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Why Russia Is Struggling to Build Putin’s Grand Dream

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(Bloomberg Opinion) — Russian President Vladimir Putin’s so-called national projects — spending plans meant to restart economic growth in Russia — appear to be stuck. Surprisingly, money isn’t the problem: There’s cash to fund them, but the Russian bureaucracy won’t spend it, apparently fearing responsibility for bad outcomes.The projects envisage a total outlay of 25.7 trillion rubles ($400 billion) until 2024. They aim to boost Russian quality of life in the broadest sense, from providing better health care and schooling to making Soviet-built cities  more livable. Putin has noted his sliding popularity, and he’s out to prove to Russians by the end of his current presidential term, which ends in 2024, that he’s good for more than a muscular foreign policy. But the program, first announced last year, has gotten off to a slow start. Earlier this month, the Accounting Chamber, Russia’s budget watchdog, published a report on the state of federal spending in the first nine months of 2019. According to the document, while total budget spending reached 62.9% of annual allocations (the lowest at this time of year since at least 2010), spending on the 12 national projects, plus a related plan to modernize Russia’s “backbone infrastructure” such as ports and railroads, only reached 52.1% of what’s been earmarked for the year. On some of the projects, in particular the effort to boost Russia’s digital economy, barely any of the available funds have been spent. And the total spending on the procurement part of the projects, as distinct from other forms of spending such as subsidies or transfers to regional authorities, has only reached 14% of the planned amount for the year.Russia regularly fails to spend its entire budget in a given year. At the end of 2018, 778 billion rubles ($12.1 billion) was left over. This year, Accounting Chamber head Alexei Kudrin expects 1 trillion rubles to be left, in large part because of the underspending on the national projects. Kudrin, a former finance minister, is the most prominent of Russia’s “system liberals,” Putin loyalists who favor more progressive government policies. He said this to the Russian parliament on Wednesday:Why aren’t we spending 1 trillion rubles, or 1% of GDP? Of course one can’t say we have too much money and that’s why we can’t spend it. I think it’s because of low-quality government. In 2017, Kudrin and fellow economist Alexander Knobel published a paper arguing that Russia was spending too much money on programs where expenditure is weakly or negatively correlated with economic growth, such as defense and security, and too little on those that drive expansion, such as education. The national projects are at least partly Putin’s response to Kudrin’s and Knobel’s thinking. Kudrin’s statement to parliament implies that bureaucrats simply don’t know how to run growth-friendly projects. It’s more likely, however, that they’re merely scared of spending the allocated money in ways that could land them in trouble. Because the national projects are Putin’s personal plan, they enjoy the attention of the president’s increasingly powerful and well-funded enforcement apparatus. Putin wants to make sure the allocated money won’t be stolen. That, however, is not easily done. As Sergey Aleksashenko, a former deputy central bank governor and now a Putin opponent, tweeted earlier this week, the requirements for spending budgetary funds are written so that they’re “impossible to execute without breaking rules. When an official asks himself if he wants to deal with the prosecutor’s office, the answer is obvious — to hell with these national projects!”A select group of Putin's friends can still profit from government spending. For example, earlier this week, the chief executive of a company owned by Putin’s judo sparring partner Arkady Rotenberg said the government-funded construction of a bridge between mainland Russia and Crimea would be merely a break-even project. But not long ago, Rotenberg sold one of the companies involved in the construction to the state-controlled natural gas producer Gazprom for a reported 75 billion rubles; he’d bought the five firms he merged into that company for 8.3 billion rubles in 2008 — from Gazprom.Of course, not everybody can pull of such schemes. Russian bureaucrats and subsidy recipients are regularly arrested and sentenced for misspending government funds even when they have achieved satisfactory results. Kirill Serebrennikov, a prominent theater director and darling of the Moscow intelligentsia, spent 19 months under house arrest on charges of embezzling government money, though he was able to show videos of the performances for which the funding was used in strict accordance with the contract. He still hasn’t been fully cleared.Earlier this month, the Prosecutor General’s office announced it had found 2,500 different irregularities in the administration of the national projects, mainly involving the distribution of subsidies and procurement. Some of these will end in criminal cases; no wonder the procurement budget was only 14% spent by the end of September.The creeping nationalization of Russia under Putin, and the accompanying empowerment of enforcement agencies, has created a dilemma. There’s not enough private initiative and private investment to boost growth beyond 1% to 2% a year, but not even Putin believes in the efficiency of government spending because of endemic corruption. As a result, government money still goes to players with good enough connections to avoid prosecution, but it’s being withheld elsewhere. Russia’s unique mixture of a grasping state, a graft culture and excessive centralized control continues to keep it from realizing its economic potential.To contact the author of this story: Leonid Bershidsky at lbershidsky@bloomberg.netTo contact the editor responsible for this story: Tobin Harshaw at tharshaw@bloomberg.netThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Leonid Bershidsky is Bloomberg Opinion's Europe columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.



