Trump scrambles Ex-Im Bank politics

The politics around the Export-Import Bank just got much weirder.

President Donald Trump is reaching for a compromise in the debate raging around the bank, aiming to keep the agency open while putting an outspoken, ultra-conservative opponent of the institution at the helm.

In doing so, Trump has confused the politics around the export credit agency, which had been a major boost to American manufacturers such as Boeing, GE and Caterpillar before Republicans took steps to crimp the flow of financing.

The formerly anti-Ex-Im Trump abruptly changed his tune on the bank last week when he called it “a very good thing” and announced plans to nominate two board members. That was a major step toward bringing the agency back to its full working capacity.

Then, two days later, he nominated for the chairmanship former Rep. Scott Garrett (R-N.J.), a vocal foe of the bank who has also come under fire in the past for his comments about homosexuality. That set up a political tightrope that both supporters and detractors of the agency may have trouble navigating.

Democrats who champion the agency because they say it creates jobs and promotes manufacturing are uneasy about supporting a social conservative who might try to hamstring the bank from within. Sen. Chris Van Hollen (D-Md.), a member of the Banking Committee, which will vet the nominees, said appointing Garrett as chair would put thousands of American jobs at risk.

Then there are conservative Republicans who have been critical of the bank and are now cheering Garrett’s nomination.

“For too long, the bank has been a clear example of corporate welfare run amok — benefiting special interests and foreign companies at the expense of U.S. taxpayers,” said Sen. Pat Toomey (R-Pa.), who also sits on the Banking Committee. “I am confident that Congressman Garrett will chart a new course for the bank that puts U.S taxpayers first.”

The result is a 180-degree flip-flop, where lawmakers and interest groups who had expended significant resources and political capital to rein in the bank could shift to support Trump’s nominees, while its biggest champions could be left behind.

“We’re encouraged and optimistic that [Garrett] would be able to substantively reform the Export-Import Bank, make it work better in the meantime,” said Chrissy Harbin, vice president of external relations at the conservative advocacy group Americans for Prosperity. “And then when the reauthorization comes up again … we’d encourage D.C. to have the same conversation about the possibility of letting it expire once and for all.”

Democrats on the Banking Committee have reservations about Garrett, including Sens. Heidi Heitkamp (D-N.D.), Joe Donnelly (D-Ind.) and Catherine Cortez Masto (D-Nev.).

Cortez Masto said she was pleased that Trump was committing to making the bank functional. Still, she has concerns about Garrett, “given his past opposition to Ex-Im’s mission, not to mention his divisive rhetoric toward LGBT families.”

“This Garrett nom is a Catch-22,” one Senate Democratic aide said. “We need to confirm him to have a quorum, but he could be a cancer inside the agency.”

Last November, Garrett lost a seat he had held since being elected to Congress in 2002. A key moment in the race came in 2015, when POLITICO reported that he told fellow GOP members that he wouldn’t support the National Republican Congressional Committee because it backed gay candidates.

Financial companies that had been campaign backers during his years as a senior member of the House Financial Services Committee pulled back.

Garrett later denied that he objected to gay candidates and said his problem was with support for same-sex marriage.

He lost to a well-funded Democratic challenger, Josh Gottheimer, but stayed plugged in to the emerging Trump team. While in Congress, Garrett served with Vice President Mike Pence and is said to be close with the former Indiana congressman. He also counted White House counselor Kellyanne Conway as a constituent and campaign donor. A December meeting at Trump Tower was well-publicized.

Garrett could not be reached to comment on this story.

Beyond Congress, his nomination also puts big American manufacturers in an awkward spot. They need more board members at the bank to provide a quorum that’s necessary to approve deals with more than $10 million. Yet they are unsure what changes might be in store given Garrett’s past comments and promises from senior administration officials like White House Budget Director Mick Mulvaney to put “reformers” at the helm.

For now, major users of the bank are focusing on the fact that Trump has put forward any nominees rather than worrying about who they are.

“Generally speaking, between the president’s comments and naming of two nominees, it’s really encouraging,” said Kate Bernard, a Boeing spokeswoman. Boeing, she added, has experienced the loss or delay of three satellite sales since the bank first fell victim to political crossfire in 2015, so giving the bank back its quorum to “shake loose” projects that remain in the pipeline is the most crucial step at this point.

There’s no question, however, that the Garrett nomination “raises some eyebrows in the business community” and “sends some mixed messages given his previous history in the House,” said one bank proponent who asked not to be named.

Garrett established himself as a consistent and outspoken opponent of the bank while in Congress, twice voting against its reauthorization in the past five years. In 2014, he expressed skepticism that attempts at reform would ever be successful, and he pushed hard the following year to let the charter expire.

“We have the opportunity to save capitalism from cronyism and to fulfill a promise to the American people to work for them instead of a select few with special connections in Washington,” Garrett said in May 2015.

“For the sake of the American taxpayer and the preservation of the free enterprise system, Congress should put the Export-Import Bank out of business.”

The White House noted that history of opposition toward the bank in discussing his appointment, saying Trump chose him “to both usher in reforms and prioritize small businesses.”

“Former Rep. Scott Garrett has passionately spoken out on some of the problems that the Bank’s previous activities created,” a White House spokeswoman said in an email. “He will be a key voice for reform.”

61ae8-exim-bank1The current nominees represent only a temporary fix: Garrett and former House Financial Services Chairman Spencer Bachus (R-Ala.), who Trump picked to sit on the board of directors, would both have to be approved to restore the bank to full working capacity. What’s more, they’ll provide a quorum that will only last until July 19, when acting Vice Chairman Scott Schloegel’s term expires. At that point, the bank would lack a quorum once again if no additional members have been confirmed before then.

