Japan’s economy in crisis

Japan is being pressured on several fronts at present – the huge drop in business due to the global economic crisis, the rapid rise in the value of its currency adding fears of deflation and, in addition, from the Russian and Chinese disputes of territory. These challenges would be a difficult enough for a strong government with public support. However, that is hardly how one would characterize the current Kan government (Democratic party – DPJ).

Prime Minister Naoto Kan

Japan’s ratio of public borrowings to gross domestic product is currently unsustainable and tittering precariously toward a financial crisis. The Kan government is well aware of this and has attempted to instigate a number of measures to free up the stagnating economy. One such plan was to put laws in place which would make it far more attractive for the elder Japanese to give their inheritance to their children early, as the younger generation are considered far more likely to spend the Japanese economy out of recession (the massive surge in sales in Sony’s PS3 consoles since the release of the new GT5 game being a case in point).

Unfortunately the Japanese public does not consider any of the proposed plans palatable, despite the fact that most analysts believe the country will end up with a current account crisis in around two years. Indeed, there are strong signs that the crisis is beginning to happen already. The composite index of indicators such as industrial output, large-lot electricity use and retail sales are showing a steady decline, according to the Cabinet Office, and the Yen is only getting stronger.

In May this year, Prime minister Naoto Kan offered up the possibility of increasing sales tax by 5% – the net result was a rapid 9% drop in popularity for him and his party. Two months later the Japanese voters rejected the plan outright, leaving Kan with few tools left to repair the country’s damaged finances, and Kan himself has said that unpleasant action may have to be taken in order to avoid a Greek-style crisis. It should be remembered that Japan has had six prime ministers in the last four years and there are still leadership challenges simmering in background.

KCS Group Staff

North Korean propaganda?

While the media has suddenly kicked up a storm over the so-called North Korean special forces having amassed at the border of the South, it important to keep in mind that this troop movement began some 2-3 years ago. That it has been announced as something to be concerned over now is merely due to the North Korean propaganda (war) machine working overtime.

Kim Jong Il is well aware of the difficulties his leadership faces in view of his own currency’s meltdown (hyper-inflation) as well as the massive food shortages experienced since the fall of the Iron Curtain that was Russia. Indeed the situation is so dire the public has taken to protesting in the streets – an extremely rare occurrence in a country that uses iron-fist policing methods.

China’s own recent public announcement that, while it is easily capable of bailing out North Korea from its financial crisis it wouldn’t, has left Kim on the back foot. As of now, it is believed that Kim is attempting to negotiate a financial package with China using conditions for a possible return to the six-party talks for nuclear disarmament as collateral. Sources also believe that Kim now fears retaliatory action from the South since the sinking of the South Korean war ship, despite North Korea’s (read Kim Jong il’s) denial that the event had anything to do with them.

As a consequence, the current news item is being used as much to control his people, as it is a show of strength to the west.

KCS Group Staff

South Korea

The main issue concerning the government of South Korea is, as always, North Korea. Backed by the US government and its military, the South Korean government decided to take a slightly different approach to years gone by, providing the North with a show of force in the form of military exercises instead of treating the North gently with kid gloves. While at first this action may not actually appear any different to any other year, it is the timing that is important on this occasion. The South has asked the US to be allowed to take over command of its joint troops in the event of an invasion, and the US government has agreed.

The City of Seoul

Last year marked a particularly low point regarding forward momentum in the political deadlock between the two Koreas. In 2008, North Korea walked away from international talks and the rest of the international community followed suit. Last year, by demonstrating to the world (namely the Japanese, South Koreans and Americans) that it was far from ready to give up its intentions of becoming a nuclear power, Kim Jong-Il chose to cut the communications hot-line between the Koreas militaries and test-fire a number of so-called nuclear capable missiles.

Kim Jong-Il

While the stakes have now risen to one of a nuclear nature between the two countries, little has actually changed. In response to the military exercises this year, North Korean Central News Agency (KCNA) said that, “North Korea has put all its soldiers and reservists on high alert to mercilessly crush the aggressors.” To date, however, there has been no troop movement on the Northern side and nobody was expecting more than a little further media sabre-rattling.

