandinavian concern in Latvia, as in Lithuania, handed over the influential media to persons willing to pay a relatively high price because they needed influence. And that is not good, because when a young country experiences the growing influence of those to whom the media is not a business, but a tool being used to influence political and economic processes, this does not yield anything good for the state or its business. Scandinavian entrepreneurs probably do not have to be advised how the business environment in Sweden and Norway might change, if their main newspapers are acquired by populist political party founders or entrepreneurs associated with Russia. It goes without saying that this would have a negative impact on both society and business. Therefore, the withdrawal of the major Scandinavian concerns is not to be seen as a business transaction, but rather capitulation, when it is recognised that changing the business environment in the media, ensuring a more transparent media market and information environment is difficult, and withdrawing and giving away the market to those who need it, it is a lot easier. Of course, for the purposes of objectivity one can also consider the version that the Swedish concern Bonnier, with short-term assets amounting to about 7.5 billion Swedish crowns in 2013, sold the Diena and Dienas Bizness newspapers because both publications had experienced 1.78 million and 6.3 thousand lats of loss, respectively, in 2008. However, publications of the Bonnier Group also suffered losses in other countries during the crisis. In Lithuania, for instance, the Verslo žinios group it controlled, publishing a daily under the same name, operated at a loss for at least several years in succession. However, the Bonnier Group did not sell publications in Lithuania or Estonia. Therefore, one has to choose whether we should believe the statements that these publications are not sold because the markets are strategic, or simply draw attention to the fact that in these countries, the Bonnier Group does not own media that has a significant impact on society. Therefore, for those who collect influence, these publications controlled by the Bonnier Group are not valuable enough to pay for them so that the offer satisfies Bonnier.


Schibsted was the last to capitulate


Oslo-based Schibsted is one of the largest media groups in Scandinavia and has been operating since 1839. Not only does it own press companies, but also TV channels, movie, publishing and mobile services companies. Schibsted employs more than 7,800 personnel. The concern operates in 29 countries, is well established in Scandinavia, in many countries of Europe, Latin America, Asia and even in Africa (Morocco). According to the financial statements of 2012, Schibsted operating income amounted to 14.763 million Norwegian crowns.


While analysing Schibsted’s withdrawal, we were surprised to find that this media group, which operated in Estonia since June 1998 and controlled the country’s largest media holding, Eesti Meedia, was still expanding as late as 2011. This was the year when a subsidiary of the Schibsted Media Group acquired 100 percent of the second biggest news portal in Latvia, tvnet.lv. The director general of Eesti Meedia managing this Schibsted investment, Mart Kadastik, called this a significant step of expansion in the Baltic countries. The development process in Lithuania took place fairly recently and was distinguished by its short-term determination to achieve results. The companies managed by this concept made attempts to establish themselves in the market of daily newspapers twice. Initially they purchased the Ekstra žinios newspaper and attempted to establish themselves with it, and after failing purchased the freely distributed and promising 15 min newspaper. After a few years it became a weekly and then disappeared completely, just like Ekstra žinios. Yes, they still have the website, which is currently the second most popular in Lithuania.


So the concern was pursuing expansion back in 2006 in Lithuania and in 2011 in Latvia, said they realised they had to concentrate on larger markets and pursue the classified advertising business and therefore sold their business in the Baltic states to the managers of the Eesti Meedia group and the host of UP Invest, one of the wealthiest people in Estonia, the pharmaceutical tycoon Margus Linnamäe. As reported, he offered to buy the shares because he had heard rumours that Gazprom allegedly intended to buy the Estonian media concern. One can only be glad that the retreating Schibsted was not replaced by Gazprom, but what it has left behind will only be seen after a few years.


The rapid development of Schibsted and very quick retreat, when the business was sold to Eesti Meedia for 30 million euro (according to bbn.ee, this transaction for Schibsted resulted in a 26 million euro loss), is surprising. But even more surprising is that in all cases the major Scandinavian concerns were replaced by influential local businessmen. Somehow they do not try to buy the Scandinavian banks or other companies, but quickly purchase companies that control the media, and especially influential newspapers. By the way, when we are talking about newspapers and their specifics, one should consider that in the opinion of some of the experts, they are much better suited to influencing citizens’ opinions compared to the TV, let alone the Internet. Therefore, national and regional newspapers are the targets of entrepreneurs combining major political and business interests. Their control can have a significant impact on election results, and through them, on all processes going on in the state. For this reason, to achieve certain goals through the media, business groups tend to pay more for influential daily newspapers than they are worth.


Why did the Scandinavians run away, and when will they return?


Business efforts to use the media to help win elections to parties that, in return, make beneficial decisions, is a tradition as old as the media itself. However, awareness of this tradition does not answer the question of why the big Scandinavian entities that control the influential newspapers retreated now. This question is best answered by an analysis of the processes taking place in the geopolitical and energy sectors. One can see the trend that with the growth of Gazprom gas prices, the Baltic countries have experienced growing discontent and the increasing efforts of business groups representing Russia’s interests to direct negative public reaction on the right path, thus reducing the possibility for people capable of achieving change detrimental to Gazprom and other Russian energy companies to enter the political arena. For this reason, the influence of the money allocated in support of Russia’s interests has significantly increased in the Baltic media market. For example, as revealed by the Lithuanian State Security Department, before the advisory referendum on the construction of a new nuclear power plant, funds were granted by businesses representing Russian interests (according to unofficial reports, tens of millions of litas) to turn public opinion against this project, despite the fact that today Lithuania imports about 70 percent of its electricity, most of it from Russia. Thus, the transparent media, which did not participate in assimilating these funds assigned by the Kremlin structures, faced strong competition. Speaking about media revenue from “non-traditional” sources which seek to influence viewers or readers, we must understand that the need for media which can provide such a kind of service is never-ending. Therefore, the larger the market share occupied by the media, which, in order to survive, become well attached to the proceeds of the sale of their impact on the consumer, the more difficult it becomes for other media to compete by refusing this income. Of course, it is likely that a large part of the Scandinavian political and business elite did not even pay attention to this problem, because media corporations do not boast, while Scandinavia is dominated by companies that suffice with traditional income.


We write all of this not to complain about how difficult it is for us, as expecting any sympathy or assistance from the pragmatic Scandinavians would be ridiculous, but to at least describe the situation of the media market in the Baltic states, enabling a better understanding of why we see the withdrawal of Scandinavian concerns as capitulation. There are no ideal or 100 percent objective media enterprises, but there are some that take into account national interests and there are others that get extra income because of a nihilistic approach. For this reason, the withdrawal of the Scandinavians at a time when Lithuania and Latvia are going through a crucial battle for energy independence (Estonia extracts shale, so its situation is a little different) is understandable as the process worsens the competitive conditions. However, in the background of the essence of the whole process, such withdrawal can be seen as desertion. Consequently, the number of media enterprises with at least minimum consideration for national interests and the essential mission of the media –
to objectively inform society – has declined in the market. Meanwhile, the effect of money from interested business structures has grown significantly. This, no doubt, will have long-term adverse consequences because today, journalists who would like to be employed in media that appreciate their professionalism, rather than in their readiness to splash dirt around when asked, have minimal choices. They either adapt or abandon journalism altogether and become spokespersons or employees of public relations agencies.


Let’s forecast the future. In view of the fierce battle for the energy independence of Lithuania and Latvia, competitive media market distortions will be the greatest. Therefore, only the media that will sell themselves to business groups that see the media as a tool of influence and disregard negative financial results will survive, along with the media that adapt, i.e. concentrate their efforts on establishing themselves in business but do not overdo representing national interests. Quite the contrary – they will often have a nihilistic approach and thus avoid the risk that their principles can complicate their competitive environment. So if we are talking about when the Scandinavian concerns could return to the national daily newspaper business of Lithuania, Latvia and Estonia, we should note that this will only happen when the Baltic countries throw off the yoke of Gazprom and Inter RAO and gain energy independence. After all, then it will not be worthwhile to overpay for media control.


There are three main factors adversely affecting the functioning of the media market: influence of the media by business associated with Russia (both its acquisition and performance through other, mostly financial, means), TNS LT survey quality (as stated in one of the comments), and the issue of the transparency of state orders, which is closely related both to the oligarchic group influence and the quality of surveys.


