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Today’s must read: Russian economic development, as seen through McDonalds

Go here, at the NY Times, and read the article now.  I’ll give a few tiny snippets to whet your appetite, but you really do need to read the whole thing:

Today, private businesses in Russia supply 80 percent of the ingredients in a McDonald’s, a reversal from the ratio when it opened in 1990 and 80 percent of ingredients were imported.
[…]
From the day it opened the gates on the $50 million factory, McDonald’s had intended to hand out its functions to other businesses and eventually shut it down, said Khamzat Khasbulatov, the director of McDonald’s in Russia.

Arms-length transactions for supplies allow McDonald’s to step back from the interaction of franchisees and food-processing companies, sparing them a headache. Russia’s 235 restaurants have not yet been franchised.

“We knew from Day 1 that our goal was to outsource all its functions,” Mr. Khasbulatov said.

Today the restaurants in Russia employ 25,000 people, a number far eclipsed by the businesses in McDonald’s supply chain, which employ 100,000, Mr. Khasbulatov said.

That is successful economic development.  Right there.

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Auto-appendectomy: the removal of one’s own appendix

Those crazy Russians!  In 1961, a team of 12 Russians spent the winter in Antarctica.  The doctor, a surgeon, developed appendicitis and eventually cut out his own appendix.

The story is in the 15 December 2009 edition of the British Medical Journal.

The skill at writing that the guy possessed is incredible.  Look at this, written in his journal while suffering appendicitis:

“I did not sleep at all last night. It hurts like the devil! A snowstorm whipping through my soul, wailing like a hundred jackals. Still no obvious symptoms that perforation is imminent, but an oppressive feeling of foreboding hangs over me.”

Here he describes the operation:

“I didn’t permit myself to think about anything other than the task at hand. It was necessary to steel myself, steel myself firmly and grit my teeth. In the event that I lost consciousness, I’d given Sasha Artemev a syringe and shown him how to give me an injection. I chose a position half sitting. I explained to Zinovy Teplinsky how to hold the mirror. My poor assistants! At the last minute I looked over at them: they stood there in their surgical whites, whiter than white themselves. I was scared too. But when I picked up the needle with the novocaine and gave myself the first injection, somehow I automatically switched into operating mode, and from that point on I didn’t notice anything else.

“I worked without gloves. It was hard to see. The mirror helps, but it also hinders—after all, it’s showing things backwards. I work mainly by touch. The bleeding is quite heavy, but I take my time—I try to work surely. Opening the peritoneum, I injured the blind gut and had to sew it up. Suddenly it flashed through my mind: there are more injuries here and I didn’t notice them . . . I grow weaker and weaker, my head starts to spin. Every 4-5 minutes I rest for 20-25 seconds. Finally, here it is, the cursed appendage! With horror I notice the dark stain at its base. That means just a day longer and it would have burst and . . .

“At the worst moment of removing the appendix I flagged: my heart seized up and noticeably slowed; my hands felt like rubber. Well, I thought, it’s going to end badly. And all that was left was removing the appendix . . .

“And then I realised that, basically, I was already saved.”

There are a couple of pictures in the link, too.

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The contradictory joys of being the US Treasury Secretary (part 2)

In my last post, I highlighted the apparent contradictions between the USA having both a “strong dollar” policy and a desire to correct their trade deficit (“re-balancing”).  Tim Geithner, speaking recently in Tokyo, declared that there was no contradiction:

Geithner said U.S. efforts to boost exports aren’t in conflict with the “strong-dollar” policy. “I don’t think there’s any contradiction between the policies,” he said.

I then said:

The only way to reconcile what Geithner’s saying with the laws of mathematics is to suppose that his “strong dollar” statements are political and relate only to the nominal exchange rate and observe that trade is driven by the real exchange rate. But that then means that he’s calling for a stable nominal exchange rate combined with either deflation in the USA or inflation in other countries.

