The System Matters

[mendeleyev]

From today's Mendeleyev Journal:

They began just shy of a year apart.

Two Stanford University students, Larry Page and Sergei Brin, started a company they named "Google" on the 4th day of September 1998 in Menlo Park, California.




Eleven months later, on the 9th day of August 1999, Russian president Boris Yeltsin named a former KGB Colonel, Vladimir Vladimirovich Putin, as Acting Prime Minister and named Putin as his eventual successor. Yeltsin stepped down early, and Putin assumed the presidency on the 31st day of December 1999. Putin's first official act, signed on the same day, was an Executive Order barring the prosecution of Yeltsin and any of his family, from ever facing charges of corruption.

Mr. Putin has been credited as reviving the Russian economy and building Russia into an energy superpower. Enjoying high approval ratings, Mr. Putin is widely acclaimed by Russians for bringing stability to the country.



Russians say that Putin has accomplished a miracle. At the end of December 2014, the value of the entire Russian stock market was $325 Billion.

Google has not been credited with reviving any nations, but they have not done too badly themselves. As Justin Worland of Time wrote recently, by the end of December 2014, the value of of all Russian stocks on the Micex exchange was $325 Billion. Google, a single company started just a year earlier than when Mr. Putin took power, was worth $340 Billion, more than the entire Russian stock market.

Ah, but then so is Apple. As is ExxonMobil, another energy superpower. Another American stock, Microsoft, is also worth more than the entire Russian stock market.

Detractors will rush to say that Putin took power at a time when Russia was on her knees and therefore somehow the comparison is invalid. They will argue that the environment in which Google started was much more favourable than the one in which Mr. Putin had to navigate, and that Russia was just emerging from the shadow of the Soviet Union.

Exactly. That is the point.

Lest we forget, in that same time frame Americans have changed presidents several times, via peaceful means and open elections. Both houses of Congress have changed hands, allowing the "opposition" to win, and yet you don't hear Americans complaining about the lack of stability. It is the United States Constitution that provides stability, not an individual.

In the midst of change, two college students founded their little company, without the need to appease any Oligarchs or national leaders, and their Google idea has grown to be worth more than the entire Russian stock market.

The worth of Russian giants like Rosneft, Gazprom, Lukoil, Yandex, Norilsk Nickel, Sberbank, etc, are still not worth the value of one American company started by college kids.

It is not about one group of people being better than others. It is the system. The system matters.

[BillyB]

It is the system. The system matters.

After the collapse of the Soviet Union, I had hope that democracy/capitalism would work there. Some say democracy/capitalism failed but I don't think those in power ever gave it a fair chance to work. Good article Mendy.

[calmissile]

Good article, thanks for posting.  It certainly helps putting things in perspective.

[Faux Pas]

Nice piece Mendy. The comparison is righteous. While the companies you cited are worth what they are worth, the Russian exchange easily could have been worth much more sans the corruption

[Larry1]

Excellent piece, Mendy.

I think Putin has a poor grasp of economics. A country's businesses have difficulty thriving when the country has an authoritarian command and control system rather than a free market protected by the rule of law.

[Gator]

Mendy, the best part of your insightful story is the fact that Sergei Brin, one of the two founders of Google, is Russian.  He immigrated to the US with his family at the age of 6. 

In a system that rewards excellence, Sergei was able to achieve greatness.  The Russian system does not reward the brightest stars such  as Sergei.  It does not follow the rule of law much less create a level playing field.  Instead, the Russian system rewards the most corrupt, the most ruthless, the most intolerant towards the rights of their fellow man. 

Ponder how many bright people like Sergei have not realized their potential in Russia and instead withered on the vine.   How many could have achieved far more for their families and their country.  This does not mean another Sergei creating another Google, but millions of unfettered Sergei's simply building a small business or growing a bigger business, adding to the economy, and selling products to Russians for a fair price less than what they pay in a corrupt system.   

[Gator]

We now understand why Doll delays her return to Russia until her younger son is settled in America.  She does not want him to build his life in Russia,  assuming he somehow avoids getting swallowed by a prolonged war in Ukraine. 

[calmissile]

We now understand why Doll delays her return to Russia until her younger son is settled in America.  She does not want him to build his life in Russia,  assuming he somehow avoids getting swallowed by a prolonged war in Ukraine.

The thought crossed my mind also.  There is also the possibility he loves America and has no desire to move to Russia.

It would be interesting to know how her American husband feels about moving to Russia.

[Anotherkiwi]

You have to remember also that Doll's younger son serves in the US Air Force.  It could even be slightly dangerous for him to return to Russia, despite being born there (not dangerous from a "hothead attacking Americans" point of view, but from officials suspicious of anything to do with the American Government).