Today the Baltic market is confronted with a paradoxical situation where Estonian business has the greatest impact on the media. Acting in Lithuania, we have to admit that it is the most popular web portal, delfi.lt, controlled by the Estonian businessman, Hans Luik, which is the mainstream media, so far guaranteeing objective presentation of events taking place in society and preventing other web portals from standing out. For this reason, in our interview with this entrepreneur we asked how he manages to survive in the current market and to preserve the principles and values ​​of the democratic media. By the way, I want to believe that the new Eesti Meedia owners, the largest of which has guaranteed that he has purchased this company to protect the media from Gazprom, will also attempt to do everything possible to prevent at least the Estonian media capital companies from supporting Russian interests and not oppose projects for establishing energy independence.


In this situation, the Scandinavians would have already withdrawn


If we are talking about the processes taking place in recent years in the Baltic media market, one can mention the example of VALSTYBĖ, a magazine of economic and political analysis published in Lithuania. Since almost seven years ago, when we began to publish the magazine, one of our main objectives was the struggle for energy independence from Russia, and during the first two years, we got questions from five companies on our intention of selling our publication. Only one interested person was related to a Scandinavian entity and their interest was very superficial, while that of all the others was very specific. Unfortunately, the links of all those four companies with Russian interests were obvious to our publication, and we refused to sell shares very profitably to protect the magazine’s mission against rape. After six months, we were not surprised at all when, once we decided to fight for energy independence and after we began publishing the magazine, we learned that there are publishers in Lithuania who proclaim themselves to be partners of the British (again the Brits) weekly magazine, The Economist. Their magazine is targeting the same segment of readers as VALSTYBĖ, thus not only reducing the potential income from the sale of magazines but from advertising, which in this segment, given the relatively small layer of wealthy people who are interested in the analysis of economic and political processes, was already limited. Quite soon it became clear that the publishers of this magazine are partners of the main Russian giant, Inter RAO, in Lithuania. Thus, the so-called partners of The Economist became the competitors of VALSTYBĖ, which consistently supported the idea that Lithuania, together with Latvia and Estonia, should seek self-sufficiency in the supply of power, and to reduce the influence of Russia. The company controlled by these partners was officially authorised by Vladimir Putin to sell from electricity from the power plant built in Kaliningrad in the Baltic States and other countries. The ambitions of these players were not limited to the establishment of a single publication for the business segment. Later, they also opened the annual The Economist publication, and the Intelligent Life, Top Gear and L’Officiel magazines. It is interesting that, since the beginning of their publishing, there has not been a year when the publishing house of these magazines has operated profitably. But talking about it is ridiculous, given the fact that while the magazine publisher, Intelligent Media, a subsidiary of Scaent Baltic, was counting losses: in 2012 – 2 million litas (8 percent more as compared to 2011 – 1.85 million litas) – the profits of Scaent Baltic were mainly coming from the supply of electricity from Russia, in 2012 it had 87.258 million litas net profit. To summarize this textbook example, in our opinion demonstrating the competition to be faced by those who do not adapt to the media policies implemented by separate interest groups, and attempt to defend the national interest with integrity, it is necessary to pay attention to one more thing. Lately, Verslo žinios, controlled by Bonnier, revealed the companies selling mostly the electricity of the Russian giant, Inter RAO, and publishing several British magazines, as the Swedish capital investment company, Scaent Baltic. So while it would seem that the competition is going on with the company, whose economic background is based on the trade of electricity supplied by the Russian entity, the official competition is going on with British magazines that are controlled by the Swedish capital company.



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Investing in Belarus: Pros and Cons

Investing in Belarus: Pros and Cons


by Maksimas Saveljevas, Attorney-at-law, Partner in Minsk, Representative of Raidla Lejins & Norcous Vilnius office in Minsk


Map of foreign investments in Belarus and China role


The origin of foreign investments in Belarus has remained quite the same. The largest amounts of foreign direct investments traditionally come from Russia and EU countries. It is noteworthy that since 2007 the Russian Federation, the United Kingdom and Cyprus have been among the top five countries investing in Belarus. Statistical data show an increase in European investments in Belarus against a backdrop of deteriorating Belarus-EU political relations.


The situation with foreign investments from China remains unclear. Belarusian-Chinese economic cooperation receives special attention in the Belarusian media, however, actual Chinese investments in Belarus are still quite modest. The most significant contributions come to Belarus from China as earmarked loans from Chinese banks aimed at carrying out projects involving the use of Chinese goods and workers. Two-way trade between Belarus and China has been showing impressive results during the past decade, however looking from a regional perspective, the figures don’t appear to be extraordinary.


It is noteworthy that Chinese and Belarusian authorities have announced quite ambitious plans for the future. In 2011, China and Belarus signed an agreement on developing an industrial area in the suburbs of Minsk (the Sino-Belarus Industrial Park). Xinhua News Agency reported that there was a Chinese investment of USD 5 billion in the project. In July 2013, China and Belarus established a partnership by signing a large number of cooperation agreements, including the offer of loans by the Export and Import Bank of China for the first Belarusian nuclear power plant. According to the statement made by the Belarusian Government on 11 July 2013, for the purposes of the nuclear power plant, from 2013 to 2018 Belarus will take a soft loan of USD 323.8 million from the Export and Import Bank of China for a 15-year period.


While Belarusian officials are very enthusiastic about the prospective inflow of investments from China, a number of experts remain rather sceptical. The Belarusian Institute for Strategic Studies believes that Belarusian authorities want, somewhat naively, to turn their country into China’s stronghold in Europe. However, the goal will not be easy to achieve as Belarus has strained relations with the West. Experts from the above-mentioned institute emphasize that while Belarus is borrowing, China is making money. Some experts believe that Belarus overrates the potential of economic benefits of cooperation with China, stressing that large-scale project financing schemes impose certain limitations on Belarusian enterprises and pose risks related to external borrowing.


A joint venture with Belarusian partners: a good business model or a future failure?


One option that many foreign investors consider when they looking for ways to invest in Belarus is establishing a joint venture with reliable Belarusian partners, bearing in mind certain difficulties they may face due to lack of knowledge of certain aspects of the local market.


Belarusians are quite positive about establishing joint ventures with foreigners. However, as there is always a question of reliability of local partners, foreign investors need to be careful about the process of selecting such partners. A proper operational due diligence review, based on information obtained from reliable third sources of information or by investors themselves, is always strongly recommended. The financial viability of local partners should also be checked in advance, though this is a pretty difficult exercise on the Belarusian market due to a lack of well-recognized reputable credit agencies on the market. When making a business plan for a Belarusian joint venture, foreign investors are quite often advised to produce a number of alternative business plans and solutions in case the initial business plan does not work. It is always good to think about any exit strategy as early as at the stage of entering the Belarusian market – this can pay off if things really go wrong.


Unfortunately, shareholders’ agreements are a grey area in Belarus, since there is no relevant regulation at the moment (though such a regulation is in the plans of the government). Therefore, a foreign investor who enters into a shareholders’ agreement with a Belarusian partner within the framework of a Belarusian joint venture the way he is used to do in other jurisdictions has to be aware that in the event of a dispute, such an agreement may be declared void or voidable by a Belarusian court or arbitral tribunal and eventually become unenforceable.


Nevertheless, foreigners could consider establishing an overseas holding company and regulating the relationship with Belarusian partners by means of a shareholders’ agreement of the holding company governed by foreign substantive laws and providing for settlement of disputes outside of Belarus. However, there is always uncertainty if any foreign judgement or arbitral award in any dispute arising out of the shareholders’ agreement will be recognized and enforced in Belarus. Often foreign investors are advised to check in advance whether Belarusian partners have any sufficiently liquid foreign assets in case of any overseas holding company setup.


