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PANAMA CITY, BEYOND THE MYTH
Boomers, your attention, please! Panama offers a real estate’s ball and you are its special guests. The dreams factory is very busy organizing the feast, counting on you to populate the numerous waterfront resorts and towering condominiums aiming to the clouds. Don’t worry about etiquette. Tuxedos are not required. Local weather is H2, meaning too hot and humid for formal dressing. All you need is some available cash, prime credit history and good will to relocate.
In addition to quick buck condo flippers, Panama is also attracting those retired on a modest fixed income. Traditional destinies have become either very expensive (Florida), extremely insecure (Mexico) or crime prone and chronically affected by inflation (Costa Rica). Tropical weather, public security and first world class services in the Sunshine State are unaffordable for many retirees and although the real estate bubble is finally deflating and housing prices are starting to draw back, they will not retreat to where they were five years ago.
However, when considering expatriation, security is one main factor. America is a much more secure place to live than any country south of the border. The World Health Organization considers Latin America as the most violent region in the world, after Africa. Street crime has reached alarming proportions, fueled by widespread poverty, corruption and skyrocketing drug consumption. That was 2005. Now, Alexandre Addor Neto, Sub-Secretary of Security of the Organization of American States (OAS), declared that Latin America is the most violent region in the world. Most deaths are connected to organized crime. Juvenile gangs are immersed in the cult of violence and crime as an expedited way to reach economic and social status.
Although relatively safer than its neighbors, Panama is not a safety haven. Forget about what some unscrupulous promoters have published about Pinkerton Consulting & Investigations praising Panama’s security. It is a shameless deceit. On July 19, local newspaper La Critica reported that during the conference promoted by the Panamanian Society of Business Administration, there was a general concern about increasing insecurity. Walking throughout Panama City, we found many policemen patrolling the streets. Some were heavily armed. To protect visitors, authorities created the Tourism Police.
Panama’s capital has two faces. One reigns with beauty and splendor. The other lies in the twilight zone. Economically, socially and architecturally speaking, the city is sharply divided between two main sections – upscale and downscale. Tourists are encouraged to avoid the last one. La Cresta, El Cangrejo, El Carmen, Obarrio, Marbella, Punta Paitilla, Coco del Mar, Punta Pacífica, Costa del Este, among others, are high and middle class neighborhoods. Security is tight. Upscale Panama provides the best housing, shopping and life quality, but entry level rents are double and triple Panamanians’ average wage ($340 monthly), while luxury condos and penthouses cost thousands monthly. US dollars share with Balboas as official currencies, a big advantage against countries competing to attract American expatriates.
Santa Ana, El Chorillo, Curundu, Calidonia, San Miguelito and many eastbound areas, host the blue collars and the alienated poor. The majority of gang related wars occur in these neighborhoods, although pick pocketing, robbery and assaults are also very common. Small food markets, mostly run by hard-working Chinese families, are among preferred targets for thugs. Although rents are really easy on the pocket, you would not dare to live on such places. Life there is notoriously hazardous and downgraded.
While a dense forest of new condominium towers, mostly owned by well-off foreigners, grows up steadily, 40% Panamanians are struggling against poverty, pariahs in their homeland. Inequality causes anger and social disengagement, rooting criminal attitudes early in life. Authorities actually have a huge problem with juvenile delinquency which often turns deadly violent. Narcotics and weapons trafficking, as well as money laundering, are primary concerns. Panama is a major cocaine transshipment point and money-laundering center for narcotics revenue. Official corruption remains a major problem. A healthy society cannot afford to have half of the population living below the poverty line. Misery feeds the lawless armies. Panamanians are constantly complaining about insecurity and widespread corruption.
Fast-paced tourists may not notice these contrasts, but residents do. Foreigners living in poor countries are often preferred targets to resented outlaws. It is possible to live caged in the protected environment of a luxury condominium, but what is the point? However, Panama’s upscale neighborhoods are safer than its Costa Rica’s counterparts. We have walked unharmed throughout these areas very late at night. No one with a sound mind would dare to do the same in Costa Rica. Panamanian police seem better prepared to deal with crime.
Nevertheless, public security cannot be determined by how successfully the state could repress illegal activities, but by how well a society provides opportunities for its citizens to socially and economically advance while abiding the Law. Latin American governments tend much more to punish crime than to supply hopes to those less fortunate. Panama is no exception.
Before taking the life changing decision to relocate abroad, do an extensive investigation of cultural differences. Can you readapt to the new environment? Panamanians speak Spanish. If you want to interact, learn their language. Those claiming that anyone can do well in Panama speaking in English might be referring to professionals trained to work with foreigners. Promoters stating that life in Panama is very similar to America are notoriously misguiding readers. The Panamanian’s society is quite different.
Metro areas are extremely noisy. Traffic horns, loud music and all kind of high-decibel pitches pollute the city. Infrastructure, although unquestionably better than its neighbors, does not come close to American standards. Once you leave the well-protected premises of your condo, the real Panama comes up to chase you. Peddlers and beggars knocking on your car windows are vivid reminders that, skyscrapers and shopping malls apart, Panama is still a third world country.
Therefore, if you have your mind set on Panama, make several trips to get acquainted. Life is much bigger than biased promotions. To perform a reality check, lease a furnished apartment ($700-$2500 monthly). You will need two personal references and a local bank account, but if you are able to pay for six months in advance, things can be smoother. Brokers have managed to monopolize the booming housing market. The bright side of this is they can show you more options and guarantee a fair deal. Never rent an apartment without checking it first. Dwellings are usually not ready until firmly rented, meaning that they are not painted yet, conditions have to be improved and such.
Unlike Costa Rica, where cellular services are limited to residents, Panama’s private companies offer mobile phone plans to nonresident foreigners, using prepaid cards ranging from $5 to $20. We were wireless connected in less than an hour! Cellular services apart, it is fair to say that like any other Latin American country, time runs slowly in Panama. It is a laid-back culture with a different concept of life ruling on almost every aspect of society. Be ready to deal calmly with it. If you want things to happen the American way, then stay home and live happily forever stressed.
To get the real taste of the capital, rent a car and drive throughout the city, avoiding rush and late hours. If afraid to deal with Panama’s traffic madness. Cabs are very affordable and will take you anywhere for a few bucks. A couple of bucks covers most trips. To avoid problems, do not hire “pirates” and agree on a fare before to step in. Public buses are not recommended. “Los Diablos Rojos” (Red Devils) are hot, noisy and unsafe. Another kind, “Las Chivas Parranderas” (Party buses), offer open bar service, loud music and sometimes including small bands performing live! The party bus side is open but for a few ropes serving as guard rails! There are benches inside to seat party goers, heavily drinking while carted through the city.
International cuisine is amply represented by restaurants spreading mostly within the upscale areas. Service quality varies with price range, but it is by far more affordable than in America. Panama City’s nightlife is hot! For body shakers, Latin salsa discos abound. Casinos are legal, as is adult prostitution. Sins are cheaper here, no doubt. Safety depends on where you go and whom you are dealing with, so common sense applies.
Panama’s metropolis offers plenty of amenities and entertainment, but still lacks a strong cultural destination. Those accustomed to a healthy cultural life should better look for some other places – Buenos Aires, Montevideo, Santiago ...? Although Panama looks good against more traditional retirement destinations, due to its lower cost of living, better public security, infrastructure and services, and a set of benefits for investors and retirees that no other countries remotely match, it is not the paradise nor the safe haven that some hired pens are portraying.
Beware the “Wizards of REA”.
Considering living standards and building costs, suitable properties are actually over-valued. Prices have increased 3-fold within the last two years. New ocean front-side apartments sell now for S400,000. One 10-year-old condo at Balboa Avenue, was sold last year for $150,000, flipped four months later for $190,000, and is now on sale again for $250,000! Avid for profits, condo flippers are betting hard on advertising. The “Wizards of REA” (real estate advertising) have shamelessly proclaimed that properties in Panama are not overpriced when compared to similar dwellings in North America and Europe. REA alchemy works by overlooking the huge gap in living standards, income, infrastructure and safety between first and third worlds. Profiteers are trying to convince foreigners that it is possible to own a share of “paradise” for a bargain. Compared to what? Pasadena? Miami Beach? Côte d’Azur? Low purchasing power keeps most Panamanians out of this deceptive equation, while the wealthy among them are just too smart. Considering the huge income gap between USA and Panama, real estate properties are overpriced and totally out of touch with Panama’s living standards.
Common sentiment says that money laundering is the backbone of many upscale housing projects. We found no facts sustaining this charge. But the truth is that most investments were done by nonresident speculators ready to flip for a profit. One Spaniard investor recently told us that the time for small good deals in local real estate is already over, mainly due to soaring speculation, but also to higher building costs. Donald Trump is entering the ball with one $250 million luxury development. Nevertheless, the Donald is not infallible. The $2 billion bankruptcy of his Entertainment Resorts is proof enough.
How many retirees would be willing to relocate to Panama if housing prices and crime rates keep their upward trend? Big question! Considering that the first wave of the postwar generation is approaching retirement, profiteers could hit the Jackpot just by managing to charm a small fraction of boomers, whose median annual income is $47,300. That is mucho dinero (big money) when compared to Panama’s $4,100 yearly average income. Also it remains to be seen how, and to what extent, the local housing market could be affected by the recent downturn of that industry and the economic slowdown in USA.
