Posts Tagged ‘Economy’

Saving Cyprustan: How Russia Sees Cyprus

Sunday, March 24th, 2013

The day that Cyprus rejected a European bailout that would have given every bank account in the country a “haircut,” the Cypriot finance minister Michael Sarris went on a mission. He went not to Brussels or Berlin, however, but to Moscow. Sarris had to find $7.5 billion dollars to cover the gap between the $12.5 billion the Eurozone was going to give Cyprus—the Europeans and IMF insisted the loan be capped at 10 billion Euros— and the $20 billion that the Cypriots needed to plug the hole in their economy. Flying to wealthy, flashy Moscow, which, as we’ve all heard, has oodles of money in Cyprus, though no one knows exactly how much, was a predictable move, like calling your spendthrift millionaire friend when you can’t make your rent this month.

So Sarris showed up in Moscow, but not hat in hand, exactly. He came offering stakes in Cypriot telecom companies and in its recently discovered offshore gas reserves— reserves which Gazprom was reportedly eying in a potential private bailout. And yet, on Friday, the three-day talks with Russian Finance Minister Anton Siluanov and Dmitry Medvedev—who is said to have audibly cheered in a meeting when he saw the news that Cypriots had rejected the Euro bailout–ended with little to show for the effort. Medvedev said he wasn’t shutting the door on bailing out Cyprus with help from Europe, but Sarris went home to a ticking clock, empty-handed.

It’s not clear why Moscow didn’t bite, but all of this exposes a very interesting geopolitical situation. Russians are said to have up to $32 billion in Cypriot banks, which is not insignificant for a country with a $25 billion GDP. But don’t quote me on that Russian number. Asked by a Russian paper how much Russian money was in Cyprus, the head of the Cypriot Central Bank said, “depends on how you count it.” This is in part because it’s very easy for Russians to acquire residency as well as to register off-shore or shell companies on the island. Often, however, they are registered to a local lawyer, so the company is technically Cypriot, but stuffed with Russian cash.

Cyprus is often talked about as a money laundromat for ill-gotten Russian money, and as a tax shelter, but the more accurate description is probably “haven.” Some of Russia’s wealthiest tycoons have money stashed in Cyprus, but so do people from the humble ranks of Russia’s many, many millionaires, not to mention droves of the merely upper-middle class. (The big dogs have their money all over the world—Isle of Man, Switzerland, London real estate, the Cayman Islands—but Cyprus is the starter haven, the gateway to the world of offshore accounts.) The reason, as former Russian finance minister Alexei Kudrin explained, is simple: Cyprus was once an English colony, which means that it has English law, which the Russians revere for its ability to fairly settle business disputes. Not only is Cyprus an Orthodox Christian country, with an alphabet from which Cyrillic was derived, it is also a place with rule of law and a functioning, independent court system. Russians do not have this at home, where money or property can be yours one day, and someone else’s the next, without any legal recourse. So yes, money gets laundered in Cyprus, but money is also kept safe there from other Russians, specifically those working in the Russian government.

And that’s where it gets crazy: on Thursday, Medvdev said that unnamed “government structures” have their funds in Cyprus. Which explains Russian President Putin’s outburst when the European plan was first announced: Putin, the man who jails dissidents and on whose watch corruption and government extortion of businesses has reached near mythical levels, called the Cypriot bank tax “unfair.” But not really. How does one explain to the average foreigner that the Russian government is sheltering its money…from the Russian government?

It’s worth noting here that Russians generally don’t see their government as a ruling body and neutral arbiter, or as a guarantor of the rule of law. Russians, correctly, see their government as a collection of front-row seats to the auction divvying up Russia’s natural plenty. In the last decade, government bureaucrats have become the country’s new elite. Their expenditures on houses, cars, or watches rarely match their official incomes. Over the summer, for example, a Moscow real estate company found that over half of the luxury flats in Moscow—those priced at $2 million and up—were purchased by government officials. It’s no surprise then, that when Russians are asked about corruption, they are not so much infuriated as envious: polls repeatedly find that a majority of Russians simply want to get into a government post to get access to the goodies.

And once you get those goodies, you must hide them in a place where other people in the government—say, overzealous fire marshals—can’t get at them.

But the Russian government itself owns a lot of businesses, like VTB Bank—where Kudrin, until recently, served as chairman of the board—that, in turn, does a lot of business in Cyprus. VTB is one of Russia’s largest banks and it is mostly owned by the Russian government. Which makes some of its transactions seem rather strange indeed. For example, Alexey Navalny, an opposition politician, uncovered one such scheme: VTB decided that it could make some money renting oil drilling equipment it purchased from China. VTB did not purchase them directly, but through a Cypriot company, registered to two Russians, which bought and sold them to VTB at a 50 percent markup, and pocketed the difference: $150 million. (The point was for the Cypriot company to make the $150 million, rather than the rental of the drilling equipment, which is lying unused in some forsaken field in Siberia.)

To the Russians, Cyprus has become a kind of Mediterranean Russian colony. There are Russian storefronts, nearly 50,000 Russian residents, and many more vacationers from the Russian middle class. Cyprus has become wildly dependent not on Europe, whose currency it uses, but on Russia. It’s a particularly ironic twist given that Russia, historically, has seen itself as the Third Rome, the Orthodox power that picked up the flag that Byzantium dropped when it was conquered by the Turks. Perhaps it is because of this that the Europeans, particularly the Germans, pushed for the Cypriots to pay for part of their own bailout. Greeks are one thing, but Russians—whom Europe sees as the barbarians at the gate, aping its fashions and customs—are another, and Germany sees no reason why a country that turns off its gas supply to punish Ukraine, should be bailed out by German taxpayers.

The real question in the Cyprus debacle is why Russia is being so careful. You’d think Moscow would be happy to rush in and save a small European country that the Continent has snubbed. They already have a colony in the Mediterranean. $7.5 billion would be a cheap price to turn it into an ally.

Saving Cyprustan [TNR]

Geeks in Space

Thursday, June 25th, 2009

Richard Garriott is a geek. He loves fantasy; he has two thin braids running down his back that, for pictures, he swings over onto his chest for maximum effect. Back in the 1980s, he developed a series of fantasy role-playing video games under the Ultima umbrella, making him, perhaps, the Henry Ford of gaming. He made a fortune, and he used it to build two houses in Austin, Texas, named after the home of the hero of his video games, Britannia Manor. (The one he lives in now, Britannia Manor Mark 2, is equipped with a set of secret passageways, artificial rain, underwater caves, an authentic 16th-century vampire-hunting kit, crossbows, armor, two skeletons, an observatory, and a lock of hair from a wooly mammoth.)

And, because Garriott is a geek, he has also used his millions to pursue his love of space. In 2000, he shelled out hundreds of thousands of dollars to be the very first self-funded tourist in space. But then the dot-com bubble burst, and he lost most of his money and had to sell his seat on the rocket. But Garriott loves space so much that, once he regained his financial footing, he decided to buy back that trip rather than resume construction on the still half-finished Britannia Manor Mark 3, the other casualty of the bust. This time, it would cost him $30 million—up from $20 million—and the training would take about a year out of his life, but it was space and, goddamn, it was worth it.

“It’s so important to see Earth from orbit,” he told me recently. “It’s a truly life-changing event.”