But in the meantime, major users of the bank fear that the administration is trying to reshape the agency in a way that would hurt large companies that have traditionally benefited from it. Various administration officials have hinted at their own ideas for reform.

Mulvaney, who was a critic of the bank while a member of Congress, told CNBC last week that Trump’s nominees would make sure the bank “sticks to its knitting.” Commerce Secretary Wilbur Ross told the network in a separate interview that he wanted a reformed bank to “help small businesses more.”

Some reforms will be put into place as soon as Garrett and Bachus — or any two nominees — are confirmed and a board with at least three members votes to approve them. The bank’s 2015 charter included a slate of changes for the bank, and while a majority have been completed, a handful require a board quorum to be implemented — something the bank has lacked since its reauthorization was passed almost a year and a half ago.

Two of the outstanding requirements involve appointing a chief ethics officer and chief risk officer. A third involves the bank’s lending to small businesses and “increases the authority of staff to approve applications for up to $25 million in export financing for small business working capital and insurance products.”

But beyond that, bank observers say there is little a chairman can do on his own to change the bank’s operations.

And while he could attempt to direct export credit assistance more often to smaller businesses, “there’s not a ton of discretion,” said Peter Cohn, an analyst with Height Securities.

“So I don’t know that we’re going to see a whole lot more than window dressing on that front,” he said.

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Why Weak Currencies Have a Smaller Effect on Exports

Because manufacturers increasingly use components from abroad to make things, exports now incorporate a lot more imports

Workers at a Robert Bosch GmbH plant in Blaichach, Germany, use touchscreen panels on the automobile gasoline direct injector valve assembly line. Germany is an export powerhouse.
Workers at a Robert Bosch GmbH plant in Blaichach, Germany, use touchscreen panels on the automobile gasoline direct injector valve assembly line. Germany is an export powerhouse. PHOTO: KRISZTIAN BOCSI/BLOOMBERG NEWS

As various central banks loosened monetary policy this year, some economists predicted another cycle of beggar-thy-neighbor currency wars, in which countries race each other to become the cheapest exporter.

But it hasn’t panned out that way, and now a growing body of evidence suggests why: A shift in trade dynamics is blunting the impact of a weak local currency.

This could be all the more relevant now, when the monetary policies of the world’s most powerful central banks—the Federal Reserve and the European Central Bank—are heading in very divergent directions, possibly taking the value of their currencies along with them.

When a country loosens its monetary policy, interest rates fall and investors tend to pull their money out in search of higher yields elsewhere, pushing down the currency’s value.

That is still happening. But the dynamic isn’t affecting trade flows as much as expected. What has changed is where businesses source the things they need to make the products they export. Manufacturers once found most components needed to make their goods at home. Now they increasingly look abroad for such inputs. As a result, exports now incorporate a lot more imports.

It is still the case that when a currency such as the euro weakens, it reduces the price of goods sold by German manufacturers in the U.S. But it also increases the price of the things that German manufacturers import to make those exported goods.

Containers at the Port Newark Container Terminal in Newark, N.J.
Containers at the Port Newark Container Terminal in Newark, N.J. PHOTO: JULIO CORTEZ/ASSOCIATED PRESS

Measuring the impact of global supply chains on trade flows is the task of a project undertaken by the Organization for Economic Cooperation and Development and the World Trade Organization.

Using detailed figures from economies around the world, economists at the two bodies have measured how much foreign content there is in each nation’s exports, confirming a significant increase since the mid-1990s. The foreign content of Switzerland’s exports, for instance, increased to 21.7% in 2011 from 17.5% in 1995, while the imported content of South Korea’s exports almost doubled, to 41.6% in 2011 from 22.3% in 1995.

Economists at the International Monetary Fund and the World Bank have used those measures to assess whether currency movements have the same impact they once did on exports and imports. They found that the effect has in fact reduced over time, by as much as 30% in some countries.

Policy makers are beginning to take note. “As countries become more vertically integrated via global value chains, exchange-rate variations will have a diminishing impact on the terms of trade,” said Benoît Coeuré, a member of the European Central Bank’s executive board and one of its thought leaders, speaking in California last month. He concluded the process will reduce the role of currency moves as “shock absorbers” that direct global demand toward weaker economies from stronger ones.

Japan offers the clearest indication that big currency depreciations don’t deliver the export boost they once did. In early 2013, the Bank of Japan launched a massive stimulus program that increased the supply of yen and led to the currency’s sharp depreciation against the dollar and the euro.

That strategy was a key element of Japan’s package of measures designed to lift the economy out of a long period of stagnant growth. But what followed was something of an anticlimax. The yen’s weakening had little impact on Japanese exports, and failed to restart economic growth. Puzzled policy makers pointed to the weak state of demand in the global economy, but even if that were the case, Japanese exporters should have gained market share.

A similar pattern has emerged in the wake of the ECB’s January decision to launch its own program of quantitative easing. Like the yen, the euro weakened, continuing a decline against the dollar that started in early 2014 and now amounts to roughly 20%.

In early 2015, the launch of QE was expected to boost eurozone growth by aiding exports. But once again, the impact of a weakened currency has been modest. Indeed, in the three months to September, eurozone growth was held back by a more rapid growth of imports over exports, while industrial output flatlined.

Experts believe it takes about 12 to 18 months for foreign-exchange moves to have their full impact on trade flows, so the effect would have been felt by now in both the eurozone and Japan. The euro started weakening against the dollar in early 2014, while Japan is about three years into its currency depreciation.

