Chairmanship of the EU might force Dutch PM Mark Rutte to put his cards on the table. Will the ‘smiling’ PM finally be able to lower his armour made of teflon, opportunism and insignificance?!

Since the 1st of January, The Netherlands is again the chair of the European Union for half a year. Consequently the Dutch Prime Minister Mark Rutte of the liberal-conservative party VVD is the man, who should make a difference in a conflict-laden European Union, that threatens to collapse under the multitude of nearly unsolvable issues that is on the agenda: issues that probably all need to be dealt with within the first half year of 2016.

Please hold the seat of your pants for this worrisome list:

• The refugee crisis, which acts as a fission fungus in the core of the EU.
• Should the admitted refugees stay forever in the EU or should they go back to their home countries at any given moment in the future?!
  
• And where should these refugees live within Europe when all the smoke clouds have lifted?
  
• How can they be divided more evenly over the EU countries, without alienating especially the Eastern European countries by forcing them to accept refugees at gunpoint?
  
• And how to stop new refugees in their attempts to reach the shores of the EU, if that is what you desire?
  
• The mounting nationalism and the unstoppable emergence of populist parties all over Europe. These are all parties, which combine a social-conservative program with lots of (often unfeasible) promises to both the elderly and the native, white, disadvantaged population, with a strong disliking of the EU and a sheer hatred for minorities from other religious groups and/or other continents;
  
• The collision course of the leading politicians in a.o. Poland and Hungary against the rest of the EU, with their new, ultra-conservative policies, their politically dangerous exclusion of religious/sexual/political minorities and their increasingly tight grip on the national press and media;
  
• The mounting agitation between the individual countries in the EU, which distrust each other’s motives and seem less and less willing to believe each other at face value and help one another through arguably the most difficult times since the establishment of the (predecessors of the) Union in the Fourties and Fifties of last Century;
  
• The Greek euro-crisis, which acts like a smouldering forest fire – ready to blaze up again when enough financial or political fuel is present – and for which a structural solution is not possible within the current legal/political framework of the currency union;
  
• The British government blackmail against the other EU countries ‘to either make a number of intrusive changes in the EU framework on British behalf or to be confronted with a political advise from PM David Cameron, in favour of a Brexit of the United Kingdom away from the European Union’;
  
• And last but not least: the regional outbursts of nationalism, in which provinces and federal states want to dissociate themselves from the nation of which they are a part: Scotland and Catalunya to mention a few.

Boy, is that a scary list indeed.

It is a list which requires an elephant skin, sheer persistence in the hardest of times, top-notch political manoeuvering capabilities and a political instinct for attainability that would put former European Council president Herman van Rompuy to shame.

All these features are demanded from the temporary chairman of the EU, in order to keep the whole European Union together in the next months. And “Reddite ergo quae sunt Caesaris, Caesari” (i.e. Give to Caesar what belongs to Caesar),  these are all specific qualities of Dutch PM Mark Rutte, which he has proven ‘beyond reasonable doubt’ on numerous occasions during the last five years of his leadership.

With: 

• his background as human resource manager and schoolteacher, 
• his minute ambitions and nearly total lack of grand visions, 
• his enormous loyalty to the people that supported him and to his political friends, 
• his ‘teflon coating’ of which all problems and political blunders seem to glide off effortlessly 
• and his seemingly excised grin that never fades in public, 

Mark Rutte has proven himself as both a political survivor and a very capable bridge builder. Someone, who can connect the most different personalities and opinions within a group of people, without alienating his allies.

At first glance Mark Rutte is an extremely capable captain to guide the EU vessel through the biggest of political tidal waves and keep all sailors aboard and safe. An extremely good manager, who keeps everybody more or less happy.

Except for... the general public: in The Netherlands both the intellectual elite and Joe Sixpack (in Dutch Jan Modaal) get increasingly fed up with the fact that Mark Rutte has no clear grand vision, no red line for what is and what is not acceptable and no visible principles whatsoever.

Rutte’s ability to morph into every cabinet with nearly every possible partner, stretching from leftwing to rightwing is both his strength and his fatal weakness, as it eventually leaves people puzzled about what Rutte’s own opinions and fundamental principles are.