[mendeleyev]

Sergei indeed is Russian, and one of many very intelligent and talented "tech" or "geek" guys/gals in this part of the world who truly understand the Internet.

To contrast his success, one needs to look no further than Pavel Durov, the founder of vKontakte, similar to Facebook. Pavel was stripped of his company had to flee Russia.

Some eye-opening tidbits from Wikipedia:

In 2011 he was involved in a standoff with a SWAT team outside his home in St. Petersburg after the government had demanded the removal of the pages of opposition politicians after controversial parliamentary elections.^[7] They left after about an hour.

On April 16, 2014 Durov publicly refused to hand over data of Ukrainian protesters to Russia's security agencies and block Alexey Navalny's page on VK.^[8] Instead he posted the relevant orders on his own VK page ^[9][10] claiming that the requests were unlawful.

On April 21, 2014 Durov was dismissed as VK CEO. The company claimed it was acting on a letter of resignation written by Durov a month earlier that he supposedly failed to recall.^[8][11] Durov then claimed the company had been effectively taken over by Vladimir Putin's allies,^[11][12]
suggesting his ousting was the result both of his refusal to hand over personal details of users to the Russian Federal Security Service and his refusal to hand over the personal details of people who were members of a Vkontakte group dedicated to the Euromaidan protest movement.^[11][12]

Durov left Russia in 2014, stating that he had no desire to go back and that "the country is incompatible with Internet business at the moment^."

To a degree, I understand a small measure of that pressure. Just today I received a request to provide details about recent travels to Ukraine. Based on counsel, I cannot comment any further than that. But the pressure is real, and magnified greatly for those who are Russian citizens in media.

[Anotherkiwi]

To a degree, I understand a small measure of that pressure. Just today I received a request to provide details about recent travels to Ukraine. Based on counsel, I cannot comment any further than that. But the pressure is real, and magnified greatly for those who are Russian citizens in media.

Presumably you mean a request from some Government department or ministry.  Although you're obviously not going to tell them to take a flying leap into the Moskva, I'm sure that your counsel will gently point out that (assuming you didn't do anything illegal when you returned), as you don't require a visa to travel to Ukraine, and because you're a permanent resident (and citizen?) of Russia, it's not actually any of their business.  It's probably also against the Constitution for them to ask.

I do realise that they could revoke your residency on any pretext but, as you see Putin and Medvedyev so often, you could surely appeal directly to them.  They, at least, would realise just how much of a storm could be generated if their minions appeared to threaten an American journalist for no reason at all.

[Gator]

Pavel Durov, the founder of vKontakte, similar to Facebook. Pavel was stripped of his company had to flee Russia.

I did not know about Pavel.  He somehow dealt with the corruption, the ruthlessness, the intolerance, etc. and excelled.  What did him in?  Lack of free press, in this specific case the power for people to connect and communicate freely. 

To a degree, I understand a small measure of that pressure. Just today I received a request to provide details about recent travels to Ukraine. Based on counsel, I cannot comment any further than that. But the pressure is real, and magnified greatly for those who are Russian citizens in media.

Even in America, police are allowed to seek and question witnesses.  I truly hope the "small measure" is nothing more.  Be careful.  You are not in Kansas. 

[Shadow]

Apple and Orange.
The worth of the top 10 Rusian companies exceeds that of Google.
The worth of Russia is not equal to the worth of the Russian stock market.

[jone]

Apple and Orange.
The worth of the top 10 Rusian companies exceeds that of Google.
The worth of Russia is not equal to the worth of the Russian stock market.

Shadow,

You're a bright guy.  But you missed the point of the article.  The system which creates investment and wealth in a country is what he was referring to.  One could argue that the obscene wealth held by the few oligarchs in Russia would easily outstrip the value of Google.

But the system that creates true wealth in a country, rather than wealth stolen from going concerns or acquired as the result of monopolies, is endemic to Western Society.  Putin's Russia, on the other hand, cannot create such wealth because it is not conducive to entrepreneurship.

The reason that Ukraine and her citizens opted for a Western path was a desire to begin building the systems that can create such wealth for citizens and for a country.

It is my continuing belief that up until the start of 2014, that Russia had no enemies.  Russia created those enemies so as to create an ultra nationalism.   Up until the start of 2014, there was discussion of Russia joining NATO.  Albeit such talk was obscure, but no country held Russia as an enemy.  Russian forces and NATO forces held joint exercises.

So what do you do when your country fails, when you cannot create true wealth or infrastructure for your citizens?  You point to outside factors and rally round the Rodina.  I have had experience in the financing of ventures in Russia.  Always there is a dearth of outside investment money.  Russia has no such money to give.  Now, with most international funds and investors pulling out, the kernel of business cannot matriculate.