Which, together with Nouriel Roubini’s recent observation that the US holding their interest rates at zero is fueling “the mother of all carry trades” [Financial Times, RGE Monitor], provides for a delicious (but probably untrue) sort-of-conspiracy theory:

Suppose that Tim Geithner firmly believes in the need for re-balancing.  He’d ideally like US exports to rise while imports stayed flat (since that would imply strong global growth and new jobs for his boss’s constituents), but he’d settle for US imports falling.  Either way, he needs the US real exchange rate to fall, but he doesn’t care how.  Well, not quite.  His friend Ben Bernanke tells him that he doesn’t want deflation in America, but he doesn’t really care between the nominal exchange rate falling and foreign prices rising (foreign inflation).

The recession-induced interest rates of (effectively) zero in America are now his friend, because he’s going to get what he wants no matter what, thanks to the carry trade.  Private investors are borrowing money at 0% interest in America and then going to foreign countries to invest it at interest rates that are significantly higher than zero.  If the foreign central banks did nothing, that would push the US dollar lower and their own currencies higher and Tim gets what he wants.

But the foreign central banks want a strong dollar because (a) they’re holding gazzilions of dollars worth of US treasuries and they don’t want their value to fall; and (b) they’re not fully independent of their political masters who want to want to keep exporting.   So Tim regularly stands up in public and says that he supports a strong dollar.  That makes him look innocent and excuses the foreign central banks for doing what they were all doing anyway:  printing local money to give to the US-funded investors so as to keep their currencies down (and the US dollar up).

But that means that the money supply in foreign countries is climbing, fast, and while prices may be sticky in the short term, they will start rising soon enough.  Foreign inflation will lower the US real exchange rate and Tim still gets what he wants.

The only hope for the foreign central banks is that the demand for their currencies is a short-lived temporary blip.  In that case, defending their currencies won’t require the creation of too much local currency and they could probably reverse the situation fast enough afterward that they don’t get bad inflation. [This is one of the arguments in favour of central bank involvement in the exchange-rate market.  Since price movements are sluggish, they can sterilise a temporary spike and gradually back out the action before local prices react too much.]

But as foreign central banks have been discovering [1], free money is free money and the carry trade won’t go away until the interest rate gap is sufficiently closed:

Nov. 13 (Bloomberg) — Brazil, South Korea and Russia are losing the battle among developing nations to reduce gains in their currencies and keep exports competitive as the demand for their financial assets, driven by the slumping dollar, is proving more than central banks can handle.

South Korea Deputy Finance Minister Shin Je Yoon said yesterday the country will leave the level of its currency to market forces after adding about $63 billion to its foreign exchange reserves this year to slow the appreciation of the won.
[…]
Brazil’s real is up 1.1 percent against the dollar this month, even after imposing a tax in October on foreign stock and bond investments and increasing foreign reserves by $9.5 billion in October in an effort to curb the currency’s appreciation. The real has risen 33 percent this year.
[…]
“I hear a lot of noise reflecting the government’s discomfort with the exchange rate, but it is hard to fight this,” said Rodrigo Azevedo, the monetary policy director of Brazil’s central bank from 2004 to 2007. “There is very little Brazil can do.”

The central banks are stuck.  They can’t lower their own interest rates to zero (which would stop the carry trade) as that would stick a rocket under domestic production and cause inflation anyway.  The only thing they can do is what Brazil did a little bit of:  impose legal limits on capital inflows, either explicitly or by taxing foreign-owned investments.  But doing that isn’t really an option, either, because they want to be able to keep attracting foreign investment after all this is over and there’s not much scarier to an investor than political uncertainty.

So they have to wait until America raises it’s own rates.  But that won’t happen until America sees a turn-around in jobs and the fastest way for that to happen is for US exports to rise.

[1] Personally, I think the central bankers saw the writing on the wall the minute the Fed lowered US interest rates to (effectively) zero but their political masters were always going to take some time to cotton on.