Rutte’s lukewarm reactions to the constant flow of insults against muslims coming from PVV leader Geert Wilders, alienates people among these minorities and makes them feel like second rate citizens. And also when Geert Wilders alienates his fellow MP’s and the cabinet, Rutte is never the person to draw the line and strongly reply to Wilders.

Mark Rutte’s responses seem to state that even though he is offended at occasions, he is the last person in the world to do something about it. Everybody is on his own and must solve his own political problems. This stance often disappoints his fellow politicians and (perhaps) even his cabinet members.

And even when Rutte is ‘angry’ and speaks swollen words about certain political events (hence: the MH17 incident), he never makes the impression that his words should be taken seriously and that they will lead to decisive actions on his behalf. After he expressed his anger and speaks the words that he deems necessary, he continues with the order of the day as if nothing happened. Business is business and an elephant’s memory is rather a handicap than an asset for a pragmatic politician!  

The general picture of Rutte is that of an extremely capable, but ultimately spineless politician, who would even cooperate with the devil out of pure opportunism and pragmatism, if there would not be any strong reasons against that. And more and more people notice this sheer fact and lose their confidence in Mark Rutte as a genuine ‘spiritual’ leader and see him instead as a capable manager without fantasy and without an all too strong conscience.

The Dutch (slightly religious) newspaper Trouw printed a very interesting essay by Belgian thinker and lecturer Jonathan Holslag about this lack of a grand vision and clear principles within the Dutch cabinet, and the influence that this might have upon the EU leadership in the next six months. I print here the pertinent snippets of this essay, which was much, much longer:

The Dutch chairmanship excells in bleakness

PM Mark Rutte has little sympathy for grand visions, where Europe itself longs for this. This is the reason that the Dutch chairmanship might even slow down the EU, instead of accelerating its pace.

On January 1st The Netherlands took over the chairmanship of the EU; a frugal chairmanship, frugal in both budget and ideas. “We go for the pragmatic solution”, as Mark Rutte emphasized his stance. “Europe does not long for a grand vision”. The Netherlands first and foremost wants to make a difference with practical proposals to spur innovation, safety and competitiveness of our European industries.

Yet, the 500 million Europeans are absolutely not waiting for practical proposals; they want a new image of the future and a new spot on the horizon: a clear story about how we all will be able to build a stronger, safer and more cooperative community.

When we fail to make that image of the future more palpable, we will be less and less able to convince Europeans of the general interest of all kinds of practical solutions. I am afraid that Europe will not survive, when we not better explain why Europe is a necessity and when we not use the combined weight of 500 million Europeans to support positive initiatives.

[...]

What we need is an understanding that technology is not the standard for progress, but humans itself are; the way in which we are able to realize the versatility in needs that we have, by optimally deploying our talents. That is progress. The point is not to produce the same goodies more efficiently, but to give people time for important matters, like cooperation, creativity, identity and self-development.

Of course politicians cannot achieve this all on our behalf, but they could rearrange the economy in such a fashion that it becomes a building spot for a better society, instead of politicians offering the economy to the highest bidder and marginalizing interesting initiatives by the people.

Earlier, The Netherlands dared to start such discussions, but nowadays it seemed to have lost track. That such a strong country does not even dare to look at the future with hope and imagination makes me gloomy. Europe now does not need pragmatism. This business-like stance has become the ultimate justification of stagnation... and in this world stagnation is actually deterioration.

According to me this whole article is a must-read, even if you don’t agree with its contents, or with the general direction of it. Myself, I fullheartedly agree with the general direction of the article.

While Mark Rutte is the ideal manager / shopkeeper to keep the EU shop open and to smooth out the various misunderstandings within the European Union, he has not been the politician to make people enthusiastic again about the political EU.

Yet, we need such a politician dearly as the long, long list of issues and the soaring nationalism everywhere can work as a wrecking ball against the constitution of the EU as a whole.

The general public in The Netherlands and in the EU as a whole deserve brave politicians with a clear political stance and a clear vision on what the EU should be all about. No more general managers, but cooperative leaders who bind people together, instead of alienating people from their fellow Europeans.