This past March, commodities guru Jim Rogers predicted a real estate crash that would trigger defaults and spread troubles to emerging markets. “You can’t believe how bad it is going to get before it gets any better,” the respected fund manager told Reuters, “It is going to be a disaster for many people who don’t have a clue about what happens when a real estate bubble pops. It is going to be a huge mess.” Mr. Rogers declared that the crisis would spread to emerging markets. “When you have a financial crisis, it reverberates in other financial markets, especially in those with speculative excess,” he said. “This is the end of the liquidity party. Some emerging markets will go down 80 percent, some will go down 50 percent. Some will most probably collapse.”
When U.S. economy decelerates, the whole world slows down. It is plausible that a domino effect could eventually set off over the whole Central American region – so tightly dependant on American buyers. U.S. house prices are falling the most since the Great Depression. A harsher tumble might be next in store for Panama’s hyperinflated home prices. On July 18, local newspaper Panama America published that “speculators and ghost projects are reigning over the real estate market.” It seems that some iconic projects could not make it higher than their colorful advertising boards.
According to Francisco Jimenez Criado, from the Panamanian Office of Investments (OPI) in Spain, Europe has again labeled Panama as a banana republic, lacking in serious, capable and prepared people. Investors will stop looking at Panama and will search for more serious investments. The Customers Association of Financial Services of Spain (AUSBANC) harshly proclaimed that “Panama is deceiving the world community of investors and consumers” through a false marketing campaign. “It’s a worldwide big real estate scam.”
Extreme speculation, insufficient infrastructure, legal, financial and technical problems, could all be starting to derail the housing express train. Nevertheless, the “Wizards of REA” keep claiming that the sky is the limit for both high-rise projects and housing investors. They have come to believe that well-off foreigners have more money than brain!
Most Panamanians benefit neither from better housing nor from the wealth it creates. Lacking in local buyers support, Panama’s housing boom relays almost totally on foreign demand. If boomers fail to show in big numbers, there will be trouble in newer found “paradise”. More than 25,000 high-end dwellings are projected or already on construction. Recent census figures from the Migration Policy Institute (MPI) indicate that the number of all Americans residing in Panama is around 5,000. Probably, many of those projects will not ever make it out of the drawing boards.
Lenient visa and residency rules at risk.
Before recent changes, non-resident Americans were entitled to stay in Panama for three months, extendable to six upon request. Presently, tourist visas concede one-month visits, extendable for one 60-day period upon request and previous acceptance by immigration authorities. The new legislation will flush out “snowbirds” and “permanent” tourists, which used to stay in Panama for a trimester, then travel abroad for 72 hours in order to renew their visas. It will also affect those intending to prospect future retirement. Foreigners are now forced to apply blindfolded for a resident status that carries time and money costs. Furthermore, to renew visas, they must return to their countries of origin!
Panamanian authorities, under public pressure to fight organized crime and insecurity, which many attribute to Colombian drug cartels, are aiming at their own foot. Far from confronting the real causes of social distress and violence, they are strangling the golden goose of tourism. Housing is the main engine of GDP expansion. Neither the central government nor investors want to see it crashing. There are strong rumors that authorities, hard-pressed by developers and real estate brokers, intend to revert to the tourist visa 30-day restriction.
Considering Panamanian authorities’ ill-fated decisions and the current housing and economic woes in America, it is advisable to be skeptical of optimistic forecasts about Panama’s “great values”. Go there. If you think that you have found it in there, then prepare to stay for a prolonged period of time. Informed decisions need time to mature, but save money and mishaps in the long run.
Do not follow the beaten path. Like Odysseus, refuse to be charmed by Sirens songs. Inexperienced, wannabe get-rich-quick investors, are regularly herded toward masked shearing-houses. Boomers, your attention again, please! As special guests to Panama’s real estate ball, you are totally entitled to leave or stay, so don’t rush to pay for the bill!Link here.
THE DOMINICAN REPUBLIC ROLLS OUT THE WELCOME MAT
Following the example of Panama and Belize, the Dominican Republic has just enacted a new law aimed at attracting foreign residence with a fast track residency system, especially aimed at foreign retirees. With the approval and publication of Law 171-07 on Foreign Retirees, the Dominican Republic bills itself as “a paradise for people wanting to retire to an idyllic setting.”
The new law promises a fast-tracked residency program with simplified paperwork, all to be done within 45 days. It also allows the import of duty-free household goods and a host of tax breaks. These tax breaks include reductions on motor vehicle taxes, exemption on transfer taxes for the first purchase of local real estate, a 50% reduction on taxes on mortgages, a 50% reduction on the annual property tax, exemption on taxes on dividends and interest, and a 50% reduction on capital gains taxes.
Local real estate developers praised the new law. Jose Luis Asilis, the president of the Metro Group, called for an international campaign to publicize the news overseas. Asilis told a meeting that Europeans and Americans can “live in the Dominican Republic like kings on a fraction of what they receive in pensions.” The minimum monthly income required under the new law is $1,500 for retirees with a government or private pension and $2,000 in verified income from all others.Link here (scroll down).
EXPETRIATING TO THE CARIBBEAN
Want to escape to the Caribbean and take your beloved dog, cat or turtle?
This usually can be done, but nothing is easy when you are dealing with island life. Be prepared for a challenge. There is no uniformity of pet policies between the island nations of the Caribbean. Some allow pets in as long as they have documentation of shots. Others, like Jamaica, only accept animals born and raised in the U.K. Even guide dogs on Jamaica must be U.K. dogs!
It is important to check directly with the government of the country you plan to enter before taking a pet with you. Policies can change. An unpleasant surprise might await if you fail to do the necessary homework. Proper documentation of your pet’s health history and vaccination record must be on the forms that country requires. Island bureaucrats really like their forms. That being said, it is not always the island government that messes with your buddy’s immigration plans.
When I planned to move to Dominica with my husband and Chester the Pug, I assumed we should be able to take a dog with us when we fly, right? After all, my brother had flown his Poodle all over the world with him. But no, not a Puggie in the tropics. No airline would take our “free” rescued dog from Puerto Rico to Dominica. They have rules about snub nose dogs and ambient temperatures. Some Caribbean airlines do not carry animals at all, no matter the temperature. This policy is probably a sound one since most airlines do not air condition their cargo holds. Animals are thrown in with luggage and handled by baggage handlers on most airlines. They can be left sweltering on the tarmac when delays occur – not pet friendly environments. And Pugs are known to be easily stressed by heat.
Continental Airlines has carved out a niche catering to pet lovers. Hiring designated handlers for their living cargo, the animals are not left unattended. And they have special areas that are climate controlled! So, we had no concern flying Continental with our pooch as far as Puerto Rico. But Continental did not fly into Dominica. Chester cost us when we had to charter a plane to get him to the island. We discussed leaving him behind but realized that amid such life upheaval we really needed the comfort of having our pet with us. Also, because he looks very different from island dogs, our furry friend has made it easy for us to meet and chat with people everywhere we go.
One advantage of using a charter was that it allowed us to bring a lot of extra luggage to the island, which was handy since we were making a permanent move. When we landed on Dominica, the customs man looked at Chester and remarked, “He’s not worth much.” We did not have to pay duty on our expensive free dog. This may not be the case for you, if your beastie looks more valuable than ours. Dominica does not require immigrant critters to be quarantined, but some Caribbean nations will place your companion in a tropical Ellis Island for up to six months (at your expense).
Sadly, pet immigration does not always work out. I have an expat friend from Switzerland who wanted to move her turtle with her to Dominica. She was given her pet as a small child and when, in her 50s, she planned to retire in Dominica she wanted her turtle to retire with her. No airline would accept such an exotic pet and she had to leave her life-long friend behind in Switzerland. There is still grief when she speaks of her old buddy.
Be aware that the usual pet products you buy at home may not be available on your island. We brought a years supply of heartworm and flea and tick prevention, and have ordered replacements from up North as it runs out. Fleas, ticks and mosquitoes abound in the tropics, so be sure to bring prevention for your pets. After struggling to find a commercial food Chesta would eat, he now eats a homemade diet, which is probably better for him than store bought products anyway. He likes it better, and it is less expensive to feed him lovely chicken, or fresh tuna, and rice than to ship in Science Diet.
So, be prepared to research in depth about your island’s animal import policies. But also check carefully the rules of the carrier you plan to use to move your pet. Finding the “final answer” may take considerable time, so start early in your planning to move with your pets. In order to help you in your research I have set out below some references that may help you with your research.
In spite of all the hassles, I am very glad we brought our beast with us. He is a link to our old life, and a joy in our new Caribbean Life!Link here.
THE EASTERN CARIBBEAN HAS ITS FIRST UTILITY-GRADE WINDMILL
James Post, a Dutch entrepreneur has erected a 80 kW Wind Generator at his villa resort in Grenada. While this size was not the most economical option, it does save on energy cost and serves the purpose of demonstrating that wind energy is feasible.
When James landed in the Eastern Caribbean island of Grenada in June 2000 after a 30 year career in high tech electronics, he soon had the thought that wind energy would be an excellent option in this region. Electricity on Grenada is generated by diesel fuel – neither cheap nor environmentally friendly. Combined with the strong reliable tradewinds this seemed to be a no-brainer.