Russia has replaced partnerships with your country and with Germany and other European powers with an alignment with China and North Korea.  Somehow, I just cannot see this as a step forward.

[Shadow]

Shadow,

You're a bright guy.  But you missed the point of the article.  The system which creates investment and wealth in a country is what he was referring to.  One could argue that the obscene wealth held by the few oligarchs in Russia would easily outstrip the value of Google.

But the system that creates true wealth in a country, rather than wealth stolen from going concerns or acquired as the result of monopolies, is endemic to Western Society.  Putin's Russia, on the other hand, cannot create such wealth because it is not conducive to entrepreneurship.

The reason that Ukraine and her citizens opted for a Western path was a desire to begin building the systems that can create such wealth for citizens and for a country.

It is my continuing belief that up until the start of 2014, that Russia had no enemies.  Russia created those enemies so as to create an ultra nationalism.   Up until the start of 2014, there was discussion of Russia joining NATO.  Albeit such talk was obscure, but no country held Russia as an enemy.  Russian forces and NATO forces held joint exercises.

So what do you do when your country fails, when you cannot create true wealth or infrastructure for your citizens?  You point to outside factors and rally round the Rodina.  I have had experience in the financing of ventures in Russia.  Always there is a dearth of outside investment money.  Russia has no such money to give.  Now, with most international funds and investors pulling out, the kernel of business cannot matriculate.

Russia has replaced partnerships with your country and with Germany and other European powers with an alignment with China and North Korea.  Somehow, I just cannot see this as a step forward.

The one who is missing the point is you.
A stock market is for companies to raise capital. Multinational companies will in general not raise capital in Russia, nor will they invest highly in there due to international perspective that currently seems correct.

Building a company that uses the stock market to gain capital is something completely different form building  a stock market. As such to compare the values is simply incorrect.
The Russian stock markt still has a higher capital as the German local stock market (not to be confsed with the Frankfurt international one). Does that mean Google is doing much better as Germany as well?

Apple made 18 billion in the last quarter selling iPhones. The Netherlands has a loan to Greece of 17 billion.
If Greece starts making iPhones they can pay off the loan after three months.

Such comparisons sound like gibberish, yet it is the same that is made here.

[jone]

You totally missed the word used, Shadow:  SYSTEM.

Russia can't raise capital for its stock market because it is a backwards graft and corruption ridden system.  The local citizenry, who should be the investors in a stock market, are not because they know all too well that the government has a habit of nationalizing those companies that show promise - or have them transferred to one of Putin's oligarch cronies. 

Let's look at things a different way:  You have a choice of starting Google in a country with Russia's system of government and investment or in a Western country.  I don't know too many here that would agree to start it in Russia. 

Yet, back in the early 2000s that is exactly what people were doing.  Myself included.  There is no longer an opportunity in Russia to gain a return on an investment.  There will be more capital flight from Russia this year, probably around 100 Billion US Dollars.  In other words, the equivalent of over 1/4 of the national reserves of this gas station country will be removed for infrastructure development.

Defend Russia all you want, but those are the trends that almost all economists agree upon.  Couple that with the continued devaluation of the currency and the ultimate end is that there is no good outcome in view for Russia.  After all, in 1999 it was a number of countries that came to Russia's rescue and saved the economy.  Those same countries are the ones that now have sanctions against Russia's economy.  Russia has only one place to turn:  China.  The Chinese are already licking their chops at the surcharges they can charge Russia because it has no where else to go. 

Who else would Russia go to?  North Korea?

[Shadow]

The system is exactly why a comparison between one company and the stock market of a country are not comparable, as much as you try to defend it.

Would you wish to launch a company like Google on the US stock market or on that of Brussels? Pretty much the same question. Chances are that unless you make it to the NASDAQ it will be impossible to obtain such net worth.

Where you mention that Russian multinational companies also gather capital from international markets (as long as they can) you are correct, as that is where the money lies.
Russians are not yet convinced that the non-existing money makers like stock actually work in their country, and history incuding current devlopments have proven them right. While in America and Europe people mainly rely on money that does not exist, in Russia people are not yet fully ready.

[jone]

Again, you miss the point.   The author of the article was comparing the 'SYSTEM'.  Thus the title of the article. 

Hmmm, usually, when an article is written professionally, as this one was, the title is usually reflective of the main point of the article.

I would agree that the people of Russia are not fully ready for a speculative type system.  However, they have no problem using ATMs which is a digital form of money.

[AC]

Lest we forget, in that same time frame Americans have changed presidents several times, via peaceful means and open elections. Both houses of Congress have changed hands, allowing the "opposition" to win, and yet you don't hear Americans complaining about the lack of stability. It is the United States Constitution that provides stability, not an individual.