Although I have few hopes left regarding the backbone, as well as the political imagination and determination of PM Mark Rutte, it is a fact that the current situation within the EU requires from him that he finally puts his political cards on the table. 

Hopefully, this very talented and capable PM drops his armour of teflon, inappropriate opportunism and insignificance and finally choses the direction for the EU to go to. For the simple reason that he must...!

When the oil markets are ill, the Russian economy gets in a coma! The ultimate “two-trick pony” Russia can’t come up with new tricks to do, so it pumps up oil ‘like there is no tomorrow’, in spite of the plummeted price level of oil.

The news that Russia ended December 2015 with a record production of oil, in spite of the extremely low prices per barrel, is peculiar, but not surprising.  

Russia is the ultimate ‘two trick pony’, with the production of oil and gas and the fabrication and export of weapons as almost its only two tricks. So in order for the Russians to keep up their standard of living, the oil dollars must keep on flowing into Russia.

Well over four years ago, I wrote an article about the dependency of Russia from the oil markets.

This article, with the tell-tale title “When the oil market sneezes, Russia catches a cold”,  described how enormously large changes in oil prices mattered for the Russian Gross Domestic Product. For the sake of this article, I copied the two charts which were part of the August, 2011 article, in combination with a few snippets:

The fluctation of the Oil prices in 2010 and the
consequences of this development for Russia
2011 chart courtesy of ycharts.com
Click to enlarge

Four possible extrapolated annual incomes,
based upon fluctuations in the oil price in 2010
Chart by: Ernst's Economy for You
Click to enlarge

To show you how problematic these dropping oil prices could be for Russian GDP, I took a YTD chart on WTI Crude and multiplied the 2010 Russian production of 10,15 mln barrels with the four price levels that I point out in this chart.

It becomes clear from this calculation that the difference between the highest and lowest oil price in 2011 is a theoretical yearly revenue of $126 bln. And it becomes also clear that when the oil price structurally drops under $79,32, Russia has a serious revenue problem.

Therefore you could say that when the oil market sneezes, Russia catches a serious cold.

Lately, I had noticed that this very old article had entered into a “second youth”, as it gave insight in the current economic conundrum that is playing for president Vladimir Putin. Nowadays, with the current oil prices of roughly $35-$40 per barrel, the problem is even more topical and scary in its possible consequences.

With such erratically low oil prices, the Russian state misses an enormous part of its usual annual income, for which it is virtually impossible to find an alternative soon.

How desperately the Russians are strapped for cash currently, becomes clear from the following two articles, which have been printed in the Dutch newspaper Telegraaf and the Russian(!) website Sputnik News:

The Russian oil production reaches record levels.

With respect to oil production, also Russia became a frontrunner in their struggle for market share. This month a new record in oil production was set by the country.

In comparison with November, the outflow in December increased by another 0.4% to 10.825 million barrels per day.

Also for 2016, the Russian government is not considering to pinch off the production capacity. During last year the oil price dropped dramatically after OPEC countries refused to diminish their production, in spite of the plummeted demand and the persistently high production of shale gas.

The world power Russia is for over 40% of its annual income dependent on oil. The oil price for Brent quoted $37,28 per barrel on December 31st. Russia’s export [to the non-CIS countries – EL ] rose by 11%.

And in its article, Sputniknews added to this news that the Russian oil production in 2015 had grown by a staggering 40%, in comparison with 2014:

Russia Oil Output Rises to New Record High in 2015

Russia's oil production reached a record 534.081 million metric tons in 2015, media reports said.

In 2015, Russia's oil output amounted to a record 534.081 million metric tons, 40 percent higher than in 2014, according to media reports.

Russia's oil exports to non-CIS countries increased by 10.6 percent and reached 220.267 million tons, sources said.

Russia Deputy Prime Minister Arkady Dvorkovich, for his part, said that he does not believe oil prices will plummet to 25 dollars per barrel. At the same time, he added that the period of such low prices "cannot last too long." When hammered out, Russia's budget for 2016 stipulated global oil prices would be about 50 dollars per barrel.

There is a lot of hope and despair encapsulated in both the statements that ‘the oil prices will not plummet to $25 per barrel’ and that the period of such low prices ‘cannot last too long’.