He says he has also noticed a pattern: All those other tech geeks thirsting for the same view. For instance, when Garriott finally went up, in October of last year, he was already Space Tourist No. 6. But Nos. 1 through 5 were all tech geeks, too. Space Tourist No. 1 was Dennis Tito, who bought Garriott’s first seat in 2001. Tito made his money by bringing mathematical analytics to money management. (He also had a bachelor’s in astronautics and aeronautics.) Tito was followed by Mark Shuttleworth, the Web-security millionaire; then came Greg Olsen, the optoelectronic millionaire; Anousheh Ansari, the telecom millionaire; and Charles Simonyi, the millionaire responsible for Microsoft (MSFT) Office. Google (GOOG) co-founder Sergey Brin has reserved a flight but hasn’t yet found the time to go, and tech venture capitalist Esther Dyson just plunked down $3 million to train for five grueling months—including a tundra survival mission, a machete and all—just to be Simonyi’s understudy for his second flight, in March 2009. (Guy Laliberté, the tech-savvy founder of Cirque du Soleil, is the next space tourist, scheduled to go up on Sept. 30.)

And these are just the travelers. There is also a shadow NASA out there, made up of tech geeks who are investing their second entrepreneurial wind into beating NASA, Boeing (BA), and Lockheed Martin (LMT) by building lighter, faster, cheaper, and, amazingly, reusable rockets that will supplant the space shuttle when it is retired in 2010. First, there is Jeff Bezos, founder of Amazon (AMZN), who in 2000 founded Blue Origin, a secretive company focused on making suborbital space tourism affordable and accessible. (First qualification for working there? “You must have a passion for space.”) There is also Armadillo Aerospace, founded by John Carmack, of DOOM and Quake fame. And there’s the Big Space Cheese himself, PayPal co-founder and Tesla CEO Elon Musk, whose space company, Space Exploration Technologies (or SpaceX), has become adept at scoring massive government contracts to build rockets that will make space deliveries of things like supplies and satellites for NASA and the Department of Defense. (Musk recently made his ultimate destination clear: Mars.)

So why do tech geeks love space? Though they may have the resources—a trip to space will now set you back some $45 million—this can’t be the full answer: You don’t see Donald Trump or P. Diddy signing up for an astro-mission. What makes it worth it for the tech geeks? Garriott, for one, has thought about this extensively. In part, he loves space because his father, Owen, was a NASA astronaut. But then there’s the social conditioning.

“There’s a documentary called Orphans of Apollo that’s stated this well,” he explained. “There’s a generation of us, who are the tech leaders of today, who were universally inspired to go into science and technology because of the NASA Lunar Space Program. And the reason the movie is called Orphans of Apollo is because, in many ways, we feel orphaned by the fact that the space industry has not done a good job of capitalizing on that momentum of what many of us believed were the first steps into space, carrying the mission of human space flight farther and farther into deep space.”

“The same kids who grew up wanting to be computer engineers are the same kids who grew up watching Star Trek, OK?” says Eric Anderson, CEO of Space Adventures, the Vienna, Va.-based company that facilitates space travel for civilians. (Garriott is on the board of Space Adventures, and Dyson and Brin were early investors.)

“Technology entrepreneurs are the ones with the technical curiosity, the desire to do new things and explore new territory,” says Dyson. “And this is the ultimate new territory. There was a belief once, too, that America was something new and unnecessary.” Dyson believes we will eventually be colonizing other planets. Like Garriott, she also has space in her blood. In the late ’50s, her father, physicist Freeman Dyson, worked on using nuclear pulse propulsion to vault rockets into space. Esther was 7 at the time, and she recalls thinking that, naturally, one day, she would get to travel in one.

Now, these techies-made-good finally have a way to get to space. If they have the means, they come to Anderson. “Entrepreneurs take calculated risks,” Anderson says. “They’re willing to spend their life and time and money doing things that they know might fail.” And he’s willing to help them try for a slice off the tophis is a private company, and he would not reveal the terms of the contracts—though most of money goes to the Russians, who do all the heavy lifting. (Currently, there are no space-tourism flights leaving from American soil, and, according to a NASA spokesman, there won’t be for some time.)

The Russians, on the other hand, have been all too happy to oblige. Once the vanguard of space exploration, they suffered their own version of Garriott’s bubble bust. In 1991, the Soviet state fell and with it went the massive state subsidies for their space program. In 2000, Garriott and Anderson approached the Russians to see if they wanted to profit from this decaying part of their infrastructure, too. After the obligatory pooh-poohing, the Russians agreed to sell one seat on the three-seat Soyuz rockets they send up to the International Space Station. (NASA also buys seats on the Russian rockets, for $51 million per seat, which is still cheaper than building their own or sending up the space shuttle, which also happens to have a worse safety record than the Russian-made Soyuz.)

Space Adventures forks over most of the hefty fee to the Russians, who take the Space Tourist up to the International Space Station for about a fortnight. (The tourists themselves insist on being called “Space Explorers.”) Before they go, however, each space tourist must train for five months (900 hours) in the isolation of Star City, a secret hamlet just outside of Moscow that only recently started appearing on maps. There, working alongside Russian cosmonauts and some American astronauts, they work to attain “user level” proficiency in all things rocket: communication, emergency, life-support, electronics, and rocket-propulsion systems. It is all in Russian. (Dyson speaks the language; Garriott had a translator.) They undergo turns in the centrifuge and are subjected to endoscopies and colonoscopies. They are sent on zero-gravity “parabola” flights, which are fun with a caveat. (“The Americans try not to make you sick,” says Dyson. “The Russians try to make you sick.”) There’s survival training in the wilderness, including a bout in a tiny space capsule stranded at sea in which you have less than 90 minutes and very limited space to change out of your spacesuit. Garriott says he emerged black and blue, having failed on his first attempt: The capsule heated up so much that his core body temperature became dangerously high.

For the people who weren’t sufficiently athletic or eagle-eyed to become astronauts in the first place, completing this training is no easy feat. Nor is space a cakewalk. Once in orbit, blood becomes more concentrated and pools in your head; muscles atrophy and bones lose calcium. Back on earth, cosmonauts have to be lifted out of the landing capsule, essentially paralyzed for days.

“It’s no joy ride,” says Dyson, who is still waiting for the price to come down before she uses her successfully completed training in space. “It smells. It’s noisy. It’s the same people every day. The food gets repetitive. It’s lonely.”

But for the tech geeks, it is part of the fun.

“Now that I have been to space, and I have survived the second market crash, I hope to restart Britannia Manor Mark 3!” Garriott wrote in a recent e-mail. “Plus, of course, I plan to get back to space ASAP!”

Geeks in Space [The Big Money]

Prophet Motive

Friday, May 15th, 2009

This year, Nouriel Roubini, the economist known to the general public as Dr. Doom, Prophet of the Financial Apocalypse, spent the early hours of Mardi Gras on the floor of the Frankfurt Stock Exchange. It was only 11 a.m., but the party was rollicking. Traders careened around the floor, hooting and honking, dressed as dragons and devils and convicts. Rock music roared overhead, and no one seemed to care that, by the bye, the market had tanked. Tickled, Roubini registered the flicker of amusement on his Twitter thread: “Nouriel is at the Frankfurt Stock Exchange,” he wrote, “where everyone is dressed in Mardi Gras costumes even if the market is down 2.5%.”

Roubini has always been a bon vivant–a trait that has mesmerized the tabloids ever since Facebook photos surfaced of him, the professional pessimist, partying … with women. But, today, there was no time to celebrate. First, he had to go see Axel Weber, head of the nearby German Central Bank, to discuss “how the German taxpayer is going to have to bail out the lazy Italians and the lazy Greeks,” who were up to their eyebrows in debt. Then there was a panel discussion with finance gurus Robert Merton and Stephen Ross; there were clients to counsel, a keynote address to deliver, and e-mails, hundreds of e-mails, slowly piling up in the BlackBerry on his belt. By the time he responded to the ones worth responding to and updated his blog, it was nearing 4 a.m., and he only had time to sneak in a few hours of sleep before another day of flights, meetings, conferences, and TV appearances.