KCS  Group Staff

India – The Worlds fastest growing economy?

As one of the world’s fastest growing economies and dynamic emerging markets, India is also a country where particular caution needs to be exercised from a business development perspective. This relates to both risks associated with the prevailing security environment that, as we have highlighted in recent reports, is plagued by multiple threat categories, as well as an abundance of economic crime, government corruption and strong family ties in big business. Together these issues undermine the attractiveness and rule of law upholding India’s investment climate. A number of recent, high profile scandals have rocked India’s corporate world and continue to resonate negatively on investor confidence at present.

Shri Anuj Kumar Bishnoi - Director (SFIO)

During the course of last year, investigations conducted by India’s Serious Fraud Office (SFO) revealed major financial irregularities to have taken place at Satyam Computers, India’s fourth largest information technology (IT) company, with a market capital of two billion dollars (US). Investigations followed the arrest of B. Ramalinga Raju and B. Rama Raju (January 2009), the two brothers who founded Satyam, and Srinivas Vadlamani, the company’s chief financial officer, after a fraud case running into the hundreds of millions of dollars was discovered to have taken place at the company.  B. Ramalinga Raju, the 54-year-old chairman and owner of the company, had earlier revealed to Satyam’s board of directors that he had falsified the company’s accounts for “several years and more than US$1 billion of cash and assets that were reported at the end of September (2008) did not exist.” Investigations revealed that the Satyam fraud case, which had been engineered by the company’s founders and top managers, involved a complex web of fictitious companies, clients, transactions, receipts and even fictitious income tax payment certificates. Satyam’s shares fell sharply on the Bombay stock exchange when the markets learned “the truth behind the mask of India’s celebrated new (IT outsourcing) economy,” as millions of dollars (in Indian rupee equivalent) of shareholder value (in the company) abruptly disappeared in what some analysts have dubbed as India’s ENRON.

Satyam founder Mr. Ramalinga Raju

Investor confidence in India’s publically traded companies was badly shaken as a result and the Satyam has been struggling to maintain its survival, despite government intervention in appointing a new board of directors. At the time Satyam was employing over 50,000 persons and its clients included ArcelorMittal, the world’s largest steelmaker, and Telstra, Australia’s biggest phone company. Despite the fact that Satyam had become a “black eye” for India’s outsourcing industry, it was clearly in the Indian government’s interest to do all it could to keep the company afloat.

KCS Group Staff

Algeria – Intermittent clashes between government and Islamic militants evident

A steady stream of terrorist attacks and clashes between authorities and militants has continued to characterise the security landscape in Algeria in the beginning of 2010 and the latter phases of 2009. Last week (January 16), the emir of al-Qaeda’s “Al-Arqam” cell, Abou Amin, was among five terrorists killed by Algerian security forces in Bejaia, according to local sources. During the same operation (near Tazmalt) a suicide bomber killed the Algerian army’s regional commander and an intelligence officer. According to Algerian security sources, Bejaia regional commander, El Hadj Bouamama, a colonel from the DRS (Département du Renseignement et de la Sécurité) and a local gendarme had pursued two terrorists to Allaghene after a gunfight nearby. When the officers approached the wounded fighter to assess his condition, he detonated an explosive belt hidden under his clothes, killing the two law enforcers. Recent army operations in the area between Tizi Ouzou, Boumerdes, and Bouira have reportedly forced armed groups to retreat eastward towards the Bejaia region of Kabylie.

Bejaia region of Kabylie

Last month (December 25), a roadside bomb explosion killed one Algerian soldier and injured two civilians near Tizi-Ouzou, in what appeared to be a remotely detonated blast targeting a National Army truck convoy in the village of Taboudoucht. The military trucks were reportedly part of an anti-terrorist operation in the Kabylie region. Two days earlier, another bomb exploded near Setif, killing one Algerian civilian and injuring three others. On December 17 Algerian security forces killed four armed terrorists in Bou-Saâda, after the alleged assailants were intercepted in their vehicle. More than 20 militants have been killed in December and November in different regions of Algeria.