And although a calculation price of $50 per barrel does not sound unreasonable by itself, it remains the question whether such an average oil price will actually be achieved in 2016. As one of the savvy professors at Minyanville once said: ‘Markets can remain erratic for a longer time than people or countries can cover their losses!’  

Let’s take the bull by the horns and let’s try to calculate what income Russia generated from this massive production of oil in 2015.

I do so, calculating with a production average of 10.73 million barrels per day [this is the 534.081 million metric tons per annum, mentioned in the Sputniknews article, recalculated to average barrels per day – EL], multiplied by the average price per barrel per month (based upon the WTI Crude price), which I retrieved from the following chart by Ycharts. Of course this method of retrieving monthly prices is quite rough and consequently not very precise, but it will do the job.

The fluctation of the Oil prices in 2015
Chart courtesy of ycharts.com
Click to enlarge

The annual Russian oil income in 2015,
based upon calculations with the average monthly oil price
Chart by: Ernst's Economy for You
Click to enlarge

When we compare this approximately $191 billion in Russian annual income from oil for 2015 – even with the current record production during this year –  with the extrapolated annual income amounts in the second chart of this article (ranging from $293 billion to $420 billion per annum in 2011), it becomes perfectly clear that the Russian economy has been hit by a bulldozer, due to the dropping oil prices.

And even more when we take into consideration that – as the Telegraaf article states – oil income amounts to 40% of the total Russian Gross Domestic Product (GDP).

Nevertheless, the Russian oil production in 2016 will probably remain at a “suicidal” level, in spite of the dramatic price development of last year. In order to generate enough income for the state and its (wealthy) citizens, the Russian oil pumps must be fired up into infinity, like ‘there is no tomorrow’. With Saudi-Arabia’s equally suicidal strategy to keep their production levels also very high, in spite of the expected fierce competition from Iran and the US in combination with the disappointing global demand for oil, the chances that the oil prices will go up soon are very dim.

For both countries the reason for their ‘erratic behaviour’ is simply summarized by the abbreviation T.I.N.A.: There Is No Alternative!

The Russian weapons industry alone is not able to fully cope with the Russian misfortune at the international oil markets. And further the Russian manufacturing industry is still ailing in comparison with Europe, Asia and North-America.

The same is true for the Russian agricultural industry, as well as the commercial and financial services industries, wherein the effects are reinforced by the economic boycotts that have been established by the EU and the US. On top of that the Russian economy as a whole already showed its enormous fragility in the last quarters of 2014 and the whole year 2015.

Although not everything bad in Russia can be blamed upon Vladimir Putin, he can be held widely responsible for the fact that he never undertook serious attempts to make the Russian economy stronger and more independent.

He failed to establish a credible constitutional and legal state that would have enjoyed the trust and confidence of global investors and he also forget to spur new developments in the manufacturing industry or the financial and commercial services industries in Russia, thus diminishing the country’s enormous dependence on oil.

All the Russian oil money, gained during the last fifteen years, seems to have disappeared in either the pockets of corrupted officials and business men, in building and housing projects for the more well-to-do Russians and in roads and infrastructure. Or in monstrous, prestige projects like the 2014 Olympic Games and the 2016 World Football Championships, which by themselves created a whole, vast network of gargantuous megalomania, corruption, bribery and spillage.

The generally high oil prices of the last fifteen years meant an enduring party for Russia that lasted for a long time. Everything was cool as long as the money flowed in. Now, however, it seems that the oil party is definitely over.

The chance for real improvement of the oil prices in 2016 is still very small as I argued in the aforementioned parts, in spite of the hope expressed by the Russian minister. The whole situation for both Saudi-Arabia and Russia reminds of a Catch-22 situation with no way out:

• Producing more oil means lower oil prices and less income per barrel
• Producing less oil means higher oil prices, but a plummeting income per annum

And every favourable change in the oil production (down) and oil prices (up) leads to new competitors stepping on the driving train, like Iran and independent oil producers in the US and Canada.

My first article about the Russian oil income was named: When the oil markets sneeze, the Russian economy catches a cold!

Now this article is titled: When the oil markets are ill, the Russian economy gets in a coma!  