When I caught up with Roubini three days later, he was draped over a booth in an Upper East Side diner, his hair rumpled, collar undone. The speckled blue tie he had worn on Maria Bartiromo’s show that afternoon was gone. His speech was still a rapid spit-out of facts and favored metaphors (the government “cannot be half-pregnant” with the banks), with modifiers in just the wrong places (“I was all day long giving talks”), but it was disembodied: Roubini was wiped and having a hard time propping himself up.

Now that his early prophesies of a “bloodbath” have come to pass, Roubini’s star is at its apex, and everyone wants a little ray of its gloomy light. This includes his editors at Forbes, The Wall Street Journal, and a growing number of other publications; his students at NYU, where he is a popular tenured professor; and his consultancy’s swelling portfolio of clients–the World Bank, IMF, 50 central banks, and 30-odd finance ministries among them. He also appears on CNBC almost every day. He is a curious presence on the network–the antipode to its yawping, fratty ethos–and he is trotted out to play the foil, delivering bad news with a dark and steady gaze, punctuated by the occasional impish smile. It’s good for business, Roubini admits, but he makes no secret of his contempt for the network’s roster of “perma-bulls who declare that this is the dramatic and cathartic event that signals the bottom of the crisis, and recovery is three months ahead.”

“What a delusion,” Roubini sniffs.

Though he hasn’t attacked the Obama administration’s policies with Paul Krugman’s fury, and though he is no longer the most bearish of the bears, his short-term outlook is still quite bleak: a 36-month downturn, double-digit unemployment, and sluggish, recessionary growth well into 2010. At best.

Roubini is widely seen as an incorrigible pessimist, and, in the years leading up to the crisis, this nose for doom pitted him against his more cautious colleagues in the academy and the regulatory agencies, as well as the ebullient in-house economists at banks and hedge funds. Even those who predicted a downturn didn’t recognize the extent of the problem. They homed in only on certain pet indicators–trade imbalances, say–and saw a temporary, contained recession in the works. Roubini, on the other hand, saw something else entirely. Like a good mechanic or internist, he understood the wiring. He knew, for instance, that current-account deficits were integral to the housing bubble, and that those two factors linked up to countless other factors at home and abroad. So he took what, back in 2004, was just a hunch–there is a foreign-financed bubble in the United States–and eventually pushed it, step by logical step, into a Socratic cul de sac: We are headed for an unmitigated financial disaster that will completely change the way the world does business and leave no one untouched. The theory seemed far-fetched, even hysterical–until it came true.

By calling the recession, Roubini has traveled from the Jeremiah wilderness to become one of the world’s central economic authorities. So, does he have a unique ability to penetrate data, or was he simply a relentless pessimist the business cycle was eventually bound to vindicate? Is he our great economic seer, or did he just get lucky?

Roubini can be a pleasantly phlegmatic man, but, whatever the topic, he almost always positions himself as a clear-eyed outsider battling against the half-wits. “Silly” is one of his favorite adjectives, as is “ridiculous.” When we met in New York, he wasted little time in dismantling the myth of his newfound stardom. “People sometimes write these articles saying, ‘He was an obscure academic professor and now he’s become a rock star,'” he said, one arm absently bumping an increasingly irritated man enjoying a club sandwich behind him.

Then there is the problem of Roubini’s pop-culture image: Dr. Doom, the partying pessimist. He hates both parts of the packaging. “In many ways the Dr. Doom moniker is inappropriate,” he punched into his BlackBerry, unprompted, one very early morning in New Delhi. “I turned out to be much more of a realist than a pessimist, grounded in reality rather than living in a bubble of delusions about how bad things would get.” And he flares at any mention of his reputation as a playboy, accusing Nick Denton, the publisher of Gawker Media and the main peddler of these allegations, of anti-Semitism (Denton’s mom is Jewish).

If Roubini slides easily into the role of victim, it’s a stance that his ancestral history may have predisposed him to. The Roubinis are from Mashad, a city on the eastern fringe of Iran and the resting place of the Imam Reza, the eighth of the twelve Shia imams. This made Mashad a major religious hub and, thus, a difficult place for its Jewish community, the Roubinis included, to live. The city’s Muslims and Jews, however, managed to maintain a tense equilibrium for centuries until, in 1839, a Jewish woman got a strange prescription for an abscess on her hand: cut open a puppy, stick your hand in its innards, hold for an hour. She carefully followed the Muslim doctor’s advice, but got the timing wrong, killing the dog on a major Muslim feast day. This was interpreted as a mockery of the holiday, and the town exploded in violence. When it was over, 36 Mashadi Jews were dead and the rest were forced to convert to Islam, an event that came to be called the Allahdad. For the next century, until the Iranian state slowly loosened its grip in the 1940s, the Jews had to secretly keep their faith while maintaining an elaborately Islamic facade.

The trauma of the Allahdad forged a strong insularity among the Mashadi Jews, one they maintain even in the exile of Long Island and Israel–and it gave them the sense that the unimaginably bad is nearly always possible. “It’s like a big tribe,” Roubini says. “They mate among each other; they don’t even mix with other Jews.”

Roubini himself was born in 1958, not in Mashad, but in Istanbul, where his parents had a short layover before moving on to Tehran, Tel Aviv, and, finally, Milan, where the family set up its Oriental rug business and lives to this day. Because they arrived in Italy when they were young, Nouriel and his two brothers, born one after the other in the span of 21 months, were able to duck right into Italian society (though they spoke Farsi at home) and, in the typical way of first-generation immigrant children, disappear. The Roubini boys came to immerse themselves in politics during the 1970s, when Italy was rocked by social unrest and domestic terrorism; according to his youngest brother David, Nouriel began leading student assemblies on the events of the day. “I was like everybody else, the son of a good upper-middle-class family, and like many of my generation, I was socially conscious,” Roubini says. “I wanted to make the world a better world. And, probably, my interest in economics came from my interest in politics.”

The interest was largely incomprehensible to Roubini’s parents. In the Mashadi community, a boy was expected to go into his father’s line of work; many didn’t finish high school. “Unlike Ashkenazi Jews, Middle Eastern Jews put less emphasis on education,” Nouriel explains. “They were more about business. There was no particular impetus to learn. So I’m a little bit like an outsider because I broke out of it.”

He has remained an outsider ever after, never fully inhabiting any role or place since his grad-school days at Harvard, when he was able to pursue a blend of academic economics with tangible questions of policy. After seven years of teaching at Yale, he was drawn south, to New York, to fill the cultural void that New Haven had opened in his life. (He missed the opera in particular. At one Yale party, an advisee’s wife walked in on Roubini and four other economists ripping through the Catalogue Aria from Don Giovanni, a list of the paramour’s conquests: “In Italy, six hundred and forty;/In Germany, two hundred and thirty-one;/A hundred in France; in Turkey, ninety-one;/But in Spain already one thousand and three.”)

But, at NYU in the mid-’90s, he wasn’t fully comfortable, either, and was drawn south again–this time to the policy battles of Washington, where he served briefly at the World Bank and the IMF, before deciding to abandon academia for a while and adopt the life of a bureaucrat at the White House and Treasury (where he was Timothy Geithner’s adviser). That, too, did not satisfy him for long. Two years later, he was back in New York, trying again to fuse economic policy with theory, and, in 2005, he added another element to the mix: RGE Monitor, a multimillion-dollar international consultancy.

The crisis has blessed Roubini with fame, wealth (mid-recession, RGE is still growing), and odes from his peers. Nassim Taleb, who also predicted a catastrophe in his book The Black Swan, calls Roubini “the best living economist”; heavyweights like Brad Setser, Simon Johnson, and Kenneth Rogoff were nearly as flattering in their appraisals. And yet, Roubini still sees himself as outnumbered and put-upon, the man no one will listen to until it is too late.