Child suicide bomber thwarted

Many further terrorist suspects have been arrested by Algerian security forces and suicide bombings have been thwarted. Last month (December 21) at least six suspected terrorists were arrested Algiers, in what Algerian officials described as one of the most important operations undertaken in the capital city in recent years. The arrests predominantly took place in the Kouba and El Harrach suburbs of Algiers and the terror suspects included an imam at a mosque in Kouba. Earlier this month, an Algerian court convicted nine young men (some of whom were still in their teens) on charges of financing armed fighting groups in the Mascara region, after they were arrested in Mamounia some days earlier. Other members of the network continue to remain at large. Two other men were sentenced to prison terms by an Algiers court on charges of recruiting young men for Al Qaeda in Iraq. In August of last year, Algerian security services thwarted terrorist plans for a 13-year-old boy to perpetrate a suicide attack in Skikda during Ramadan. The child, Abou El Miaâd, reportedly assumed his father’s name in 2005 when the senior El Miaâd – an Al Qaeda regional emir – was killed during Ramadan in a clash in Skikda. After the child’s mother and siblings surrendered to authorities in 2006, as part of the National Reconciliation program, the boy was reportedly taken by an Al Qaeda in the Islamic Maghreb leader, Abdelmalek Droukdel, to be raised among armed fighters.

Stuart Poole-Robb

State’s consolidation over “commanding heights” reaches into telecoms

Talk of a new “national champion” in the telecommunications sector is ripe in Russia at present. Last month (July 10), the Russia’s government and Joint Stock Financial Corporation, Sistema, agreed on the acquisition of Sistema’s stake in Russian state-owned telecommunications holding company, Svyazinvest. Sistema is currently the only private sector shareholder in the state-controlled telecoms holding, with a stake of 25%. In June, Russian Communications Minister, Igor Shchyogolev, announced that Svyazinvest is seeking a merger with one of the top three mobile operators in Russia, a move seen as an optimal path for the state telecoms holding to expand into the country’s lucrative mobile (telecoms) business. Russia’s so called “big troika” of mobile operators – MTS, Vimpelcom and MegaFon – currently each have a market share of around 30 percent.

The trends in market consolidation in favour of the state follow the recommendation of a government commission at the end of May to reorganise the core assets of the Svyazinvest holding, predominantly by merging them into a single company. The reorganisation concept envisages a number of approaches to restructure the state’s telecoms assets, the most attractive of which appears to be the merger of Rostelecom (the national domestic long-distance and international operator) and Svyazinvest’s seven large inter-regional telecoms operators. The merger process, which is expected to last up to 3 years and is being advised by a range of international consultants, would result in either a new state holding based on Rostelecom, or a single company – the so called national champion. Negotiations on the reorganisation process were commencing with the minority shareholders in Svyazinvest’s units and creditors at the time of writing, although it will not be until the autumn that the Svyazinvest Board of Directors is expected to approve a restructuring strategy. The current proposition of establishing a national champion in the Russian telecoms sector has effectively ended speculation over the privatisation of Svyazinvest in the short term or the straight divestiture of some of its assets.

Security and communications go hand in hand
The Russian government commission’s approval of the Svyazinvest reorganisation last May coincided with the appointment of Russia’s former-Minister of Communications and Information Technologies, and current adviser to the President of the Russian Federation, Leonid D. Raimen, to the position of Chairman of the Board of Svyazinvest.

Raimen has been a key figure in the Russian telecommunications industry since the mid-1990s, but has been particularly influential during the era of the Putin presidency. He is deemed to be a close associate of Putin’s from the St.Petersburg days in the 1990s (Putin’s wife, Ludmilla, worked in a telecoms company headed by Raimen) and has been one of the few senior government officials whom Putin has personally requested to remain in his cabinet after periodical government re-shuffles.