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Яolcats

Via a mysterious blogger some describe as a grumpy, toothless old man, I bring you:  ?olcats (English translations of Eastern Bloc Lolcats).  It’s important that you click through to see the images, but here are a few captions to whet your appetite:

  • The men I’ve sent to death weigh heavily on my mind; but this burden is but a fist of straw compared to the strain of the republic.
  • Have strength, my little cabbage. By the mercy of NKVD Order No. 00447, we have been chosen for Resettlement. We will show the tin mines of Kolyma the true power of the proletariat.
  • Aaaaah… Pig iron, your musk is that of glorious industry …
  • Cease your protests, the deal is done!  You are to make a fine wife for uncouth American businessman!
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Soviet Russia and Chelyabinsk-40

A friend pointed me towards this piece on the Damn Interesting site.  It was so interesting that I just had to share it with my little audience.  Do read the whole thing, but here are a few titbits to whet your appetite:

…
Chelyabinsk-40 was absent from all official maps, and it would be over forty years before the Soviet government would even acknowledge its existence. Nevertheless, the small city became an insidious influence in the Soviet Union, ultimately creating a corona of nuclear contamination dwarfing the devastation of the Chernobyl disaster.
…
In 1951, after about three years of operations at Chelyabinsk-40, Soviet scientists conducted a survey of the Techa River to determine whether radioactive contamination was becoming a problem. In the village of Metlino, just over four miles downriver from the plutonium plant, investigators and Geiger counters clicked nervously along the river bank. Rather than the typical “background” gamma radiation of about 0.21 Röntgens per year, the edge of the Techa River was emanating 5 Röntgens per hour.
…
The facility itself was also beginning to encounter chronic complications, particularly in the new intermediate storage system. The row of waste vats sat in a concrete canal a few kilometers outside the main complex, submerged in a constant flow of water to carry away the heat generated by radioactive decay. Soon the technicians discovered that the hot isotopes in the waste water tended to cause a bit of evaporation inside the tanks, resulting in more buoyancy than had been anticipated. This upward pressure put stress on the inlet pipes, eventually compromising the seals and allowing raw radioactive waste to seep into the canal’s coolant water. To make matters worse, several of the tanks’ heat exchangers failed, crippling their cooling capacity.
…
[T]he water inside the defective tanks gradually boiled away. A radioactive sludge of nitrates and acetates was left behind, a chemical compound roughly equivalent to TNT. Unable to shed much heat, the concentrated radioactive slurry continued to increase in temperature within the defective 80,000 gallon containers. On 29 September 1957, one tank reached an estimated 660 degrees Fahrenheit. At 4:20pm local time, the explosive salt deposits in the bottom of the vat detonated. The blast ignited the contents of the other dried-out tanks, producing a combined explosive force equivalent to about 85 tons of TNT. The thick concrete lid which covered the cooling trench was hurled eighty feet away, and seventy tons of highly radioactive fission products were ejected into the open atmosphere.

Incredible.

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Russia, Georgia, the Caucasus

Inspired by this piece in the FT by Martin Wolf …

“I am feared; therefore I am.” This is more than a restatement of Machiavelli’s celebrated advice that, for a ruler, it “is much safer to be feared than loved”. Vladimir Putin, the latest in the long line of autocratic Russian rulers, would agree with the Italian on that. But the war in Georgia is not just a re-assertion of Machiavelli’s principles of statecraft; it is a renewal of Russian national identity. It is yet again feared. In the eyes of its rulers, therefore, it exists.

… a friend asked why, if Georgia started this whole thing, we’re necessarily viewing Russia as the bad guys.  This was my attempted reply:

First the background. The area of the Caucasus (Georgia, Azerbaijan, Armenia and bits of southern Russia) is viewed as generally important for a few reasons:

  • Geographically, it represents the land-bridge between the Caspian sea to the east and the Black sea (which connects to the Mediterranean sea through the Bosphorus (the body of water that splits Istanbul in half)).
  • Economically, it is traditionally a very important trade route between Europe and the east. In today’s world, that means that oil pipelines run through the area (the Bosphorus is the world’s busiest stretch of water for oil (the English channel is the busiest overall)).
  • Politically, it has been a focal-point of conflict for centuries, since it represented the junction of the Russian, Ottoman (Turkish) and Persian (Iranian) empires. Since World War I for sure and arguably before, the area has been seen as Russia’s “backyard” – the equivalent of Mexico and central America to the USA.
  • Militarily, the three previous reasons join to give it enormous strategic value. Commanding the Caucasus enables you to project power all over the Middle East and eastern Europe.