James requested and was granted a license to generate electricity via his windmill from Grenada Electricity (Grenlec), which like all the Eastern Caribbean electricity generating companies, is a monopoly with every citizen obligated to use their services. The licence was granted to generate and supply his own energy to the resort he was developing. But there was no interest from Grenlec to buy, or even accept free, excess energy into the national grid from the utility grade windmill. The project was therefore put on ice until in Spring 2006, when, after successive fuel price increases, the climate was ripe to reopen the case.
Discussions with the electricity company led to an agreement to supply excess energy from the windmill back to Grenlec. But first James had to erect his windmill. As he says, “Being first is ... [a]s they say in Holland – thrown into deep water.” He project managed the whole installation process, from start to finish. A technician from the Dutch windmill supplier came over to supervise the positioning of the tower and turbine. Much time and energy was devoted to training a group of locals, from steel men to electricians.
James is now ready to install more windmills across the region, using this now proven process and trained workforce. The specialists from the Netherlands then only need to come over for the critical part of the commissioning. Further cost reductions can be achieved by producing the towers in the region. There are two mainstream approaches to incorporate wind energy into the existing power generating infrastructure on the islands:
A HEDGE FUND HAVEN MAKES ITS RULES EVEN LIGHTER
This summer’s credit crunch showed just how little investors and regulators know about the assets owned by financial companies. But even as regulators and politicians around the world push for greater oversight of hedge funds, the small English Channel island of Jersey – a haven for funds thanks to its light regulatory touch and low taxes – is relaxing its rules even further.
It is a shift that could trigger a race to the bottom among offshore financial centers. The demands that the Financial Services Commission, Jersey’s regulator, places on some funds where investors have put in a minimum of at least $1 million will effectively fall to zero as of January. Funds that choose to set up shop in Jersey, already home to hedge funds with a total of more than £40 billion ($81 billion) under management, will be able to opt for a regime that requires no regulatory authorization to register, no outside audit and no public filings of prospectus changes, Jersey officials say.
Jersey’s decision to introduce a new regime “was based on demand from the hedge-fund and other alternative-investment management community, which wanted an unregulated product,” said Robert Kirkby, a technical director at Jersey Finance, a quasi-governmental body that helps shape and promote financial services on the island. Funds can still choose a more rigorous oversight regime, he said.
The move could intensify the rivalry among islands such as Jersey, Guernsey, the Cayman Islands and the British Virgin Islands to become the offshore haven of choice for hedge funds and other alternative-asset managers – a business that provides the islands with much-needed jobs in financial and legal services. The amount of money in offshore-registered hedge funds reached $1.17 trillion in July, up from about $431 billion five years earlier and representing about two thirds of all hedge-fund assets, according to Chicago-based firm Hedge Fund Research Inc.
Peter Niven, chief executive of GuernseyFinance, a promotional body, said the island has considered offering a zero-regulation regime and will “monitor both changes and trends in the industry,” but so far feels it goes against investors’ desire for strong corporate governance. Ted Bravakis, a spokesman for the Portfolio of Finance & Economics, the Cayman Islands’ Finance Ministry, said that “if the market asked for it, we’d consider it.”
Any trend toward lighter rules among offshore havens presents a challenge for regulators in Europe and the U.S., which are moving in different ways to push for more disclosure among hedge funds and reduce the risk that their combined investment strategies could precipitate a financial crisis. Regulators and politicians in many European countries are pushing for a stricter disclosure regime, which could require hedge funds to obtain ratings like those used for bond issues.
The U.S. has created two groups to develop “best practices,” which will include voluntary guidelines to mitigate systemic risk and improve disclosure. Britain’s Financial Services Authority already requires detailed checks on fund managers and filings about their trading and risk management. Still, responsibility for valuing the assets of hedge funds, protecting them from fraud and appointing staff is in the hands of the funds and their directors. In the case of offshore funds, they fall within the purview of offshore regulators. “Regulators in places like London have quite a limited role” in the regulation of a hedge fund, said Stephen Burke, an executive director at London based IMS Consulting, which advises funds on regulatory compliance.
In an industry paper in 2005, the FSA expressed concern that investors might have a “false set of expectations” about the extent of its influence over hedge funds. A spokesman declined to comment further. The U.S. S.E.C. tried to regulate hedge funds by requiring most fund advisers to register with the agency and be subject to routine inspections and examinations. A federal appeals court threw out the rule last year and the S.E.C. has since focused on proposing to raise the monetary threshold investors must meet in order to buy into a fund.
While many funds are registered offshore, the managers are typically based in the U.S. or U.K. and are subject to the antifraud laws of the country where they are based. Still, by incorporating a fund offshore, managers feel they can strip out one layer of regulation and administration, as well as lower their tax burden.
For their part, many offshore havens are trying to make that as easy as possible to do. Mr. Kirkby said that because funds already face regulatory requirements in places like London, they would rather not suffer an extra layer of time-consuming and duplicating regulation where their funds are incorporated. The new lighter regime, he said, is for funds that work with high-net-worth individuals or institutional investors who know what they are doing, and all funds will be required to inform investors of the risk they are taking.Link here.
Singapore is the fastest growing Asian hedge fund center.
Singapore’s efforts to become a leading asset-management center appear to be paying off, with more than 100 hedge funds now based in the city-state, managing assets of US$16.5 billion. London-based HedgeFund Intelligence says that Singapore is a more competitive location for hedge funds than other Asian centers. Hedge fund assets more than doubled in the first half of 2007, when 20 new hedge funds set up shop. Five of Singapore’s funds now have more than US$1 billion in assets, says the firm.
Over the last few years, the government has consistently tried to create an attractive fiscal and legal environment for asset management. The factor that appears to be spurring hedge fund growth in Singapore is the relatively short time taken to register a fund there, an issue identified by hedge fund managers as the most crucial.
Since June, 2006, the Singapore Exchange has accepted listings of hedge funds. Their units are not traded. Issue and redemption takes place in the over-the-counter market. The listing rules for hedge funds require that a fund must be authorized or recognised under section 286 or 287 of the Securities and Futures Act, or be offered only to institutions and/or accredited investors, and have a minimum asset size of at least S$20 million or US$20 million for Singapore and foreign currency denominated funds respectively. Fund managers are required to have in place an independent risk management function and the investment management team of a hedge fund is expected to have at least one principal with a minimum of five years relevant investment management experience.Link here.
BEST BUY’S APPROACH TO THE ART OF WAR
Retail electronics leader drafts China strategy.
Best Buy opened its first store in China earlier this year with great fanfare. Situated in the heart of the busiest shopping district in Shanghai, the popular store is jammed with well-heeled customers who want the newest electronic gadgets. They like the company’s trademark in-store displays that make it easy for shoppers to compare prices of different brands. Electronics makers are excited, too. Last month Panasonic launched a 103-inch plasma TV in the Chinese market, exclusively with Best Buy in Shanghai. The store, Best Buy’s first outside North America and, at more than 80,000 square feet, its largest anywhere, is already one of its top 50 revenue spinners.
Despite its early success the Minneapolis chain is not rushing to put a Best Buy store in every big city in China. Redmond Yeung, president and chief operating officer of Best Buy China & Asia-Pacific, instead has been eyeing the purchase of Chinese retailers. Best Buy, which has succeeded in the U.S. in part by tailoring its stores to match the needs of each city’s shoppers, aims to take over successful Chinese chains with a strong presence and loyal customers in the towns and cities where they operate. The acquirees will keep their names but get some sprucing up from the retailing giant. “I believe brands are going to be differentiated by the target audience,” says Yeung.
This is evidently not a company content to slowly expand from within. Best Buy last year paid $180 million for a 75% stake in Jiangsu Five Star Appliance – China’s 3rd-largest electronics and appliance chain, with 140 stores mostly in fast-growing second-tier cities in seven provinces. Two publicly held Chinese rivals, Gome Electrical Appliances, the country’s largest domestic electronics retailer, with 684 shops, and Suning Appliance have saturated many of the country’s largest cities over the past few years. Today they compete with the largest government chains and in some cities enjoy a combined market share topping 70%.
Red tape can drag out the time it takes Best Buy to open a store to at least six months. Land acquisition in big cities is often difficult, too. Electronics vendors that have built up close ties to Suning and Gome are not likely to cut Best Buy much slack on pricing versus their longer-term customers. Its customer focus and knowledge of local markets could give Best Buy a boost. At Five Star Yeung aims to boost the store and sales count by 20% to 30% a year for the next five years.
Best Buy wants to transfer to Five Star some of the principles that have made it so successful at home. It has remodeled three stores that include sales desks that offer one-on-ones to work with customers who want advice on buying several home items, not just one. It is also working to upgrade product mixes that lead to better profitability and sales for individual stores. Still, Five Star’s stores look modest by Best Buy standards. Its store signs in Wuxi (near Shanghai) call out in strained English, “Improve life quality, create social value.”
To bridge the two worlds, Best Buy is working on training staff through exchanges between Best Buy and Five Star. “We don’t have competitors like we do in Canada or the U.S. that we can draw expertise or resources from,” Yeung says. “In China you have to create things from nothing, and if you want something, you have to make it yourself.”Link here.