Those disappointments don’t mean currency movements caused by the great divergence between the Fed and the ECB won’t have any impact. That is a key concern for U.S. businesses in the wake of the Fed’s decision this month to raise interest rates for the first time in almost a decade—just weeks after the ECB moved its policy in the opposite direction. Many economists still expect the U.S. to suffer some slowdown in exports, while the eurozone enjoys some pickup. Already in the first 10 months of 2015, the U.S. trade deficit widened by 5.3% from a year earlier, reflecting a decline in exports.

And as the economists from the IMF and World bank have noted, the degree to which a currency movement boosts or reduces exports depends on how large their foreign content is. For the economy as a whole, the foreign share of U.S. exports is at the lower end of the global range, at around 15%, compared with more than 25% in Germany.

“It’s more complicated as a story for the U.S. because of the low foreign content,” saidSebastian Miroudot, a trade economist at the OECD.

Write to Paul Hannon at paul.hannon@wsj.com

Export-Import Bank Near Showdown in Congress

Senator Maria Cantwell, Democrat of Washington, tied a vote on trade to a vote on extending  the Export-Import Bank.CreditAndrew Harnik/Associated Press

WASHINGTON — In 2013, the impoverished African nation Cameroon teamed with General Electric and the Environmental Chemical Corporation, which is based in Burlingame, Calif., to begin work on a $668 million drinking water project for its thirsty capital, financed with loan guarantees from the Export-Import Bank of the United States.

But as the project moves toward its larger second phase, the threatened demise of the Export-Import Bank, a 70-year-old federal export credit agency, is rippling across Cameroon. The water project is a potential victim of an effort by conservative Republicans to kill the bank.

The Ex-Im Bank reaches a critical moment on Friday: Congress must be notified 35 days in advance of all projects of more than $100 million, and with powerful Republicans bent on letting the bank die when its authorization expires on June 30, all the projects frozen over that review period would die with the bank.

While the bulk of the Ex-Im Bank’s financing is used to support the sale of things like Boeing jetliners to companies abroad, projects like Cameroon’s are also animating a dispute in Congress that is reaching a critical juncture this week.

Senators Maria Cantwell, Democrat of Washington; Heidi Heitkamp, Democrat of North Dakota; and Lindsey Graham, Republican of South Carolina, halted Senate consideration of a major trade bill Wednesday, saying they would try to block a final vote on granting President Obama expanded trade negotiation power until they secured a vote on extending authorization for the Ex-Im Bank beyond June.

Their stand threatens the trade bill. Ms. Cantwell and Ms. Heitkamp are among fewer than a dozen Democrats supporting trade promotion authority. Mr. Obama needs their votes to break a filibuster supported by most Senate Democrats.

Ms. Cantwell and the other senators in her group accuse conservatives of sacrificing American jobs on the altar of what they portray as an ideological crusade.

“I don’t plan to start moving ahead until we stop catering to this minority group that doesn’t support the basic tools that the American people want,” Ms. Cantwell pledged.

She faces an uphill fight. Senator Mitch McConnell, Republican of Kentucky and the majority leader, said he personally opposed Ex-Im’s reauthorization, but he has promised a vote on the matter, which  would pass if it comes to a vote in the Senate.

In the House, though, conservatives say a majority of Republicans now oppose reauthorizing the bank. On Thursday, the 170-member Republican Study Committee — a conservative House group — will come out formally in favor of its extinction.

“All we have to do is nothing,” said Representative Raúl Labrador, Republican of Idaho. “I feel pretty good about our prospects.”

Virtually every Republican presidential candidate has been pulled into the campaign to kill the bank.

Representative Justin Amash, Republican of Michigan, said House Speaker John A. Boehner of Ohio could join Democrats to save the bank, but, Mr. Amash warned, “he does so at his own peril.”

Supporters of the Ex-Im Bank say the toll of that campaign is beginning to come into focus. G.E. said this week that a $350 million deal to build locomotives for Angola in Erie, Pa., is about to be lost, with 1,800 jobs.

Boeing says that it will be forced to cede deals in Asia to its only competitor in the wide-body passenger jet business, Airbus, which is based in France.

The looming cutoff of money could compel Cameroon to turn to China, which has already made a competing $850 million bid complete with financing from Beijing’s export credit agency. Executives at G.E. are scrambling for a Plan B, moving the work from its water technology facility in Minnesota to Canada or Hungary, where the company has other plants supported by those countries’ credit agencies.

“You’re talking about a country in sub-Saharan Africa,” said Heiner Markhoff, president and chief executive of G.E.’s water and process technology unit. Commercial banks “aren’t willing to take the risk without an export credit agency. It’s almost contingent on getting to the table.”

The Cameroon project shows the complexity of the issue. Ex-Im opponents say companies as large and powerful as G.E. and Boeing do not need a federal backstop to persuade private banks to finance export projects.

Mr. Markhoff said to some degree that was true — but that conservatives were missing the consequences for American companies that lack G.E.’s deep pockets and connections around the world.

The Environmental Chemical Corporation, with G.E.’s help and Ex-Im loan guarantees, struck the $668 million, three-phase deal with Cameroon’s government, which wanted an American government entity involved as well in what is a public water project.

The first phase — 10 mobile water treatment plants installed in Yaoundé, the capital, as an emergency measure — is done.

Phase 2 — a $532 million effort to move the mobile facilities to where they are needed in southwestern Cameroon while building permanent water plants in the capital — was scheduled to begin soon.

The competing Chinese proposal is part of an effort by Beijing to gain strategic influence in Africa. Its $850 million bid was substantially higher than the cost of the American project, but its financing is not in doubt.

Cameroon’s prime minister, Philémon Yang, has asked the Chinese and American teams to present side-by-side studies of the remaining work, Mr. Eber said. Environmental Chemical Corporation officials have tried to play down the Ex-Im developments in Washington, but he noted that the American study was now delayed pending the showdown.