All of this is complicated by the fifth point:

  • Culturally, the area is enormously diverse and filled with distrust. The various national boundaries are really pretty arbitrary and only loosely represent the various ethnic, religious and linguistic groupings. Note, in particular, that the Armenians were on the receiving end of an intensely brutal killing spree by the Turks back when the Ottoman empire was coming apart. Asking whether or not to call that event genocide is a good way to get people’s tempers from perfectly calm to screaming rage in milliseconds.

On to recent history:

Given that Russia had “owned” the area for the best part of a century, it was enormously shameful to them to lose it when the Soviet Union broke up in the early Nineties. It was, in a way, the ultimate demonstration of their descent (however temporarily) into mediocrity as a world power. Imagine if not just Cuba, but the entirety of Central America had switched to Soviet-inspired communism over the space of two or three years in the late 1980s. America would have shat itself.

From the point of view of the rest of the world, though, the move to independent statehood for the three little countries represented a victory over Soviet communism and a triumph for (hopefully democratic) liberalism. That is the backdrop to the Georgia conflict. It’s Russia-at-the-core-of-the-Soviet-death-machine that is seen as the bad guy and Putin as the ex-KGB nutjob that’s pulling the strings and taking Russia back to the Bad Old Days ™.

To a certain extent, this is partially the West’s fault. When the Soviet Union fell, we didn’t do the sportsmanlike thing of offering them our hand to help them stand up. We kicked them while they were down. The Shock Therapy that we foisted on them through the voice of Jeffery Sachs might arguably have helped the Soviet satellite states like Poland and the Czech Republic, but in Russia itself it really only served to cause massive unemployment, the dismantlement of healthcare and other forms of state aid and worst of all, the pillaging of anything of economic value by the now-infamous oligarchs. On top of that, Nato simply started marching east. Russia was admitted to the G8 only grudgingly, was ignored utterly in Kosovo and has never been recognised as a grown-up on the post-Cold War stage.

Telling Georgia that they could ultimately join Nato just after Russia had finished bludgeoning Chechnya into submission with a nail-studded bat was the equivalent of deliberately spilling red wine on Russia at a fancy dinner party and then saying loudly so everyone could hear “Oh dear, and that’s your only suit. Well, I’m sure you can scrub it out in the kitchen” before turning your back on them to talk to the Austrians about how their music was always so much more inspired than that brutish Russian peasant noise.

Russia has been handing out Russian passports to anybody old enough to hold them in South Ossetia for years so they could declare that they were simply defending their citizens. They’ve been sort-of-almost occupying the region for a while anyway under the guise of peacekeeping, but that role was never recognised by the UN or any other country in the region. Formally, South Ossetia and Abkhazia are part of the sovereign nation of Georgia. Their declarations of independence were – it’s widely believed – to have been encouraged, if not actually orchestrated, by Russia in an attempted loose parallel to Kosovo.

The West in general and the USA in particular had told Georgia that they had their backs. Georgia had troops in Iraq fighting with the Americans. The Georgians, stupidly it turns out, thought they were genuine allies of America. When Georgian troops started going into South Ossetia and triggered this whole mess, it demonstrated two things. First, that the USA under the Shrub [*] administration had really, really dropped the ball in its international relations. That the Georgians managed to get the idea that the US would rush to direct war with Russia over the Caucasus really says that the State and Defence departments screwed up badly. Second, that Russia was staggeringly well prepared for the Georgian move. They just happened to have an enormous mass of troops just over the border waiting to leap to the Ossetian’s defence? No. This was a trap laid by Russia and Georgia walked into it.

[*] Little bush.