Cyclopedia Of Economics

Space Industry (in East Europe)

The recent (December 2005) spate of news about Russia's space program was decidedly mixed. According to Space News, the 17-country European Space Agency (ESA) declined to participate in Russia's $60 million, two-year Clipper manned and winged space vehicle program, a touted alternative to NASA's Crew Exploration Vehicle.

With an anual budget of $800 million, the Russian Federal Space Agency sought to minimize the importance of this surprising turnabout. In a press conference, Nikolay Sevastiyanov, President of the Russian aerospace contractor RSC-Energia, said: "We're starting to design this new transportation system to support the International Space Station (ISS) once it's complete." A space tug, dubbed Parom, will tow the Clipper to the ISS.

But this is not the whole truth. The Clipper - a combined crew and cargo vehicle - is at the heart of Russia's renewed attempt to land crafts on the moon and on Mars.

The Clipper is the culmination of a decade of research, development, and geopolitical maneuvering, involving many other elements.

Consider the "Volga". It is the name of a new liquid-fueled retrievable and reusable (up to 50 times) booster-rocket engine. It will be built by two Russian missile manufacturers for a consortium of French, German, and Swedish aerospace firms. ESA - the European Space Agency - intends to invest 1 billion euros over 10-15 years in this new toy. This is a negligible sum in an $80 billion a year market.

Russian rockets, such as the Soyuz U and Tsiklon, have been launching satellites to orbit for decades now and not only for the Russian defense ministry, their erstwhile exclusive client. Communications satellites, such as Gonets D1 ("Courier" or "Messenger"), and other commercial loads are gradually overtaking their military observation, navigation, and communications brethren. The Strategic Rocket Forces alone have earned more than $100 million from commercial launches between 1997-9, reports "Kommersant", the Russian business daily.

Still, many civilian satellites are not much more than stripped military bodices. Commercial operators and Rosaviakosmos (Russia's NASA) report to the newly re-established (June 2001) Russian Military Space Forces. Technology gained in collaborative efforts with the West is immediately transferred to the military.

Russia is worried by America's lead in space. The USA has 600 satellites to Russia's 100 (mostly obsolete) birds, according to space.com. The revival of US plans for an anti-missile shield and the imminent, unilateral, and inevitable American withdrawal from the Anti-Ballistic Missile Treaty add urgency to Russian scrambling to catch up.

Despite well-publicized setbacks - such as the ominous crash at Baikonur in Kazakhstan in July 1999 - Russian launchers are among the most reliable there are. Fifty-seven of 59 launch attempts were successful last year. By comparison, in 1963, only 55 out of 70 launch attempts met the same happy fate.

American aerospace multinationals closely collaborate with Rosaviakosmos. Boeing maintains a design office in Russia to monitor joint projects such as the commercial launch pad Sea Launch and the ISS. It employs hundreds of Russian professionals in and out of Russia.

There is also an emerging collaboration with the European Aeronautic Defense and Space (EADS) company as well as with Arianespace, the French group. A common launch pad is taking shape in Kourou and the Soyuz is now co-owned by Russians and Europeans through Starsem, a joint venture. Russia also intends to participate in the hitherto dormant European RLV (Reusable Launch Vehicle) project.

The EU's decision, in the 2002 Barcelona summit, to give "Galileo" the go ahead, would require close cooperation with Russia. "Galileo" is a $3 billion European equivalent of the American GPS network of satellites. It will most likely incorporate Russian technology, use Russian launch facilities, and employ Russian engineers.

This collaboration may well revive Russia's impoverished and, therefore, moribund space program with an infusion of more than $2 billion over the next decade.

But America and Europe are not the only ones queuing at Russia's doorstep.

Stratfor, the Strategic Forecasting firm, reported about a deal concluded in May 2001 between the Australian Ministry of Industry, Science and Resources and the Russian Aviation and Space Agency. Australian companies were granted exclusive rights to use the Russian Aurora rocket outside Russia. In return, Russia will gain access to the ideally located launch site at Christmas Island in the Indian Ocean. This is a direct blow to competitors such as India, South Korea, Japan, China, and Brazil.

Russian launch technology is very advanced and inexpensive, being based, as it is, on existing military R&D. It has been licensed to other space-aspiring countries. India's troubled Geosynchronous Satellite Launch Vehicle (GSLV) is based on Russian technology, reports Stratfor. Many private satellite launching firms - Australian and others - find Russian offerings commercially irresistible. Russia - unlike the US - places no restrictions on the types of load launched to space with its rockets.

Still, launch technologies are simple matters. Until 1995, Russia launched more loads annually than the rest of the world combined - despite its depleted budget (less than Brazil's). But Russia's space shuttle program, the Energia-Buran, was its last big investment in R&D. It was put to rest in 1988. Perhaps as a result, Russia failed dismally to deliver on its end of the $660 million ISS bargain with NASA. This has cost NASA well over $3 billion in re-planning.

The living quarters of the International Space Station (ISS), codenamed "Zvezda", launched two years late, failed to meet the onerous quality criteria of the Americans. It is noisy and inadequately protected against meteorites, reported "The Economist". Russia continues to supply the astronauts and has just launched from Baikonur a Progress M1-8 cargo ship with 2.4 tons of food, fuel, water, and oxygen.