He also bristles at anything that smells remotely of constriction. When two people from the notoriously on-message Obama campaign approached Roubini and asked him to come onboard last year, he declined. Though Roubini had been happy doing policy in the late ’90s, he had chafed at working longer days for half the money, and his recommendations were being shorn of their Roubini-esque fullness. “When I was in government, every word I said in public, I had to clear it with general counsel,” Roubini says. “I prefer to be a free thinker and be able to write daily without having to worry about that.”

Before they left for Washington late last year, he told his old colleagues Geithner and Larry Summers that, though they were free to contact him, he was happy directing policy indirectly, on television or on his blog. “I cannot do everything,” he says. “You have to choose.”

Some economists–strict academics mostly–have long considered Roubini a quack. They sneer at his approach, which is wide, deep, and deeply unconventional. When he travels, for instance, he says his research includes talking to “everyone from the airport cab driver all the way to the finance minister.” One prominent economist who studies recession indicators recently slammed Roubini for his “subjective,” “wild man” predictions because they don’t always rely on econometric modeling. And Roubini certainly didn’t help his case at an IMF conference in September 2006, when he guesstimated the chances of a world recession at 70 percent before offering, by way of explanation, that he had pulled the number “just out of my nose.”

Anirvan Banerji, an economist with the Economic Cycle Research Institute, has been particularly dismissive of Roubini’s forecasting abilities: “The average time between recessions is about five years in the postwar period,” he says. “So, if you forecast a recession one year and it doesn’t happen, and you repeat your forecast year after year … at some point the recession will arrive.”

And Roubini has undeniably overshot. In 2004, he predicted that the oncoming recession would precipitate the crash of the dollar. The crisis has mainly buoyed it. On September 1, 2005, three days after Hurricane Katrina made landfall, Roubini told Reuters that economic disaster was imminent. What followed instead was a bump in financial activity that forestalled the recession for more than two years.

All the while, though, Roubini understood better than anyone just how weak the fundamentals of our economy were. The day after the now-famous 2006 IMF talk, he went on “Kudlow & Company,” on CNBC. Roubini was, as always, the foil to Kudlow’s chipperness. “All my friends are in a great mood, Nouriel. They’re in a terrific mood. They love America,” Kudlow sang. Roubini countered starkly: “Well, they’re all rich,” he said. “The average American actually is in debt”–a sign to Roubini that housing would only be the catalyst of something larger.

What sets Roubini apart from his fellow economists (and what occasionally gets him in trouble) is his willingness to intuit broad patterns and connect the dots, something that became apparent early in his career. While others spent years refining one econometric model or drilling down on one microsubject, Roubini gorged on a range of diverse topics that, to him, were all related: Japanese public debt, tax evasion, liquidity and exchange rates, monetary policy in the newly formed European Union, the effect of political cycles on industrial economies. As a graduate student, he attracted the attention of older, more established academics both for his ambitiously sweeping econometric analyses and his ability to synthesize vast swaths of seemingly unrelated information.

But the first real test of Roubini’s eclectic methodology didn’t come until 1997. That summer, the government of Thailand–highly in debt and over-leveraged after a long and poorly regulated real-estate boom–cut its currency from its peg to the dollar. Investors panicked, and Thailand’s surging economy froze, triggering massive layoffs in real estate, finance, and construction. The crisis, which quickly spread to the rest of the region, took most economists by surprise.

Roubini, by then a young professor at NYU, was trying to stay on top of the rapidly shifting situation in Asia for a class he was teaching. He found it nearly impossible until he hit on a relatively new technology: a website. He hired some students versed in HTML and set up the Asia Crisis Homepage. The bright yellow portal pooled news reports, academic work, and policy debates on the subject, filtering, organizing, and contextualizing the information in real time under no fewer than 32 headings.

Wading through the data on Thailand, Roubini found that corruption and bad policy created a vacuum that sucked in a flood of foreign capital. This skewed the country’s financial reality and accelerated an unsustainable boom. (Roubini later spotted this distinctive pattern in the United States when the Chinese, Russians, and Gulf states were hungrily snapping up U.S. debt and inundating the market with foreign cash.) But, at the height of the Asian financial crisis, Roubini was, again, in the minority. Many economists saw it as a simple comedy of errors: Misinformed investors panicked, they said, and pulled the rug out from under the Thais. Roubini, on the other hand, saw the crisis as a systemic failure rooted in Thailand’s policies. And he was right.

More than a decade later, Roubini-ism–sprawling, non-linear, and hypercaffeinated–looks pretty much the same. His prescient February 2008 blog post that predicted the Rube Goldbergian collapse of the world financial system, for example, was called “The Twelve Steps to Financial Disaster,” but, if you include all the sub-steps and sub-sub-steps, the real number is likely twice that. On television, his talking points are similarly pluralized, rushing out quickly, like a magician’s scarves, to a grand and logical finale. (At the diner, I clocked him: 295 words on the intricacies of the European monetary crisis in under 90 seconds.) This, of course, means that brevity goes out the window. Roubini’s weekly Web column for Forbes comes in at close to 3,000 words and runs at half that length. A recent Roubini academic paper tracks no less than 47 emerging countries over the course of 32 years using more than 50 variables. Giancarlo Corsetti, who was Roubini’s advisee at Yale and is now a frequent collaborator, presents with Roubini at conferences, and sometimes finds this expansive approach frustrating. “I go up, I present one or two points,” Corsetti says. “Nouriel goes up and gives you twenty-six points, three or four of which are contradictory.”

Robert Shiller, who also worked with him at Yale and was one of the first people to warn of a housing bust, isn’t surprised that Roubini, of all the great minds staring down our financial future, emerged as the one to piece it together. “A financial crisis needs general thinking, and a team of specialists will have difficulty understanding the whole thing,” he says. “Nouriel’s approach has always been worldwide, which is not rewarded in academia. There’s an element of luck in everything, but it’s not random who he is.”

This is what the life of a prophet looks like: Two days after we met at the diner, Roubini is back at the airport. He’s off on another long jag–four continents, seven countries, eight cities, ten days.

He’s been thinking a lot not just about the way down but the way out. With the help of the Obama administration’s policies (not great, he says, but better than nothing), he sees “a light at the end of the tunnel.” To actually get to the end of it, though, the United States will have to get used to consuming less, which means China, Germany, and Japan will have to get used to producing less, which means that all the intermediaries–Chile, Australia, Brazil–will have to scale back and turn inward like everyone else. The world may curve and warp a bit, and it will be difficult, but Roubini sees good in this. Given the right changes, perhaps the United States can develop with the productive long view in mind, and maybe its human talent can be spread more equitably. “When you have more financial engineers than computer engineers, you know that the brightest minds have gone into something where, probably, the margin was excessive,” he had told me earlier. “Maybe some of these bright people are going to do something entrepreneurial, more creative, or go into government. I think that’s actually a good change. The transition is painful, but the result may be good.”

On the other end of the line, I can hear him fumbling with his luggage as he talks, and there’s a sense of noble resignation in his tone. He hasn’t had any rest since we met, but, he insists, “I cannot get sick. I can’t stop.” His is hard, life-shortening work, but someone has to tell the world that only its wholesale rewiring will get us out of this.

Prophet Motive [The New Republic]

The Gun Club

Tuesday, January 13th, 2009

Last month at the Golden Idea Awards [1], an annual ceremony for the Russian defense industry, Deputy Premier and ex-KGB hard-liner Sergey Ivanov told the prize winners that he was supremely proud of them. “Even in the midst of the world financial crisis,” he said, “there has been no drop-off in the demand for our products.”

