Streetwise Professor

In what has to be considered a marriage made in hell, Norwegian telecom firm Telenor has agreed with perpetual litigation adversary Alfa Group agreed to merge their Russian and Ukrainian telecom operations and list the new company in the United States. This has to be considered a surrender by Telenor, inasmuch as (a) the deal was done on terms very similar to what Alfa had proposed some time back, and (b) Telenor was losing battle after battle in a Kafkaesque ordeal in the Russian legal system (where it was facing having to pay 9 figure fines on farcical 10 figure judgments).

The interesting thing to see about this is what happens with the Fairmex lawsuit that put Telenor in such dire straits.  Fairmex and Alfa have asserted all along that they were completely independent of one another.  The Alfa-Telenor deal is conditional on the Fairmex suit going away.  If Fairmex and Alfa are truly independent, and Fairmex has a legitimate claim, why would Fairmex do that?  Just how it goes away would be very interesting to see–I say “would” because it is highly unlikely that we’ll actually observe the real process by which Fairmex returns to its previous obscurity.

In other news from the extortion beat:

Less than a week following the remarks of Don Vladimir,  Renault agrees to throw good money down the rathole that is the Russian auto business, and fund Avtovaz:

Russia’s government said Renault SA agreed to help rescue automaker OAO AvtoVAZ as it scrambles to meet Prime Minister  Vladimir Putin’s deadline for a plan to save the country’s debt-laden car industry.

Renault said it’s “prepared to invest in the company’s growth,” First Deputy Prime Minister  Igor Shuvalov said on state television today after meeting with Renault executives. Renault owns 25 percent of Russia’s largest automaker.

“BP is resigned to letting oligarchs run TNK-BP“:

Oil major BP (BP.L) is resigned to leaving management control of its key Russian venture TNK-BP in the hands of its oligarch partners to avoid a new corporate war, sources close to the company said.

It is most likely that current interim Chief Executive Mikhail Fridman [of Alfa Group–go figure!], one of the key Russian co-owners, will retain his position and would keep his ally, German Khan, TNK-BP’s co-owner and executive director, to run the day-to-day operations into the new year, the sources said.

The sources told Reuters that BP had no chance in the foreseeable future to promote its protege to CEO, leaving the day-to-day decisions at the firm, which generates a quarter of BP’s worldwide oil output, to the oligarchs.

It sounds like Telenor, Renault, and BP have all decided it best to follow Bobby Knight’s 1988 advice.  Good luck with that.

Sophia Grene has a nice article in the Financial Times about my post on “Dark Pools.”

In the Chicago area for last night’s Smoking Popes concert.  It was well worth the trip.  My daughter deemed it (per Facebook)  “Greatest.  Concert.  EVER.”  It was very good.  The Popes are an excellent pop-punk band.  Very good entertainers.  Very good musicians.  The show was in a typical college bar, but they are not the typical college bar band.  Being just a bar setting, it was very intimate–we were about 6-10 feet from the stage.  Really had a great time.

Today we conceded to the lousy weather, and visited the I.L. Ellwood House in De Kalb (where the concert was).  It was a treat.  The house itself is a marvelous Gilded Age mansion, built in 1879 and extensively remodeled in 1899.  It is well worth a visit.  I’ve been there many times over the years; I spent a lot of time in Sycamore (the De Kalb County seat) at my grandparents’ house.  My grandparents volunteered at the house from when it first was opened to the public, so I went there from time to time.  In the decades since, the house has been restored, room-by-room, and is quite magnificent.  It is Victorian, but tastefully so.  The woodwork is truly spectacular–the product of German and Scandinavian craftsmen who immigrated to the area in the post-Civil War era.

Ellwood made his fortune in barbed wire, of all things.  In the last quarter of the 19th century, De Kalb was the barbed wire capital of the world.  It was known as the “Barb City” and its high school teams are called “The Barbs.”

There is a barbed wire museum at Ellwood House.  It may sound cheesy, but it is truly fascinating.  It depicts a remarkable episode in the history of American property rights, real and intellectual.