The dark side of Russia's space industry is its sales of missile technology to failed and rogue states throughout the world.

Timothy McCarthy and Victor Mizin of the U.S. Center for Nonproliferation Studies wrote in the "International Herald Tribune in November 2001:

"[U.S. policy to date] leaves unsolved the key structural problem that contributes to illegal sales: over-capacity in the Russian missile and space industry and the inability or unwillingness of Moscow to do anything about it ... There is simply too much industry [in Russia] chasing too few legitimate dollars, rubles or euros. [Downsizing] and restructuring must be a major part of any initiative that seeks to stop Russian missile firms from selling 'excess production' to those who should not have them."

The official space industry has little choice but to resort to missile proliferation for its survival. The Russian domestic market is inefficient, technologically backward, and lacks venture capital. It is thus unable to foster innovation and reward innovators in the space industry. Its biggest clients - government and budget-funded agencies - rarely pay or pay late. Prices for space-related services do not reflect market realities.

According to fas.org's comprehensive survey of the Russian space industry, investment in replacement of capital assets deteriorated from 9 percent in 1998 to 0.5 percent in 1994. In the same period, costs of materials shot up 382 times, cost of hardware services went up by 172 times, while labour costs increased 82-fold. The average salary in the space industry, once a multiple of the Russian average wage, has now fallen beneath it. The resulting brain drain was crippling. More than 35 percent of all workers left - and more than half of all the experts.

Private firms are doing somewhat better, though. A Russian company unveiled, in March 2002, a reusable vehicle for space tourism. The ticket price - $100,000 for a 3-minutes trip. One hundred tickets were already sold. The mock-up was exposed to the public in a Russian air base.

As opposed to grandiosity-stricken Russia, Kazakhstan has few pretensions to being anything but a convenient launching pad. It reluctantly rents out Baikonur, its main site, to Russia for an $115 million a year. Russia pays late, reports accidents even later, and pollutes the area frequently. Baikonur is only one of a few civilian launch sites (Kapustin Yar, Plesetsk). It is supposed to be abandoned by Russia in favor of Svobodny, a new (1997) site.

Kazakhstan expressed interest in a Russian-Kazakh-Ukrainian carrier rocket, the Sodruzhestvo. It is even budgeted for in the Russian-Kazakh space program budget 2000-2005. But both the Russians and the Ukrainians were unable to cough up the necessary funds and the project was put on indefinite hold.

Umirzak Sultangazin, the head of the Kazakh Institute for Space Research, complained bitterly in an interview he granted last year to the Russian-language "Karavan":

"Our own satellite is an dire need. So far, we are using data "received" from US and Russian satellites. Some information we use is free, but we have to pay for certain others ... We have high-class specialists but they are leaving the institute for commercial structures because they are offered several times bigger salaries. I have many times raised this question and said: Look, Russia pays us not a small amount to lease Baykonur [some 115m dollars a year], why should we not spend part of this money on space research? We could have developed the space sector and become a real space power."

Kazakhstan has its own earth profiling program administered by its own cosmonauts. It runs biological and physical experiments in orbit. The "tokhtar" is a potato developed in space and named after Kazakhstan's first astronaut, the eponymous Tokhtar Aubakirov.

Almost all the former satellites of the USSR have established their own space programs after they broke away, vowing never again to be dependent on foreign good will. Romania founded ROSA, the Romanian Space Agency in 1991. Hungary created the Hungarian Space Office.

The Baltic states - to the vocal dismay of many of their citizens - work closely with NATO on military applications of satellites within the framework of BALTNET (the Baltic air space control project). Poland (1994), Hungary (1991), Romania (1992) and the Czech Republic have been cooperating with ESA on a variety of space-related commercial and civil projects.

Ukraine hedges its bets. It signed with Brazil a space industry bilateral accord in January. A month later it signed five bilateral agreements regarding the space industry with Russia.

Many Western academic institutions, NGO's, and commercial interests created frameworks for collaboration with space scientists from Central Asia, Central and Eastern Europe, Russia, CIS, and NIS. The University of Maryland pioneered this trend with its East-West Space Science Center, formed in 1990.

The space industry - and particularly the emerging field of launch technologies - represents one of the few areas in which the former communist countries may retain a competitive edge and a relative advantage. The West would do well to encourage the commercialization of this knowledge. The alternative is proliferation of missile technologies and military applications of technology transferred within collaborative efforts on civilian projects with Western partners. The West can save itself a lot of money and heartache by being generous early on.

Spam

Tennessee resident K. C. "Khan" Smith owes the internet service provider EarthLink $24 million. According to the CNN, in August 2001 he was slapped with a lawsuit accusing him of violating federal and state Racketeering Influenced and Corrupt Organizations (RICO) statutes, the federal Computer Fraud and Abuse Act of 1984, the federal Electronic Communications Privacy Act of 1986 and numerous other state laws. On July 19, 2002 - having failed to appear in court - the judge ruled against him. Mr. Smith is a spammer.