CHINESE STOCKS HEAD FOR THE CHOP?
Despite some volatility, Hong Kong’s Hang Seng share index has been standing at around 28,000 recently. That is up 40% this year. Just a few years ago, the Hang Seng was languishing at around 11,000. But it could have gone much higher.
A year ago, Hong Kong seemed set fair to reap a major crop of Chinese IPOs in 2007, but the reality has been that new share issues on the mainland will top US$100 billion this year (25% of the world’s total) while Hong Kong has pulled in just US$6 billion so far.
Perhaps Hong Kongers should not be that sorry. More and more commentators are saying that the Chinese stock exchange bubble, which has seen Shanghai’s stock index rise more than 500% in the last two years, is unsustainable. If all that loose Chinese liquidity had flowed into Hong Kong rather than being diverted to Shanghai, Hong Kong would be in similar straits. Bubbles this dramatic always end in tears, and the gutted balance sheets of many major Chinese companies – ignored by investors – leave the market desperately unsupported.
Poised at the edge of a cliff, and despite the efforts of the government to tamp down share prices with a series of tax increases and liquidity curbs, Chinese speculators continue to make hay while the sun shines. Over US$30 billion of new issues are expected in the next three months.
Bizzarely, the mainland is said to have been buying shares in Hong Kong Exchanges and Clearing (HKEx) at the same time as leaning on major companies to list in Shanghai rather than in Hong Kong. Beijing, it seems, does not want Hong Kong to become too powerful. But at the same time it knows Hong Kong cannot be kept down. Chinese officials deny that they have been putting money into HKEx, which operates the territory’s stock exchange. Hong Kong insiders said there unmistakable signs that it was happening. They believe that newly-formed state investment company CIC, which has been given $200 billion to play with by Beijing, will plough much of this money into Hong Kong assets.
So there you have it. Do you believe the Shanghai index, or do you believe Beijing?Link here.
CARIBBEAN GOVERNMENTS URGED TO FIND ALTERNATIVES TO TAX CONCESSIONS TO LURE INVESTORS
The Government of The Bahamas and its counterpart governments in the Caribbean region are being urged to diversify their focus from tax concessions and explore other factors to lure foreign investors. The advice came in a Public Information Notice [PIN] that followed a seminar that was held to discuss various regional issues in the Caribbean. The discussion centered on key policy issues emerging from the ongoing economic integration of Caribbean countries among themselves and with the global economy.
“Directors noted that, while the Caribbean countries’ heavy reliance on tax incentives may help attract investors, they are costly in terms of foregone revenues,” the release said. “Directors observed that other efforts to attract investments may be more effective for the region as a whole, and pointed in this connection to factors such as institutional quality, infrastructure, and governance, as important determinants of [foreign direct investments].”
Bahamas Minister of State in the Ministry of Finance Zhivargo Laing conceded that the concessions granted to developers under the Hotels Encouragements Act and other incentive legislation are unquestionably significant. Seeking to put the matter into perspective, he said the country needs international capital flow to catalyze its development because the local savings and investment are not enough to grow and further develop this economy. “We’d love to get there one day, but we’re not there today,” he said.
Against the backdrop of intense competition for global investment dollars, the IMF has encouraged Caribbean policy-makers to weigh carefully the costs and benefits of tax exemptions and consider reducing them if possible. Officials pointed out that regional cooperation and coordination could play a particularly useful role in facilitating progress along these lines.
According to the IMF, overall macroeconomic performance in the Caribbean has been favorable in recent years. Regional economic growth, which had fallen sharply with the decline in tourism after the September 11 terrorist attacks, has rebounded strongly. Average annual inflation fell to 4% in 2006, down from 9% in 2003. Most countries in the region took advantage of the economic cycle early on to strengthen fiscal balances. On average, overall budget deficits improved by 4% points of GDP during 2002-05.
However, economies still have significant risks. For instance, the IMF said The Caribbean region is vulnerable to fluctuations in external demand and damage from hurricanes. “As a result, economic growth and overall macroeconomic performance have been volatile, and with current account deficits mostly in double digits, the region remains highly dependent on external financing,” the notice said. “Moreover, public debt remains very high, exceeding 100 percent of GDP in some cases. While debt levels have fallen modestly in recent years, fiscal deficits deteriorated in some countries in 2006.” The IMF noted that the strong commitment in Caribbean countries to social development and equitable growth has contributed to notable progress in the areas of health, education and poverty eradication.
An executive board assessment of the Caribbean economy recognized the historically open nature of Caribbean economies, indicating that it has served the region well and has contributed to achieving relatively high per capita income levels.Link here.
NEW “NON-DOM” RULES IN UK HELP THE IRISH
Announcing its expected reform of the UK “non-dom” rules in this week’s pre-budget report, the UK Government also removed an anomaly from the regime which had punished Irish residents. UK residents who are non-domiciled, who currently pay £4 billion in UK tax on UK earnings, will now also have to pay an annual charge of £30,000 to ensure that they contribute something with respect of the foreign income and gains which they keep abroad and on which they do not pay UK tax. The charge will apply if they have been resident here for more than 7 years. Users of the remittance basis also lose their tax-free personal allowances.
The Government says the measure is targeted to protect competitiveness by ensuring that secondees to the City are not affected (the majority have left the UK by 7 years). The Government says it will also amend the current rules to remove flaws and anomalies that allow remittance basis users to sidestep UK tax where it is due on foreign income and gains. It will also tighten up the day-counting rules to bring the UK into line with international practice.
The new non-dom rules will also end discrimination that has prevented Irish people resident in the UK enjoying the same tax relief as other foreign nationals. They will now only be taxed on Irish source income if remitted to the UK.Link here.
SHRINKING BANK SECRECY SHIFTS FOCUS TO LEGITIMATE TAX PLANNING
Managing offshore, often undeclared funds in bank secrecy strongholds such as Switzerland and Luxembourg has been a traditional activity of many private banks. But a global movement towards more stringent tax and transparency requirements is challenging this approach.
“It is becoming very difficult for clients of private banks and trust companies to hide their money from the tax man, which they have maybe been able to do in the past,” said Stephanie Jarrett, from law firm Baker & McKenzie. “I don’t think banking secrecy is at an end but certainly the tax frontiers are being pushed and thinking you can carry on simply relying on banking secrecy is short term.”
The European Union’s savings directive, introduced in 2005, dealt the first blow to bank secrecy in Europe by forcing European wealth management centers such as Switzerland and Luxembourg to apply a withholding tax on savings from undeclared EU income. U.S. tax legislation is equally stringent and experts predict new efforts in the fight against tax evasion also in relatively loosely regulated emerging countries.
Yet, this appears to be an opportunity for small players who offer ad hoc tax solutions to allow wealthy individuals to pay as little tax as possible without breaking the law. “In the next five to 10 years it will remain complex. That plays in favor of niche players,” said Lombard International Assurance’s CEO David Steinegger, whose company designs insurance-based solutions to help rich clients to legally reduce their tax burden. “It’s not a negative. It is an opportunity.”
Changes in tax laws can spur new business for wealth managers, who like to say they increasingly focus on what the industry now calls “fiscal optimization”. A tax amnesty in Italy in 2001-2002 prompted UBS and Credit Suisse to enter the local on-shore market as billions of euros of offshore funds returned home. A similar move in Belgium attracted foreign private bank players.
At the same time, the appointment of center-left Italian Prime Minister Romano Prodi, who has the fight against tax evasion on his agenda, in 2006 brought new business for tax engineers such as Lombard. “Before the Italian elections, when people thought Prodi would take over and – [unlike] (former prime minister) Berlusconi government – be tough on tax, we saw a high wave in business,” said Steinegger.
With tax laws tightening up, private bankers agree that onshore business will gain an increasing share of wealth management business vs. offshore activities. “Offshore will always exist. In the long-term onshore is growing,” said Bernard Coucke, Head of Europe and Deputy Global CEO of ING Private Banking.Link here.
PRIVATE BANKS GIRD FOR ASIA ONSHORE PUSH
Global private banks, used to serving Asia’s wealthy from Hong Kong and Singapore, are increasingly jumping directly into the region’s local markets, betting that tougher restrictions there will be offset by a bounty of new millionaire clients. Capital controls and limits on what products they can offer are just some of the constraints these international players are prepared to accept as they enter new markets like China, India, Japan and South Korea.
Banks are looking to drum up business from newly-minted wealthy in those countries who are unfamiliar with or reluctant to deal with foreign banks in more liberal offshore financial centers like Hong Kong or Dubai. This will mark a challenge for institutions used to the offshore model pioneered by Switzerland and adopted with relish by Singapore – where tough bank secrecy laws are paramount to attracting investors’ money from all over the world and bankers are free to offer a wider range of products.
“The biggest problem is because your hands are tied it makes you, as a big international real private bank, look like your domestic competitors,” said Roman Scott, managing director of Calamander Group and a consultant to the private banking industry in Asia for the past decade. “If you truly allowed them to go into the market with the full range of what they are capable doing ... they would just kill the domestic competition.”