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Behind the Relentless Stock Rally, Waves of Anxiety Are Building

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(Bloomberg) — Nerves are fraying underneath the stock market’s technology-fueled rally.Short bets against the biggest equity exchange-traded fund are stubbornly high and recently ticked up, even after the ETF’s 41% climb from March’s lows. The Cboe Volatility Index — known as the market’s “fear gauge” — remains elevated, while investors are piling into products that shield against losses. Meanwhile, a near-record mountain of cash seems stuck on the sidelines. All this as liquidity is in short supply.While pundits will argue forever whether any of those things are actually bad news for bulls, the stats show caution is bubbling beneath a surge that’s left behind everything but the biggest of tech companies. Heavyweights such as Apple Inc. and Amazon.com Inc. hitting record highs have helped cushion the S&P 500 from a resurgence in coronavirus cases, with the gauge down about 0.2% over the past month. An equally weighted version of the index — which gives Royal Caribbean Cruises Ltd. as much influence as Microsoft Corp. — has tumbled roughly 6.4% over that same period.“It’s been a bull market that really has not been fully embraced,” said Emily Roland, co-chief investment strategist at John Hancock Investment Management. “There’s a certain amount of skepticism inherent in investors today, and it makes sense.”Stubborn ShortsSkepticism is evident in the still-sizable cohort of holdouts betting against the $278 billion SPDR S&P 500 ETF Trust, ticker SPY. Short interest as a percentage of shares outstanding on SPY — a rough indicator of bearish bets on the fund — is currently 5.1%, according to data from IHS Markit Ltd. Short-interest reached a near-record of 7.4% on March 3, and was as low as 1.2% at the beginning of 2020.There’s “no doubt” that the Fed’s stimulus is driving the run-up in asset prices, which could explain the unloved nature of the rally, according to Penn Mutual Asset Management.“It’s harder to love a rally if it’s more of a liquidity-driven phenomenon rather than earnings just doing fantastic,” said Mark Heppenstall, the firm’s chief investment officer.Volatility JittersWhile well below March’s soaring heights, the VIX is still flashing warnings for a stock market fresh off its best quarter since 1998. The measure of implied equity swings remains elevated at about 27, roughly double its February low. The gauge spent all of 2019 below 30.Rising stocks usually imply a falling VIX, as markets price in good news on the horizon. However, the blistering speed of the equity rebound has upset that relationship, according to Goldman Sachs Group Inc., which estimates that the gap between the gauge and S&P 500 returns is one of the largest on record.Caution is evident in ETF flows. The $1.2 billion ProShares Ultra VIX Short-Term Futures ETF — the largest volatility-tracking fund — posted roughly $263 million in inflows last week for its strongest weekly showing since 2016, and is on track to absorb an additional $159 million this week.Building a BufferThe current landscape has sparked interest in so-called buffer ETFs, which cushion holders from a certain percentage of losses in exchange for a cap on gains. It’s a space pioneered by niche issuer Innovator ETFs — whose funds have attracted over $3 billion since first launching in 2018 — though competitors have started to launch rival defined-outcome ETFs as demand grows.“For people who have FOMO right now and they’ve been sitting on the sidelines and missed a 40% bounce, they’re saying, ‘do I get in now or are we back at a top?’” said Bruce Bond, Innovator’s chief executive officer. “It allows them to not have to time the market perfectly, but to get in and participate in the upside.”So far, the buffer funds have worked as advertised. When stocks bottomed on March 23, the $252 million Innovator S&P 500 Power Buffer ETF was nursing year-to-date losses of 17.5% versus the S&P 500’s 30% tumble. Four months later, the Innovator ETF is up about 1.3% in 2020 while the index is still down 1.4%.Cash HoardAnd then there’s the near-record levels of cash sitting on the sidelines. U.S. money-market absorbed $1 trillion during the pandemic-fueled turmoil, swelling total assets to an all-time high of roughly $4.8 trillion in late May. That stockpile has started to shrink — barely. The total sum still sits at about $4.65 trillion, Investment Company Institute data show.“That money has to come from somewhere, and presumably it’s coming out of risk assets,” said Phil Orlando, chief equity strategist at Federated Hermes. “This extraordinary amount of cash is the one metric you can put your finger on that would suggest you’ve got some concerns.”Shallow DepthWhile massive intervention on the part of the Federal Reserve has largely restored bond market functioning, JPMorgan Chase & Co. warns that equity liquidity levels are far from normal. Market depth for E-mini S&P 500 futures — the ability to trade without substantially impacting prices — remains about 60% below levels seen before March’s correction, analysts wrote in a note.That “unstable equilibrium” could leave stocks exposed should turmoil descend on markets again, they wrote.“Liquidity conditions have improved considerably, though not fully, and overall functioning has mostly been restored, but markets remain in an unstable equilibrium and vulnerable to shocks,” strategists including Joyce Chang, Nikolaos Panigirtzoglou and Marko Kolanovic wrote in a report.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.