Brightmail, a vendor of e-mail filters and anti-spam applications warned that close to 5 million spam "attacks" or "bursts" occurred in June 2002 and that spam has mushroomed 450 percent since June 2001. This pace continued unabated well into the beginning of 2004 when the introduction of spam filters began to take effect. PC World concurs.

Between one half and three quarters of all e-mail messages are spam or UCE (Unsolicited Commercial Email) - unsolicited and intrusive commercial ads, mostly concerned with sex, scams, get rich quick schemes, financial services and products, and health articles of dubious provenance. The messages are sent from spoofed or fake e-mail addresses. Some spammers hack into unsecured servers - mainly in China and Korea - to relay their missives anonymously.

Starting in 2003, malicious hackers began using spam to install malware - such as viruses, adware, spyware, and Trojans - on the unprotected personal computers of less savvy users. They thus transform these computers into "zombies", organize them into spam-spewing "bots" (networks), and sell access to them to criminals on penumbral boards and forums all over the Net.

Spam is an industry. Mass e-mailers maintain lists of e-mail addresses, often "harvested" by spamware bots - specialized computer applications - from Web sites. These lists are rented out or sold to marketers who use bulk mail services. They come cheap - c. $100 for 10 million addresses. Bulk mailers provide servers and bandwidth, charging c. $300 per million messages sent.

As spam recipients become more inured, ISPs less tolerant, and both more litigious - spammers multiply their efforts in order to maintain the same response rate. Spam works. It is not universally unwanted - which makes it tricky to outlaw. It elicits between 0.1 and 1 percent in positive follow ups, depending on the message. Many messages now include HTML, JavaScript, and ActiveX coding and thus resemble (or actually contain) viruses and Trojans.

Jupiter Media Matrix predicted in 2001 that the number of spam messages annually received by a typical Internet user will double to 1400 and spending on legitimate e-mail marketing will reach $9.4 billion by 2006 - compared to $1 billion in 2001. Forrester Research pegs the number at $4.8 billion in 2003.

More than 2.3-5 billion spam messages are sent daily. eMarketer puts the figures a lot lower at 76 billion messages in 2002. By 2006, daily spam output will soar to c. 15 billion missives, says Radicati Group. Jupiter projects a more modest 268 billion annual messages this year (2005). An average communication costs the spammer 0.00032 cents.

PC World quotes the European Union as pegging the bandwidth costs of spam worldwide in 2002 at $8-10 billion annually. Other damages include server crashes, time spent purging unwanted messages, lower productivity, aggravation, and increased cost of Internet access.

Inevitably, the spam industry gave rise to an anti-spam industry. According to a Radicati Group report titled "Anti-virus, anti-spam, and content filtering market trends 2002-2006", anti-spam revenues were projected to exceed $88 million in 2002 - and more than double by 2006. List blockers, report and complaint generators, advocacy groups, registers of known spammers, and spam filters all proliferate. The Wall Street Journal reported in its June 25, 2002 issue about a resurgence of anti-spam startups financed by eager venture capital.

ISPs are bent on preventing abuse - reported by victims - by expunging the accounts of spammers. But the latter simply switch ISPs or sign on with free services like Hotmail and Yahoo! Barriers to entry are getting lower by the day as the costs of hardware, software, and communications plummet.

The use of e-mail and broadband connections by the general population is spreading. Hundreds of thousands of technologically-savvy operators have joined the market in the last five years, as the dotcom bubble burst. Still, Steve Linford of the UK-based Spamhaus.org insists that most spam emanates from c. 80 large operators.

Now, according to Jupiter Media, ISPs and portals are poised to begin to charge advertisers in a tier-based system, replete with premium services. Writing back in 1998, Bill Gates described a solution also espoused by Esther Dyson, chair of the Electronic Frontier Foundation:

"As I first described in my book 'The Road Ahead' in 1995, I expect that eventually you'll be paid to read unsolicited e-mail. You'll tell your e-mail program to discard all unsolicited messages that don't offer an amount of money that you'll choose. If you open a paid message and discover it's from a long-lost friend or somebody else who has a legitimate reason to contact you, you'll be able to cancel the payment. Otherwise, you'll be paid for your time."

Subscribers may not be appreciative of the joint ventures between gatekeepers and inbox clutterers. Moreover, dominant ISPs, such as AT&T and PSINet have recurrently been accused of knowingly collaborating with spammers. ISPs rely on the data traffic that spam generates for their revenues in an ever-harsher business environment.

The Financial Times and others described how WorldCom refuses to ban the sale of spamware over its network, claiming that it does not regulate content. When "pink" (the color of canned spam) contracts came to light, the implicated ISPs blame the whole affair on rogue employees.

PC World begs to differ:

"Ronnie Scelson, a self-described spammer who signed such a contract with PSInet, (says) that backbone providers are more than happy to do business with bulk e-mailers. 'I've signed up with the biggest 50 carriers two or three times', says Scelson ... The Louisiana-based spammer claims to send 84 million commercial e-mail messages a day over his three 45-megabit-per-second DS3 circuits. 'If you were getting $40,000 a month for each circuit', Scelson asks, 'would you want to shut me down?'"

