Transcript A World of Crime: The Underside of Globalization

Connections
Russia: Virtual Economy/Bear Trap
Russia – Cyprus: Money Laundry/EU Entrèe
Russian Underworld
Cyprus Crisis
Global Underworld
Iceland Crisis
Global Financial Crises
Virtual Economy – Bear Trap
• Manufacturing destroys value: Value of Inputs > Outputs
– Survives on fictitious prices/Underpriced energy
– Energy sector underpins domestic economyProfits from exports
• Capital goods costs and prices relatively high
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Dinosaur heavy industry vs. ease of entry in consumer sector
Soviet “demand” for investment raised PI
Get much less bang-per-buck from investment than in West
Putin’s aim: double GDP in 10 years  50+ % investment rate
Inputs that compensate for adverse environment – Siberian cold –
counted as output, not cost
 Handicapped capital  Overstatement of capital stock
• Cold and distance from market
– Duluth and Perm: A contrast in adjustment
A World of Crime: The Underside of Globalization
Crime tracing to collapse of Soviet empire
• Discriminated minorities: Jews, Chechens, Georgians
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Tolkachi...go-betweens in the Soviet planned economy, matching S-D
Hyperinflation – caviar as money – police for hire – protection racket
Natural resource price controls  windfall for “robber barons”
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Grandest larceny in history – biggest capital flight ever
Switzerland and Cyprus favored laundries ... Israel too
Cyprus: Non-European entity in EU w/o European financial standards
• 1970s: Accommodating financial services/legal environment for shell
companies/flag of convenience shipping/weapons and narcotics
trafficking/cold-war espionage/home of Soviet foreign trade bank
• 1990s - : fee-for-service money laundering for oligarchs  entrée to EU
• Cypriot banks buy high yield Greek bonds  insolvency
• Lender of last resort surprise
• German view: financial crisis as morality play  won’t bail out oligarchs
• Russian view: Deposit tax = theft...European conspiracies against Russia
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Simeon Mogilevich: “Boss of Bosses”
Ukrainian born Jew, 1946
Economics degree, 1968
Russian prison for currency-dealing, 1970s
Fortune based on “sale”/theft of Jewish émigré property
Legal enterprises
– Israel
– Hungary: armaments factory
– Russia: Inkombank
• Sukhoi, military aircraft
• 1998 money laundering via BNY with Khodorkovsky’s Bank Mentep
• Worldwide criminal enterprises
– Prostitution
– Arms smuggling
– Drug smuggling
» FBI 10 Most Wanted List
Boris Berezovsky: Prototypical Oligarch, 1946- 2013
• Mathematician...Member Russian Academy of Sciences
– Binary relations in multi-criteria optimizations
• Media mogul: gained national TV station in privatization
– Yeltsin inner circle...Proponent of Putin ... “The tsar’s Jew”
– Godfather of the Kremlin: Boris Berezovsky and the looting of Russia
– Oligarch vs. Oligarch: Berezovsky’s KGB guys vs. Gusinsky’s KGB guys
• Fell out with Putin...dropped out to Britain
– Name change – conversion to Orthodox
– Retained assets in Georgia, Europe/Fisher Island off Miami coast
• Investment in Neil Bush’s Ignite! Learning
– Political agitation: International Foundation for Civil Liberties
• Financed Ukraine’s Orange Revolution
• Political power in Latvia
– Philanthropy: Kensington Castle upkeep
– Lost suit to Roman Abramovich  fortune evaporates
• Suicide in Ascot, March 23, 2013
Iceland: Another Banking Island/Another Banking Crisis
Michael Lewis: Fishermen get PhDs, become investment bankers
No longer a country but a hedge fund.
Statistics @ 2007 peak
2003-2007
• Population.......0.3 million
Stock market up nine fold
• GDP...............$20.5 billion
Real estate prices tripled
• Bank assets...$140 billion
Global asset purchases
Speculative mania: You have a dog, I have a cat...
Carry trade: Borrow yen @ 3%...Lend krona @ 15%
2008 Collapse
• Stock market down 85%
• Krona down 80% against euro  Current account surplus
• Public and private debt...850% of GDP
• Inflation of 17%...Real GDP down 5.5%...IMF loan of $2.1 billion
Banks nationalized...Icesave program rejected
– Each Icelander would have paid $135/month to Brits and Dutch for 8 years
Domestic savers bailed out/British and Dutch savers screwed
Iceland: Another Banking Island/Another Banking Crisis
Preludes to the Icelandic Financial Crisis, Aliber and Zoega,eds.
• IMF, 2006 Warnings of overheating but banks are okay
• IMF, 2008 ...challenge of orderly rebalancing...of mitigating risk
• OECD, 2006 Financial markets are thriving: controls lifted, banks
privatized, sector opened to international capital. Liberalization rocks!
• Hebertsson & Zoega, 2005 Analogies to Mexico and Sweden in ‘90s
• Fitch, 2006 Sovereign debt downgraded...risks of hard landing seen
• But banks okay
• Danske Bank, 2006 Critical study dismissed: Danish spite
• Hebertsson & Mishkin, 2006 (Chamber of Commerce)
Strong fiscal position/excellent institutions/ability to rewind current account
deficit/high quality financial regulation and supervision  crisis unlikely
• Portes & Baldursson, 2007 (Chamber of Commerce)
– Financial sector responded “quickly and decisively” to external criticism
• Buiter & Sibert, 2008 (Landsbanki...kept confidential)
– Need credible lender of last resort  Join EU and eurozone
Preludes to the Icelandic Financial Crisis, Aliber and Zoega,eds.
Critical Voices
• Gros, 2008 Iceland on the Brink (Center for European Policy Studies)
– Iceland as “hedge fund” exposed to global crisis/No lender of last resort
– Primed for classical banking crisis/currency crisis and real estate bust
• Gylfason, 2008
– Implicit state guarantee allowing banks to borrow huge amounts internationally
• Aliber, 2008 Manias, Panics and Crashes (update of Kindleberger)
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International borrowing by banks  expansion of credit in Iceland
Debt financed stock market boom
Icelandic banks owned  Bank capital grew with stock prices
High bank capital  Additional bank borrowing
A Giant Ponzi Scheme
– Asset price decline...Banks shut out of credit markets...Bank Runs
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