It is probably the only Russian industry that can claim such an honor. November’s dismal economic data showed [2] that the Russian economy had gone off a cliff; the double-digit declines in industrial output, commodities prices, and consumer spending were the biggest since the country’s outright collapse in 1998. Yet Russia’s weapons exporters are still doing brisk business. Their expected earnings for 2008 [3], a disastrous year for everyone else in Russia, were $8 billion, with a crop of future contracts worth some $33 billion.

The industry starts with a considerable advantage—proximity to the Kremlin. The weapons export monopoly, Russian Technologies [4], is run by Sergey Chemezov, Putin’s buddy from their Dresden days in the KGB. “There’s been a significant increase in Russian arms exports under Putin,” says Paul Holtom of the Stockholm International Peace Research Institute [5]. Russia is now second only to the United States in weapons exports.

And now, the industry is set to get another gift from the nation’s rulers. World demand for most Russian products—oil, nickel, gas—has collapsed, and Russia’s currency reserves are leaking like a sieve. So the Kremlin has started notching the ruble downward to ease those pressures. Its phased devaluation [6]—about 1 percent to 2 percent a week for the last two months—has left the ruble some 18 percent lower than its August peak. What’s more, economists predict that the Kremlin will deflate the ruble another 20 percent this year in order to protect the country’s reserves and revive its exports. (Even after years of promising diversification, commodity exports are still Russia’s lifeblood.)

As the ruble drops by more than one-third of its value, Russian guns, planes, and tanks, already the bargain alternative to pricey American models, will become still cheaper. This is important for two reasons: As the revenue streams of Kremlin-connected oligarchs dwindle, this one could hold steady since a cheaper product can catch dropping world demand. This could also help because some of Russia’s weapons customers are oil producers hurt by tumbling oil prices. Venezuela, for example, has signed a series of lucrative arms contracts with Russia but is already negotiating a loan [4] to pay for all those goodies. Cheaper arms, however, should alleviate these pressures—and keep pinched customers from reneging on those defense contracts.

That’s good news for Russian weapons exporters but bad news for some of the world’s peacekeepers. Once the world’s arms warehouse, the Russian defense industry since the collapse of the Soviet Union has been hobbled by inefficiency, an aging work force, and inferior products. (In an unprecedented incident last year [7], Algeria, an old Soviet customer, sent back 15 MiG fighter jets, claiming they were lemons. “It was the first time a foreign customer returned a military hardware purchase—ever,” says Stephanie Neuman, a weapons trade expert at SIPA. “It was unheard of.”) But what Russia lost in market share, it made up for in zeal, aggressively peddling its weaponry all over the world. Desperate to attract new customers and win back old Cold War allies, Moscow attached few strings to its weapons deals. Such terms of trade were very attractive to the countries that America refused to do business with, and soon Syria, Iran, North Korea, Libya, Venezuela, Somalia, Eritrea, Burma, Yemen, and Sudan all became Russian customers.

Of course, the United States has armed its fair share of unsavory actors, but on the whole, say weapons experts, its export controls are much tighter than Russia’s. “The U.S. sells widely, but places where it draws the line, Russia jumps in,” says William Hartung of the New America Foundation [8]. And Russia, recognizing that the West looks askance at sales to these rogue actors, has made some gestures of appeasement, like promising to do surprise inspections after a sale is completed to someone in what it calls the “awkward” market. It is unclear whether any such inspections have taken place.

The other discrepancy between the two superpowers is what they sell. America makes the bulk of its money selling very expensive, high-end technology—big-ticket items like fifth-generation fighter planes. Russia also sells mostly tanks and planes, but it also churns out a huge number of small arms and light weapons, the industry term for things like AK-47s, shoulder-fired anti-aircraft missiles, and RPGs. The figures are murky, but last year Russia sold as much as $400 million worth of these. And once these cheap and highly portable weapons are sold to “awkward” states, they very quickly turn up somewhere else entirely.

While the big stuff like planes and helicopters has been found in some nefarious corners of the world (Darfur, for example), it is the light, cheap stuff that presents the biggest problem. “Soviet-bloc weaponry constitutes the bulk of illicit circulation,” says Matt Schroeder of the Federation of American Scientists. And circulate it does. Russian guns sold to Eritrea recently surfaced in the hands of Somali insurgents [9]; the computer of a captured FARC leader revealed that Hugo Chávez was planning on arming them with Russian shoulder-fired surface-to-air missiles; Russian rifles sold to Algeria were found being used by death squads; and, in the summer of 2006, Russian anti-tank missiles, or RPGs, sold to Syria were found under the auspices of Hezbollah in southern Lebanon. (RPGs are cheap, but they cost the Israeli army nearly three dozen tanks.) And those Hamas missiles we’ve been hearing about of late? According to military sources, those are Russian Grad missiles, funneled to Gaza through Syrian and Iranian intermediaries.

It remains to be seen, of course, if a devalued ruble exacerbates the situation by making small arms and light weapons even cheaper. For one thing, the Kremlin seems unwilling to take the ruble down 20 percent in one fell swoop, which would really give the weapons exporters a boost. The Russian weapons industry is not in good shape: In recent years, there has been very little spent on R&D and even less on the Russian army (the industry is almost completely dependent on exports), and it is fast losing market share in its two largest markets: India and China. And, given that the entire world is hurting, there may be a bunch of canceled arms contracts around the corner.

On the other hand, countries might cut back on the big, less portable weaponry but keep the light and cheap guns flowing. The collapse of other Russian industries may make selling arms that much more urgent for the cash-strapped Kremlin, which has already stepped up its salesmanship, sending President Dmitry Medvedev on a sales trip to Venezuela in November [10]. And, with a cheaper ruble at its back, Russia might find some eager customers in the increasingly awkward and dangerous corners of the globe.

Links:
[1] http://www.kommersant.ru/photo/archive/search.asp?L=2&dt=1&ex=y&lang=2&lib=1&ps=50&searchbtn=search&text=aircraft&pg=6
[2] http://www.ft.com/cms/s/0/7f67201a-cba7-11dd-ba02-000077b07658.html?nclick_check=1
[3] http://english.pravda.ru/russia/economics/17-07-2008/105807-arms-sales-0
[4] http://www.iht.com/articles/ap/2008/07/14/business/EU-Russia-Russian-Technologies.php
[5] http://www.prio.no/
[6] http://www.cnbc.com/id/28600838
[7] http://en.rian.ru/russia/20080218/99490063.html
[8] http://www.newamerica.net/people/william_d_hartung
[9] http://www.fas.org/blog/ssp/2006/08/manpads_for_hezbollah.php
[10] http://www.reuters.com/article/worldNews/idUSTRE4AJ52B20081120

Wal-Mart’s Ruble Trouble

Friday, November 21st, 2008

Wal-Mart unexpectedly replaced its CEO on Friday, but things are looking up for the number 1 retailer as chastened American consumers rethink about those aspirational brands they’ve loved so long. Last week, the company posted a whopping 10 percent jump in profits [1], just as Starbucks [2] saw its same-store sales plummet 8 percent [3].

Besides cashing in on American consumer woes, in recent years much of Wal-Mart’s growth has come from overseas; indeed, incoming CEO Mike Duke has been in charge of Wal-Mart’s international operations. A decade ago, just 5 percent of its earnings came from abroad. Now, more than 40 percent of its stores are overseas. To be exact, they’re in 14 other countries where more than 50 million weekly visitors provide the Arkansas retailer with nearly a quarter of its sales [4]. Wal-Mart has had particular luck in Mexico, China (the source of much of Wal-Mart’s goods), and Latin America. The company is expanding in the larger markets, with more than 300 stores doing brisk business in Brazil and its first store in India early next year [5].

