G. Doctorow

Russian Oil Production Appears to Have Peaked

The demise of the Russian oil industry has been repeatedly predicted by gloating detractors in the West for decades. The reasons for stagnating or falling production in Russia at present are not dwindling reserves, shortage of capital, backward technology or mismanagement by state administrators - the arguments usually brought up by those paid Western lobbyists on behalf of the international oil majors wishing to move back in and colonize Russia. The comparatively banal facts explaining stagnation and decline are purely economic and fiscal motivation: at $40 a barrel it is uneconomic to produce for export at many of Russia's more remote and climatically challenged fields - at $60 per barrel it will begin to become interesting. Secondly, until the recent economic crisis began to bite, the government export taxes provided a disincentive to expand exports, though those taxes were essential to insure the revenues from export accrued to the stabilization fund and the proficit that today promises to keep Russia afloat in the face of forecast deficits of 5% or more now and in the several years to come.

Royal Bank of Scotland Hit Hard Despite Bailout Rumors

FORTIS RESCUE - September 29, 2008

The achievement of a deal to shore up Fortis Bank hammered out by the Benelux governments acting in concert over the past three days has put the first smile in weeks on the face of Belgium’s otherwise dour Prime Minister Yves Leterme, and with good reason.

This rescue is remarkable for its swiftness and efficiency, a stunning justification for the existence of a state, the Kingdom of Belgium, that has at times over the past two years seemed to be headed for dissolution. The rancorous disagreement between Flemish and Walloon communities over the ongoing and substantial transfers of wealth from the relatively prosperous centre-right leaning North to the high-unemployment, socialist minded South has contributed to separatist extremism in both camps. At its most positive, it translated into calls for radical institutional reform, namely a shift from the federalism introduced in the 1980s to a Swiss-style confederalism, in which most of the governmental functions would devolve on the respective French and Dutch language communities, leaving little more than justice and defence in the portfolios of the administration at the national level. The timing and venue for inter-community negotiation of possible institutional change itself became disruptive to the formation of a national government, alerting the entire world for more than half a year when there was only a caretaker government that there are question marks over the kingdom’s viability.

The fact that the Prime Minister and his Finance Minister could act so expeditiously these past several days is all the more striking given the scandalous break-up of the Prime Minister’s power base, the majority coalition, or ‘cartel’ in Flanders that brought him to power in the face of a grudging and unfriendly Walloon contingent in Parliament. And it is fair to say that the break-up in Flanders was in good part instigated by intemperate remarks of none other than the francophone Minister of Finance, Didier Reynders, who bated a minority fraction in the Flemish coalition with his remarks on the very sensitive issue of French-speaking communes on the periphery of Brussels where the elected burgomasters were unseated for violating language laws of Flanders, to which they are formally attached.

None of this prevented Leterme and Reynders from working hand in glove to save the country’s single largest private employer (headcount in Belgium of 25,000) that serves 6 million accounts domestically, or roughly one in two families in the country. This reality corresponds to the insight propagated by the media outlets for the country’s haute bourgeoisie, the Flemish-speaking De Tijd and French-speaking L’Echo de la Bourse, that apart from their common love for chocolates and moules et frites, the country is glued together by economic self-interest, given that a divorce would undermine investment for perhaps two decades and greatly impoverish the populations of both communities.

At the same time, the rescue of Fortis has meaning that extends far beyond the borders of this country of 12 million. The rescue answers directly a question that has been on the minds of many participants in European financial markets ever since Fed Chairman Bernanke and Treasury Secretary Paulson in the United States began their successive rescues of America’s leading investment and commercial banks several months ago: how does Continental Europe save transnational banks in the absence of EU wide regulators and with an ECB lacking the powers of the American Fed and Treasury?

What we have just seen is a tripartite solution bringing together The Netherlands and Luxembourg in the rescue of a Belgium-based entity. It has been described as 'quasi-nationalisation... - since the states involved are taking only 49% positions which are intended to buy time for the still independent bank and the markets to solve the underlying problems of Fortis on their own. And it has addressed directly the loss of confidence which underlay the whole crisis - forcing the departure of Maurice Lippens, the founding father of Fortis and one of the country's leading oligarchs - from his chairmanship of the bank’s board. This is a rare and salutary case of the elite devouring one of its own.

The solution found for Fortis stands in marked contrast with the much more socially disruptive and ‘unilateralist’ minded solutions which the Anglo-Saxon countries have applied in recent days and months. The federally ordered bankruptcy of Washington Mutual and its re-sale at a knock-down price to JP Morgan Chase last Thursday effectively expropriated its shareholders. The settlement imposed on AIG to save the country’s and the world’s largest insurer may easily turn into wealth destruction given the punitive interest rates in the bridging loan and the need to quickly dispose of assets in fire-sale circumstances of the presently blocked financial markets. The refusal to offer government guarantees to Barclay’s and other potential buyers of Lehman Brothers in the day preceding its declaration of bankruptcy effectively threw the investment bank to the wolves on the justification that its failure did not threaten the financial system.

Putting aside the question of whether a failure of Bear Stearns in March would have been more or less disruptive than Lehman in September, the unknowing and wholly innocent victims of this bankruptcy include other major American financial institutions and pension funds, which are penalised for lending to their confrères, the problem said to be at the root of the ‘credit crunch’ in general. It punishes not only those who knowingly held Lehman paper, but also those around the world who bought structured instrument life insurance policies or savings plans via their prestigious retail banks in the belief that these were utterly conservative, capital-secure investments. Most were unaware that the underlying guarantees had been issued by Lehman.

In the United Kingdom, the nationalisations and government mandated sales of bank assets in 2008 starting with Northern Rock and running into the present week have in common the expropriation of shareholders.

Against this context, the Fortis rescue plan appears to be surprisingly humane. Let us hope that it is also successful.

Gilbert Doctorow
Brussels