As a limited liability company (a общество с ограниченной ответственностью (ООО) in Russian), which is the most popular business setup option in Belarus, may be set up by at least two founders, those foreign investors who prefer a limited liability company over a single-member unitary enterprise (a унитарное предприятие in Russian; applicable to situations when there is only one founder) attract a Belarusian partner as a co-founder, assuming there are no ready-made solutions for creating а company with exclusively foreign investors as founders. In a number of instances, to avoid a joint venture setup with involvement of Belarusian partners, foreign investors go for an option of two foreign founders employing two related foreign companies as founders and members, or for an option of allocating a pretty marginal number of shares to an expatriate CEO of the limited liability company established. There are also optimal solutions available on the market for legally correct and economically viable disposal of a single-member unitary enterprise or the second partner’s joining the business after a while.


It is also in line with the existing practice that any foreign investor, who is contributing a major investment, retains the controlling stake enabling him to have a qualified majority at corporate level. However, this is not a uniform recipe, since Belarus has witnessed disputes among foreign and local shareholders, when the locals with a minority stake were effectively blocking the majority’s decisions or otherwise opposing the majority. Long-lasting disputes between shareholders brought to the court have also taken place in Belarus. That is why it becomes extremely important to have the Articles of Association of a newly established company properly worded and agreed to among the shareholders, so that the interests of majority and minority shareholders are properly reflected in order to avoid any disputes or mitigate their effects from the outset.


The impact of membership of Belarus in the Customs Union (CU) and the impact of Russia’s membership in the World Trade Organization (WTO) on economics and the investment environment in Belarus


One of the most important changes associated with the CU is that agreements signed within the framework and decisions made by the supranational institutions of the CU (the Commission of the CU, and, since 2012, the Eurasian Economic Commission / EEC), which change trade flows in terms of magnitude and direction (for example, Belarus had to reduce tariffs for about 2,000 products, but had to increase them for 700 products), are binding on all members of the CU. Most of EEC’s decisions are adopted unanimously, but the role of Russia seems to be dominant, which strengthens the risk of dependence of Belarus on Russia. At the same time, exports of Belarus to Russia and Kazakhstan are now seeing steady growth.


Investors with presence in various CU countries generally quite positively perceive the CU as a transnational structure eliminating or reducing trade barriers; however, they still have some concerns regarding its impact on the investment environment (for example, it seems that free economic zones in Belarus or any major tax incentives granted in such zones might be abolished as a result of the CU).


By joining the WTO, Russia bound itself to reduce tariffs, which automatically means a cut in import tariffs in Belarus, due to the country’s participation in the CU. Different industries in Belarus are and will be affected, in particular those that produce import competing products (for instance, pharmaceutical products, TV sets, refrigerators, truck tractors and trucks etc.). At the same time, even if Belarus is able to maintain its current levels of state support for agriculture, Russia can force Belarus to ‘deliberately’ reduce its exports of some goods to Russia, if Russian producers complain of unfair competition due to the high levels of subsidization of Belarusian agriculture. Some economists believe that this is likely to happen in the coming years.


Privatization in Belarus


Eight small and medium size State Owned Enterprises (SOEs) representing different industrial sectors have been selected for the first pilot privatization and assigned to the Belarusian National Investment and Privatization Agency. On 22 December 2010, the Belarusian Ministry of Economics and the International Bank for Reconstruction and Development (World Bank group) signed a Grant Agreement, pursuant to which the Ministry of Finance of Austria established a Trust Fund in the amount of USD 3.6 million for a 5-year period to support the Belarusian privatization programme implemented by the Agency. The project is implemented under the supervision of the World Bank. The aim of the privatization programme is to implement a small scale case-by-case privatization programme in accordance with international practices. A case-by-case privatization process is aimed at: (i) attracting the best strategic investors of either domestic or foreign origin able to ensure further development of the company; (ii) generating revenues to the state budget as a result of successful sales; (iii) minimizing the potential negative social impact of these transactions.


Overall, the progress of pilot privatization is quite slow. It is not fully clear whether the privatization process is going to be completed in the case of at least one of the above-mentioned eight companies in the nearest future. As the process is supervised by the World Bank and financed by the Government of Austria, it is generally perceived as fairly transparent. In fact, privatization processes in Belarus have only started. A number of privatization deals were completed in the past; however, these were very specific cases targeted at either Russian investors or local investors.


Investors interested in the privatization of particular companies could obtain individual investor guarantees and incentives by entering into specific investment agreements. Legal experts usually advise to seek a 100% stake in the targets in privatization to avoid any kind of pressure (whether actual or implied) from the minority represented by the State. Also, it should come as no surprise for investors that any kind of additional social or loss-bearing entities are sold together with the targets in privatization. Furthermore, foreign investors should be aware of the intentions of Belarusian authorities to introduce the ‘golden share’ rules that would enable Belarusian authorities to intervene, under certain circumstances, in the management of the privatized companies. However, it is worth mentioning that scandalous stories of nationalization or de-privatization (when the results of privatization were revised) are quite rare in Belarus and have happened when strategic industry enterprises are involved.


Some key legal risks and practical tips for foreign investors


Below is the summary of some key legal risks and practical tips when considering Belarus for investment.


Legal risks


Lack of regulation of the shareholders’ agreement, which may be void or voidable.


A large number of official bodies performing controlling functions.


Insufficient attention to the peculiarities of local legislation (currency regulations, taxation, book-keeping and corporate legislation, in particular) may lead to severe implications.


A lot of legislative changes, some of which are made retroactively (e.g. restrictions on circulation of shares were adopted with retroactive effect).


The case law sometimes differs from legislation.


Enforcement of judgements and arbitral awards can be time-consuming; bailiffs should be properly supervised by the creditor to avoid a ‘no asset to exact’ situation.


Practical tips


Foreign investors thinking of investing in large-scale projects may seek to conclude individual investment agreements providing for substantial tax and non-tax benefits and operational guarantees.


In case of a significant investment project, be ready to invest additionally into local social projects supported by the State.


When considering privatization, always target for a 100% stake, and do not leave any minority stake to the State or local authorities.


Preferably choose foreign arbitration as a forum for any contractual disputes with the State or local authorities.


When you consider investing in Belarus, explore various investment scenarios in the case something goes wrong with your main investment plan.


Have an exit strategy from the outset.


A thorough tax and legal analysis and planning of prospective business operations in Belarus is highly recommended.


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 Shale  Gas  –  from America with Love?

Shale Gas – from America with Love?


The shale gas revolution has fundamentally changed the energy market in the U.S. Now the whole world is waiting for its expansion – Russia anxiously, Europe with hope. Can shale gas go global? Much will depend on the improvement of extraction technology, investment frameworks and U.S. global energy strategy.


US production of natural gas and crude oil from shale formations is transforming energy markets and geopolitics.  The dramatic rise in US natural gas production has led to a rapid and sustained decline of US domestic gas prices, a revival of US manufacturing, a global glut of displaced liquefied natural gas (LNG) and a subsequent erosion in the linkage between crude oil and natural gas prices in Europe.  Global gas markets are becoming more competitive and Middle East dominance of oil markets is increasingly challenged by the US and Canada.  Shale formations are ubiquitous, so technologies that can produce them economically can democratize access to energy.  Countries historically dependent on a single supplier, or on imported gas or coal, can access indigenous supply if the right economic framework is in place.  So far, only a few countries have created such frameworks.


The US experience


Since 2008, when the production of shale gas first garnered widespread attention in the United States, the US has experienced positive benefits with regards to price, climate and industry growth. US shale gas production rose from 2.25 trillion cubic feet (Tcf) in 2008 to a projected 8.6 Tcf in 2013.  The US is poised to become a net exporter of natural gas by the end of this decade.  Today, natural gas prices in Europe average more than twice the average US price, while Asian gas importers pay roughly three times as much for gas. The US Environmental Protection Agency announced in October 2013 that carbon dioxide emissions from power generation declined by ten percent between 2010 and 2012 largely as a result of natural gas replacing coal as the power generation fuel of choice.


Impact on global markets


European markets began to see price improvements in 2008, when the US began producing enough shale gas to lower its imports of LNG, freeing up those LNG cargoes to go elsewhere, including Europe. Gazprom was forced to decide between adapting to new market realities or cede some of its market share. In 2012, a number of gas companies in Western Europe renegotiated long-term gas contracts with Russia’s Gazprom, including Poland’s PGNiG, Italy’s Eni, and Germany’s E.ON; some renegotiations resulted in retroactive price reductions.