The glaring omission here is, of course, that backward R in BRIC [6]: Russia. For four years now, Wal-Mart has been actively—and secretly—scouting the Russian terrain, trying to find the best bucket to catch a sprinkling of petrodollars. But, after four years of jerking around Russian realtors, there are still no stores in sight. This summer, Wal-Mart announced that it had hired a German retail executive to head up Wal-Mart’s emerging markets division, with a scouting office in Moscow. Aside from that, however, Wal-Mart is keeping mum. “We continue to study the market” was the mysterious comment from Richard Coyle, the company’s senior director of international affairs.

Why the hesitation? Well, as you may have heard, Russia is a strange place, prone to unpredictable government intervention and hefty bribe-taking [7]. And if you want to build in Moscow, where nearly all of Russia’s new wealth is concentrated and spent, you’d better be prepared to pay. A lot. Unlike in California, skyrocketing prices there are no bubble.

So, let’s say you’re Wal-Mart [8], and you’ve managed to get a scrap of land. You’d quickly discover that there are all kinds of permits and papers needed to start building, but they’re hard to get, so, well, you’d have to come to a special-and pricey-understanding with the permit granters. When IKEA set up shop in Moscow in 2004, for instance, it fought with city authorities for months [9] over the building of an expressway ramp to its shopping center. The other way around it is to buy an existing chain-the strategy Wal-Mart pursued, to its resounding profit, in England (ASDA) and Japan (Seiyu). But retail is lucrative in Russia—the food market alone was estimated to be more than $140 billion last year—and it’s less than a decade old, so there aren’t many sellers just yet. An existing chain of 50 stores will now cost about $2 billion. It may seem like a bargain—Wal-Mart lobbied Tony Blair to allow its $14 billion deal [10] to go through, but ASDA was a ready-made, highly developed product. When Wal-Mart purchased it in 1999, the 50-year-old company was already Britain’s No. 2 retailer and had started mimicking Wal-Mart’s methods [11]. By contrast, Russian chains are still less than a decade old based on local, logistically fraught distribution chains.

Russian analysts estimate it will cost about $15 million to $20 million to build and stock each store. Unfortunately, Russian borders aren’t the most permeable. Often, authorities stop goods at the gate—say, goods coming from China—skim a little off the top, or just impound the whole lot without explanation or recourse. In 2006, for example, Russian customs agents seized 167,000 Motorola cell phones [12] and, after changing their reasons for doing so a few times, ground about 50,000 of them to a fine metallic powder. Also, the country is huge; even if those Chinese goods get into the country, the roads and railways spanning its 11 time zones are uneven at best and nonexistent at worst. (Don’t try to fly the goods, though, since Russian domestic flights tend to fall out of the sky with alarming frequency.) This matters a lot for Wal-Mart, since it has built its entire empire on big volumes of cheap goods from China coursing through a speedy, ultraefficient distribution network. Natalya Zagvozdina, a retail analyst with Renaissance Capital, puts Russia’s infrastructural readiness at somewhere near 25 percent. “And that’s probably a generous estimate,” she adds.

Then there’s the question of corporate culture. Wal-Mart has learned the hard way that it doesn’t always translate well. In 2006, it shuttered its operations in South Korea after a decade of incorrectly emphasizing dry goods when Koreans wanted food and beverages. In Germany, where Wal-Mart was already fighting an uphill battle in a very competitive market, it also faced problems of etiquette. Locals balked at other people bagging their groceries or smiling at them when they entered the store. (German men, apparently, thought they were being hit on [13].) It’s also not hard to foresee how a line in Wal-Mart’s employee manual stipulating that employees report rule-breaking would go over in Russia, a place where authority is a terrifying joke, interactions are highly personalized, and where ratting on someone is one of the gravest sins one can commit.

So that’s the bad news for Wal-Mart. The “good” news is the same as at home: The financial crisis has hit Russia, too. The Russian stock market has lost more than 70 percent of its valu [14]e this year and the construction industry is in crisis, as is the local credit market. Indeed, Wal-Mart may have some buying opportunities, because retail chains that have accumulated tremendous debt in the last few years are now finding it impossible to refinance. All of a sudden, properties that weren’t up for sale because they were still young and profitable—or that were going for $2 billion—now cost half what they did three months ago. (A hint from Russian investment bank Troika Dialog’s Anna Matveyeva: Buy a smaller chain that isn’t politically connected enough to fall back on the government for a bailout. There is, for example, Kopeika—or “kopek”—which already has almost 500 stores and about that many millions in debt.)

And remember: The Russian consumer is still itching to spend and is still woefully underserved, crisis and all. Assuming that one hypermarket—a grocery-department store hybrid—serves about 100,000 people, Russia needs 1,400 of them to serve the entire country; it has 150. (A decade ago, there were none at all.) And neither is the market empty: French retailer Auchan has smoothed the way [15] by hacking through some of Russia’s notoriously thick red tape and figuring out how to navigate such a coded place, so Wal-Mart doesn’t have to start from scratch.

For all the talk of nouveau Russians bathing in gold, there were only 33 billionaires before the crash. There are 140 million other Russians, whose per capita income was about $8,000. That’s why the Ford Focus—not the custom-trimmed Maybach—is the country’s most popular car. The average Russian is price-sensitive but also doesn’t save much, spending about 80 percent of their income-and they’re going to be even more cost-conscious now that their economy is on the rocks. “So far, the crisis hasn’t touched the Russian consumer,” says Zagvozdina. “It’s still a huge market with very fast growth, and, in the next five years, I don’t think Wal-Mart will be able to make do without Russia.”

And, she adds, Wal-Mart’s greeters might have a positive effect on Russia’s particular brand of customer service: “Maybe the clerks will have more normal reactions to shoppers instead of looking at them like they’re just random, annoying people milling about and demanding things.”

Source URL: http://www.thebigmoney.com/articles/number-1/2008/11/20/walmarts-ruble-trouble
Links:
[1] http://www.nytimes.com/2008/11/14/business/14shop.html
[2] http://www.thebigmoney.com/search/quotemedia/sbux
[3] http://www.marketwatch.com/news/story/starbucks-shares-fall-disappointing-results/story.aspx?guid={35253B39-43B9-4FBC-8260-E15E287D25B7}&dist=msr_25
[4] http://walmartstores.com/sites/AnnualReport/2008/docs/wal_mart_annual_report_2008.pdf
[5] http://www.hindustantimes.com/StoryPage/StoryPage.aspx?sectionName=&id=1066c5ce-7e08-4430-884e-62a641a59001&MatchID1=4857&TeamID1=1&TeamID2=5&MatchType1=1&SeriesID1=1224&PrimaryID=4857&Headline=Bharti Wal-Mart sticks to India plan
[6] http://en.wikipedia.org/wiki/BRIC
[7] http://www.forbes.com/feeds/afx/2008/07/27/afx5257689.html
[8] http://www.thebigmoney.com/search/quotemedia/wmt
[9] http://www.highbeam.com/doc/1P1-103470088.html
[10] http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/2783372/Wal-Mart-did-lobby-Blair-over-Asda.html
[11] http://www.managementtoday.co.uk/search/article/492390/mt-interview-allan-leighton/
[12] http://www.nytimes.com/2006/06/14/world/europe/14russia.html
[13] http://www.businessweek.com/magazine/content/05_15/b3928086_mz054.htm
[14] http://www.bloomberg.com/apps/quote?ticker=INDEXCF:IND
[15] http://www.iht.com/articles/2008/05/06/business/auchan.php

The Nose Cutting

Thursday, September 18th, 2008

There’s a saying oft heard in Russian schoolyards: “Go ahead and spit at me. Fill your mouth with shit and spit at me.” It may be an indelicate way of suggesting that one should cut off one’s nose to spite one’s face, but it provides some insight into why Russia’s economy, which grew by eight percent last year, has suddenly melted. The failures on Wall Street linked arms with falling oil prices to wallop a Russian market that, due to a combination of internal factors, had been sliding all summer. On Tuesday afternoon, trading on Russia’s two exchanges, the RTS and MICEX, was shut down after they plummeted 12 and 18 percent, respectively. Wednesday morning, weary Russian brokers gingerly tried their luck again, but after six and three percent downturns, the exchanges will remain shuttered till Friday.