G.E. officials said that without the support of the Ex-Im Bank, the company could still leverage its global operations to attract government financial backing elsewhere, probably in Hungary or Canada. But that would lead to moving work to the countries where that financing is available.

That could mean leaving a midsize company like the Environmental Chemical Corporation and much smaller suppliers behind. “We have 43 different suppliers in different states for this project,” Mr. Markhoff of G.E. said. “This is not about ‘big corporate welfare.’ ”

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Export Champions! webinar – Transforming Your Company into an Export Powerhouse with Cutting-edge Financing.

Export Champions! – Transforming Your Company into an Export Powerhouse with Cutting-edge Financing.

Join us for a webinar on July 07, 2015 at 3:00 PM EDT.

Register now!

https://attendee.gotowebinar.com/register/4402376754828717314

Fi3E BadgeExport Champions™ is a new program, which allows small and mid-size US manufacturing companies to vastly boost their export sales by utilizing cutting-edge export credit and capital markets financing for international opportunities.

Using actual case studies of the three US companies, whose export revenues from just three projects total over $525 million, as the result of their foresight to deploy financing techniques traditionally reserved for large companies and mega projects, Broad Street Capital Group and representatives of various US Government and private trade and project financing institutions, will empower other US small and midsize companies to successfully compete for large export business opportunities.
“Today, we are witnessing a paradigm shift in the way US small and mid-size companies are able take advantage of sales opportunities, which are two or three times their annual revenue.” said Alexander Gordin, Managing Director of the Broad Street Capital Group. “The key, is a carefully structured project, which is developed with specific long-term, low-cost financing solution in mind from the beginning” said Gordin. Featured Image -- 2741

The Export Champions™ webinar is a one hour introductory presentation during which participants will learn: 
which foreign markets and buyers to target, 
how to correctly develop a financeable transaction, 
which financing tools and programs to utilize, 
how to put together a correct team of advisers, 
utilizing external economic and political factors to gain an advantage, 
how to mitigate risks along the entire transaction life cycle

After registering, you will receive a confirmation email containing information about joining the webinar.

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Export Champions!™ With help of cutting-edge financing, four small and mid-size US companies are poised to export over $525 million of goods and services!

With the help of cutting edge financing, four small and mid-size US companies are poised to export over $525 million in just three individual transactions! 

Fi3E Badge(April 23, 2015, Washington, DC) During US EXIM Bank’s Annual Conference, Export Champions!™, a new program, which allows small and mid-size US manufacturing companies to vastly boost their export sales by utilizing cutting-edge export credit and capital markets financing for international opportunities, was announced by the Broad Street Capital Group.

Using actual case studies of the three US companies, whose export revenues from just three projects total over $525 million, as the result of their foresight to deploy financing techniques traditionally reserved for large companies and mega projects,  Broad Street Capital Group and representatives of various US Government and private trade and project financing institutions, will empower other US small and midsize companies to successfully compete for large export business opportunities.

“Today, we are witnessing a paradigm shift in the way US small and mid-size companies are able take advantage of sales opportunities, which are two or three times their annual revenue.” said Alexander Gordin, Managing Director of the Broad Street Capital Group. “The key, is a carefully structured project, which is developed with specific long-term, low-cost financing solution in mind from the beginning” said Gordin.

The Export Champions! program will offer monthly half-day web based programs and live training events to help companies learn:

  • which foreign markets and buyers to target,
  • how to correctly develop a financeable transaction,
  • which financing tools and programs to utilize,
  • how to put together a correct team of advisers,
  • utilizing external economic and political factors to gain an advantage,
  • how to mitigate risks along the entire transaction life cycle

The first Export Champions! event to take place in New York on May 8th.  Companies seeking to boost their international sales opportunities should send their inquiries to info@broadstreetcap.com , or call  + 1 212 705 8765 ext 702

About Broad Street Capital Group

Based in the heart of the New York City, Broad Street Capital Group is an international private merchant bank with extensive experience in developing and financing exports and infrastructure projects in emerging markets. The firm works closely with a number of international Export Credit Agencies, as well as with all trade and development agencies of the U.S. Government.   For over 25 years, Broad Street Capital Group has successfully served a broad array of private and state-owned clients in multiple countries and has been involved in several high-profile cross-border transactions in energy, IT/telecom, aerospace, healthcare, hospitality and franchising sectors. The firm’s hallmark is its proprietary Develop, Finance, Supply and Insure™ approach to help clients achieve their international business goals For more information, please visit www.broadstreetcap.com

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Maintaining Export Advantage in the Face of a Rising Dollar: Part 2

The path to becoming competitive in the international export space.In my previous post, I outlined the first two steps of the five-step framework that would enable U.S. exporters to maintain their competitive edge in the face of rising U.S. dollar, which makes all U.S. goods and services more expensive abroad. Those first steps were to recommit to exports and expand markets served.

Below, I describe the remaining three steps: READ MORE

Faeroe Islands Boom by Selling Salmon to Russia

Tiny territory dodged sanctions between Moscow and West over Ukraine

SØRVÁGUR, Faeroe Islands—As the tit-for-tat economic confrontation between Russia and the West nears its first anniversary, there are plenty of losers: associates of PresidentVladimir Putin barred from going to the U.S., European farmers banned from selling fruit to Russia, and German electrical-equipment companies that have lost a fifth of their Russian sales.

But one winner can be found in the rough sea between Iceland and Scotland: the tiny Faeroe Islands.