US LNG exports are likely to grow, albeit slowly. The US is poised to become a net exporter of natural gas by the end of this decade, with some analysts projecting LNG exports of as much as six to eight billion cubic feet per day (bcf/d) by the end of this decade.  So far, one export project has received final export authorization from the US government for 2.2 bcf/d and is currently under construction, while four additional applications, totaling 4.57 bcf/d, have received export approval conditional upon technical and environmental approval.  The US Department of Energy expects to issue new conditional approvals every two months, but final approvals can come up to eight months after conditional approvals, and if these projects reach final investment decision (not a certainty), construction can also take two to three years. It is safe to say that there will be LNG exports from the US, but the volume will be determined by market prices and the pace of development of competing LNG projects elsewhere in the world.  As additional supplies of natural gas become available, whether as a result of US LNG exports or production of shale gas in Europe, Europe’s negotiating power will continue to grow.


Growing US oil production from shale impacts global oil markets.  US production has helped to replace supply lost from Libya, Iraq, Sudan and Nigeria.  US oil supply growth has helped lower the cost of security cooperation on Iran to China, Japan and Korea.  The potential impacts of shale oil and gas development are enormous, particularly if the phenomenon can go global.


Can the shale gale go global?


In spite of the positive market impacts to date, the benefits of shale oil and gas continue – so far – to be limited primarily to the US. Shale formations are ubiquitous, with resources being identified in Europe, Asia, Africa and South America.  While Russia, China, the US and Argentina are among the largest resource holders for both shale gas and shale oil, there are sizable gas resources in European countries including France, Poland and Ukraine, as well as Romania, Bulgaria and Lithuania.


The US success is the result of the right configuration of geology, economics, technology, industry experience and policy. In 2008, natural gas prices in the US were relatively high, the resource plays were known, and the technological advancements in horizontal drilling and hydraulic fracturing made development economic. The domestic oil and gas service industry was robust, technically capable and reputable. The US had in place an investment framework that helped to assure companies that they would see a return on their investment. And last but not least, the policy framework in the US, which included a stable regulatory regime and land/mineral ownership rights helped companies take the risk of investing.  The scale of success in the US was dependent on all of those factors, and that success will be difficult to replicate.


Public confidence


While US production has not been without controversy, the existence of sound environmental laws on drilling safety, water usage and emissions allowed US production to rise rapidly. Even so, many states created new laws on fluid disclosure, community impacts, water recycling and well bore integrity to address public concern over the scale of development.  In Europe and Latin America, shale oil and gas can be developed safely and successfully, but governments have to create policy frameworks to ensure safety and protect investment. Rules need to be robust and include rigorous enforcement mechanisms to engender public confidence. Numerous reputable organizations, not least of which include the International Energy Agency and Resources for the Future, have done work to outline how shale oil and gas can be developed safely, and their reports can help to provide a blueprint for designing sufficient regulatory frameworks. While safety and environmental protection are often the primary focus of regulatory efforts with regards to oil and gas development, governments also need to consider the issue of local benefits, which can be addressed through policies like revenue sharing or severance taxes. Additionally, development can be harder when there are entrenched interests that support the status quo in the energy sector, whether with regard to the fuel mix or supply hegemony.  Governments can combat these interests by promoting the diversity of supply and fuel types.


Investment frameworks


Economics matters.  Decisions to invest are driven by risk and reward. The cost of developing shale formations varies greatly depending on geology and the availability of infrastructure. Tax and regulatory costs must incentivize exploration in early stages, as the risk of failure can be high. Unfortunately, some of the initial enthusiasm for shale gas development in Lithuania and Poland has waned, largely because the resources are proving to be too small or too costly to develop at current natural gas prices.  In Central and Eastern Europe, oil and gas development can be particularly costly because there is limited existing infrastructure both for drilling and for delivering gas to markets. Given the numerous opportunities for natural gas development globally (including, but not limited to, unconventional gas), governments will need to be competitive in order to attract investment.


The Outlook for Europe


Misinformation, domestic politics and a lack of private ownership have slowed the development of shale in Europe so far. Those countries most dependent on imported gas from Russia have been the most motivated, led by Poland and Ukraine. Romania and Bulgaria have important resources, but internal political rivalries and some external desire to preserve market share have temporarily complicated development. In Western Europe, the United Kingdom has made major strides towards allowing the development of its shale resources in a safe and sustainable manner, evaluating the risks, working with industry to consider safe operating requirements, and being pragmatic about the timeline for development. In Germany, which currently has a de facto moratorium on fracking, a formal moratorium is expected to result from recent coalition-forming talks among the leading political parties. Similarly, France currently has a moratorium on the practice of hydraulic fracturing.  Russia, on the other hand, already a major player in the oil and gas world has substantial reserves of shale oil, providing them with a potential win in oil even as shale gas development elsewhere in the world is forcing them to adapt. So far, Russia has proven to be better able to adapt than expected, negotiating on fiscal terms and attempting to become more competitive. This will serve to make the Russian economy more competitive and, in the long run, less dependent on natural resources.


At present, no single European country has taken a leadership role with regards to developing a strong regulatory framework for shale development, and the EU Commission is not in a place to do so with such fragmented views among member states and given the intensely local nature of allocation of water resources, land access and drilling safety. The US has taken a leadership role in promoting the safe development of shale gas through initiatives like the Department of State’s Unconventional Gas Technical Engagement Program, but global leadership on shale will have to extend beyond the US. The shale revolution should not just be an American tale; it should be a global opportunity.


In the end, the shale revolution strengthens global energy security and lowers the cost of carbon reduction.  New supplies of oil and gas, be they from shale or from ultra-deepwater reservoirs or the Arctic, represent a slow democratization of energy that provides new countries with the chance to generate economic growth, improve their carbon intensity and reduce the power of hegemonic suppliers.  Even as incremental energy demand shifts from West to East, the world is becoming less dependent on energy production centered in an elite few countries. US LNG exports and perhaps new supply from Canada, Australia and East Africa will give countries more choice. In an era where ‘energy security’ remains critical to national security in Europe and elsewhere, this is an important shift, and one to be encouraged.  But it will take good leadership to get the mix right.


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Chinese Renminbi – American Dream?

Chinese Renminbi – American Dream?


„It‘s all for money and goods, this fighting and quarrelling“
(Pieter Bruegel the Elder, 1570)


The Third Plenum of the 18th Central Committee announced a comprehensive programme of reforms that will support China’s ambitions to develop into a global superpower by the end of the decade. China is envisioned to become more market-oriented, competitive, liberal, transparent and investor-friendly. In other worlds, China will continue to go along the path of Westernization, which, symbolically, started precisely 35 years ago during The Third Plenum of the 11th Central Committee Congress led by a legendary reform leader Deng Xiaoping. The strategy proved to be highly successful: in 1978 China’s economy was more than ten times smaller than that of the USA and produced only 2% of global economic output, whereas in 2018 China is forecasted to surpass America to become the largest economic power generating 18% of the world’s economic output. These impressive achievements more than anything else motivate the Chinese political elite to keep the Western direction.


And yet the fact that China is becoming like the West, by no means suggests that China likes the West. China is becoming similar to its Western counterparts in virtually every dimension except one – the political system. In spite of economic liberalization, the People’s Republic of China was, is and will continue to be ruled by the Communist Party. Hence, political rivalry between the West and China ought to intensify in line with growing Chinese economic power. China’s plans to create an air defence identification zone around Japanese controlled Senkaku (Chinese: Diaoyu) islands were immediately followed by a “Cold War-like” rhetoric from the Pentagon. The incident perfectly illustratesthe existing tensions between China and the West that at times remind us of the Cold War antagonism: the difference is that today it is China and not the Soviet Union that represents the East. However, this time the battle will not be about who will get the larger number of nuclear warheads.To paraphrase the inscription of Pieter Bruegel the Elder “It’s all for money and goods, this fighting and quarrelling”. China already flooded the world with “made in China” goods, but a stable and freely convertible currency is a necessary prerequisite in order to successfully compete in the global financial industry. China perfectly understands that and is ready to fire off a principal weapon: the Chinese Renminbi, which is actually ready to compete with the US dollar and the euro, even though it will not be an easy task in a world controlled by the Western powers.