A double digit loss is a devastating shock for any market, but Russia’s stock market has lost over half its value since the start of the year. In the first part of the year, investors were already jittery about the Kremlin’s meddling in the business world. And then things got really bad in August. Remember August? That was when Russia could not resist using Georgia’s attack on South Ossetia to retaliate with such force that the West could only marvel at Russia’s lack of discretion. When Putin responded to Western criticism, he was so defiant that Leonid Radzihovski, a columnist for the liberal online political journal Ezhednevny Zhurnal, characterized his government’s diplomatic position as: “If America wants it so much, let it come and make up with us.”

Putin gambled that it was worth taking the economic hit at home to reestablish Russia’s geopolitical stature. With oil prices in the triple digits, he surely figured, the blow would be well-cushioned; foreign investors would eventually calm down and realize they couldn’t live without Russia. And he had reason to believe it. Even though much of the growth was fueled by petrodollars, the Russian economy was slowly diversifying and strengthening. Russian wages and consumer spending were growing at over ten percent a year, construction and manufacturing boomed–everything was expanding so fast that even with an added risk premium (around three percent), foreign corporations’ Russian outposts were extremely profitable. “They can’t afford not to be here,” a Russian analyst told me two weeks ago.

The problem, however, is that Western investors got scared off by the extremity of the Kremlin’s response to Georgia, the harshness of American criticism, and the way domestic companies were being strong-armed even more than they had been for the last six years (metallurgical company Mechel lost a third of its value in one day this July when Putin trained his critical gaze on it). Investors decided that they could very much afford not to be there. “Doing business in Russia has never been for the faint of heart,” Alexander Kliment, an analyst with the Eurasia Group, told me this week. “But now investors are really starting to see the unpredictability of the Kremlin’s decision making.”

And here’s where things get really Russian: Though the Kremlin acted as if it wanted the West to shove off, what they really meant was, love us. We may despise you, but you still gotta love us. It’s a common Russian attitude towards the West, one of both contempt and envy that the analyst described as “the double-faced Janus.” As Radzihovski sarcastically put it, “We’re quite sure that the more we shit on their countries, governments, and the West in general, the greater will be their masochistic pleasure in crawling back on their bellies with their money. Having read Dostoyevsky, Western bankers will behave accordingly in the land of Dostoyevsky!”

Apparently, Western bankers didn’t get the joke, because in August alone, over $20 billion of foreign investment made for the hills, $7 billion of it in the first two days of the war alone. Scared to do business with such a reckless, unpredictable partner, investors had been closing ranks all summer, and Georgia only locked up their formation. The risk premium has spiked to nine percent, foreign banks stopped lending money to Russian companies–suddenly in dire need of it because all that foreign capital had fled–and foreign issuance dropped by over 85 percent since June. And then oil prices tanked, American brokerages folded (taking their foreign investments with them), and Russian companies, already cash-strapped, started looking around for money, putting in margin calls, borrowing at home, and forcing the Russian Central Bank to free up some $45 billion to pump into the market to keep it liquid. If the government doesn’t clean up its mess quickly and efficiently, it might be risking its own life. “The system is based on economic growth and rising living standards,” Kliment said. “If they drop, the wheels come off politically.”

Russia would have been hit by this crisis no matter what, but, had it not hobbled itself all summer, it would have met the downturn with a greater reserve of strength. Now, although the whole world is hurting, no other stock market is doing as badly as Russia’s. Take Brazil, another resource-rich emerging economy riddled with corruption. Its stock market is also in crisis–after an eight percent drop yesterday. But Brazil isn’t telling its neighbors to go do unprintable things; it’s strengthening trade deals with them and diversifying its energy sector. It isn’t going out of its way to beat its chest and attempt to instill fear it mistakes for respect. And, as a result, it didn’t take as big of a hit this week. But then again, Brazilian children probably don’t go around advocating shit-spit revenge either.putin1

Office Party

Monday, October 1st, 2007

Alexei, the improbably young, impossibly effervescent director of international and investor relations at Russia’s largest private bank, really likes the Moscow Marriott Grand Hotel. “It’s really great,” he says, nodding emphatically. “Everything is very convenient here, very convenient. Really great.” It’s practically the first thing he says to me after we shake hands. I notice the hotel’s inoffensive taupe marble, the surprisingly loud fountain in the lobby; Alexei notices its good organization. “I value efficiency,” he says, nodding emphatically.

This throws me off. How could someone raised in this comically disorganized country possibly value efficiency?

Alexei came of age when the Soviet economy had stagflated itself into absurdity. High oil prices in the ’70s created an artificial sense of growth and this, combined with Brezhnev’s standpat resistance to any reform, reinforced and exacerbated the inefficiency of the country’s command economy. Workers pilfered their workplaces for supplies they couldn’t find on store shelves. They took home rubbing alcohol and bolts; they took home meat meant for stuffing sausages. They took hours out of their workday to scavenge for groceries and, when Gorbachev cracked down on vodka production in 1985, for sugar to run their bathtub stills. People read newspapers at work; they knitted and read romance novels. People did everything, it seemed, but work. “We pretend to work, and you pretend to pay us,” the old saying went.

But the state did pay, diligently, dutifully, regardless of their workers’ performance and regardless of their value. It paid its engineers and its old ladies guarding the rooms of state museums; it paid its bus drivers and it paid its doctors, though it paid the latter significantly less. And, when the Soviet worker passed from a life of toil to a life of leisurely retirement, the state paid him his pension and life was good and there was no unemployment.

But then capitalism came and spoiled the arrangement. Now pensioners are out on the streets raging against their shrunken pensions, and their children are trying, at middle age, to adjust to the rat race of a brutal new economy. Their grandchildren, on the other hand, are thriving.

Since 2000, the Russian economy has been growing by some 6 percent every year. Most of that comes–once again–from ballooning oil prices, but whatever oil and gas money isn’t getting stashed in Swiss banks (and billions of it is) is rapidly cycling through Moscow’s economy, spawning new and legitimate businesses.

“It’s a generation of workaholics,” Anya Katyurovskaya, who writes for Kommersant, who writes for Vlast magazine, told me. “It’s not unusual nowadays to call someone at one or two in the morning and hear, ‘I’m still at the office.’ This was unheard of in our parents’ generation.”

For young Russian professionals, the corner-cutting employee of their parents’ generation has become an irrelevant and ridiculed bogeyman: the sovok. The term is a play on the Russian words for “Soviet” and “dustpan,” and sovoks are exactly that: stale curmudgeons.

“They work nine to six, no matter what,” 24- year-old Vladimir Zimovtsev explained to me when we met for a rushed lunch. “The easier their work day, the better. They’re going to get paid anyway, so the client is just an inconvenience. He takes away their time to read a magazine or a newspaper at work, and this inevitably comes out as anger toward the client.”

Vladimir, a highly paid sales planner at Toyota’s Moscow office, got his MBA in Strasbourg, France. When he came back to Moscow looking for a job, he applied exclusively to foreign companies.