Because these 18 wind-swept rocky islands aren’t part of the European Union, the volleys of sanctions and counter-sanctions have passed them by. Russia’s food-import embargo last year retaliating against countries that sanctioned it thus handed the fishing-dependent Faeroes a virtual monopoly in Russia for their biggest export: fresh salmon.

“We are the lucky ones,” said Atli Gregersen, an owner of salmon farming brand Hidden Fjord, who has only been able to supply four of a dozen Russian importers who came to his factory looking for fish.

 Russia’s retaliation against Western sanctions over Ukraine left the Faeroe Islands, a non-EU country, as the only place in the world able to sell Russia large amounts of fresh salmon. Photo: Gareth Phillips for The Wall Street Journal

As Russia and the West descend deeper into a Ukrainian standoff with echoes of the Cold War, countries not involved in the fight are taking advantage of a shifting world order and the Kremlin’s push for new alliances. China has been securing more natural gas from Russia, Turkey might benefit from a new energy pipeline, and Mr. Putin personally promised last week that Moscow would help Egypt develop its nuclear-energy program.

Perhaps the starkest demonstration of just how far-reaching the global economic shifts wrought by the Ukraine crisis have been can be found here in the North Atlantic. The Faeroe Islands are the only major salmon producer in the world that wasn’t hit by Russia’s counter-sanctions last August and is close enough to send fresh fish to Russia by boat and truck.

Since September, Russia, a salmon-loving country of 145 million people, has been importing just about all of its fresh salmon from the Faeroe Islands, which has a population of 50,000. The Faeroes’ salmon sales to Russia totaled 27 million pounds or $79 million from September to December, according to data released Thursday, representing more than 40% of its total salmon exports by value and up from just 7% in that period of 2013. The average price of fresh salmon sent to Russia—around $3.13 a pound at the current exchange rate—was about 25% higher in those four months than the average price of the fresh salmon the Faeroes sold everywhere else, according to government data.

Behind that lucrative spike in exports were months of diplomatic and business maneuvering by the both the Faeroese and the Russians, telling a story of one nation’s scramble to feed its people while it confronts the West—and another’s push for economic gain from the new East-West standoff. The Faeroes’ tale shows that the showdown over Ukraine has turned into a confrontation with global consequences, redrawing trade routes, scrambling alliances, creating new economic winners and losers, and touching off national debates over countries’ allegiances and values.

“People need to have food. Russia needs to have food,” Kaj Leo Holm Johannesen, the Faeroese prime minister, said in an interview, rejecting criticism at home and abroad that his efforts to build ties with Russia amid the crisis have undermined the islands’ traditional bonds with the West.

Hunching forward in his chair and swinging his fist through the air, the 50-year-old former fish salesman added: “Other people can think about something else, but they will never stop us to deliver food. Never.”

The Ukraine crisis brought a new opportunity—and a new test of Faeroese independence and of how it balances trade interests with its Western ties.

A year ago—the night of Feb. 21, 2014—the pro-Russian president of Ukraine, Viktor Yanukovych, fled Kiev after huge protests calling for closer ties with the European Union culminated in deadly violence. As the new government took a pro-European tack, Russia claimed that Russian speakers in eastern Ukraine were threatened. Russia annexed the Ukrainian peninsula of Crimea and, Western leaders say, started fomenting a separatist war in eastern Ukraine.

On July 17, Malaysia Airlines Flight 17 was shot down over eastern Ukraine with 298 people on board. Western governments believed pro-Russian separatists were responsible. The rebels have suggested Ukrainian forces downed the plane. On July 29, amid public outrage over the tragedy, the U.S. and Europe dramatically expanded their sanctions against the Russian economy. Among other things, the U.S. limited transactions with three major Russian state-owned banks while the EU banned trading in certain military-related goods and stopped exports of oil-production technology.

In August, Moscow retaliated, insisting Kiev was at fault for Ukraine’s bloodshed. It banned the imports of a wide range of food products, including fish, from the U.S., Canada, the EU, Norway and Australia. European economies felt the brunt of the pain from the sanctions volley and Russia’s broader economic woes. Germany, for instance, saw its exports to Russia in 2014 fall by around $7 billion—a decline of 18% from 2013. U.S. exports to Russia fell by just $369 million, a 3% drop.

When news of Russia’s retaliation came in, the Faeroe Islands’ Mr. Johannesen said he directed his staff to get an urgent message to Moscow: “We are not part of EU—we are totally outside.”

Faeroe Islands Prime Minister Kaj Leo Holm Johannesen, shown in his office, lobbied hard to expand salmon sales to Russia after Moscow stopped buying the fish from Norway, as part of tit-for-tat sanctions over the Ukraine crisis.
Faeroe Islands Prime Minister Kaj Leo Holm Johannesen, shown in his office, lobbied hard to expand salmon sales to Russia after Moscow stopped buying the fish from Norway, as part of tit-for-tat sanctions over the Ukraine crisis.PHOTO: GARETH PHILLIPS FOR THE WALL STREET JOURNAL

The locals here still speak Faeroese, a Nordic language derived from the tongue spoken by Vikings who settled the islands 1,200 years ago. The islands have been under Danish rule for almost all of the last six centuries, but negotiated a home-rule agreement with Denmark after World War II that grants the Faeroes trade independence while giving Copenhagen control of other aspects of foreign policy, the currency and the legal system. The islands chose not to join the European Union and to make trade policy on their own.

Selling fish through peace and war has long been the Faeroe Islands’ economic lifeblood. The tiny country supplied Great Britain in World War II and signed a fishing agreement with the Soviet Union in the 1970s.