Reiman is widely believed to have a personal stake in the mobile operator MegaFon (through Telekominvest, a St.Petersburg based telecoms holding structure Reiman established in the mid-1990s), which has received preferential licensing treatment from the Russian regulators while Reiman was communications minister. It also appears that MegaFon, with Reimain’s influence in the background, has close connections with the Russian security services since the company has won tenders organised by the Federal Government Communications and Information Agency (FAPSI) to operate a closed cellular communications network used by government security and law enforcement structures. In hindsight, this is hardly surprising. Reiman was first propelled onto the federal level in July 1999, by Sergei Stepashin, the Russian Prime Minister at the time, who appointed him as First Deputy-Chairman of the Russian State Committee for Telecommunications (Gostelekom).

In 1991-92, Stepashin was chief of the Federal Security Agency (later renamed Federal Security Service, or FSB) of the St. Petersburg and Leningrad Region Directorate, while Reiman was deputy head of the Leningrad City Telephone Network (LGTS) for Development. Communications and state security have always been closely interrelated government agencies in the former-Soviet Union: the latter invariably needed the services of the former, while the former could never take a step without a nod from the latter. In August 1999, when Boris Yeltsin appointed Vladimir Putin to become Russian prime minister, Putin appointed Reiman Gostelekom chairman. The following summer, with Reiman as the communications minister, one of his first acts was to sign off on Decree 130, which allowed FSB and other Russian security personnel to tap into the private phone conversations of practically any Russian citizen.

Foreign investor squeeze out from leading Russian mobile operator
Leonid Reiman as a key trusted face of the Russian government overseeing the reorganisation of Svyazinvest will ensure not only that the state’s interests will be adequately represented in the process of telecoms assets restructuring, but also that Putin’s rising class of power-bureaucrats or siloviki (as described in KCS’ last report on Russia) will have a dominant role (stake) in any potential re-distribution of property taking place as a result of the restructuring process. When the Russian communications ministry announced its intention of merging Svyazinvest with one of the country’s top mobile telecoms operators in June, noting Reiman’s recent appointment to the Chairmanship of the Svyazinvest Board and links to MegaFon, most market analysts foresaw a Svyazinvest-MegaFon partnership emerging.

Last month, however, Reiman appeared to surprise the markets, when he reportedly signed off on a government memorandum proposing to unite Svyazinvest’s mobile telecoms assets with Vimpelcom, another of Russia’s mobile troika. Under this proposal, Svyazinvest will acquire (buy out) the entire ownership stake held in Vimpelcom by Telenor, the Norwegian telecoms operator, which has long been an active investor in the Russian and ex-Soviet telecommunications market. Telenor is presently engaged in a high profile shareholder struggle and enduring legal battle with Vimpelcom’s other main shareholder, Altimo, the telecommunications subsidiary of the Alfa Group, which is controlled by the Kremlin-connected Oligarch, Mikhail Friedman.

The Norwegian company is currently struggling to maintain its stake in Vimpelcom, after Russian courts fined Telenor $1.7 billion originating from an allegation by Farimex, a tiny Vimpelcom shareholder, which claimed that Telenor held back Vimpelcom’s expansion into the Ukrainian mobile telecoms market. Telenor’s main stake in Vimpelcom has been suspended and is currently held by Russian bailiffs. The company has continued to appeal against the fine (as well as appeal for a delay in enforcement of the fine) and a final hearing on the case is expected to take place at the end of September this year. The Norwegian group fears, however, that its Vimpelcom stake may be sold before the final decision is announced. Telenor holds a combined stake of 29.9% in Vimpelcom, which had a market capitalisation of $42.3 billion in 2008, according to the company’s investor relations department.