We take it for granted, but in its day, barbed wire was a very big thing.  It was an extremely important invention, because it made it possible to fence the ranges and contain livestock.  Railways found it a godsend, because it made it possible to protect rights of way cheaply.

Because of its importance, barbed wire was the subject of intense patent litigation.  It was probably the most important patent litigation of the 19th century, with the possible exception of that involving the cotton gin.  One De Kalb magnate, Ellwood’s eventual partner Joseph Glidden, won this protracted intellectual property fight based on his double strand patent.  Another De Kalb magnate, the rather eccentric and combative Jacob Haish, lost out to Glidden on the “bottom patent” (the most basic one), but made his fortune on other patented variations of barbed wire.

Not only did barbed wire figure importantly in the development of American intellectual property law, it also played a decisive role in the iconic battles between ranchers, cattle grazers, and farmers over the establishment of property rights over the grasslands and water sources in the Plains, and especially in Texas.  Barbed wire made it possible to enclose the rangeland, sparking battles between free range grazers and those who enclosed and demarcated property with fences.

The “wire that fenced the West” reduced the cost of privatizing prairie lands, and thereby decisively shaped the economic evolution of the area.  The American West would have been a very different place without barbed wire.

Barbed wire also played a role in the trusts of the 19th century.  Glidden sold out his interest to a company called  Washburn and Moen Manufacturing Company, which together with Ellwood (who had earlier bought a half-interest in Glidden’s patent) dominated the business.  Former Glidden-Ellwood salesman “Bet-a-million” Gates, who had gone into competition with his former employers, bought them out, along with several other competitors, and formed the  American Steel and Wire Company.  ASW monopolized the business, and was eventually absorbed into US Steel.

A prosaic thing, yes.  But barbed wire helped shape American economic history, and the evolution of property rights.  Ellwood House does a fine job of keeping that history alive.

Nice Vladimir is welcoming with open arms foreign investors to share in Russia’s bounties:

Russia’s prime minister, Vladimir V. Putin, whose government took control of several oil companies when he served as president, gave a speech Tuesday saying the state must now step back from the economy and let private enterprise take the lead in pulling Russia out of recession.

The speech, at a banking forum in Moscow, echoed recent assurances by his ministers and economic advisers that Russia is becoming more attentive to the concerns of investors. Mr. Putin also reiterated their suggestions that a new round of privatizations could be in the cards for Russia, Andrew E. Kramer of The New York Times writes from Moscow.

The speech on economic policy was noteworthy for its exceptionally warm endorsement of a role for private investors. That had not been the case in recent years.

“We understand how deceptive blind faith in an omnipotent state is, how illusory are the hopes that total intervention in economic life might fix everything and put everything in its place,” Mr. Putin said.

He went on to praise private enterprise. “To the extent that the situation stabilizes, that the effects of the crisis are overcome, we plan to consistently and purposefully reduce state intervention in the economy,” he said, adding that a new round of privatizations could follow.

The government already has been extending an olive branch to the petroleum industry, offering new investments and a greater role in a sector at a meeting with oil company executives last week.

Bad Vladimir is telling foreign investors who responded to his past blandishments to shut up and pay up or else:

Russian prime minister Vladimir Putin on Friday gave  Renault an ultimatum to either help fund  Avtovaz or see its 25 per cent stake in Russia’s biggest carmaker reduced.

“Either they (Renault) participate in funding the enterprise or we will have to agree with them on dividing up our stakes,” Mr Putin told government officials.

More from Lex:

Vladimir Putin’s warning that  Renault must provide further financing for  Avtovaz, the Russian carmaker, or see its 25 per cent stake diluted will send Siberian shivers down investors’ spines. These may prove unwarranted. Arguably, Avtovaz’s Russian state owners have in effect funded an $800m capital increase, so minority investor Renault should also contribute.

Investors will worry, however, that this could become another example of Moscow renegotiating a deal with a foreign investor under duress, as happened with Royal Dutch Shell.