“I didn’t want to work for anyone of the old Soviet mentality,” he said. “Everything in our office is done according to Western methods, 100 percent. I don’t know – and don’t want to know – anything else.”

It is a common attitude among young Muscovites. The new Russian professional speaks English, is comfortable with technology, and works weekends. Danila Oleolenko, who moved to Moscow from Novosibirsk after college in search of a career, works for Sovero Media, an independent Russian advertising agency. He is frequently away, crisscrossing the country supervising production and scouting locations for billboards and ads. At his suggestion, we met for dinner at Propaganda, a popular hangout. “I never cook anymore,” he says, cheerfully spooling pasta onto his fork. “I come here most nights after work. The food is good, and it’s a very good value.” By the time Danila extricates himself from his office and crawls home through Moscow traffic – “I spend most of my time at work or in the car,” he says – there isn’t much time or energy left to whip up a home-cooked meal. So Danila, who earns a comfortable salary, has begun making the same kinds of opportunity cost calculations as his American counterparts: His time is too valuable to waste on labor-intensive thrift. In a city where affordable restaurants are still a new phenomenon, and where, until recently, most people ate almost exclusively at home to save money, this analysis is new and conspicuously Western.

On my last trip to Moscow, I was surprised not only by young Russians’ punishing work ethic, but by their matter-of-fact, almost soldierly approach to their duties. No one complained. No one pinned her distended schedule to her chest like a medal. It was, quite simply, the way things had to be done. A friend who is an art director at a sports magazine once sent me an email from work at four in the morning with no explanation. This was just his weekly routine, the mad rush to close the week’s issue, and there was no point grumbling about it. Ayshat Zulumhanova, a 21-year-old account manager at a prestigious advertising firm, says her job is very stressful and the hours are long. “On a light day, I could be there nine to six, or I could stay till one or two, or even four in the morning.” But, she hastens to add, no one is monitoring your hours. You choose to stay. The point is to get your work done rather than to put in face time for the boss. “It’s an honor system,” she says. “You stay till you finish your project, and when you’re done, your work is evaluated on its merits. The system of evaluation is very honest – it’s pointless to cheat.”

It’s pointless to cheat in part because there is so much opportunity, especially in industries like magazine publishing, financial services, advertising and marketing. These fields never existed in the Soviet Union, so when it collapsed, Ayshat’s generation found itself in a vacuum, “building their businesses from scratch,” as Stephen Jennings, CEO of Renaissance Capital, told a conference of investors last year. This generation’s parents did not know how to manage a portfolio or put out a fashion magazine–and they were too busy keeping their families afloat during the chaos of the ’90s–so their children had to step in instead. Kostya Penkov, who at age 30 was named editor-in-chief of the Russian edition of Men’s Fitness (it folded in 2005), recalled the launch of Playboy in Russia in 1993. “We didn’t have publishing software, just this moveable metal type,” he said. “Even better, we only had Latin characters, but the magazine, of course, was in Russian. So we had wrack our brains coming up with Cyrillic headlines that we could spell out using Latin letters.”

The result of Russia’s opening is that resource-based companies, like natural-gas giant Gazprom, tend to have an older managerial class. The same is true for professions like law and medicine, where experience adds value. In the new economy – media, advertising, finance – the average employee is 20 years younger. At ArkConnect, Ayshat’s agency, for example, the business side is run almost exclusively by women under 35.

“In the West, an ambitious college graduate is competing with someone his parents’ age who is just as ambitious, just as hard-working but who also has 20 years of relevant experience,” Rem Petrov, the publisher of InStyle in Russia, told me. “In Moscow, young twenty- and thirtysomethings are more ambitious, have better communication skills; they work better and harder. They a have a significant competitive edge over their parents.” Petrov, it seems, is one of the few middle-aged people in media who can still compete.

Young Muscovites, then, are vying mostly with each other, and they do it in ways and settings that are increasingly similar to those in the West. They work in friendly, open spaces, a change from the old Soviet workplace of unwelcoming, closed-door offices or crowded, noisy rooms. The offices of the Russian Internet giant Yandex, for example, are airy and colorful, laid out with lots of common space and good humor. There’s a stage for talent shows and the two halves of a conference room that can be divided with an accordion wall are called “GDR” and “BRD”. Vladimir, the Toyota employee, sees a positive development in this. “In the Soviet Union, people sat in their little offices and no one knew or cared about what was going on. There was no information flow,” he says. “Now, where I work, no one has an office but the CEO. Everyone sits together. We are constantly discussing ideas and making decisions as a group. You feel like you’re part of a team, that the business actually depends on you. You’re invested in it.”

This psychological investment is instantly apparent. Young Muscovites make an effort to dress well for work. And, now that the novelty of available consumer goods have worn off, Moscow yuppies dress with subtlety and taste, abandoning the gaudy burgundy club jackets that, in the new Russia of the ’90s, connoted luxury. “I’m usually meeting with businesspeople in their 30s and 40s, so I have to look professional,” Slava Pospelov told me. At 26, Slava is a marketing manager at Ochakovo, a Russian beer company. “Your appearance takes care of 50 percent of anyone’s questions, so I try to look good. I wear nice Italian shirts, nice shoes.” He says that at his office, you can always spot the sovoks. “They’re the ones wearing old shirts and synthetic ties, and you know just by looking at them that they just don’t give a shit about anything.”

One can’t help but smell a kind of idealism in these conversations, a certain hard-nosed belief in meritocracy. It surpasses a desire to simply mimic the West. The goal, once again, is to catch and overtake. The young Russians working in these new industries seem to be in overdrive, both in terms of how hard they work, and in their faith in the fairness of the market. (One can imagine an Olympic competition in office sports between the lackadaisical Americans and the disciplined, ruthlessly trained Russians.) Vladimir, for one, already thinks Russia has overtaken Western Europe. “When I was in France, I saw lots of things we do better than them,” he told me. “Why are their banks closed on Mondays, for example? Why do they have a 35-hour work week?” He has a ready answer: “Because they work to live, and we live to work.”

Perhaps their zeal and their conscientious approach to work is not just a reaction to the old system, but a reaction to the current one. At the investor’s conference, Stephen Jennings spoke of the contradictory “dialectic” of the Russian economy. He praised the new generation as “modern, efficient, effective and honest,” but lamented the hyper-centralization of the state, which breeds “inefficiency, stalled reform, corruption and a serious decline of economic and social infrastructure.” Despite Putin’s recent announcement that he is launching a crusade against corruption, life in Moscow is checked at every turn by its countless manifestations: traffic cops who pull you over just to collect a bribe, say, or real estate prices inflated by the kickbacks the developer has to pay to get the building permit. In a society so choked with corruption, so unpredictable and highly personalized, any measure of objectivity and the sense of control it must bring must be very reassuring.

Then again, the youthful zeal could be, more simply, homage to the hand that feeds you. After all, these buzzwords and sharp clothes ultimately pay for cars and vacations in Vietnam and all the other Western luxuries that this generation’s parents couldn’t have. Whatever the reason, Moscow’s new corporate culture breeds optimism and self-assurance, and, of course, gibes at the poor old sovok left in the dust.

“They don’t dress well, they don’t speak English, they approach everything with this old Soviet attitude that everyone owes them something–they aren’t assets,” Alexei told me over lunch at the Marriott, peppering his speech with English “sorrys” for emphasis. “I mean, no offense, but sorry! They just aren’t.”

He paused to spear a forkful of lox, then added, “Thank God I never worked a day in the Soviet Union. It’s a good thing, because I didn’t respect the business culture at the time. I mean, no offense to that generation and all they’ve accomplished, but thank God! I mean, sorry, but it was a very strange country.”