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Trump administration quietly rolls back protections against predatory payday loans

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Our mission to help you navigate the new normal is fueled by subscribers. To enjoy unlimited access to our journalism, subscribe today.

President Donald Trump quietly ended a rule intended to protect low-income Americans from predatory high-interest payday loans this week. The move reverses a banner Obama-era initiative that required lenders to make sure that someone taking out a loan could afford to repay it. 

The rule, which was instituted and then reversed by the Consumer Financial Protection Bureau (CFPB) would have held payday lenders to the same basic rules that banks must abide by, evaluating someone’s income and monthly payments before handing them a personal loan.

Democrats and other advocates say that the Trump administration is removing essential protections for vulnerable populations in the midst of a global pandemic and recession. 

“By eliminating the ability-to-repay protections, the CFPB is making a grave error that leaves the 12 million Americans who use payday loans every year exposed to unaffordable payments at annual interest rates that average nearly 400%,” said Alex Horowitz, senior research officer with Pew Charitable Trusts’ consumer finance project.

Elizabeth Warren, who led the creation of the bureau following the 2008 financial crisis called the decision “appalling.” 

The interest rates on payday loans average at 400% nationally but often exceed 600%, compared to personal loan rates that typically range between 10% and 28%. About 80% of people who take out payday loans aren’t able to pay them back within two weeks and have to take out another loan, perpetuating their indentureship to these loan companies, according to the CFPB. The industry also has a history of purposefully targeting communities of color

In 2017, the Obama-appointed CFPB approved a rule to limit loans of this nature after conducting five years of research and hearing public comments. The rule was set to be implemented in 2018 but was delayed by Trump’s former CFPB head Mick Mulvaney and then overturned entirely by current-head Kathy Kraninger. 

“Our actions today ensure that consumers have access to credit from a competitive marketplace, have the best information to make informed financial decisions, and retain key protections without hindering that access,” said Kraninger in a statement.

No new research was done by Kraninger to justify the rollback and some ex-CFPB staffers allege that some Trump appointees manipulated data around payday loans when proposing the rollback. 

Mike Hodges, the CEO of Advance Financial, one of the country’s largest payday lenders has donated well over $1.25 million to Trump and said in an online webinar last year that his donations have given him access to administration officials where he pled his case to rollback the rule. 

“I’ve gone to [Republican National Committee chair] Ronna McDaniel and said, ‘Ronna, I need help on something,’” Hodges said during the online seminar, hosted by industry consultant group Borrow Smart Compliance.

“She’s been able to call over to the White House and say, ‘Hey, we have one of our large givers. They need an audience,’” he said. “I have gone to the White House and … the White House has been helpful on this particular rule that we’re working on right now. In fact, it’s the White House’s financial policy stance to remove the rule and even the payments piece.”

Senator Sherrod Brown related the rule change directly to Hodges’ donations this week, saying that “the CFPB gave payday lenders exactly what they paid for by gutting a rule that would have protected American families from predatory loans that trap them in cycles of debt.”

Presidential candidate Joe Biden indicated in a recent tweet that if elected president he would fire Kraninger from her role. “Here’s my promise to you: I’ll appoint a director who will actually go after financial predators and protect consumers,” he wrote. 

More politics coverage from Fortune:



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How a hair-care company went from salon supplier to sanitizer powerhouse

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When AG Hair moved into its new, 70,000-sq.-foot, state-of-the-art manufacturing facility in Coquitlam, B.C., two years ago, it was part of a plan to supercharge expansion of its hair care product line to salons in international markets. Europe was next on its list. Then COVID-19 hit.