The West rules the rest


The year 1991 was the year of triumph and victory for the Western World. The Collapse of the Soviet Union ended the Cold War and greatly increased the ideological and military dominance of the USA and its Western allies. Symbolically, the same year witnessed the collapse of the the Japanese real estate market that put an end to a post-war Japanese economic miracle. With the Soviet Union and Japan defeated, the West set off to dominate the world. America de-facto became the world policeman, whereas united Germany became the economic powerhouse of the newly created European Union (Maastricht treaty was signed in 1992). China was no match for the West at that time: its economy was no larger than that of France, Italy or … the State of California.


The year 2001 marked two attempts to question the global dominance of the West. The September 11 attacks challenged the military and ideological supremacy of the West. Just a few months later, British economist Jim O‘Neill coined an acronym “BRIC” (Brazil, Russia, India and China) – a group of emerging powers that supposedly were eager and ready to challenge Western economic dominance. And yet neither terrorists nor BRIC posed a real threat to the Western World. The War on Terror gave a nice “excuse” for the USA to carry on its world police duties. Economically BRIC countries, although making good progress, were no match for the West either. The GDP of all BRIC states combined was still significantly lower than that of the USA or the European Union alone. China was still seen as a place to produce cheap “made in China” goods whereas Russia continued to lose its influence in Eastern Europe to the rapidly expanding European Union and NATO.


In fact, the largest threat to the West was the West itself. Excessive confidence and optimism led to excessive borrowing, which eventually led to global financial and economic crisis in 2008. The situation looked increasingly serious and reminiscent of the Great Depression. When the credit boom suddenly went bust, many countries were forced to impose strict fiscal discipline, while consumers massively cutback their spending, fearing that the worst was still to come. With domestic consumption trapped into a vicious credit cycle everyone had high hopes that exports would drive their economies out of recession. The temptation to start “Beggar Thy Neighbour” type of competitive currency devaluation policies was extremely high as were the stakes. But it was precisely these “strategies” used by many countries that delayed economic recovery after the Great Depression and resulted in multiple armed conflicts in late 30’s. The world seems to have learned this lesson: the Currency War did not happen this time and precisely this non-happening allowed international trade and the global economy to recover.


The Currency War that did not happen


An English proverb says: “A friend in need is a friend indeed”. And the best friend of the Western world during the economic crisis was China. Not only did China not embark on Trade Wars with the USA or the European Union, but it also did not succumb to the temptation to devalue its currency in times of economic distress. China is occasionally accused by the USA of implementing competitive devaluation practices that allegedly give Chinese producers an unfair competitive advantage over American producers. But in fact it is not so much about China as about the USA itself.


To begin with, China’s current account surplus was a mere 1.3% in 2001, but as the USA started implementing ultra-loose monetary policy things started to change dramatically. Too cheap and too easy credit transformed Americans into the real “homo-consumericus” – to paraphrase Rene Descartes, the motto of American consumers became “consumo ergo sum” (“I consume, therefore I am”). Cheap and abundant “made in China” goods, German cars, Taiwanese computers, Saudi Arabian oil and American dream houses – all those purchases made the USA current account deficit widen from 3.7% in 2001 to 5.7% in 2006. China benefited a lot from this consumption frenzy in the USA. In just 6 years, the Chinese current account surplus increased almost tenfold reaching an impressive 10% of GDP in 2007. But China was not alone. For example, Germany has increased its current account surplus from 0% in 2001 to 7.5% in 2007. So did Saudi Arabia, Sweden, Israel, Malaysia, Japan and other export-oriented countries that managed to avoid a USA-like consumption boom (Spain, Greece and the Baltics were among those that did not). Hence, blaming China for growing global trade imbalances during the pre-crisis period would not be objective. Especially keeping in mind the fact that China removed the peg in mid-2005 and allowed the Renminbi to gradually strengthen against the US dollar from mid-2005 until mid-2008.


But even more important is that China decided not to weaken the Renminbi during the global economic crisis in 2008 and instead allowed it to strengthen in line with the US dollar (which was strengthening vis-à-vis other currencies due to its status of safe haven currency). This action had a profound effect on increasing the attractiveness of the Chinese Renminbi. First, by doing this China sent a clear signal that it will not start currency wars with its trading partners. Hence, China proved that it can be a reliable and trustworthy trading partner for the West. Secondly, China effectively transformed the Renminbi into a safe haven currency i.e. an anchor of stability that is sought after by international investors in times of economic crisis. By choosing not to devaluate its currency and re-pegging it to the US dollar instead, China in fact sent a signal for international investors that the Renminbi is at least as strong as the US dollar in times of turbulence. Thirdly, China’s action illustrated the growing divergence between China and the rest of BRIC countries. Since the onset of the crisis, the currencies of Brazil, Russia and India significantly weakened against the US dollar. The Brazilian Real and the Russian Rouble were particularly hard hit and lost close to 60% of their pre-crisis value while the Indian Rupee depreciated by 30%. The Chinese Yuan, on the contrary, gained in value until mid-2008 and then remain fixed vis-a-vis the US dollar until mid-2010.


Renminbi: at least as strong as the US dollar


In fact, the global economic crisis in 2008 was not the first time the Chinese Renminbi proved itself as an anchor of stability. During the 1997 Asian financial crash most South-East Asian countries devaluated their currencies, but the Chinese Renminbi on the contrary - appreciated. This helped other Asian countries to regain their international competitiveness at the expense of China. For example, the current account balance of Thailand, Malaysia, Philippines, South Korea and Indonesia turned from a negative one in 1997 to a positive one in 1998 and the years to follow. On the contrary, China’s trade deficit with ASEAN countries turned negative in 1998, while the total current account surplus gradually declined from 3.9% in 1997 to 1.9% in 1999 and further on to 1.3% in 2001. Were China to follow the example of other countries and devaluate the Renminbi, the recovery in South East Asia would have been undermined. But China decided not to devalue and instead even allowed the Renminbi to strengthen symbolically. Hence, the first test was passed in 1998, the second one – in 2008, and the third, decisive one, in 2013.


In May 2013, FED announced that the era of economic stimulus (money printing) is comming to an end. Warren Buffet once rightly remarked that “you never know who’s swimming naked until the tide goes out” – and with FED’s announcement the tide of easy money expectations suddenly all but vanished. As a result of that, the currencies of all the BRIC countries weakened against the dollar except one: the Chinese Renminbi. In just four months the Indian Rupee, Brazilian Real and Russian Rouble depreciated by 22%, 19% and 7%, whereas the Chinese Renminbi on the contrary – appreciated by 1%. This shows that the Renminbi is building up credibility as a safe and stable currency that tends not to lose value in times of economic turbulence – property so needed and sought after by international investors. Hence, contrary to the other currencies of BRIC countries, the Chinese Renminbi fulfils the necessary condition to become one of the global reserve currencies. China’s case becomes even stronger keeping in mind the fact that Japan – its long-standing rival in Asia – is implementing Abenomics economic policy as a consequence of which the Japanese Yen depreciated significantly… It’s now Japan and not China who would rightly deserve accusations of encouraging global currency war. Especially given that the current account surplus in China dropped to 2.2% of GDP in 2013 and is expected to narrow further to a mere 1% in 2015.


Making the Renminbi global


And yet, keeping a stable exchange rate is definitely a necessary, but by no means a sufficient condition to become global reserve currency. It is financial liberalization that is needed. The ruling Chinese Communist Party was unwilling to liberalize financial markets fearing that foreign capital inflows and cheap capital could destabilize the domestic economy. However, The Third Plenum of the 18th Central Committee seems to be a game-changer. Measures have been announced that in less than a decade could potentially make the Chinese Renminbi among the top three global reserve currencies. There are two ways in which China will liberalize and globalize the Renminbi: a gradual widening of the trading band around the official fixing rate determined by the People’s Bank of China and experiment with Shanghai (and possibly Guangdong) free trade zones.