The line between permission-based or "opt-in" e-mail marketing and spam is getting thinner by the day. Some list resellers guarantee the consensual nature of their wares. According to the Direct Marketing Association's guidelines, quoted by PC World, not responding to an unsolicited e-mail amounts to "opting-in" - a marketing strategy known as "opting out". Most experts, though, strongly urge spam victims not to respond to spammers, lest their e-mail address is confirmed.

But spam is crossing technological boundaries. Japan has just legislated against wireless SMS spam targeted at hapless mobile phone users. Many states in the USA as well as the European parliament have followed suit. Ideas regarding a "do not spam" list akin to the "do not call" list in telemarketing have been floated. Mobile phone users will place their phone numbers on the list to avoid receiving UCE (spam). Email subscribers enjoy the benefits of a similar list under the CAN-Spam Act of 2003.

Expensive and slow connections make mobile phone spam and spim (instant messaging spam) particularly resented. Still, according to Britain's Mobile Channel, a mobile advertising company quoted by "The Economist", SMS advertising - a novelty - attracts a 10-20 percent response rate - compared to direct mail's 1-3 percent.

Net identification systems - like Microsoft's Passport and the one proposed by Liberty Alliance - will make it even easier for marketers to target prospects.

The reaction to spam can be described only as mass hysteria. Reporting someone as a spammer - even when he is not - has become a favorite pastime of vengeful, self-appointed, vigilante "cyber-cops". Perfectly legitimate, opt-in, email marketing businesses and discussion forums often find themselves in one or more black lists - their reputation and business ruined.

In January 2002, CMGI-owned Yesmail was awarded a temporary restraining order against MAPS - Mail Abuse Prevention System - forbidding it to place the reputable e-mail marketer on its Real-time Blackhole list. The case was settled out of court.

Harris Interactive, a large online opinion polling company, sued not only MAPS, but ISPs who blocked its email messages when it found itself included in MAPS' Blackhole. Their CEO accused one of their competitors for the allegations that led to Harris' inclusion in the list.

Coupled with other pernicious phenomena - such as viruses, Trojans, and spyware - the very foundation of the Internet as a fun, relatively safe, mode of communication and data acquisition is at stake.

Spammers, it emerges, have their own organizations. NOIC - the National Organization of Internet Commerce threatened to post to its Web site the e-mail addresses of millions of AOL members. AOL has aggressive anti-spamming policies. "AOL is blocking bulk email because it wants the advertising revenues for itself (by selling pop-up ads)" the president of NOIC, Damien Melle, complained to CNET.

Spam is a classic "free rider" problem. For any given individual, the cost of blocking a spammer far outweighs the benefits. It is cheaper and easier to hit the "delete" key. Individuals, therefore, prefer to let others do the job and enjoy the outcome - the public good of a spam-free Internet. They cannot be left out of the benefits of such an aftermath - public goods are, by definition, "non-excludable". Nor is a public good diminished by a growing number of "non-rival" users.

Such a situation resembles a market failure and requires government intervention through legislation and enforcement. The FTC - the US Federal Trade Commission - has taken legal action against more than 100 spammers for promoting scams and fraudulent goods and services.

"Project Mailbox" is an anti-spam collaboration between American law enforcement agencies and the private sector. Non government organizations have entered the fray, as have lobbying groups, such as CAUCE - the Coalition Against Unsolicited Commercial E-mail.

But, a few recent anti-spam and anti-spyware Acts notwithstanding, Congress is curiously reluctant to enact stringent laws against spam. Reasons cited are free speech, limits on state powers to regulate commerce, avoiding unfair restrictions on trade, and the interests of small business. The courts equivocate as well. In some cases - e.g., Missouri vs. American Blast Fax - US courts found "that the provision prohibiting the sending of unsolicited advertisements is unconstitutional".

According to Spamlaws.com,  the 107th Congress, for instance, discussed these laws but never enacted them:

Unsolicited Commercial Electronic Mail Act of 2001 (H.R. 95), Wireless Telephone Spam Protection Act (H.R. 113), Anti-Spamming Act of 2001 (H.R. 718), Anti-Spamming Act of 2001 (H.R. 1017), Who Is E-Mailing Our Kids Act (H.R. 1846), Protect Children From E-Mail Smut Act of 2001 (H.R.  2472), Netizens Protection Act of 2001 (H.R. 3146), "CAN SPAM" Act of 2001 (S. 630).

Anti-spam laws fared no better in the 106th Congress. Some of the states have picked up the slack. Arkansas, California, Colorado, Connecticut, Delaware, Idaho, Illinois, Iowa, Kansas, Louisiana, Maryland, Minnesota, Missouri, Nevada, North Carolina, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Tennessee, Utah, Virginia, Washington, West Virginia, and Wisconsin.

The situation is no better across the pond. The European parliament decided in 2001 to allow each member country to enact its own spam laws, thus avoiding a continent-wide directive and directly confronting the communications ministers of the union. Paradoxically, it also decided, in March 2002, to restrict SMS spam. Confusion clearly reigns. Finally, in May 2002, it adopted strong anti-spam provisions as part of a Directive on Data Protection.