These days, a grid-like underwater glow visible from the coastline highway in the winter darkness is evidence of a more recent boom: salmon farming. The circular pens are sometimes lighted from below to speed up the fish’s internal clocks. The choice salmon specimens sometimes end up sliced into sushi in Midtown Manhattan. The less attractive salmon often goes to fish processors who salt or smoke it. In all, the Faeroes are perhaps more reliant on fishing than any other country. In 2013, fish sales abroad represented 95% of exports and 40% of total economic output.

After Mr. Johannesen’s urgent message, it quickly became clear to the Faeroese that Moscow had no intention of boycotting them. Critical Russian food imports, including around a billion dollars a year of Norwegian fish, had just come to a halt. Trucks filled with fresh salmon were turning around on their way to the Finnish-Russian border.

The Kremlin needed the Faeroe Islands to feed its people—and to underscore the point frequently heard from government officials and state media that Russia could thrive even with reduced ties to Europe and North America.

 
“We had no way out,” said Azamat Yusupov, a supplier to high-end Russian restaurants who had previously relied on Scottish salmon and flew to the Faeroes days after the ban was announced.
Hidden Fjord welcomed Mr. Yusupov with a spread of sashimi and took him out to their marquee salmon farm, a set of roughly 500-foot-diameter rings of netting off the island of Vágar, framed by dramatic, rocky crags.
Mr. Yusupov was sold. He calls Faeroese farmed salmon some of the best he’s eaten and says he would consider staying with it once sanctions lift.
There was just one problem: Hidden Fjord still had no approval from Russia’s veterinary inspection agency, even though the company had first applied back in 2011.
A worker processes fresh salmon at the Hidden Fjord factory in Sørvágur. E
A worker processes fresh salmon at the Hidden Fjord factory in Sørvágur. PHOTO: GARETH PHILLIPS FOR THE WALL STREET JOURNAL

To try to smooth things over for Faeroese exporters, Mr. Johannesen decided to go to Moscow himself. He flew there with two aides on Sept. 7, kicking off one of the more unusual trips in Faeroese diplomatic history. Danish officials lived up to their legal obligations by helping organize the visit—even though the talks would help the Faeroes benefit from Russian sanctions targeting Denmark and others in Europe.

The Danish ambassador invited Mr. Johannesen for dinner at his Moscow residence. Mr. Johannesen brought along Dmitry Dangauer, the chief executive of Russian Sea Group, a fish importing giant. The next day, the Faeroese delegation arrived at the headquarters of Russia’s federal fishing agency to meet a phalanx of government officials and seafood-company executives.

After the meeting, the fishing agency announced that Russia had accelerated veterinary approval of Faeroese fish and promised the customs service would work closely with Faeroese officials.

Mr. Johannesen later told a Faeroese newspaper, “It was an extremely constructive meeting. Maybe one of the best meetings I’ve ever had.”

Danish Foreign Minister Martin Lidegaard said his government understood the Faeroes’ decision to continue exporting fish to Russia. But, he added, Denmark and the EU expected the Faeroes “to refrain from exploiting the situation by significantly increasing their export of goods to Russia that are subject to embargo.”

E

On Sept. 11, Hidden Fjord finally dispatched its first-ever shipment to Russia: 19 tons of salmon bound for St. Petersburg. By thenBakkafrost , the largest Faeroese salmon producer, had received Russian veterinary approval for an additional factory. Its share price on the Oslo stock exchange surged, in part because of Russia, an analyst said. A Danish newspaper noted Bakkafrost’s rally had created the first Faeroese billionaire family as measured in Danish kroner: Bakkafrost CEO Regin Jacobsen and his mother Oddvør, the two largest owners of Bakkafrost stock (although in dollar terms their combined shares are worth just under $200 million).

While Russian imports of frozen Chilean salmon have also surged, just about all of the country’s imported fresh salmon this fall came from the Faeroes, according to Russian government data and research firm Customs Inform.

The future is uncertain: Demand could decline with the fall of the ruble, and Russian officials have signaled they may lift the food embargo in exchange for concessions from the West. The Faeroese hope the premium segment of the market they target will be less affected than the average Russian consumer by economic travails, and that even if Russia ends the embargo, the islands will have won new customers for the long term.

Regardless, for some Faeroese, the sanctions’ economic boon and the prime minister’s efforts to strengthen ties with Russia raised uncomfortable questions. Was the country crossing the line from legitimate economic pursuits to “stabbing the West in the back,” as Sjúrður Skaale, a leading opposition politician here, asked?

Mr. Jacobsen, the Bakkafrost CEO, has said the Russian embargo allowed his company to build up a new customer base and to demand higher prices—but even he voiced concern about actively seeking to boost the Faeroes’ business with Russia during the Ukraine conflict.

“It does not come to the Faeroe Islands to speak out too much in this,” said Mr. Jacobsen. “If we speak out, we should speak out as a part of the West.”

Mr. Johannesen, who became prime minister in 2008, makes no apology for his actions. Asked about Mr. Jacobsen’s criticism, he shot back: “If he should speak as part of the West, then he would not export a kilo to Russia.”

Write to Anton Troianovski at anton.troianovski@wsj.com

Should Congress Reauthorize the Export-Import Bank?

Two Experts Square Off on Whether the Bank Really Helps Small Business

WSJ.com

PHOTO: BLOOMBERG NEWS

Over the past few months, one of the most heated debates in small-business politics has centered on the fate of a federal agency: the Export-Import Bank of the United States.

At issue is whether Congress should reauthorize the bank when its current authorization expires in June. The bank’s mission, it says, is to support U.S. jobs by making it easier for domestic firms to sell abroad. As such, the bank says, it provides competitive export financing and ensures a level playing field for U.S. companies.