First way: Gradual widening of the trading band


Prior to mid-2005, the Renminbi was fixed to the US dollar with occasional devaluations to retain the international competitiveness of Chinese manufacturing production and keep the trade balance in surplus. For example, China’s trade balance moved into negative territory in 1993 and was immediately followed by the Renminbi devaluation the year after. However, devaluation of the Renminbi in 1994 proved to be the last one, since improving productivity and rising export volumes helped China to keep an international trade surplus. Hence, the Renminbi remained fixed to the US dollar until mid-2005 when significant trade surpluses started to accumulate, threatening the stability of global trade. As a result, China decided to unpeg the Renminbi from the US dollar and introduced a managed float regime. Specifically, the Renminbi was allowed to fluctuate +-0.3% around the official fixing rate determined by the People’s Bank of China. The band was widened to +-0.5% in 2007, +-1.0% in 2012 and is expected to be widened further on to +- 1.5% at the beginning of 2014.It is important to mention that between mid-2008 and mid-2010, the sRenminbi was temporarily re-pegged to the US dollar, but this event did not change the general tendency for the Renminbi to gradually increase its exchange rate flexibility and eventually transform from a fixed to a floating currency – an essential feature aiming to become a global reserve currency. So far, the experiment has gone smoothly: the Renminbi has gradually but surely been appreciating against the US dollar, approaching the 6 Renminbi per US dollar mark (the rate was 8.27 when the peg was abandoned in mid-2005).


However, more freedom for a currency necessitates more freedom for the financial market as a whole. First, capital controls should be gradually lifted. For example, China imposes limits on the amount of foreign currency an individual can take in a given year. The existing regulation is that each individual is not allowed to take more than 50 000 US dollars per year. However, these regulations become superficial given that many people find ways to bypass the law. In addition, the recent upsurge of the usage of virtual global currencies, such as Bitcoin, could make these restrictions even harder to enforce. Another issue is interest rate liberalization. Under existing regulations, a commercial bank’s deposit rates cannot exceed the benchmark deposit rate set by the People's Bank of China by more than 10%. For example, the one year benchmark deposit rate currently stands at 3%, hence, Chinese savers can receive for their one-year deposits no more than 3.3%. China also used to impose similar limits on lending rates, but those restrictions were removed in July 2013. And yet, it will be a real challenge for China to eradicate the deposit rate control, since it would seriously hurt banks’ profitability and may potentially destabilize the Chinese financial system, which is dominated by state-owned banking groups. Hence, this road to Renminbi globalization will be gradual and potentially with some set-backs if experiments do not bring the desired results.


Second way: Shanghai free trade zone


At the same time China is moving in another direction in trying to make the Renminbi more freely convertible and used by the international community. In September 2013, China opened up the Shanghai free trade zone with no restrictions on capital movement and interest rates. The experiment is expected to last three years and if it proves to be successful the capital and other controls will be gradually lifted in other provinces and later – on a national scale. In fact, Shanghai is already not alone as the Guangdong free trade zone is expected to be opened in early 2014. If those experiments succeed, China expects to liberalize the Renminbi by the end of 2015. Hence, as soon as 2016, a powerful rival will come to the global stage with the aim of challenging the US dollar and euro and together Western absolute dominance in the world of money.


The battle for money: ChinAmEurica


The Cold War between the West and the Soviet Union left the world littered with dangerous nuclear warheads. On the contrary, Sino-American rivalry will leave it covered with “made in China” goods, US dollars and Chinese Renminbi. That is because China and America are like newlyweds firmly tied into a marriage of convenience. China is the biggest creditor of the USA, whereas the USA is by far the biggest export partner of China. This simply means that America without China would experience severe financial crisis, whereas China without America would delve into deep economic crisis. However, as Benjamin Franklin once put it “Where there’s marriage without love, there will be love without marriage”. Love, after all, is not war and this is very good news for the global economy. To paraphrase an anti-war slogan of the Cold War period, the Sino-American rivalry will “make money, not war”. Europe and the rest of the world can greatly benefit from this battle; hence, contrary to the situation during the Cold War, countries should strive to get into the front line of this battle.


The battle for money between China and the West will make both parties more prosperous. On one hand, China’s rivalry won’t allow the West to become overly complacent and relaxed. Rivalry is a necessary condition for capitalism to flourish – and China is perhaps the best country to take over the role of a key competitor. On the other hand, increasing pressure from the West will prompt China to speed up reforms and challenge the West in the world of money and finance. China clearly understands that and seems to be ready to globalise the Renminbi as soon as 2016.


Finally, China, together with the USA and the European Union, is supposed to become one of the three global powers responsible for safeguarding the stability and prosperity of the global economy. And yet, the fight for ChinAmEurica as a new world order for decades is not going to be easy for anyone.


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The Winners of the Year – Good China and Grim Russia

The Winners of the Year – Good China and Grim Russia


by Eduardas Eigirdas, Baltic Economy Editor-in-Chief


The Chinese economy has a great growth potential, and this is good news for the World economy. But it is time to answer one question – what kind of world China represents and wants to rule? Today it seems that it has decided to manufacture the largest copy in the world – that of the US economy. But its political posture is unclear. Will it act like Putin’s Russia or find the way to cooperate with the West (for example, through Renminbi)? America and Europe in turn must understand that they possibly nurture a dragon inspired by the great Mao, whose real friends are disciples of another statesman, J. Stalin, and whose major objective is not a thriving society, but a victory against the alleged enemy surviving Mao's times. This article helps to clear the situation.


Key words: China, Chinese economy, China modernization, China Communist regime, Renminbi. US economy, US dollar, Euro, Russia, Putin, Kremlin, Global trade.


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Latvian Armoured Cars for Dictators

Latvian Armoured Cars for Dictators


Karolis MAKRICKAS


The dismal days when the mafia and sheikhs were driving black Mercedes cars have ended. Now, if you want to stand out, you need an armoured "Dartz" all-terrain vehicle, so that losers could die of envy eyeing your luxury and so that enemies and deceived business partners could not hunt you down with missiles and mines.


The good news is that in order to buy such a car, you don’t need to travel to the other end of the world or to look for a dictator who is selling his property for a mere trifle as the gallows approaches. It is sufficient to get to the Latvian brothers in Riga.


The "Dartz" company  is headquartered in the "Russo-Baltique" factory, which used to manufacture armoured vehicles for the Russian tsars in the old days and also contributed to the invention of the helicopter. As the company’s representatives say, they do not care at all about what your requirements are, since they are ready to implement all of them and surprise you. Still, no work will commence unless you open up your wallet and show them that no winds are blowing through it. How much should you have? Well, if your option is not a basic version, then there should be at least 1 million Euro in your pocket.


When cooperatives were allowed to be founded in the Soviet Union in 1988, this offer was immediately snatched up by Leonard Yankelovich, thus giving birth to the "Dartz" company. According to the founder and the company’s current representative, the inspiration to create armoured cars arose after heavy vodka drinking following all the best traditions of Russian mentality. An interesting thing about this whole miraculous story is not only that Leonard himself boasts that he has never been a car mechanic of any kind (and therefore knows little about machinery), but also that he has no driver’s licence, which means that he cannot drive any of the steel horses that he creates.


Art


Each product made by "Dartz" is art, which Leonard considers to be tantamount to the famous Fabergé eggs: not everybody is so rich and not everybody can show real appreciation for a luxurious armoured car in terms of art. Besides, all cars are different. If the owners of two luxury "Bugatti Veyron" cars ever met, the differences between their cars, in most cases, would not be impressive, whereas in the case of a "Dartz", several different accessories and options exist, and much more is available for an extra amount of money. So the buyer that Leonard is aiming at is something between the rapper Lil Wayne and a Saudi Arabian prince, though both extremes are possible.


Quite recently, the rapper Kanye West and his lovely wife Kim Kardashian decided to renew their car fleet. The "DARTZ Prombron Iron Diamond" car, which was assembled based upon the "Mercedes-Benz" G-Class, cost the rapper 400,000. Twice this amount was spent on the car’s extra armour and its salon interior. But because he could not manage to reach agreement with his wife on the desired colour, the rapper decided that he would buy two cars with the same set of equipment instead. After the purchase, 2.4 million was dropped into the "Dartz" bank account.