Responding to this unfavorable legal environment, spam is relocating to developing countries, such as Malaysia, Nepal, and Nigeria. In a May 2005 report, the OECD (Organization for Economic Cooperation and Development) warned that these countries lack the technical know-how and financial resources (let alone the will) to combat spam. Their users, anyhow deprived of bandwidth, endure, as a result, a less reliable service and an intermittent access to the Internet;

"Spam is a much more serious issue in developing countries...as it is a heavy drain on resources that are scarcer and costlier in developing countries than elsewhere" - writes the report's author, Suresh Ramasubramanian, an OECD advisor and postmaster for Outblaze.com.

ISPs, spam monitoring services, and governments in the rich industrialized world react by placing entire countries - such as Macedonia and Costa Rica - on black lists and, thus denying access to their users en bloc.

International collaboration against the looming destruction of the Internet by crime organizations is budding. The FTC had just announced that it will work with its counterparts abroad to cut zombie computers off the network. A welcome step - but about three years late. Spammers the world over are still six steps ahead and are having the upper hand.

Steel Industry

The recent steel spat between the USA and, among others, the EU, is a classic case of suicidal protectionism. American steel producers ended up imposing quotas and tariffs on manufacturers they have only recently purchased in central and eastern Europe.

The battle is far from over. US producers of oil country tubular goods have just applied for relief under the infamous section 201. They blame Ukraine and Romania - as well as 11 other countries - of dumping. They demand to apply duties at the border on this steel product, so as to restore fairness and "equilibrium" to the market.

Last month Bush imposed tariffs of up to 30 percent in the first year of the new regime on $8 billion of steel imports, mainly from Europe, South Korea, and Japan. This is about one tenth of the global market. The tariffs are scheduled to decline to 24 percent in the second year and 18 percent in the third. Both Europe and Japan are challenging these measures in the WTO.

Bush was fiercely chastised for his decision by free-traders and economic liberals the world over. Many believe that this is merely the opening shot in an all-encompassing trade war. They fear a 1930's-style world depression.

The administration has already backtracked. It promised to consider more than 1000 requests to exclude up to $1 billion in steel imports from the tariffs. The gaffe-prone US Treasury Secretary, Paul O'Neill, said that this is done in order to reduce the "shrillness" of the conversation. More likely, it is aimed to prevent the emergence of an anti-American trade coalition.

One of the chief complainants to the American administration is US Steel, the largest American producer, now that LTV, National Steel, and Bethlehem Steel went bust.

The absurd is that US Steel is a major European steel producer as well. Two years ago it has purchased the continent's second largest steel mill, VSZ, in Kosice, Slovakia. It paid over $60 million in cash, assumed more than $320 million in obligations and agreed to invest c. $700 million in plant over a ten year period.

This was no small acquisition. VSZ has a capacity of 4 million tons (and a production run of 3.4 million tons) - to US Steel's 13 million tons. Next year, the Slovak factory will be upgraded with new tin-plate steel facilities and an automotive-grade galvanized steel line. This will boost its annual production by 15 percent.

Last year, US Steel lost $62 per every domestically produced ton. US Steel Kosice (USSK) made a profit of $55 per ton. USSK plans to purchase still mills in the Czech Republic as well. No wonder other American companies - such as Harsco - were drawn to invest in eastern Slovakia.

Non-American firms were slow to react to the American takeover of the European steel industry. The only notable acquisition was by LNM, the world's fourth-largest steelmaker. It purchased the Romanian Sidex, a loss leader with 28,000 workers. Its bid was backed by Britain's prime minister, Tony Blair, in a now-notorious letter to the Romanian government.

The unilateral slapping of tariffs by their biggest market - the EU - threw central European producers into disarray. Hungarian Radio announced that Hungary will impose import restrictions later this month "to protect the domestic steel industry and market". The EU was likely to institute import barriers against cheap Hungarian steel as well.

According to the April issue of "Rzeczpospolita", the Deputy Minister of Economy, Janusz Kaczurba, threatened to introduce import restrictions on foreign producers, if they attempt to bring the surplus of their steel output to Poland." His posturing was aimed mainly at Russian mills, now somewhat deprived on both the American and the EU markets.

Poland epitomizes the dilemma facing central European countries in the wake of the American action.

Exports from central and eastern Europe to the USA will not be adversely affected. Actually, they may yet increase. But steel imports to the region may explode. It is thus forced into protectionism by the hasty moves of other, much larger, market players.

Polish exporters are damaged by any European retaliatory move. Poland is the third largest steel exporter to the EU, after Russia and Turkey. The BBC reported that the Polish press quoted  Polish experts in Brussels as:

"(Warning) that the EU protective measures (safeguard quotas and tariffs of up to 26 percent) may hit Polish exporters arguing that the import quotas will require exporters to implement swift and precise administrative procedures to win a chunk from the overall import pool which is to be distributed on a "first come, first serve" basis. They also warned that Polish steel exporters could be pushed out from the EU market by more aggressive rivals, such as South Korean steel concerns, that could offer more attractive commercial terms."

Poland is going through an agonized restructuring of its inefficient steel mills. The government actually pays these decrepit and rusty plants to phase out their production over a few years. EU competition policy officials have lodged vocal - and often petty - objections to the aid the Polish government plans to provide to the consolidating steel industry. Poland will submit a revamped plan to Brussels by April 20.