Opportunistic Vs strategic state behaviour
Reiman’s latest proposal to merge Vimpelcom with Svyazinvest’s mobile telecoms assets, could pave the way not only for the Russian state to sequestrate Telenor’s assets and thereby cast further shadows over Russia’s already challenging business climate for the foreign investor, but also to take control of one of Russia’s mobile telecoms troika. While market analysts suggest that such a deal should by no means be seen as a foregone conclusion, it does imply that the power brokers behind the Russian state are once again behaving in an opportunistic manner (ie, engaging in further asset grabbing in a similar manner to some of the state takeovers of investor assets in the energy sector in recent years), rather than a strategic manner (ie, restructuring state assets in order to create a dynamic new player in the telecommunications market, stimulate competition and improve service provision to consumers).

Stuart Poole-Robb

Growing Tension/Acts of Espionage

Venezuela
Some weeks ago following work in Caracas, KCS was made very aware of the developing friction between Venezuela and Colombia. Advising clients of the growing tension between Venezuela and Colombia this month was not well received, as in many cases these issues are considered no more than a minor spat. However, all indications were that this situation had a way to go and COULD result in serious conflict between the two neighbouring countries.

Main Square in Venezuela

Colombia is becoming more isolated in the region and is surrounded by hostile neighbours. Recently, the President of Venezuela, Hugo Chavez, said he would cease trade deals with Colombia and he even threatened to seize Colombian owned businesses if there were any further complaints. Or, as he referred to it, ‘sabre rattling’ between the two countries, which clearly indicates an escalation. This is very worrying for the region.

China
More recently, following this KCS writer’s return from China, I wrote about the attitude of the Chinese Government over so called ‘acts of espionage.’ At the time, I said that I didn’t think it was any more than just a storm in a teacup and that what the Chinese Government was more likely to be doing was covering up more serious issues.

On Monday, KCS learnt that nearly 10,000 Uighurs are missing and many believed to be in prison or killed. Also, the Chinese crackdown on the unrest in the Muslim region of Sixjiang and the fact that the Chinese police were machine gunning people after dark. KCS has now learnt that large numbers are missing.

Finally, China is supposedly reducing the number of executions it carries out every year. I, for one, do not see any sign of that and it does not bode well for western business wanting to trade in China.

KCS Group

A Week in the World of Espionage

China – Government sponsored spying?
Recent Chinese figures show that the economic decline is slowing. But all this could come to nought and foreign inward investment cease if the Chinese government does not get a better strategy on its allegations of espionage. Allegations against the west are almost as prolific as the west’s allegations against China.

The Government accused Rio Tinto employees of harming China’s economic interests and its security. What they are alleged to have stolen is not known but “What information would a steel manufacturer have that could be considered a state secret?” This is not clear to this KCS staff writer at this time!

So what is behind this claim? Perhaps the Chinese government are just a little frustrated at failing to make another major acquisition and are looking for a scapegoat. The Chinese (cash rich) state businesses have been scoping the world for suitable acquisitions. However, the suspicion is that they are not as independent as they claim – so new deals will therefore continue to evade them!

Nevertheless, with the huge trade in counterfeit products flowing into Russia from China and China’s constant hacking into western secrets, it is highly likely that foreign companies will think twice before doing business in China.

All this uncertainty will undoubtedly raise concerns with the large multi-nationals. For some time the Chinese have been telling the world that their state-owned companies are independent. Now it is not so clear. For my money, control comes from Beijing. When the Chinese company needs help it only needs to ask: a sure sign of State control. There are no secrets in China, except those that the Chinese wish to keep so.

Russia -
What on earth is a well-known German business doing with Rosatom, in Iran?
With so many of their employees in Iran (at last count over 200 and growing) the Germans are caling this ‘government to government trade.’

More interestingly, what is a well-known American corporate (hidden by major subcontractors) doing there? Perhaps, this explains why Amdinajad picked on ‘the little Satan’ this time to cause embarrassment to the UK and avoid upsetting the US company.

Now Iran has put forward proposals for new talks with the West, the US is pushing trade as the main bargaining chip. Either way, the clerics were frightened by the wind of change that blew through the streets of Tehran some weeks ago, now perhaps they are seeking to grasp the ‘olive branch’ of trade offered by the West.