Besides, a "Dartz Prombron" car can often be seen on the big screen as well. For instance, in the movie "A Good Day To Die Hard", this all-terrain vehicle was used to hunt down Bruce Willis all throughout Moscow. Whereas a bit earlier, in last year’s impressive cinema masterpiece, this gold-plated car was driven by the Wadiyan dictator and all-beloved repressor, Aladeen. If it is namely a golden "Dartz" car  that you want, the price starts at 1.2 million Litas.


Equipment


Each "Dartz" car can be primarily chosen as a pseudo-sedan or a pseudo-platform van. As previously mentioned, the choice of optional equipment is almost unlimited; you just have to have the money. For instance, only one "Dartz" car in the entire world has a jacuzzi, whereas another one has a royal-style bed. In the meantime, other owners of these cars want as much armour as possible, so that even an indirect nuclear explosion would cause the least amount of damage as possible. Besides, all the cars are equipped by default with a black box – just like on aircraft. So, should the armour happen to be breached, the boss’s last swear-words will surely be recorded.


The most expensive "Dartz" car sold with the greatest number of accessories went to China – it cost its owner 7,000,000.


According to the company’s representatives, Russians always buy black cars, Arabians – white cars, whereas golden, glittering and shimmering cars are chosen by rappers. It is namely for them that special golden alloy wheels whose shape resembles AK-47 ammunition are manufactured.


It is also worthwhile mentioning that this armoured all-terrain vehicle is not only one of the safest in the world, but also the fastest. The maximum speed is 180 km/h (about 110 mph) which is an excellent result for a tank weighing 4 tons.


Armour


A separate topic here is the car’s protection, which exists in several options, starting with the lightest level, B2, and ending with the most complex, B7+. Moreover, the car can be equipped with cameras pointed in all directions as well as with various explosive sensors. And, if it’s very necessary, even an anti-missile defence system.


Unlike those made by other manufacturers, this car is delivered already shielded and protected and, therefore, is much safer than those that, just after having been manufactured, are fitted with armour plating. Once, an armour technology was devised in the Soviet Union called "The Capsule": first, a kind of armoured capsule for the passengers is constructed, and then it is surrounded with the car’s components. The weight of a "Dartz" car manufactured with all possible protection reaches 8 tons.


Even the bulletproof glass selected for the car is special – it’s the same type that’s protecting tourists from the odour of Lenin, who is lying in Red Square.


Do you still doubt whether it is worth buying one? Maybe you will be encouraged by the fact that each car buyer gets a golden pistol and a small golden bottle of vodka as a present!


Excerpts from the article


Only one "Dartz" car in the entire world has a jacuzzi, whereas another one has a royal-style bed. In the meantime, other owners of these cars want as much armour as possible, so that even an indirect nuclear explosion would cause the least amount of damage as possible. Besides, all the cars are equipped by default with a black box – just like on aircraft. So, should the armour happen to be breached, the boss’s last swear-words will surely be recorded.


Quite recently, the rapper Kanye West and his lovely wife Kim Kardashian decided to renew their car fleet. The "DARTZ Prombron Iron Diamond" car, which was assembled based upon the "Mercedes-Benz" G-Class, cost the rapper 400,000. Twice this amount was spent on the car’s extra armour and its salon interior. But because he could not manage to reach agreement with his wife on the desired colour, the rapper decided that he would buy two cars with the same set of equipment instead. After the purchase, 2.4 million was dropped into the "Dartz" bank account.


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David Brin: Why Do We Need to Forecast the Future?

David Brin: Why Do We Need to Forecast the Future?


David Brin is an American scientist and author of science fiction; he has received Hugo, Locus, John W. Campbell Memorial, and Nebula Awards. He has shared his insights with corporations such as Google, Procter & Gamble, and SAP, with NASA, and even the United States Department of Defense. According to D. Brin, he usually asks questions and does not give answers to his clients, since the skill to ask relevant questions is of paramount importance.


VALSTYBĖ: You have consulted a few of the world’s largest corporations. What can be predicted considering the future by a writer, that can’t be predicted by corporate executives earning tens of millions of dollars? 


All human civilizations invested heavily in prediction of the future. In the past, to forecast the future, shamans read goat entrails or watched the distribution of the stars. This process has changed today, yet shamans have survived under different names, from stock market analysts to politicians and business leaders, whose job is to appraise possible scenarios of the future as accurately as possible in order to employ available opportunities and resources accordingly. Besides being a writer, I have been trained as a scientist, and I tend to distrust those professions since their predictions, as often as not, are based on intuition, not science. But, as is known, even science can be murky as it looks ahead, while intuition sometimes tells a lot more.


The answer to the question why my predictions are appreciated by corporate executives earning millions of dollars is rather simple: they seldom dare to peer beyond the five-year horizon.  I must make it clear that in such cases not so much possibilities of specific events are predicted, as of the trends, which will have major impact upon the lives of humans and the planet. It is rather negative trends, not positive ones that are normally sought for in the future, so that possible issues and risks are known well in advance. A commonplace example: George Orwell's classic novel “1984” was a "self-preventing prophecy" that stirred millions into action, working to prevent the author's vision from coming true.


VALSTYBĖ: What are the most common questions asked by representatives of the largest corporations? What are they trying to learn from you? Do they want to know predictions about the evolution of the technology, or do they want to learn how the new technology might influence people’s lives and lifestyles in the future?


In the near term, they always want hints about business opportunities and dangers.  For example, what trends might make the current motif for cell-phones obsolete?   Will rising world education levels, decentralization of skills (when anyone may do anything), and the rise of desktop manufacturing (for example, 3D printers) mean the return of cottage industry, replacing large-scale manufacturing? Will biological synthesis follow its own Moore's Law pattern, the way computers have, leading to an Internet of organic chemistry?


The biggest forces are social. What will happen when the 20th Century's relentless drive to "professionalize everything" comes to an end? Will we see a rising era of amateurs who won’t have a thorough understanding of anything because half of the work will be done by computers? Will ubiquitous cameras - getting smaller, faster, cheaper and more mobile each year - lead to a Big Brother state, to increasing proliferation of pictures on Facebook, or to hyper-empowered individualism?  And if all individuals will be able to get a live view of any of the remotest corners in the world? Will this lead to tyranny by mobs, when someone is wrongly accused and he or she is watched by the enraged who seek to do away with him or her? Or maybe the world will just become a safer place to live?


Paradoxically, I do not offer answers, only a lot of questions to my clients. It is the skill to ask relevant questions that is essential.


VALSTYBĖ: Is it possible to state that the vitality of a corporation directly depends on its ability to identify how the world will change over the next decade? Is knowledge of the future important to individuals?    


Kings rule. Then comes the time for them to die. We strive to learn how the world will be changing but we’ll never know it for sure. Corporations may corroborate their predictions by collecting and analyzing Big Data, by engaging in activities ranging from social modelling to artificial intelligence, however, no matter how effective these predictions are, sooner or later, they are doomed to fail and corporations to collapse. And there is just one trait that helped corporations and human beings survive for thousands of years. That trait is resilience. It is not enough to have knowledge of the future; one must be resilient to survive.


It is only natural that both small and large corporations aspire to know the future. It is capacities and resources made available for the search of the future trends that make a difference.


VALSTYBĖ: What do you think about a vision that in the year 2050 nobody will be able to lie, ‘cause a sensor embedded in the clock or in any other part of the “body” will work as a lie detector, and consequently mendacious populists will lose any chance to win elections?


My 1980 novel Sundiver dealt glancingly with a future in which it became difficult to lie, because all citizens could track lies and deceptions. Recent scientific work suggests that something like this may be coming.  In which case, we will have to decide what kind of society we want when such technologies are around.  We have several options.  If we try to ban the technologies, that will only ensure that in the end only governments and, for example, secret services will get them. Or we may all grab these methods and then use them against each other, dissolving into a morass of accusations and recriminations. A war of all against all. Statistically, a person tells a lie three times in a 10 minute conversation. The third option is to use such technologies by cultivating a general social norm of forgiveness for small mistakes… because we will all need it. Catching dangerous or malicious lies, we may also forgive and shrug-off the inevitable foolish exaggerations and slips of the tongue that are deeply part of human life.