The US also spared other niche players, such as Slovenia. This tiny country's steel industry, geared to the needs of the now-defunct Yugoslav Federation, has dwindled from 15,000 workers to less than 4000 workers, according to the Financial Times. What's left of "Slovenske Zelazarne" will likely be privatized this year. Smaller steel mills have already been sold to Swedish and other European investors.

"Vecer", a Macedonian daily, estimated that the measures and countermeasures in the latest trade conflict will have no serious effect on Macedonian producers such as Makstil, and Balkanstil. The paper noted that the USA has exempted developing countries, members of the WTO, with less than 3 percent of the American market.

Countries like Macedonia and Poland may even see their exports to the US increase at the expense of larger fish. According to "Plus Biznesu", Poland, for instance, is allowed, under WTO regulations, to export up to 850,000 tons of steel products to the American market. It currently exports less than one eighth of this quantity.

"Vecer" expects Macedonia to negotiate a bilateral compromise with the USA. Macedonian exports to the EU are also sheltered under the Stabilization and Association Agreement signed last year. Most of Macedonia's $120 million in annual steel exports go to the EU.

Even Russian exports to the US will go largely untouched. No tariffs were imposed on the first 5.4 million tons of slab steel. Imports from Russia constitute one quarter of this tariff-free quota. Kasyanov, the Russian premier, went as far as supporting the American move. Quoted by Radio Free Europe/Radio Liberty, he said:

"One should not regard this [U.S. decision] as a step towards a trade war with anyone ... It is the right of any country. If there was a difficult situation with certain imports in the Russian Federation that would jeopardize a whole industry, I would not exclude the possibility of taking similar measures, in accordance with our laws ... Nevertheless, as I have already pointed out, the negative effect is evident."

The steel industry in central and eastern Europe is in dire straits. Over-capacity may have been exacerbated by massive investments enthusiastically promoted by multilateral financial institutions such as the EBRD.

The European Bank for Reconstruction and Development invested hundreds of millions of dollars since its inception in steel production from Kazakhstan to Macedonia. It awarded a $25 million revolving credit line to a privatized Ukrainian mill. The ill-timed loan was intended to help the plant increase its exports and penetrate new markets.

Another $100 million were lent to Sidex, the recently privatized Romanian producer. These funds are intended to help it reduce emissions. Magnitogorsk Iron and Steel Works in Russia received $105 million. The investment in Kazakhstan is envisaged at c. $400 million. Similar investments were made in Hungary.

The result is a glut of production capacity in some categories - mainly long and flat steel, rolled aluminum, and semi-fabricated copper.

Other desperate steel mills throughout the region are being nationalized.

The Czech daily, "Mlada Fronta Dnes" reports that the Vitkovice Steel Company was sold to Osinek, a subsidiary of the National Property Fund (FNM). Osinek was preferred to the likes of US Steel, Shiran (from Israel), and Trinec Iron Works. The state vouched to privatize the mill - but only in a package with Nova Hut, another tottering steel plant in Ostrava.

In Poland, the Treasury Ministry - in cahoots with a consortium of five banks - had to bail out Huta Katowice. One third of the mill's debt was written off and the Polish state issued bonds to guarantee the rest. HK will now be consolidated with other crumbling steel assets to form a holding company, Polskie Huty Stali.

While the manufacturing side of the business is being vigorously privatized and modernized - mining, smelting, and fabrication are still technologically backward and state-owned. According to Adam Stobart in his presentation to the Adam Smith Conference in Vienna in August 2000 - the main problem is developing and capturing markets. Central and eastern Europe has become a net importer from Western Europe of many steel products.

The old sales strategies in captive domestic and east European markets no longer work. Competition from Western Europe and Asia is awesome. Consumers - including branches of multinationals - have become more sophisticated and demanding. Some manufacturers adapted - but the majority haven't.

Stobart enumerates the advantages of steel producers in central and eastern Europe: good location, low labour costs, skilled labour and "enthusiastic managers", growing domestic markets, customers that are keen to buy locally. Will these be translated into a dominant market share? Not if free trade is thwarted by blatant politicking and rampant protectionism.

Stock Exchange, Macedonian and Regional (Balkans)

The Macedonian Stock Exchange (MSE) is not operating successfully. True, some of the parameters which we use to measure the success of a stock exchange have lately improved in the MSE. For instance, the monthly money volume has increased together with the number of transactions. But this is a far cry from success.

Who is to blame? Is the current management of the MSE incompetent?

I do not think so. Actually, I think the MSE has an excellent management team, doing their best to incorporate new trading techniques and to list new firms. The problems lie elsewhere.

A stock exchange is a very important financial market. It is a highly efficient and visible instrument of financing. In the West, it is used to finance most of the needs of corporations, way above financing available from banks. Individuals and firms save some of their income and invest it. The stock exchange is meeting grounds for savers wishing to invest their savings - and firms looking for investments.

Another function of stock exchanges is to assist governments in financing their internal borrowing requirements. Governments sell obligations (called bonds) to investors through the stock exchanges in their countries. A stock exchange is, therefore, an indispensable tool for re-financing national debt.

But a few conditions must prevail before a stock exchange functions properly.