For instance, the bank encourages lenders to make loans to U.S. exporters by providing working-capital guarantees on the loans. It also provides products like credit insurance so that companies are protected if foreign buyers fail to pay bills. And it makes and guarantees loans to foreign buyers so they source from U.S. companies.

During the debates about the bank, one of the big arguments the bank and its advocates have made is that the institution is particularly valuable to small companies. Nearly 90% of the bank’s deals last year, covering more than $5 billion in financing and insurance, directly served small companies. Overall, the bank authorized $20.5 billion in financing.

Yes: It’s a Lifeline for Small Businesses Looking to Export
By Todd McCracken

Small firms face a host of financing challenges when they try to export. If Congress kills the Export-Import Bank, the challenges will get steeper.

Imagine the situation a small company faces when it approaches a bank for a loan to start selling overseas. The company is starting off with less equity than a big firm, and processing loans for smaller amounts isn’t as profitable for banks.

Exporting is, usually, strike three: The business’s customers are foreign buyers, and most banks won’t consider foreign receivables as collateral.

National Small Business Association data show that over the past five years between one-fourth and one-third of small firms haven’t been able to access adequate financing. And that’s among all small businesses; the number would almost certainly be higher among small exporters.

In light of that, the Export-Import Bank is a critical tool. Because the bank shoulders some of the risk of international deals, more small businesses are able to export today. There’s a larger argument for the bank, as well. There are foreign-export credit agencies around the world that provide substantial support for their country’s exporters. Killing the bank is tantamount to unilateral disarmament and will damage our global competitiveness.

Critics, however, say the bank doesn’t do much for small firms—and mostly helps industrial giants.

Helping the Little Guy
Yes, the bank does a lot of business with large companies. But small-business deals account for more than 85% of its transactions. Small companies did amount to a smaller percentage of the total dollar amount of deals—but smaller firms do smaller deals and represent a smaller total dollar amount. In 2014, nearly half of the bank’s small-business authorizations involved amounts under $500,000.

Let’s run down some of the other arguments made by critics. And refute them.

—Small companies that are helped aren’t actually as small or needy as the bank claims. But the bank uses Small Business Administration size standards, based on industry. Where a restaurant with 1,500 workers would be anything but small, a manufacturer with the same number is considered small by the SBA, which routinely revisits these standards with a good deal of stakeholder input.

—A report found the bank miscategorized 200 small companies. But that was 200 errors out of 6,000 companies examined—a 97% accuracy rate.

—The bank helps only a tiny fraction of small businesses. Less than 1% of small firms export; the bank couldn’t possibly benefit 10%, 20% or more.

—The Export-Import Bank is risky and a drain on taxpayers. The bank doesn’t provide subsidies. Customers pay for its financing and loan guarantees, and 98% of its deals include partnering with a private bank. The bank is a self-sustaining agency that in each of the past two years transferred nearly $1 billion in revenue to the Treasury—and its borrowers have had a very low default rate.

—An NSBA survey showed two-thirds of small exporters had no more trouble landing export financing than regular loans. Those who said that were older, larger and more experienced. We can’t dismiss the concerns of over a third of small exporters.

—The bank’s track record is all thanks to its accounting methods. But it uses the same method all federal agencies do—not some tricky system they’ve cooked up.

—The bank distorts the export market. But the market is already distorted for small firms, whether through the challenges they face or an unfair tax code. The bank helps to level the playing field.

Ex-Im Bank isn’t crony capitalism, it isn’t a drain on taxpayers and it has no private-market alternative. It’s a lifeline to small firms looking to export that otherwise wouldn’t be able to do so.

Mr. McCracken is the president and CEO of the National Small Business Association, a nonpartisan small-business advocacy group. He can be reached at reports@wsj.com .

No: The Bank Is Mainly Welfare for Large Firms
By Diane Katz

The Export-Import Bank is pushing out a slew of misinformation crafted to convince Congress that it is worthy of a long-term renewal. One of its central themes is that the bank is a champion of the little guy.

But, in fact, the bank is a fount of corporate welfare—and its subsidies put other U.S. firms at a competitive disadvantage and distort export markets.

It is impossible to know precisely how many small businesses actually benefit from Export-Import financing. Officials claim 20% of annual authorizations, but that is a stretch given the bank’s expansive definition of “small,” which includes firms with as many as 1,500 workers or revenue of up to $21.5 million annually. A recent investigation by a news agency found that the bank improperly categorized hundreds of corporations and conglomerates as small businesses.

Also consider that the bank finances less than 2% of U.S. exports overall. Economist Veronique de Rugy of the Mercatus Center at George Mason University calculates that the bank benefits just one-half of 1% of small businesses in the country.

Just How Crucial?
Proponents claim that the Export-Import Bank provides export financing that is otherwise unavailable to small companies. But based on the bank’s own data, Ms. de Rugy has documented that only 10.9% of the bank’s loans and long-term loan guarantees were categorized as necessary because the risk was too great for an exporter or a financial institution to assume. In other words, 89.1% of those loans and guarantees had nothing to do with private financing being unavailable.

Record demand for U.S. exports indicates no shortage of private capital to finance the sale of American goods overseas. In a 2013 survey of small exporters by the National Small Business Association, some 63% reported that getting export financing was no more difficult than getting regular financing.

U.S. exports would remain very strong if the bank isn’t reauthorized—regardless of whether other nations have export credit agencies to subsidize native businesses. Reauthorization would not remedy actual barriers to export growth, such as high corporate tax rates and budget deficits that push hundreds of billions of dollars into Treasurys instead of business investment.

No Benefit at All
What’s more, the contention that the bank is a financial plus for the government is a mirage caused by the bank’s accounting. The Congressional Budget Office reported in May that Export-Import Bank programs, if subjected to the fair-value accounting methods required of private banks, actually operate at a deficit that will cost taxpayers some $2 billion over 10 years, in addition to the bank’s operating costs.