And that is the way it is.

Will 2016 become the year in which large and small ICT suppliers "get even" with their corporate and governmental principals for forcing down the hourly rates during the crisis years?

One week ago I was visiting a good friend of mine, “Harry” (not his real name), who works for a ‘Big Blue’ company as an ICT specialist, mainly within the telecom industry. At this moment, Harry is involved in a long-term assignment in a multifunctional role at KPN, the leading telecom company in The Netherlands.

We talked about our business – the ICT business – and about the way in which large principals from the government, as well as the financial and commercial services industries, have (sometimes bluntly) forced down the hourly rates and the general costs of ICT during the crisis years from 2009 to 2015.

This forcing down of the hourly rates and the general costs of ICT happened in a number of different ways: 

• By outsourcing (large parts of) the ICT department to specialized service organizations within The Netherlands or in the low wage countries inside or outside Europe;
• By hiring large numbers of ICT professionals from these low-wage countries inside or outside Europe: either as internal personnel or as external consultants;  
• By stretching the payment terms for invoices and bills from 30 to 90 days or even longer, as a way of cash management at the expense of someone else; 
• By demanding lower hourly rates from their steady external ICT suppliers, either through negotiating for long-term, fixed cost delivery contracts or through pushing down the hourly rates for individual consultants and (often small) ICT-companies.

No sane person would blame large principals for doing what is described in the first two bullets, as all companies large and small have to watch their costs and expenses.

However, things start to grind when companies and government bodies (!) do what is described under bullet three.

ICT companies – especially the smaller ones – which had often been strapped for cash themselves, were sometimes brought to the brink of bankruptcy with this cash management strategy: especially as they were often in a subordinate position to their large principals and did not dare to blow the whistle and/or enforce earlier payment of their bills. Their personnel required their monthly wages (by far the largest expense for an ICT company), while the money flowed back in slower and slower as a consequence of this darn starvation strategy, thus forcing ICT companies to take huge amounts of working capital loans, until the banks said: “enough is enough”.

However, the most common way for large principals to force down the costs and expenses for their ICT investments was bullet four: demanding lower hourly rates from their suppliers.

And of course every company, financial institution or governmental body has the right – and perhaps the duty towards their stakeholders – to ask for lower prices from their suppliers when the going gets really tough.

However, the latter often happened at gunpoint: mostly in advance – at contract prolongation time – or even afterwards and retroactively (!) in some cases. In most cases the message was perfectly clear: “you’re down – with your prices – or you’re out!”

While the large ICT suppliers had some negotation space left against their large principals, due to their considerable interest for the company or governmental body as a whole and their key positions within the ICT organization, such was often a devastating blow for the smaller suppliers and  freelance professionals, who mostly lacked such negotiation power.

Choosing between ‘yes’ and ‘no’ in such situations was like choosing ‘between a rock and a hard place’. Losing a large part of the hourly rates was often a fierce financial blow, but losing the customer as a whole was even worse; especially in times when there was a blatant excess supply of personnel in the ICT market and new assignments were extremely hard to find. And therefore most small ICT companies and freelancers said ‘yes’ to their principals, when these demand lower rates, until it started to really hurt financially.

The following snippets from a KPN press release from the end of 2014 state in concealed phrases how such negotiations went:

KPN and several of its suppliers have agreed better conditions that significantly reduce the payment terms in return for discounts. These mutual beneficial agreements will give both KPN and its suppliers greater financial flexibility. KPN will record a one-off cash payment of approximately EUR 225m in the fourth quarter of 2014, which is seen as a change in phasing and therefore excluded from KPN’s outlook.

The agreements align KPN’s payment terms and increase KPN’s flexibility in selecting suppliers, resulting in a more adaptable and lower cost base. This agreement is part of KPN’s strategy to use the majority of the cash proceeds of the sale of E-Plus to increase its financial flexibility and support the execution of its strategy in The Netherlands and Belgium.

As said, in concealed phrases, this press release stated the following message: ‘We, as KPN, will not postpone payment of your invoices and bills into oblivion anymore, but in exchange you will earn much less money at our expense, irrespective of your own costs and commitments towards your personnel. About that, we don’t care!’