Not only was the European expansion put on hold, but salons in major markets across Canada and the United States were temporarily closed. Very few were purchasing hair products, so manufacturing was halted in mid-March, leaving most of the company’s 82 employees out of work.

AG Hair could have waited out the pandemic but instead decided to lean into its entrepreneurial culture and make a sharp pivot. It began providing hand-sanitizing products for front-line health-care workers, addressing a global shortage.

“We realized there was this massive need for health-care professionals, and we wanted to make a difference and be able to provide them with the products they needed,” says AG Hair CEO Graham Fraser.

AG Hair received Canadian and U.S. approvals a week after applying for the licences needed to make sanitizer, and produced samples to show local authorities within 48 hours.

AG Hair’s Coquitlam facility has pivoted to making hand sanitizer (Photograph by Alana Paterson)

“That rapid response time, and the fact that we had gone through all of the Health Canada regulatory hurdles, showed [the local health authorities] that we were a partner they could trust and someone they could look to, to deliver the products they needed,” Fraser says.

Within a month, the company started pumping out the products, first for the health-care industry, then for consumers on its own website and on Amazon. About 10 per cent of AG Hair’s hand-sanitizer production also went to people in need, as identified by organizations such as United Way.

Parallel 49 Brewing Company is also using AG Hair’s Coquitlam manufacturing facility to produce its own blend of liquid hand sanitizer for front-line health and emergency workers, in partnership with the B.C. government.

Fraser credits his team for its energy and creativity in making the hand-sanitizer production happen, and helping put AG Hair staff back to work.

“We realized we had an opportunity . . . and then it became this incredible, almost war-room mentality and collaboration with our owners, our executive team and our people to say, ‘How are we going to get through this?’ ” Fraser recalls. “I think our success speaks to the type of people we have and the entrepreneurial spirit of pursuing every avenue we have, understanding how we can produce the products and making it happen.”

AG Hair’s commitment to investing in future growth is a big part of what makes it a Best Managed company, says Nicole Coleman, a partner at Deloitte and co-lead of its Best Managed Program in B.C.

“Capability and innovation come through quite strongly with this company,” says Coleman, who is also AG Hair’s coach at Deloitte. “I don’t think they would be able to pivot as quickly if they weren’t so strategic and had the internal capabilities to do it.”

The manufacturing facility was a big investment, but one Coleman says has already paid dividends.

“They were looking forward with a strategic plan in mind about future growth and how they could expand, rather than just focusing on the day to day,” she says. “Best Managed companies are always pushing the envelope and are conscious about planning for the future.”

AG Hair was founded in Vancouver in 1989 by hairstylist John Davis and graphic artist Lotte Davis. The husband-and-wife team began bottling hair products in their basement and selling them direct to salons from the back of a station wagon.

The company eventually moved its manufacturing off-site, to a third party. One day, John went to watch the operations and was surprised to see salt being poured into the mixture. Although he was told salt is commonly used as a thickener, he didn’t like the potential side effects of dry hair and skin.

It was at that moment John decided the company would oversee its own manufacturing. “Through that experience, John also became an expert in product development,” says Fraser, who came to the company in 2000 as director of sales.

After having worked for more than two decades at PepsiCo and Kraft Foods, Fraser was eager to work at a smaller, more agile company where he felt he could help make a difference.

“It was perfect because I got to bring a lot of structure and process that I learned in those organizations, but I also learned an awful lot about being an entrepreneur from John and Lotte: that sense of urgency, the decision-making process, the need to get things done and drive things forward and pursue opportunities,” he says.

Fraser has helped drive AG Hair’s expansion into the U.S. and internationally, including Australia, Taiwan, and Central and South America. A portion of its sales go to One Girl Can, a charity founded by Lotte that provides schooling, education and mentoring for girls in sub-Saharan Africa.

Fraser also oversees the development of new, trending products, including a new deep-conditioning hair mask made with 98 per cent plant-based and natural ingredients. Hand-sanitizing spray and gel will be the latest addition to the company’s product lineup.

“We don’t see the demand [for hand-sanitizing products] going away,” he says. “As the isolation policies start to get lifted, people are going to need forms of security and protocols as they get back into regular life and work. We see there’s going to be a need for these types of products long-term.”


This article appears in print in the June 2020 issue of Maclean’s magazine with the headline, “Working out the kinks.” Subscribe to the monthly print magazine here.

The post How a hair-care company went from salon supplier to sanitizer powerhouse appeared first on Canadian Business – Your Source For Business News.



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