Private banks’ hunger to tap Asian markets directly was highlighted when Wall Street giant Morgan Stanle announced it would make a major drive into India next year, hiring 100 private bankers in a bid to manage $1 billion in assets by the end of 2010. The head of Asia-Pacific private banking for Credit Suisse said it was preparing to enter Japan’s private banking market next year. BNP Paribas, France’s biggest bank, said it is doubling its team in China next year and looking to make a 30% boost to staff in India and Taiwan.
The allure of Asia’s domestic markets lies in their high growth and massive potential. The number of wealthy individuals in Asia – people with more than $1 million in financial assets excluding their homes – grew 8.6% to 2.6 million in 2006, according to a report by Merrill Lynch and consultants Capgemini. Asia’s wealthy saw the value of their assets rise 10.5% last year to $8.4 trillion. By comparison, Mr. Scott estimated the private banking industry in Hong Kong and Singapore manages a combined $600 billion.
Past forays into restrictive Asian markets have proven difficult. Three years ago, Japan ordered Citigroup to close its private banking operation because of a series of rules violations, a reflection of the regulatory scrutiny players face in the market. International firms must also fight to win market share from deeply entrenched Japanese financial institutions. In mainland China, challenges include limited product offerings and the country’s tightly controlled capital account, as well as a lack of local expertise and distribution.
In many Asian markets, uncertainly still surrounds exactly which products and services global private banks can and cannot offer. “Regulations are not necessarily clear, and client confidentiality, privacy, anti-money laundering procedures and ownership rules are not clearly defined,” said Justin Ong, a partner at PricewaterhouseCoopers in Singapore. “This can cause problems if banks are simply bringing an offshore servicing mentality to the onshore marketplace. People and products are also areas of concern – hiring the right talent who have the requisite knowledge ... is extremely challenging.”
Given those challenges, some firms such as JPMorgan Private Bank and Switzerland’s Bank Sarasin & Co said that they are content to remain focused for the time being on Singapore and Hong Kong. But many private banks will find the potential opportunities too tempting to ignore. “If I was a major private bank, I would be spending all of my time thinking about going onshore in India and China,” said Mr. Scott. “It’s going to be frustrating for the next three or four years ... but you are building the future. Those who don’t build that now will be left behind. In 10 year’s time, that is where the market is going to be.”Link here.
BAILOUT OF NORTHERN ROCK’S CUSTOMERS HIGHLIGHTS RAW DEAL GIVEN TO UK EXPATS
Expats have had their state pensions frozen while domestics’ pensions are inflation-indexed.
Seven in 10 British expats not set up an offshore savings account when they leave Britain, potentially leaving them open to unnecessary extra tax charges. Britain’s savings ratio is at its lowest level for around 50 years thanks to increased taxes and higher debts. But expats are in an enviable position, working in regions where their tax is much lower than Britain – in some cases they pay no tax.
For those expats who are keen to save, a cloud has appeared on the horizon, after Northern Rock had to ask the Bank of England to step in with emergency lending after it was unable to raise credit in the financial markets. The so-called “credit crunch” is starting to hit home, and Northern Rock has been the first notable British victim. We are assured that the company is operating as normal, but that did not stop customers withdrawing around £2 billion from the bank following the announcement of the Bank of England’s assistance.
Customers with Northern Rock Guernsey may also be concerned about how safe their money is - perhaps more so than those on the mainland, since Guernsey has no compensation scheme. However, the Government, in a bid to stop the outflow of funds from Northern Rock, has agreed to underwrite all of the deposits currently held by the bank, including the Guernsey assets.
The news highlighted the absense of a compensation scheme, and the Guernsey Financial Services Commission’s director general, Peter Neville, will be taking the matter up with the “political authorities”. He was also at pains to point out that there have been delays in Northern Rock Guernsey customers getting their money because of the number of requests, but that the company remains solvent.
There is no doubt that it is a great comfort that the Government has seen fit to underwrite these deposits. If I had more than £31,700 in the UK division of Northern Rock – the maximum that you can recoup if disaster strikes under the standard Financial Services Compensation Scheme – I would be very grateful to the Government too. But it seems unfair that a scheme, set up specifically so that if any financial institution was to go bust compensation can be paid, should be potentially underwritten at everyone else’s potential expense. If Northern Rock fails to recover, the taxpaying public faces a £21 billion bill.
It is irksome given that more than 50,000 pensioners in Britain have lost their life savings because their company has gone out of business, and despite court decisions in their favor, they are still struggling to get compensation. In addition, there are still around 550,000 pensioners worldwide who have had their state pensions frozen at the rate at which they left Britain. The Government estimates it would cost around £400 million annually to uprate these in line with inflation, to match the treatment of pensioners living in the UK – a not insignificant figure.
The £21 billion cheque signed so quickly to help out the Northern Rock customers would uprate these pensions for the next 50 years. It raises the question of why the Government is trying so hard to deny these pensioners what, surely, must be their right.Link here.
UK WARNED BY U.S. BUSINESS GROUP OVER FOREIGN PROFITS TAXATION PROPOSAL
A group of U.S. multinational corporations have voiced concerns over proposed changes in the UK to the taxation of foreign profits. In the letter, fears were expressed with regard to two major areas of taxation – the direct effect on U.S. business, and concerns for international tax policy.
One of the main concerns expressed by the group was that “there will not be a strong rule which would exempt from taxation payments of dividends, interest, rents and royalties outside the UK between related companies which have been made out of active business profits.”
Commenting on the effect that the proposed reforms could have on intellectual property, the letter continued, “This new approach is a serious departure from customary international practice. If the rule were to be implemented in this form, no U.S. corporation would ever hold or develop IP in or below a UK holding corporation.”
With regard to the issue of international tax policy concerns, the letter went on to state that, “We are also concerned that the elements of extra-territorial taxation in the package will only encourage other countries to reject OECD standards. ... If a major economy like the UK, with a traditional leadership role in tax policy, were to move away from international norms, the potential for retaliatory actions that could adversely affect both UK and U.S. businesses would be a real, current danger.”
Commenting on the situation in a Financial Times report, PwC’s John Whiting observed, “The propositions fail because they increase the administrative burden and they seem to increase the tax burden on business.”
The NFTC letter concluded, “The emerging details of the proposals, as they stand, could be far more harsh than the U.S. rules. That could only have the effect of discouraging the inward investment from the U.S. which historically has been so important to the UK economy.”Link here.
INCREASED SCRUTINY BUILDS OVER UNREPORTED OFFSHORE INCOME IN AUSTRALIA
Australia’s Acting Commissioner of Taxation, Jennie Granger, has urged people to talk to the Australian Taxation Office (ATO) about any unreported offshore income as soon as possible. Ms. Granger revealed in a speach that, “Commencing in July this year there has already been 91 voluntary disclosures totaling [A]$4.6 million in taxable income. One recent disclosure involved [A]$700,000 in unreported income and resulted in penalties being reduced to 5 per cent of the tax payable. Where there is no voluntary disclosure and people intentionally disregard the tax law, penalties can be up to 75 per cent of the tax shortfall. For peace of mind I encourage anyone with concerns about their tax affairs to contact us as soon as possible.”
Last year the Tax Office conducted around 170 audits and reviews, resulting in around A$250 million in taxes and penalties. Commenting on this situation, Ms. Granger continued, “The booklet we have published is designed to help people better understand their tax obligations when investing offshore and alerts them to the risks of getting involved in dodgy arrangements. Australia has made a number of breakthroughs in detecting, investigating and dealing with abusive offshore investment opportunities.”
According to Ms. Granger, Australia has not only increased information sharing with other administrations, but has also recently negotiated tax information exchange agreements with Antigua and Barbuda and the Netherlands Antilles, and already has one in place with Bermuda. Negotiations with a further seven countries with similar situations are underway, and another two sets of negotiations will commence in the next two months. “Our message is simple,” Ms. Granger said. “Australian residents are subject to tax on their income from all sources inside or outside of Australia.”Links here and here.
SOUTH AFRICAN REVENUE SERVICE ACTS AGAINST NON-COMPLIANT TAXPAYERS
The SARS has continued to launch enforcement actions against taxpayers who have failed to submit their income tax returns. Accoring to SARS, with assistance from the South African Police Service (SAPS) 3 people were recently arrested in Pretoria, on charges of contempt of court. Warrants for arrests were also issued for a further 26 individuals on similar charges in the Groenkloof and Garsfontein areas of Pretoria.
The contempt of court charges relate to cases where taxpayers have outstanding returns but have failed to appear in court to be charged, and the arrests form part of various enforcement initiatives which are part of SARS’s 2007 Filing Season campaign. In addition to the arrests, SARS will also serving more than 500 summonses on taxpayers across the country who have outstanding returns. The summonses are legal warnings for taxpayers to appear in court on a particular date to face charges of non-submission of returns.
SARS has identified thousands of alleged multiple offenders across the country, who owe SARS more than 450,000 outstanding tax returns. The deadline for the submission of income tax returns is 31 October 2007.Link here.
CYPRUS RAISES THRESHOLD AT WHICH INCOME TAX BECOMES PAYABLE
The Cyprus House of Representatives has approved new measures that would increase the threshold at which income tax becomes payable in Cyprus. The new law would mean that no income tax is payable on the first CYP10,750 (€18,400; $26,000) of income for 2007. This threshold will increase to CYP11,350 for 2008.