According to my aforementioned friend Harry, this is how things at KPN went in reality during (early) 2015:

“As KPN, we have a large number of ICT suppliers at this moment, but we want to bring this number down to only two companies, which will execute the lion share of our assignments and projects and with whom we sign a long-term framework agreement. All the other suppliers can hit the road, irrespective of the fact whether we had a long-term relation with them or not. Therefore all our suppliers and perhaps a number of new ones, will receive the opportunity to make a tender offer at KPN for our future projects and assignments.

However, if you don’t want to grant KPN at least a 15% discount on your current prices and sales numbers, don’t even bother to send your tender offer for the next period. This 15% discount is our starting position for negotiations and thus it can not be your final offer.

May the lowest priced supplier win this contest! All others can be considered as the weakest link, so ‘goodbye’ will be our message to them!”

As I neither could find official records about these events from KPN nor from their ICT suppliers, I have to believe my friend’s words in this matter. According to Harry, his ‘Big Blue’ company was among the victims of this new round of contract negotiations with KPN, just like many others.

In my humble opinion, when this story is right (about which I have little doubt) this is a blatant example of how some large principals have (ab)used the crisis to force down their ICT expenses, at the expense of their suppliers.

But, as far as I’m concerned, a pivotal point has emerged during the second half of 2015.

To me it seemed as if all the large principals from the government and the financial and commercial services industries had woken up after seven years of ‘hibernation’, in which their ICT efforts had been well below par and were mostly meant to ‘keep the shop open and not lose track of the competition’.

Suddenly, even the formerly weakest suppliers in the ICT business seemed to have hardly anybody at the “reserve bench” anymore.  High quality, specialized freelance professionals were called on a daily basis with new assignments from governmental and non-govermental sources.

Even the steady influx of low-wage workers from Eastern Europe or Asia was not enough anymore to fill the void between supply and demand regarding required ICT services. Negotiations about higher hourly rates, which had been ‘not done’ – or even suicidal –

for a number of years in a row, were suddenly a reality again.

And now it has become 2016. It will be a year of which I believe that the impulse in the ICT industry, that started in the second half of 2015, will gain much more momentum in.

Almost every company, institution and governmental body has a vast backlog of work and projects that have been neglected out of necessity during the last seven crisis years, as money, funding or support from the stakeholders totally lacked during these years.

These could be nice innovative projects and necessary new developments, but also activities that really cannot wait anymore, as the sheer existence of companies and governmental bodies can depend on that.

All these new projects and activities could very well mean that there might emerge a genuine shortage in the supply of ICT workers, where formerly an excess supply of ICT workers existed.

And in every situation in which there is a real shortage in supply, prices go up. This is the simplest and most fundamental of economic laws.

However, what makes the current situation particularly special, is the extent to which some large principals (ab)used the situation during the crisis years, when supply of ICT workers substantially exceeded demand.

Many ICT companies, who could only sell their workers at absolute bottom prices during the crisis years (or even below their cost price), might see this as the perfect moment to take revenge against their disloyal principals and raise their prices a ‘teeny weeny’ bit more than strictly necessary. Just for the simple fact that they can do it and to get even with the principals who bluntly forced them to lower their prices in earlier years.

Or they could decide to play the oldest trick in the ICT industry: delivering young and unexperienced professionals for the prices of older, seasoned professionals, in fixedly contracted projects and semi-permanent maintenance jobs, either hoping that their principals will not notice the difference or simply not caring about that.

And the biggest pitfall for the ICT industry as a whole might also return in 2016: that ICT companies become so strapped for new personnel, that they convince everybody and their sister in other industries, to become ICT-workers. While some of these “side-influx workers” (i.e. “zij-instromers” in Dutch) have become excellent ICT-professionals after all, many of these new ICT-workers simply lacked the quality and the experience to become really good in it.

With that in mind, 2016 might become a very interesting year for both supply and demand of ICT services.

Perhaps, it might even mark the start of an overheating (!) economy in the making, after so many years in which the sun seemingly did not want to shine anymore within the ICT industry and many, many other industries within The Netherlands. 

Can I be wrong? I can be wrong! But when I’m right after all, don’t forget where you read it first!