KCS Group

Travel Warning – China

The Chinese are concerned by the constant rejection over the acquisitions that they have been attempting over the last two years. They are frustrated and angry over what they see as continual, foreign government interference. China’s State companies have been wondering the globe searching for major deals over the last couple of years. However, each time they get close they find obstruction, obstruction that they perceive comes from western governments.

The Chinese actions over the next few weeks will comprise further and more rigorous investigations of local employees but they are designed to be no more than intimidating. E.g. Rio Tinto.

Rio Tinto offices

It is said in some quarters that, “… this issue is the ill-defined ‘grey area’ between commercial interests and national security.” I do not agree.

I do know that this area is ill-defined in western eyes but the Chinese authorities will take whatever action is necessary regarding what they (want to) believe constitutes a threat to national security. However, the current situation with Rio Tinto is not a national security issue.

I do agree that western companies will be quite nervous as they attempt to determine what the real reason for this action might be. It will inevitably deter many from entering/operating in China but that’s the risk they (the Chinese) are prepared to take to express their frustration and anger at their treatment, as they see it.

Shenzhen, China

In addition, the current mass of press and media coverage also covers other embarrassing matters; matters that the Chinese do not want aired in Public. For me this whole action is no more that a storm in a teacup.

While a high-level government decision was recently made to clamp down on activities such as sharing information with western concerns, some see this as undermining the position of local companies and becoming just a little too familiar by the hard liners.

On numerous occasions such sabre rattling has been conducted to take the eye off other more, serious and sensitive matters such as the Uighars debacle to name but one! Regardless, these actions are never isolated and local employees, long term residents, and other far eastern nationals working in China are exposed in one way or another. Therefore they must tread with care during this carefully orchestrated strategy of frustration and annoyance.

I agree that foreigners “… are increasingly likely to feel squeezed between company and national interests.” You are also right to believe that legitimate commercial activity may very well be construed as crossing a red line from a Chinese national security point of view – but only if it suits them and that any action they take has a benefit. They always take the long view and this must not be forgotten.

Stuart Poole-Robb

Revelling in the new Russia

Mikhail Gorbachev was known for his unorthodox approach. He would stop his motorcade without warning in order to ‘talk to the people’. Today, in Moscow, few people were around to see Barack Obama, even if he had chosen to stop. As Obama visited Dimitri Mededev in Ilyinka Street, the roads, although blocked to Moscow’s commuters, were lined only with hip-high barricades!

Mikhail Gorbachev

Corruption – a growth industry?

The Russians were really not that keen. In a country where corruption has risen from an all time high of $40bn a year ten years ago, to $400bn a year in 2009, why should they be? They are too busy trying to make a living from the $400bn market.

Nevertheless, Mededev and Obama seem to have made progress, reaching a joint understanding in reducing the nuclear capability of their countries over the next seven years.

The Russians believe that this is a ‘reasonable compromise’ but there are very serious differences over US plans to put a missile shield in Central Europe. Clearly, a ‘thaw in the icy situation’ that grew during the last days of Bush over Georgia.

Mededev and Obama

The Russians need the Americans; problems with the Chinese and terrorism! Russia announced on Monday that this would allow the US to ship arms and personnel over its territory to Afghanistan from anti-terrorist operations; resuming co-operation after the conflict with Georgia some 12 months ago.

A new commission is to be formed to cover energy, terrorism and drug trafficking. The latter the Russian Government is deeply concerned about.

US Investment in Russia?

Trade is also high on the Russians agenda although, how they will encourage US corporates into Russia with corruption running at an estimated $400bn, is beyond this Writer’s level of creativity!

Traditional due diligence in this country will not avail you or, mitigate any risk or threat.

The Kremlin

When in Russia you need eyes in the back of your head, a strong network of connections and a ‘krisha’ – without these your investment will disappear faster than the level of corruption has grown!!

KCS Risk level chart 4 - Severe 'Incidents that pose significant danger or disruption'

Stuart Poole-Robb