Prior to these changes, the income tax threshold stood at CYP10,000 of an individual’s income. Tax was then payable at 20% on income between CYP10,000 and CYP15,000, at 25% on income between CYP15,001 and CYP20,000, and 30% on income over CYP20,001.
Tax residence in Cyprus is defined as presence in the country for more than 183 days in a calendar year. Resident individuals are subject to tax on their world-wide income. Non-residents are taxed only on certain types of income arising in Cyprus.Link here.
IRS ISSUES REDESIGNED ALLOWABLE LIVING EXPENSE STANDARDS
The IRS has issued the 2007 allowable living expense standards, also known as collection financial standards, which are used to determine the ability of a taxpayer to pay a delinquent tax liability. For purposes of federal tax administration, the standards came into effect on October 1, 2007.
This year the standards have been redesigned to incorporate a number of new measures, including (1) a new category for out of pocket health care expenses, (2) the elimination of income ranges for national standards with regard to food, clothing and other items, (3) a nationwide set of tables for national standard expenses, eliminating separate tables for Alaska and Hawaii, (4) an expanded number of household categories for housing and utilities, (5) an allowance for cell phone costs in housing and utilities, (6) equal allowances for first and second vehicles under transportation expenses, (7) fewer Metropolitan Statistical Areas for vehicle operating costs, and (8) a separate nationwide public transportation allowance.
The Allowable Living Expense standards rely on data from the Bureau of Labor Statistics, the Medical Expense Panel Survey and other governmental surveys of actual consumer expenditures, and provide a basis for allowances. The IRS adjusts survey data for inflation according to the Consumer Price Index.Link here.
GRASSLEY DECLARES TAX DEBT COLLECTION BILL “DEAD ON ARRIVAL” IN SENATE
Sen. Chuck Grassley has assured opponents of a House of Representatives bill to terminate the IRS’s outsourcing of tax debt collection to private companies, which also contains tax provisions punishing Americans who renounce their citizenship, that the legislation will be “dead on arrival” when it reaches the Senate.
The House bill’s principal provisions would repeal the IRS’s authority to contract out tax collection to private collection agencies. Opponents of the outsourcing program contend that it violates taxpayer privacy rights, and is more expensive to administer than keeping debt collection in-house at the IRS.
The bill now moves on to the Senate, but as far as Grassley is concerned, “It attempts to stop a program that is brand new, yet already working. It’s helping to close the tax gap ... Using private companies to contact delinquent taxpayers and urge them to pay frees up IRS employees for complex investigative cases that require the specialized knowledge of people who know the tax code inside and out.”
Grassley was also highly critical of little-known provisions in the bill that would increase penalties for failure to provide 1099 information returns, and that would repeal the suspension of interest and penalties on certain tax deficiencies, for example, due to negligence, where the IRS has notified a taxpayer after 36 months. The bill also proposes to revise rules on expatriation by imposing an immediate tax on individuals that renounce their U.S. citizenship, and would mark-to-market gains on the property of expatriating individuals.Link here.
INCOMING U.S. AMBASSADOR TO CHILE WILL PUSH HARD ON MONEY LAUNDERING
The conservative Chilean daily El Mercurio reported that Paul Simons, the next U.S. ambassador to Chile, will make money laundering legislation one of his top priorities. El Mercurio based its report off of answers Simons submitted to the U.S. Senate Foreign Relations Committee as part of his confirmation process. His plans to fight money laundering include promoting strong legislation and more regulation of certain financial institutions.
“From the time I am confirmed,” he said, “I will emphasize to Chile’s government the importance of creating legislation that complies with all international standards, and does everything possible to facilitate investigations.” Simons also proposed expanding government regulations to include non-bank institutions such as currency exchange businesses and mail courier companies, which he says currently operate in Chile with no oversight. He added that Chile’s anti-terrorism finance laws “seem solid, but that they still have not been tested.”Link here.
CONFESSIONS OF AN “EX” PEAK OIL BELIEVER
The good news is that panic scenarios about the world running out of oil anytime soon are wrong. The bad news is that the price of oil is going to continue to rise. Peak Oil is not our problem. Politics is. Big Oil wants to sustain high oil prices. Dick Cheney and friends are all too willing to assist.
I have researched questions of petroleum, since the first oil shocks of the 1970s. I was intrigued in 2003 with something called Peak Oil theory. It seemed to explain the otherwise inexplicable decision by Washington to risk all in a military move on Iraq. Peak Oil advocates, led by former BP geologist Colin Campbell, and Texas banker Matt Simmons, argued that the world faced a new crisis, an end to cheap oil, or Absolute Peak Oil, perhaps by 2012, perhaps by 2007. Oil was supposedly on its last drops. They pointed to our soaring gasoline and oil prices, to the declines in output of North Sea and Alaska and other fields as proof they were right.
According to Campbell, the fact that no new North Sea-size fields had been discovered since the North Sea in the late 1960s was proof. He reportedly managed to convince the International Energy Agency and the Swedish government. That, however, does not prove him correct.
The Peak Oil school rests its theory on conventional Western geology textbooks, most by American or British geologists, which claim oil is a “fossil fuel”, a biological residue or detritus of either fossilized dinosaur remains or perhaps algae, hence a product in finite supply. Biological origin is central to Peak Oil theory, used to explain why oil is only found in certain parts of the world where it was geologically trapped millions of years ago. That would mean that, say, dead dinosaur remains became compressed and over tens of millions of years fossilized and trapped in underground reservoirs perhaps 4-6,000 feet below the surface of the earth. In rare cases, alleges the theory, huge amounts of biological matter should have been trapped in rock formations in the shallower ocean offshore as in the Gulf of Mexico or North Sea. Geology should be only about figuring out where these pockets in the layers of the earth, called reservoirs, lie within certain sedimentary basins.
An entirely alternative theory of oil formation has existed since the early 1950s in Russia. It is almost unknown to the West. It claims conventional American biological origins theory is an unscientific absurdity that is unprovable. They point to the fact that western geologists have repeatedly predicted finite oil over the past century, only to then find more. Lots more. The emergence of the USSR and then Russia as the world’s largest oil producer and natural gas producer has been based on the application of the theory in practice. This has geopolitical consequences of staggering magnitude.
Scientists at the Institute of the Physics of the Earth of the Russian Academy of Sciences and the Institute of Geological Sciences of the Ukraine Academy of Sciences began a fundamental inquiry in the late 1940s – where does oil come from? In 1956, Prof. Vladimir Porfir’yev announced their conclusions: “Crude oil and natural petroleum gas have no intrinsic connection with biological matter originating near the surface of the earth. They are primordial materials which have been erupted from great depths.” The Soviet geologists had turned Western orthodox geology on its head. They called their theory of oil origin the “a-biotic” theory – non-biological.
If they were right, oil supply on earth would be limited only by the amount of hydrocarbon constituents present deep in the earth at the time of the earth’s formation. Availability of oil would depend only on technology to drill ultra-deep wells and explore into the earth’s inner regions. They also realized old fields could be revived to continue producing, so called self-replentishing fields. They argued that oil is formed deep in the earth, formed in conditions of very high temperature and very high pressure, like that required for diamonds to form. His team dismissed the idea that oil is was biological residue of plant and animal fossil remains as a hoax designed to perpetuate the myth of limited supply.
That radically different scientific approach to the discovery of oil allowed the USSR to develop huge gas and oil discoveries in regions previously judged unsuitable, according to Western geological exploration theories, for presence of oil. The new petroleum theory was used in the early 1990s to drill for oil and gas in a region believed for more than 45 years, to be geologically barren – the Dnieper-Donets Basin in the region between Russia and Ukraine. A total of 61 wells were drilled in the Basin, of which 37 were commercially productive, an extremely impressive exploration success rate of almost 60%. The size of the field discovered compared with the North Slope of Alaska. U.S. wildcat drilling was considered successful with a 10% success rate.
That Russian geophysics experience in finding oil and gas was tightly wrapped in the usual Soviet veil of state security during the Cold War era, and went largely unknown to Western geophysicists, who continued to teach fossil origins and, hence, the severe physical limits of petroleum. Slowly it began to dawn on some strategists in and around the Pentagon well after the 2003 Iraq war, that the Russian geophysicists might be on to something of profound strategic importance.
If Russia had a proprietary scientific know-how, it possessed a strategic trump card of staggering geopolitical import. It was not surprising that Washington would go about erecting a “wall of steel” – a network of military bases and ballistic anti-missile shields around Russia, to cut her pipeline and port links to western Europe, China and the rest of Eurasia. Ironically, it was the blatant U.S. grab for the vast oil riches of Iraq and, potentially, of Iran, that catalyzed closer cooperation between traditional Eurasian foes, China and Russia, and a growing realization in western Europe that their options too were narrowing.
Peak Oil theory is based on a 1956 paper done by the late Marion King Hubbert, a Texas geologist working for Shell Oil. He argued that oil wells produced in a bell curve manner, and once their “peak” was hit, inevitable decline followed. He predicted the U.S. oil production would peak in 1970. A modest man, he named the production curve he invented “Hubbert’s Curve”, and the peak as “Hubbert’s Peak”. When U.S. oil output began to decline in around 1970 Hubbert gained a certain fame. The only problem was, it peaked not because of resource depletion in the U.S. fields. It “peaked” because Shell, Mobil, Texaco and the other partners of Saudi Aramco were flooding the U.S. market with dirt cheap Middle East imports, tariff free, at prices so low California and many Texas domestic producers could not compete and were forced to shut their wells in.