One possible scenario is that the Kremlin wants to unite Russia’s lumbering automakers into one holding company, merging Avtovaz with Oleg Deripaska’s Gaz. And with Russia’s state-controlled Sberbank set to take 27.5 per cent of Germany’s Opel alongside Canada’s Magna, Opel – rather than Renault – is the favoured foreign partner.

An analogy might be United Aircraft Corporation, into which Russia combined several aircraft makers in 2006. EADS, the Franco-German parent of Airbus, became a UAC shareholder as it already had a stake in one of its constituents. In a hamfisted attempt to draw it into a closer partnership, another state-owned Russian bank then bought 5 per cent of EADS.

Yet trying to sideline Renault in Avtovaz would be worse than the Shell debacle. Shell’s agreement governing the Sakhalin-2 project was arguably unfair to Russia. Renault’s $1bn-plus investment in Avtovaz, by contrast, came only in late 2007 – after the state had retaken control of Avtovaz.

It seemed to be an example of the new model of state-dominated economic development, with minority foreign investors, favoured by Mr Putin. Moscow can hardly expect to rewrite the rules yet again.

Uhm, Lex, dude:  Wanna bet?

Lex tries to put the best gloss on Putin’s predatory threat, but Russia’s unilateral decision to pump funds into Avtovaz doesn’t obligate Renault to do the same.   If Putin wanted to negotiate an arrangement with the French automaker, he could have done it.  To take an action, presumably based on calculations of his/Russia’s self-interest in no way justifies a demand that Renault take similar actions–again based on Putin’s/Russia’s self-interest.  (Similarly, any “unfairness” in the Shell Sakhalin II deal in no way justifies the thuggish and high-handed way in which Russia wrested control from the Anglo-Dutch group.)

Note to GM (that is, to US taxpayers): What is happening to Renault is likely a harbinger of your future as a minority shareholder in Opel.  Good luck with that.

All those listening to or reading Putin’s siren call in his speech about Russia’s “becoming more attentive to investors” should ignore his words, and heed his deeds.  The precipitous drop in foreign investment is the main reason for Russia’s appalling economic performance over the past year–one of the worst in the world among major economies, and far worse than its ostensible BRIC peers.  (Yeah, yeah.  Spare me the “Whatabout Ukraine?  Whatabout Lithuania?”  If that’s your standard of comparison, than you’ve effectively proved my point about Russia not being a real, genuine “major economy,” but just another, dysfunctional, post-Soviet relic.)

Russia–under relatively rosy scenarios–will be lucky to achieve growth rates in 2010 that are half of what it experienced before the crisis.  Very lucky.  It is desperate to attract investors back.  Putin and his clique will say anything–anything–no matter how risible to do that.  Things as risible as:

“We understand how deceptive blind faith in an omnipotent state is, how illusory are the hopes that total intervention in economic life might fix everything and put everything in its place,”

“To the extent that the situation stabilizes, that the effects of the crisis are overcome, we plan to consistently and purposefully reduce state intervention in the economy,” he said, adding that a new round of privatizations could follow.

Pay no attention to the little man in front of the curtain.

There will be no doubt a new round of privatizations to get new Western money rolling in from whatever suckers foolish enough to overlook history and believe Putin’s conversion to his newfound religion.  Putin would be more than glad to sell the same horse two times, three times, whatever.  Just look at Renault and see what happens when he’s got your money.  Like I wrote before: he’s always asking more, more, more.

Until Russia credibly protects property rights, investing there is a very good way to lose.

By now everyone should know who the real Vladimir Putin is.  He’s the one that threatens to steal property–and does–not the one who dresses up as Adam Smith.

Don’t say you weren’t warned.  Again, and again, and again.

On the Olympic announcement, I’ll let Lexington Green at Chicago Boyz speak for me: I can only second virtually everything he says.  And besides, I don’t have time to write much ‘cuz I have to run to the airport–for a flight to Chicago, ironically, to see the Smoking Popes in concert with #1 daughter.

It will be interesting to observe the mood.  My guess is that it will be like the GNP Financial Trading room the day of the Crash, 19 October, 1987–half the people despondent, half overjoyed.