The most important condition is the existence of a healthy, growing economy in the stock exchange's country. Investors flock to robust economies and shy away from sickly ones.

On the face of it, the Macedonian economy belongs to the latter category. High unemployment, low savings, retarded growth, a gaping trade and payments deficits. But this is an optical illusion. The economy is in much better conditions that most Macedonians would care to admit. The unemployment figures are skewed. They reflect efforts to evade paying social taxes - not real unemployment. The economy is growing, even by official estimates. The black economy is growing even faster. The deficits are covered by enormous capital infusions from donor countries. Macedonia is receiving more international credits per capita than Russia. It is always convenient to blame the worsening economic climate - but the cold, objective figures do not bear this out.

When an economy is growing - the profits of companies (including those listed in the MSE) will grow with it. This makes the shares of these companies an interesting buy.

Since no one is buying - we must look for the problem elsewhere.

A prospering stock exchange is linked to the existence of the right micro and macro economic management. Macedonia has more than its share of problems in this respect.

The process of transformation of businesses with social capital had four basic flaws:

first, it introduced no new management, ideas or capital to the beleaguered firms which were "transformed". The market simply does not believe that they were transformed. The same people run the same shows under a different hat.

Second, such transformation violates the concept of Hierarchy, a chain of command.

It blurs the distinction between labour (workers) and capital (owners). What is wrong with that is that a ship must have a captain - and only one. Someone must have the authority and the responsibility. Collective management is no management at all.

Moreover, innovation change and revitalization are all prevented. What change could come from the same set of worn out managers? How can thousands of owners decide to worsen the conditions of the workforce - if owners and labourers are one and the same? So, management is polluted by irrelevant, non-economic considerations: power struggles amongst groups of workers, social considerations and political ones.

We identified one villain. The other one is high (real) interest rates. When interest rates are high, three effects prevent the resuscitation of the stock exchange:

First, firms have high financing expenses (interest payments) - which reduces their profits.

Second, it is not worthwhile to borrow money and to invest in shares.

Third, it is more tempting to invest money in bank deposits, yielding high interest rates - than in shares. High interest rates are the poison of stock exchanges.

The same is true for low savings rates. If people and firms do not save - there is no capital available for investment in stocks.

This, exactly, is the current situation in Macedonia : impossibly high interest rates coupled with exceedingly low savings. There is basic mistrust between clients and their banks. They prefer other ways of keeping their money.

But all the above is far from exhausting the list of pre-conditions for the proper functioning of a stock exchange.

Investors must have timely, accurate and full information about the firms that they invest in. This will allow them to respond in real time to developments in the company and to prevent losses. This will also make it difficult to cheat them - which is were we come to the question of accounting standards. Only lately have the accounting rules in Macedonia been revised to conform to the Western systems of accounting. Even now, the similarity is very slight. Macedonian firms maintain a double accounting system. One set of books is tax-driven. It is intended to show losses or profits at the whim of the management. An elaborate scheme of hidden reserves lies at the heart of the typical financial statements of the Macedonian firm. Another set of books - if they are kept at all - reflects reality. This is an enormous barrier to foreign investment - and foreign investors are the driving force in every modern stock exchange.

The trust of investors in the stock exchange is based on legislation to protect their property rights against the firm's management' against the authorities and against other investors who might wish to rig the market or manipulate the prices of stocks.

But legislation without an effective judicial and law enforcement systems is like a stock exchange without money. To enforce property rights in Macedonia takes ages and even then the outcome is not certain. Laws, regulations are in their embryonic stage and some of them seem to have had an abortion: they were hastily and unwisely copied verbatim from legal codices of other countries (Germany, Britain).

Last - but definitely not least - is the existence of a fair, transparent and non-corrupt marketplace. The stock exchange, the banks, the regulatory authorities, the police and the courts have to be above suspicion. For the market to be utterly efficient - it must be utterly free of any ulterior considerations and motives. Corruption distorts the market's allocative mechanisms and powers. It is easily discernible in dealings in the stock exchange for all to see. A stock exchange is, after all, the showcase of the local economy.

But there is a problem which towers above all other problems and it is almost endemic to Macedonia. It helps to explain much of the predicament of the stock exchange in Skopje. It is the fact that the market is missing its most important player: the Government.

Investors - both foreign and domestic - look for the Government to be active in the local stock exchange. Governments throughout the world use their stock exchanges to sell shares of state-owned enterprises to their populace. The stock exchange becomes a mechanism for the distribution of the national wealth - as embodied by the state owned enterprises - to all the citizens. As we said before, governments also use the stock exchange to borrow money from their citizens.

The Government of Macedonia does neither. It totally ignores the MSE. Not one company was privatized through the MSE. Not one Denar was borrowed from a Macedonian citizen through it. A government's activity in the stock exchange is proof that the government believes in it. Therefore, if it does not operate in the stock exchange - it proves that it does not believe in it. If the government does not believe in the stock exchange in its own country - why should the investors believe in it?

There are a few additional structural characteristics which are considered to be the hallmarks of a healthy stock exchange. But those are the by-products of all the above mentioned conditions.