While the American oil multinationals were busy controlling the easily accessible large fields of Saudi Arabia, Kuwait, Iran and other areas of cheap, abundant oil during the 1960s, the Russians were busy testing their alternative theory. They began drilling in a supposedly barren region of Siberia. There they developed 11 major oil fields and one Giant field based on their deep “a-biotic” geological estimates.
They then went to Vietnam in the 1980s and offered to finance drilling costs to show their new geological theory worked. The Russian company Petrosov drilled some 17,000 feet into basalt rock in Vietnam’s White Tiger offshore oilfield, and found a 6,000 barrels a day producer. A-biotic-trained Soviet geologists perfected their knowledge and the USSR emerged as the world’s largest oil producer by the mid-1980s. Few in the West understood why, or bothered to ask.
Dr. J. F. Kenney is one of the only few Western geophysicists who has taught and worked in Russia, studying under Vladilen Krayushkin, who developed the huge Dnieper-Donets Basin. Kenney told me in a recent interview that “to have produced the amount of oil to date that [Saudi Arabia’s] Ghawar field has produced would have required a cube of fossilized dinosaur detritus, assuming 100% conversion efficiency, measuring 19 miles deep, wide and high.” In short, an absurdity. Western geologists do not bother to offer hard scientific proof of fossil origins. They merely assert as a holy truth. The Russians have produced volumes of scientific papers, most in Russian. The dominant Western journals have no interest in publishing such a revolutionary view. Careers, entire academic professions are at stake after all.
The 2003 arrest of Russian Mikhail Khodorkovsky, of Yukos Oil, took place just before he could sell a dominant stake in Yukos to ExxonMobil after a private meeting with Dick Cheney. Had Exxon got the stake they would have control of the world’s largest resource of geologists and engineers trained in the a-biotic techniques of deep drilling.
Since 2003 Russian scientific sharing of their knowledge has markedly lessened. Offers in the early 1990s to share their knowledge with U.S. and other oil geophysicists were met with cold rejection according to American geophysicists involved.
Why then the high-risk war to control Iraq? For a century U.S. and allied Western oil giants have controlled world oil via control of Saudi Arabia or Kuwait or Nigeria. Today, as many giant fields are declining, the companies see the state-controlled oilfields of Iraq and Iran as the largest remaining base of cheap, easy oil. With the huge demand for oil from China and now India, it becomes a geopolitical imperative for the U.S. to take direct, military control of those Middle East reserves as fast as possible. The only potential threat to that U.S. control of oil just happens to lie inside Russia and with the now-state-controlled Russian energy giants. Hmmmm.
According to Dr. Kenney, the Russian geophysicists used the theories of the brilliant German scientist Alfred Wegener fully 30 years before the Western geologists “discovered” Wegener in the 1960s. In 1915 Wegener published the seminal text, The Origin of Continents and Oceans, which suggested an original unified landmass of more than 200 million years ago which separated into present continents by what he called continental drift. Up to the 1960s supposed U.S. scientists such as White House science advisor Dr. Frank Press referred to Wegener as “lunatic”. Geologists at the end of the 1960’s were forced to eat their words as Wegener offered the only interpretation that allowed them to discover the vast oil resources of the North Sea. Perhaps in some decades Western geologists will rethink their mythology of fossil origins and realize what the Russians have known since the 1950s. In the meantime Moscow holds a massive energy trump card.Link here.
Russia Oil and Energy Report
The Russian government has steadily extended its reach over the country’s energy industry over the past four years, building its state companies into major global players. Originally, the logic for the expansion was nationalist and political. Russian power players were incensed that oligarchs (or even worse, foreigners) were able to profit from private ownership of the country’s oil wealth – and by consolidating, the Kremlin gained access to a powerful tool for influencing the behavior of the European states downstream.
But now there is a new logic in the nationalization process – political competition. Within Russian President Vladimir Putin’s inner circle there are two power centers. The first, comprising First Deputy Prime Minister Dmitry Medvedev and Deputy Chief of Staff Vladislav Surkov, is the power behind Gazprom, the Russian state natural gas mammoth. The second, comprising Sergei Ivanov and Igor Sechin – who share Medvedev and Surkov’s titles, respectively – controls Rosneft, Russia’s major state oil firm.
The Gazprom and Rosneft teams are more than simply two adversarial state companies. They are the two factions struggling to succeed Putin as Russia’s next president, with Medvedev and Ivanov as the candidates and Surkov and Sechin as the powers behind the throne. For these teams the Gazprom/Rosneft tussle is more than simple one-upmanship. It is the most clear-cut and public means of evaluating who is doing better at consolidating power. With presidential elections slated for next March, the two teams will compete for the energy industry. And the completion of elections will not halt the contest. Putin has explicitly attempted to balance the two factions so that neither is all-powerful once he steps down.
To date, only two major private energy players have been reincorporated into state structures, and these two provide the blueprint for future reintegrations. The first is Yukos, whose leader – Mikhail Khodorkovsky – found out exactly what happens to those who meddle in Russian politics without the Kremlin’s express approval, direction, and sponsorship. They find themselves tossed in prison, subjects of trumped-up charges, with their wealth confiscated. Khodorkovsky was a Russian oligarch, and like all Russian oligarchs he made his fortune by robbing the Russian state blind and then evading taxes. But among the major energy oligarchs he was the only one prosecuted, and that only happened because he did not choose to follow the Kremlin’s lead. Nearly all Yukos assets now rest on Rosneft’s balance sheets, with the last bits only being acquired at auction within the past few weeks.
The second example is Sibneft. The oligarch behind Sibneft – one Roman Abramovich – was just as manipulative and theft-prone as Khodorkovsky. Unlike Khodorkovsky, he did not demonstrate a particularly deep penchant for reinvesting in his company or even making a semblance of effort to pay his taxes. But he did not evade the Kremlin’s political dictates. Instead, he put his hardly minor manipulation skills at the Kremlin’s disposal and played a critical role in engineering Khodorkovsky’s downfall. As part of a severance deal, Abramovich sold Sibneft to Gazprom for a tidy sum and was allowed to move most of the proceeds offshore to his new life in the U.K. as the kingpin of the Chelsea soccer club.
Note that neither Gazprom nor Rosneft has a track record or plans of investing in or advancing its own technological prowess. Their plan is to leverage their political connections to expand operations by mergers, takeovers, and, in some cases, methods that blur into an area that looks a lot like outright nationalization or even theft. Russian energy firms’ options are collaboration and departure, or resistance and disembowelment. What follows is how these options are likely to be applied to Russia’s remaining independent energy players, in approximately the anticipated order in which the “remedies” will be applied.Link here.
FIVE OF THE DIRTIEST MALWARE TRICKS
If the crooks behind viruses, Trojan horses, and other malicious software were as stupid as they are scummy, we would have a lot less to worry about. But as protective measures get better at stopping the obvious attacks, online creeps respond with underhanded moves to invade your PC. Here are five of their dirtiest tricks, all based on Trojan horses.Link here.
GETTING RID OF THE CRUD THAT COMES WITH YOUR PC
Most systems these days ship with a desktop littered with links, trialware, adware, and other software that you may find worthless. Adding insult to injury, major electronics retailers such as Best Buy and Circuit City are cashing in on this trend by offering to remove the junk (a service they call PC optimization or setup) – for a price.
Some of the software can be useful, but much of it deserves the derogatory terms many people employ: junkware, shovelware, and plain old crap. Our examination and tests on 15 new desktop and laptop PCs turned up, on average, seven to eight nonstandard desktop icons, four to five non-Windows applets in the system tray, five or so Welcome Center icons that Windows did not create, and additional lurkers in the Start menu and Windows Registry.
Getting rid of all this junk has a real benefit. Performance scores (as measured by our WorldBench test suite) can improve by as much as 8%, which is pretty impressive considering the speed of baseline performance on a current PC (see our chart, “Cluttered Computers”). Read on for details, including advice on how to minimize the gunk when you shop. If you cannot avoid it, see “How to Clean Your New PC” for advice on getting rid of it. Our related story, “20 Tools to Get the Junk Off Your PC”, contains pointers to useful downloads.Link here.
THE “NEW AND IMPROVED” BIG BROTHER
It is time to wake up.
Not that long ago, it was easy to know when you were in a police state. But not anymore. Indeed, in just the last 12 months, the U.S. has quietly brought into existence several initiatives that resurrect some of the worst aspects of a Nazi or Soviet-style police state. But they have done it in such a way that almost no one noticed.
In the old big brother police states, you knew your place. And you acted accordingly. Phones were tapped – often badly. Once, a colleague told me that when he was visiting Syria, he picked up the phone in his hotel room and heard his monitors chattering in Arabic. After a moment, the line became silent and he made his call – with full knowledge that every word was being transcribed for later review by Syrian intelligence.
In the classic police state, you also knew – immediately – when you had crossed the line from acceptable to unacceptable behavior. The police would come out, kill a few members of the opposition party, and then retreat behind the barricades. This still occurs in some police states like Myanmar.