VALSTYBĖ: In your opinion, what changes are there in store for us before, say, the year 2050? People with artificial body parts and cyborgs all around? A world without disease and with immortality? How about a vision, where everyone is living in a virtual world, where androids do all the work in the “real” world?


The most spectacular change, awaiting all of us in the future, is the ability to process information. The amount of knowledge accumulated by mankind is enhancing at a breakneck speed; in a few decades, the rate of knowledge accumulation will be hardly conceivable. Just one technology - artificial intelligence - could arrive from any of six different directions making acceleration of knowledge accumulation even faster. Is our brain capable of handling such amounts of information? Some researchers propose that human intelligence will develop alongside the increasing amounts of information in order to be able to process it. But if our brains fail to handle information, we’ll need help – the organic brain will be either supplemented with technical gadgets or linked with external components, such as computers, etc., much as our ancestors did when they added another layer - when mutation and evolution gave them the spectacular prefrontal lobes, and it was their way to survival.


VALSTYBĖ: Which of the currently emerging technologies will lead to major changes in how we work, how we consume, and how we produce goods?


Desktop fabrication will probably not eliminate manufacturing, mass-production and delivery systems. But it will become a commonplace factor, when people can upload design patterns and create their own small parts or machines and print these using 3D printers or similar technologies. Even factory-produced items will undergo change; they will be personally tailored to the needs of particular customers, being more unique and individual. Impatience with old-fashioned delivery systems may provoke the return of pneumatic tube transport for small or medium-scale packages. If asteroidal resources become available, all metals will plummet in price, including gold and platinum.


The late 20th Century obsession with efficiency in production and delivery improved profit margins and quality in many industries, like automobiles. Mere efficiency, however, is not enough, therefore dependence on trans-oceanic shipping will reduce, and local self-sufficiency will be a counter trend of real value.


VALSTYBĖ: Let’s go back to the year 2050. What cars will we drive then? Some people say that we’ll have better perfect batteries for electric cars, others say that the future belongs to hydrogen powered electric cars. What is your opinion? Maybe we won't have cars at all?


I portray hydrogen powered cars being used by 2050 in my novels EARTH and EXISTENCE. There are real potential advantages… but not in the near term.  The required infrastructure, if we copy gasoline distribution, would be insane. Hydrogen will make sense only when solar power becomes so plentiful that you fill your tank at home.


The big news has been the spectacular improvement in electric cars. The motors and control systems were more than ready and battery improvements, including super-capacitors, are clearly on the horizon.


Many science fiction authors speak of the self-driving car, indeed, Google driverless cars are already running on our streets.  Science fiction tales envisioned that it would require "smart roadways" with embedded cables and centralized computer control. But onboard vision and analysis systems have progressed to the point where cars can see us, anticipate trouble and avoid accidents. The implications are astounding.


VALSTYBĖ: Another tough question – oceans and human future. Will we have cities underwater? Will we be able to get our hands on the resources lying deep in the oceans? Or maybe asteroid mining is the future?


Asteroid mining is a dream that only a few of us shared in the 1980s. Dreams of underwater cities and ocean settlement go even farther back. Both frontiers offer the potential for spectacular benefits that might enrich human society far beyond any memory of poverty, if we do it rightly. Both must overcome serious obstacles that modern technologies can’t negotiate.


In accessing the vast resources from asteroids - which include almost everything we currently tear out of the Earth through mines - we must first decide to be ambitious. To become again a civilization that invests boldly in space. Sadly, that dream has been almost crushed by cynicism. Even exploration of the outer space has become an almost forgotten thing. The sea is an immense problem and opportunity, and to reach the treasures hidden in the depths of oceans we must apply plenty of science and environmental effort. The danger is that we might cause much harm, deliberately or unintentionally, seeking benefits. About 75% of the ocean floor is "desert" areas, poor in nutrients and almost barren of life. Ways may be found to "fertilize" some stretches, creating new fisheries and removing greenhouse gases from the atmosphere in an effort to stop climate change. This, however, requires formidable research so we may forecast an impact of such actions.


VALSTYBĖ: With the beginning of the Space Race between the United States and the Soviet Union, many science fiction writers predicted that by the year 2000 we will have colonies on Moon, and a lot of people will be live in space stations orbiting Earth. That didn't happen. Why?


When the year 2001 came around, I had to answer many questions like: "where are the moon bases we were promised?" But watch again the classic film by Arthur C. Clarke and Stanley Kubrick, 2001: A Space Odyssey. It portrayed a civilization that by the year 2001 had made greater leaps in spaceflight than we've achieved. But society had progressed much less on a human plane. It conveyed a world commanded by patronizing, smug white-male-American bosses who operated in habitual secrecy. Now, you may claim that was accurate! But put aside the reflex. Today's world - for all its flaws - is far more open and diverse. Neither the story writer nor the film director expected or imagined such changes.


Though we don’t possess space technologies to travel in the solar system today, nevertheless, most of the world's children now can get access to education, live in homes with sanitation and electricity. If we have wisdom to keep on improving society, we will, sooner or later, conquer the solar system filled with opportunities and wonders


VALSTYBĖ: Last but not least, the most important question for us - what kind of future do you predict for small countries, such as Estonia, Latvia and Lithuania?


Globalization has been a mixed blessing. Great positive benefits followed the wave of export-driven development as any nation of the world, not only successive ones, had a chance to work hard and send their children to school.  This has lead to a spectacular growth of a world-majority middle class, and those educated children will demand more improvements in society, still.


Globalization also carries dangers: ecological, ethical, and a risk of cultural homogenization as regional and local differences are drenched in a Standard International Culture. Corporate consolidation makes competition difficult for small countries or small businesses or individuals. Oligarchy is a mistake that plagued every society across 6000 years.


But we have seen that there will be opportunities, too. Smaller nations - like individuals - must be agile. Opportunities may be sudden and short-lived, the way Finland strode across the world stage of telecommunications for a time. You must not miss them. More often, there will be opportunities for alliances our parents could never have imagined. A Lithuanian artists' collective might collaborate with a consortium of independent neural-interface designers in San Diego, plus fabrication experts in Malaysia, and create a new kind of passenger seat for Google automobiles without ever learning of the identity of the original designer… an artificial intelligence residing in one of Google's laboratories.


Small countries will probably also be the drivers for innovation in governance. You will not get fresh ideas about constitutional freedom from major powers like the United States, China or Russia. Just give a glance at the tiny Iceland experimenting with governance. One always ought to search for new ways how citizens could exercise sovereignty, creative freedom, etc. Survival is possible not only owing to state-of-the-art technologies, but also to high culture that is able to reach out globally.


VALSTYBĖ: Thank you.


Interviewed by Karolis MAKRICKAS


Quotes


Small countries will probably also be the drivers for innovation in governance. You will not get fresh ideas about constitutional freedom from major powers like the United States, China or Russia. Just give a glance at the tiny Iceland experimenting with governance. One always ought to search for new ways how citizens could exercise sovereignty, creative freedom, etc. Survival is possible not only owing to state-of-the-art technologies, but also to high culture that is able to reach out globally.


Corporations may corroborate their predictions by collecting and analyzing Big Data, by engaging in activities ranging from social modelling to artificial intelligence, however, no matter how effective these predictions are, sooner or later, they are doomed to fail and corporations to collapse. And there is just one trait that helped corporations and human beings survive for thousands of years. That trait is resilience. It is not enough to have knowledge of the future; one must be resilient to survive.


It is rather negative trends, not positive ones that are normally sought for in the future so that possible issues and risks are known well in advance. A commonplace example: George Orwell's classic novel “1984” was a "self-preventing prophecy" that stirred millions into action, working to prevent the author's vision from coming true.


All human civilizations invested heavily in prediction of the future. In the past, to forecast the future, shamans read goat entrails or watched the distribution of the stars. This process has changed today, yet shamans have survived under different names, from stock market analysts to politicians and business leaders, whose job is to appraise possible scenarios of the future as accurately as possible in order to employ available opportunities and resources accordingly.


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