A stock exchange must be liquid so that investors would be able to convert their shares into cash easily and expediently. It must include many investment options - professionally put, it must be diversified. This will allow the investors to choose from a variety of investments and also to reduce their risks by dividing their money among a few types of investments.

The management of the stock exchange can help it by introducing efficient trading techniques, computerized trading and settlement systems and so on. The faster investors meet their money when they sell their shares - the more they will be inclined to operate in the stock exchange that allows them that. The easier it is for them to liquidate their assets by meeting buyers - the more they will prefer to work in that stock exchange.

Investing in the stock exchanges in the markets of the emerging economies has been an unfortunate decision in the last three years. Stock exchanges from Russia to Hungary and from Lithuania to Poland have jeered wildly since the end of 1993.

They resembled a roller coaster in their performance, going up and down by tens of percents annually. There are exceptions to this rule. The Ljubljana Stock exchange, for instance. The trading volume there has gone up 10 times since December 1993 - and the market capitalization is up 30 times. But this is because of the performance of the general economy in Slovenia. In Croatia, the government is privatizing its holdings in state owned companies by auctioning shares to the public through the Zagreb Stock Exchange. This has helped it a lot.

Newly-established stock exchanges are highly volatile and very dangerous. Volatility goes hand in hand with risk. They are long term investments. Since 1988, they outperformed the more established stock exchanges in the world, like Wall Street.

But these stock exchanges are growing fast, they are cheap by any measure and they are the best investment that a country can make in its own future.

Overview of the Macedonian Stock Exchange - December 2007

The Macedonian Stock Exchange, as measured by its MBI-10 index, rose to a record high of close to 10,500 in mid-2007. It has since shed 40% of its gains. This correction, or, rather, rout has its roots is a series of converging factors.

The multiple failure of the financial system in the United States, brought on by the subprime mortgage crisis and its contagion, resulted in a dollar plunge and the ascendance of the euro. Investors fled the ailing American scene in search of higher and safer returns in the markets of emerging economies of commodities and oil producing countries.

This stampede coalesced with other trends to create a bubble of hyperliquidity. Financial technology made money transfers almost instantaneous, thus reducing the need for a non-productive and illiquid float. International trade expanded at a breakneck pace, shifting unprecedented amounts of wealth from consumers to producers and manufacturers. GDP growth throughout the world outstripped inflation, generating sizable surpluses. The global monetary environment swung from inflation to deflation leading to a precipitous decline in interest rates.

Inevitably, investors migrated from cash and bonds to assets such as real-estate and stocks, fostering in the process a series of bubbles, booms, and busts as volatile "hot money" pursued returns everywhere.

Moreover: in contradistinction to the recent past, diversification offered no refuge as financial markets merged and integrated with global, around the clock networks. To their dismay, investors found that, paradoxically, as markets became more efficient, they also become more correlated. This convergence was further enhanced by geopolitical and geo-economic processes, such as the enlargement of the European Union.

Macedonia could not remain aloof. As its informal economy emerged from the shadows, capital controls were lifted, capital mobility increased, and foreign firms and investors entered the scene. The more the business climate improved, the better Macedonia's prospects appeared, the higher Macedonian stocks were valued by an euphoric public. Macedonia's professionals did nothing to restrain the hysteria or to ameliorate the casino mentality that pervaded the entire system. They benefited personally from the bubble.

The newfound optimism of Macedonia led to a repricing of risk and to heightened expectations of corporate profits, boosted by a more lenient tax regime and by decreasing interest rates. Equity risk premium plummeted until it vanished altogether and even became negative. The P/E multiple reached a stratospheric 50 before the recent correction. It is still pegged at an unsustainable 37.

Throughout this Bacchanalia, foreigners flocked into the Macedonian Stock Exchange, constituting 30-40% of the buy side. But they have begun to withdraw owing to big privatizations back home, troubles in their domestic financial systems, a more restrictive monetary policy in some countries, and the changing fortunes of the Macedonian marketplace.

The down trend in the Macedonian Stock Exchange is not a mere correction. It is a repricing of assets. It still has a long way to go. Even at 4300 - the next massive technical support - Macedonian shares are inanely overvalued.

Interview with Alexandar Dimishkovski of BID Consulting

Conducted October 2007

The Balkans as a region is experiencing a confluence of events of both fundamental and technical nature that augur well, as far as its economies go. Accession to the huge and unified market of the European Union (and to NATO) is closer and more realistic than ever. Two decades of transition from socialism and communism, privatization, institution-building, and private sector reform are finally bearing fruits. Emerging markets - and Europe - are more attractive than ever as investment destinations, now that the United States is caught in a vicious cyclical downturn which might result in a recession. These shifts in fortunes inevitably are reflected in the stellar performance of many Balkan stock exchanges and other asset markets, such as real estate.

 

But will the euphoria last? Is the exuberance irrational? Are we in the throes of a bubble about to burst?

 

Until recently and for four years, Aleksandar Dimishkovski  worked as a business and finance correspondent in Macedonia's best-selling daily newspaper, "Dnevnik". In the past year, he also served as a personal advisor to the general manager of a foreign-owned company that has established its network in Macedonia. He is known as a market analyst and a business consultant and has recently founded "BID Consulting".