Naturally, mail is read in an old-style police state. Nor were these efforts particularly sophisticated. A friend of mine from Cuba once told me that when he was growing up in the U.S., his parents who had remained behind in Cuba wrote to him often. Not only were their letters opened, but they were also censored. Entire sentences were obliterated with a magic marker to make them unreadable.
Another example of a classic police state is the use of internal passports. In the Soviet Union, you could not travel outside your own village unless you received the appropriate stamp on your internal passport. Naturally, permission was often forged, or purchased in exchange for a small bribe.
The new big brother is much more subtle, yet far more intrusive. Especially if you live in the U.S., you are under a pervasive and continuous surveillance of which the likes of Stalin, Hitler and Castro could only dream. Consider wiretapping. Thanks to a new law from Congress, enacted in July, the so-called “Protect America Act”, it is perfectly legal for the government to wiretap U.S. citizens without a warrant. All that is required is for the attorney general to certify that foreign intelligence gathering is a “significant purpose” of the wiretap. The wiretapping takes place at the telephone company switch, not at your home or office, so you will never know whether your conversations are being monitored or not. No annoying clicks or hums.
Then there is the matter of political protest. For instance, plenty of Americans oppose the Iraq war. The Bush administration is not very happy about this domestic opposition. But instead of sending out goon squads armed with night sticks, clubs and machine guns, the Bush administration’s response was much more subtle. On July 17, President Bush simply signed an executive order that essentially outlaws all opposition to his Iraq war policy. If you breach this order’s provisions, you could lose everything you own – your home, your car, your retirement account, your bank accounts, etc. – all based on a secret determination by the Treasury Department that you have no right to contest in court.
U.S. law has long required a search warrant to open first-class mail unless postal inspectors suspect it contains something dangerous, like a bomb, or contraband like narcotics. But last December, President Bush quietly asserted a new government prerogative to open domestic mail without a warrant, probable cause, or even suspicion that it contains dangerous materials or contraband.
Bush did this through a mechanism known as a “signing statement” – a statement issued when a bill is signed into law, stipulating that the president has the authority to ignore certain of its provisions. Bush has issued at least 750 signing statements during his presidency, more than all other presidents combined.
The last time the U.S. government had a widespread mail-opening program was in the 1970s, at the height of the Vietnam War. During this period, U.S. intelligence services became highly proficient at opening mail and then resealing it without the recipient ever being the wiser. And that was 30 years ago. It is hardly unreasonable to suspect that today’s surreptitious mail opening techniques are even less detectable.
Finally, there is the internal passport. In a “free” country like the U.S., it would never do to issue such an obvious reminder of government oppression. People might complain. Even the Fox Network might start complaining about our eroding civil liberties. Once again, though, the U.S. government came up with a much more subtle, high-tech, replacement for the internal passport. It is called the “Advance Passenger Information System”. With the APIS, you will need to obtain permission from the Transportation Security Administration to travel on any commercial airliner or ship that goes to or from the U.S. Until APIS clears you, you will not receive your boarding pass. You will also need permission to travel through the U.S., e.g., if you are changing planes at a U.S. airport on a trip between two foreign countries).
Naturally, the entire process – for both domestic and international travel – will occur in total secrecy. If you are denied permission to travel, you will not be able to appeal the decision to any court. Your only recourse will be through the TSA bureaucracy.
Fighting back against the new Big Brother.
Indicating displeasure with the old big brother was relatively simple, albeit dangerous. You simply dispatched a few thousand (or hundred thousand) demonstrators into the streets. Sometimes it worked, as in the Czech Republic’s Velvet Revolution. Other times, it did not, as in the violent crackdown now occurring in Myanmar.
But with the new, warm and fuzzy big brother, police state machinations are so subtle that it is impossible to know if you are being watched. You cannot tell your telephone calls are monitored, or see if your mail has been opened, or know if you are on a terrorist watch list. Your first clue that a problem exists might be when you are denied the right to board a plane, or more ominously, when your bank account is frozen.
What is more, the vast majority of Americans seem to like being monitored. It makes them feel important. Perhaps that is why reality TV shows are so popular, and why young people spend much of their free time chatting over insecure internet connection, viewing one another on their web-cams. However, if you do not like the idea of having your telephone calls, letters, political activities, and travel habits continuously monitored, there are steps you can take to avoid this type of surveillance. Here are a few suggestions.
Yes, big brother is back. Warm and fuzzy, or not, the initiatives taken in just the last 12 months by the Bush administration invade your privacy in ways you scarcely could have imagined. It is time to wake up.Link here.
LIVING IN AN IMPERIAL WORLD
The republic is dead. Not sick, not dying, not failing, or in a gradual decline, not waiting to be resuscitated, but already stone cold dead. This death probably occurred as we began to win the Cold War, but long before we realized we had prevailed. The professionalization of politics, of military and bureaucratic service to the state, of foreign policy making, and of business seems to have completely done in the old ideas. Simply federated, decentralized, self-depreciating government that once feared the people has morphed into a contemptuous, rapacious and iron-fisted murderer of freedom, and murderer of men.
The founders, as the gifted political elites of their time, worried that subsequent elites and factions would take over the republic they had birthed with every aspect of their power. Yet, as the 19th century dawned, even the most pro-state among them loved freedom and hated tyranny. They were right about government power and human nature, and their predictions true. New elites and government-dependent factions have ascended. Unfortunately, these political elites hate freedom and love the tyranny of government solutions.
One of many truths Ron Paul’s campaign is revealing is how hated real liberty is among the powers that be, how despised the individual, and how all-encompassing the contempt with which modern power brokers in Washington and New York hold the principles of the founders.
Americans who care about the existence of an American republic are many, and those who love freedom are many more. The fantastic and political wisdom-slashing adventure of the Ron Paul campaign stands witness to the fact that passion for liberty remains a vibrant force in American life. But this passion, this life, is nowhere to be found in American government, nowhere to be found in the state, or in the empire.
There seems to be no effective way to save or restore the republic, no way for any individual to even begin to solve the problem of our late 20th and early 21st century imperialism. I tend to agree, and the wisest observers in these pages warn, as Chris Floyd does, “It is pointless – and counterproductive – to simply throw yourself under the wheels of such a monstrous machine in futile spasms of rage and despair. The machine doesn’t care. It will gladly chew up your life and move on.” All this presumes that an American republic is still viable – not really dead, just severely weakened and in need of strong salts and a booster shot.
A book I read a few years ago, entitled Deep Survival, by Laurence Gonzales, offers a helpful perspective on our current condition. In studying the question of who lives and who dies in extreme survival conditions, Gonzales found that survivors shared a sense that, in fact, they were not going to live. While they wanted to live, to go home again, and to be secure – they recognized that they were so royally and absolutely FUBARed that they would die, probably quickly and perhaps horribly.
Now, obviously those who actually died in these disasters could not be interviewed, but the behaviors and actions of those who lived and those who died were measurably different. The survivors recognized the ugly truth of their own imminent death quickly – and this early recognition of reality – however harsh and frightful and depressing it may have been – was also at once incredibly liberating, in some ways exhilarating. The survivors tended to reach this point of reality sooner than did the victims. They grieved for themselves, their hoped-for futures, their now impossible dreams. Then they rolled up their sleeves and got started on the hard, and very likely pointless, work of survival.
Rules were abandoned – what could be eaten, what could learned, what could be done, and what could be considered. Old ideas of personal capabilities and limitations were gradually discarded. Prayer became real and palpable rather than formalized and pious. The idea of “living each day as if it were the last” is sometimes suggested to remind us to be loving and kind, yet it also hints at the value of self-indulgence, impulsivity and risk-taking. But when each day really might be your last – the behavior of survivors seems to be far more practical, far more thoughtful for the future, far more truthful about what one really needs, and quietly courageous without flamboyant risk-seeking.
Recognition of reality is liberating. When Jesus said, “the Truth will set you free,” I am not sure he was directly speaking of the governments of men. But recognizing the unreality of a once treasured concept – in our American case, a vibrant past and future republic, may in fact free us to do what we need to do. And what is that, exactly, you ask? Recognize that the republic is dead, and that we owe its rotting bloated corpse no loyalty whatsoever.
This done, act accordingly. Publicly and privately, we should observe the corpse as a public nuisance, a pollutant both aesthetically and materially. When the yellow brick road leads us to the grand doors of government services, we should not avert our gaze but instead pull back the curtain, grandly, loudly, with the contagious laughter of a child, or the righteous anger of a soldier back in pieces from a war, like most wars, that was from the beginning a brutal political lie.
It’s over. The faithful and the hopeful may carry the corpse of the American republic, hoping that it can be brought back into normality, into life, and into power. I am afraid these nurturers will not survive the present reality of imperialism. But some of us will look directly at the ugly, dangerous and very real empire. We will stare – with little hope but also with little fear – into the face of the FUBAR nation, and then roll up our sleeves and get started on the only life we may honestly live, as internal dissidents. Our minds focused on surviving the empire, we will live as if we are free.
We face a modern American state more overweening and dictatorial than even King George III could imagine, yet we have no declaration of independence, no privileged elite to demand it, no interested population to read and debate it. This time, our declaration will be made individually, every day, in calm desperate fearlessness, as we simply live free.Link here.
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