The same goes for the supposedly low default rate of bank clients. The bank’s true financial condition is obscured by its narrow definition of default, which does not cover a variety of loan violations designated as defaults by private banks.

The Export-Import Bank’s officials are spending millions of dollars attempting to convince Congress and the public that small businesses would disappear without export subsidies. They assume that the economic activity they subsidize would not occur absent bank financing—an absurd notion, but one prevalent among bureaucrats who cannot fathom that business actually functions without them.

All propaganda to the contrary, the vast majority of Ex-Im subsidies benefit America’s largest corporations. If Congress really wants to help the little guy, it will allow the Export-Import Bank to expire and eliminate the tax and regulatory barriers that cripple small business.

Ms. Katz is a research fellow in regulatory policy at the Heritage Foundation. She can be reached at reports@wsj.com .

 

In Pursuit Of Global Deals…this poem kind of sums up the international business experience

Dealmakers’ Anthem!

Before the sunrise hits the roofs,
Before the birds begin to sing,
As drops of dew roll off the grass,
We hear the bells of global deals ring

Their energy provides the fuel
to drive the shipments cross the globe,
The email bits are cold and cruel,
They’re deals’ blood and players’ hope

The deals take us to strange places,
Exotic towns, abandoned mines,
Through deals we learn people’s faces,
And find the truth between the lines

The deals are like drugs and vices,
They make us high, and crashing lows they bring,
We chase them hard; we sometimes take bad chances,
and yet like junkies we pursue them and ignore their sting

                                                                                                         A. M. Gordin ( ©2011-2014 all rights reserved)
Brought to you by the
A must have tool for anyone involved in international business

A must have tool for anyone involved in international business

Three Myths about the Ex-Im Bank

by , Petersen Institute

61ae8-exim-bank1Congress has begun holding hearings on the reauthorization of the US Export-Import Bank, which provides financing assistance to help US exports. TheEx-Im Bank’s charter expires in September. Three myths are being perpetuated by the new House majority leader, Kevin McCarthy, and other conservatives who would like to see the Ex-Im Bank closed. Below these myths are considered in turn.

Myth #1 — The Ex-Im Bank is a drain on taxpayers.

No, it sends money to the US Treasury from the interest and fees it receives on loans, amounting to $2 billion over the last 5 years. The reality for taxpayers is that the Ex-Im Bank pays interest on the funds it borrows and returns a profit at the end of the day. The default rate is very low, generating very little risk for taxpayer money.

The Ex-Im Bank’s foes argue that private banks would charge exporters higher interest rates, and therefore exporters are getting subsidized loans, which is costly to taxpayers. However, as my colleague Gary Hufbauer shows, this so-called “fair value” measure uses private rates that are arguably far from comparable.

Myth #2 — The Ex-Im Bank is a form of crony capitalism.

Crony capitalism prevails when ties between government and business determine success. The Ex-Im Bank’s detractors argue that too much money goes to big exporters like Boeing and General Electric (GE). In reality, the Ex-Im Bank’s clients reflect the broader distribution of US exports, where large exporters account for the bulk of trade. Specifically, 90 percent of borrowers are small businesses, similar to the rate of small businesses in trade (85 percent of exporters have fewer than 100 workers, and 95 percent of exporters have fewer than 500 workers). While small businesses accounted for only 19 percent of the total amount authorized by the Ex-Im Bank last year, this is also similar to their share in trade. Firms with 100 or fewer employees account for just 15 percent of export values, on average, and firms with fewer than 500 employees account for 25 percent of exports. The skewed distribution of export financing simply reflects the skewed distribution of exporting.

True, four employees at the Bank are being investigated by the Justice Department for allegedly accepting gifts in exchange for loans or contracts (not with the big companies). The investigation shows that corruption is not tolerated in the institution, but it still smells bad and comes at an unfortunate time. And, of course, corrupt individuals, with a much greater cost to society, are also found in private sector banks (and Congress, for that matter). In response, the Bank must be transparent in its anti-graft rules and their implementation in order to ensure we don’t toss out America’s top exporters with four bad apples.

Myth #3 — The private sector will do better.

The government intervenes when there are positive effects to lending in a sector. Take student loans. There are positive results derived by a more educated public, so governments offer students lower rates than they would receive on the private market.

The same argument can be made for trade (and exporters have a much lower default rate than students). There are public benefits from having more exporters, which create better jobs—exporting firms tend to pay more and offer more benefits than other firms—and are less vulnerable to fluctuations in local demand. In addition, there are a lot of hurdles to export participation, such as paperwork and logistics. Cheaper loans help to offset these costs, especially for small businesses that may otherwise be unable to enter the export market.

There is also a legal distortion in the private market. Trade is highly collateralized, but foreign accounts receivable are ineligible to count as collateral in bank borrowing. This means that private sector interest rates on trade finance tend to be well above what their real risk warrants.

Finally, there is the important issue of the level playing field. Our large trading partners have trade financing banks that are many times larger than the US Ex-Im bank. Without this tool, we put US firms that create good jobs for Americans at a disadvantage with respect to foreign competition.

Given the Bank’s extremely specialized role, with no obvious cost, it is difficult to understand why the Bank has even become a target. Unlike healthcare or unemployment insurance, where support follows traditional party lines, the reauthorization of the Ex-Im Bank pits the right against the far right. Does this new territory suggest that the Republican Party is fragmenting? Or is this part of a broader strategy, where bank closure brings the discussion on spending and redistribution one step closer to the bigger fish that conservatives in the party really want to fry?

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