It is not about one group of people being better than others. It is the system. The system matters.

Of course the system matters however you seem to be forgetting that the "system" was created by individuals, our founding fathers.  Without their vision the system would not have been put into place.  Without the vision and hard work of many people since the system would not continue to work.

In fact many would say that our Constitution and therefore our "system" or way of life has been under attack.  Perhaps the election in 2016 will determine if our system continues to deteriorate or if it will be restored.

It's not only the system which is important, it's also the people every day who believe in the system and work hard to keep the spirit of it alive.  No system by itself ever functions without people behind it who believe in it.

[mendeleyev]

 

however you seem to be forgetting that the "system" was created by individuals, our founding fathers

Not forgetting that at all, and would agree that a system could be replaced by those who do not wish for it to continue.

Sadly, I fear for the USA in this regard as generations have been raised with the notion that a so-called living/breathing constitution (translation: one that can be changed at will) would better suit the American people.

[AC]

Not forgetting that at all, and would agree that a system could be replaced by those who do not wish for it to continue.

Sadly, I fear for the USA in this regard as generations have been raised with the notion that a so-called living/breathing constitution (translation: one that can be changed at will) would better suit the American people.

It is living and breathing (our Constitution) but it's not the American people who are trying to change it, it's an out of control dictator who refuses to honor the other two branches of government.

[mendeleyev]

The man you reference was elected, then re-elected, by the American people. That constitution begins with a little phrase, "We the people..." So yes, unless the American mood changes in the next election, it is the American people who wish to make Constitutional changes.

[mendeleyev]

Shadow, Jone has excellent points but I understand that your allegiances make it difficult for you to concede.

The very example of the founders of Google and VKontakte are illustrative of how the system matters. Google founders remain at their company, and in fact, their IPO agreement binds them to the company until at least the year 2024.

VKontake is a different matter. Founder Pavel Durov was ousted and replaced by Kremlin-linked Alisher Usmanov and Igor Sechi, pals of Vladimir Putin.

Durov fled the country. Why? The system matters.

Those in control of the system determined that he was uncooperative. The system allowed him to be ousted because he did not wish to help that system control opposition to the system.

Durov did not flee Russia because he hated his grandmother's blini. He did not flee Russia because he was poor. He did not flee Russia because Ukrainian borsch is better than Russian, nor because they make better tractors in Belarus, or because he was addicted to Uzbek plov.

Durov fled because of the system.

The system matters.

[AC]

The man you reference was elected, then re-elected, by the American people. That constitution begins with a little phrase, "We the people..." So yes, unless the American mood changes in the next election, it is the American people who wish to make Constitutional changes.

You seem to be ignoring the fact that our system of government has 3 branches, and nothing that the man who was (allegedly and I say allegedly because there is evidence of widespread voter fraud) elected can or should be done without involvement of the Congress.  Congress is the "peoples house" and he has been giving my elected officials the finger.  From Bengazi to Fast and Furious and right down the line.  Or do you think that the US Congress is just there to rubber stamp whatever the guy says, sort of like the Russian Duma rubberstamps whatever Putin says?

And we are talking not just about our Congress, but in the case of your article about the ability of a company to raise money and go public like Google did.  Free enterprise is not going to thrive when our Executive branch keeps trying to enact taxes without representation.  Might as well just call him the next coming of King George.

Your last statement "the American people wish to make Constitutional changes" is the clincher.  Take the ACA aka Obama care.  He lied to the American people that if they liked their Doctor they could keep him.  He lied that the average family would save $1200.00 each year.  He had his architect lie to the American people but then call the American people stupid.  So your claim that the "American people wish to make changes" needs to be examined. 

In fact if the American people knew all along that they were being lied to, and the level of the dishonesty, I would say no, they do not wish to make these changes which you are alleging.  This is evidenced by the overwhelming shellacking of the Democratic party in the 2014 election.  The country is firmly Red, and those are the elected people of the American people.  One guy in the Executive branch does not get to decide by himself, otherwise the "system" which you are comparing and contrasting to Russia's system comes crashing down.

[AC]

Where you mention that Russian multinational companies also gather capital from international markets (as long as they can) you are correct, as that is where the money lies.
Russians are not yet convinced that the non-existing money makers like stock actually work in their country, and history incuding current devlopments have proven them right. While in America and Europe people mainly rely on money that does not exist, in Russia people are not yet fully ready.

In one way you are correct or close to correct as our Stock market is based on the premise that the companies involved really do have the value which their share price represents.  Because of prior Fed meddling ie printing money those values are likely overinflated.  There will of course be another market correction similar to 2008 and possibly worse.  Then the Central Bankers will go back to printing money and the illusion will appear to be real again.