Yes, America Should Be the World’s Policeman

Bush did too much and Obama too little—but a ‘broken-windows’ model of U.S. foreign policy can be just right

‘If the world’s leading liberal-democratic nation doesn’t assume its role as world policeman,’ writes Journal columnist Bret Stephens, ‘the world’s rogues will try to fill the breach, often in league with one another.’
‘If the world’s leading liberal-democratic nation doesn’t assume its role as world policeman,’ writes Journal columnist Bret Stephens, ‘the world’s rogues will try to fill the breach, often in league with one another.’ PHOTO ILLUSTRATION BY STEPHEN WEBSTER; GETTY IMAGES (COP, BADGE)

When it comes to U.S. foreign policy, Americans must sometimes feel like Goldilocks in the three bears’ house. The porridge that was President George W. Bush’s “freedom agenda”—promising democracy for everyone from Karachi to Casablanca—was too hot. The mush that has been President Barack Obama ’s foreign policy—heavy on rhetoric about resets, pivots and engagement but weak in execution and deeply ambivalent about the uses of U.S. power—is too cold.

What we need instead, as the fairy tale has it, is a foreign policy that is just right—neither too ambitious nor too quiescent, forceful when necessary but mindful that we must not exhaust ourselves in utopian quests to heal crippled societies.

The U.S. finds itself today in a post-Cold War global order under immense strain, even in partial collapse. Four Arab states have unraveled since 2011. The European Union stumbles from recession to recession, with each downturn calling into question the future of the common currency and even the union itself. In Asia, China has proved to be, by turns, assertive, reckless and insecure. Russia seeks to dominate its neighbors through local proxies, dirty tricks and even outright conquest. North Korea’s nuclear arsenal and Iran’s effort to develop one tempt their neighbors to start nuclear programs of their own. And even as the core of al Qaeda fades in importance, its jihadist offshoots, including Islamic State, are metastasizing elsewhere.

As for the U.S., the sour experience of the wars in Iraq and Afghanistan has generated a deep—and bipartisan—reluctance to interfere in foreign conflicts, on the view that our interventions will exact a high price in blood and treasure for uncertain strategic gains. One result is that aggressive regimes seem to think that they can pursue their territorial or strategic ambitions without much fear of a decisive U.S. response. Another is that many of our traditional allies, from Israel to Saudi Arabia to Japan, are quietly beginning to explore other options as the old guarantees of the postwar Pax Americana no longer seem as secure as they once were.

How should an American president navigate through this world of ambitious rogues and nervous freelancers? How can the U.S. enforce some basic global norms, deter enemies and reassure friends without losing sight of our global priorities and national interests? How do we conduct a foreign policy that keeps our nightmares at bay, even if we can’t always make our dreams come true?

When it comes to restoring order in places widely assumed to be beyond the reach of redemption, there is a proven model for us to consult. But it has nothing to do with foreign policy; it has to do with policing our toughest inner cities. And it has brought spectacular—and almost wholly unexpected—results.

Could it be that there’s a ‘broken windows’ cure not just for America’s mean streets but for our increasingly disorderly world?Could it be that there’s a ‘broken windows’ cure not just for America’s mean streets but for our increasingly disorderly world? GETTY IMAGES

The year 1991 was a year of foreign policy triumphs for the U.S., from victory in the Gulf War to the collapse of the Soviet Union. But it was the annus horribilis for American crime, with nearly 1.1 million aggravated assaults, 106,590 forcible rapes and 24,700 murders. In every category, crime was up from the year—and the decade—before. As late as 1995, some criminologists were predicting that a new wave of “super-predators” would descend on American neighborhoods. “If current trends continue, the number of arrests of juveniles for violent crimes will double by the year 2010,” reported the New York Times, citing a Justice Department report.

“Current trends” did not continue.

In 1990, New York City registered a homicide rate of 30.7 murders for every 100,000 people. By 2012, it had fallen to a rate of 5. A similar, if slightly less dramatic, story unfolded in every other major U.S. city. The social deliverance happened despite the fact that many of the factors often cited to explain crime—bad schools, broken homes, poverty, the prevalence of guns, unemployment—remained largely the same from one decade to the next.

What happened? The crack epidemic crested in the early 1990s. The police began developing new techniques to track and control patterns of criminal activity. Between 1992 and 2008, the number of law enforcement personnel rose by 141,000, a 25% increase, and from 1990 to 2000, the adult incarceration rate nearly doubled. More cops on the streets; more bad guys behind bars. It was bound to have an effect.

But something else was at work. In 1982, George Kelling, a criminologist at Rutgers, and James Q. Wilson, a political scientist at Harvard, wrote an essay for the Atlantic Monthly titled “Broken Windows.”

Their core insight turned on a social-science experiment conducted in 1969 by Philip Zimbardo, a psychologist at Stanford. Dr. Zimbardo parked a car on a street in the Bronx, with the hood up and without license plates. Within 10 minutes, vandals begin to pick the car clean of its valuables: battery, radiator, tires. By the next day, people began destroying the car, ripping up pieces of upholstery and smashing windows.

Dr. Zimbardo then conducted the same experiment in tony Palo Alto, Calif., near the Stanford campus. This time, the car—also with the hood up and the license plates removed—sat untouched for several days. So Dr. Zimbardo smashed a window with a sledgehammer. “Soon, passersby were joining in,” wrote Drs. Kelling and Wilson. “Within a few hours, the car had been turned upside down and utterly destroyed.” What to conclude?

“Disorder and crime are usually inextricably linked, in a kind of developmental sequence,” Drs. Kelling and Wilson argued. It had long been known that if one broken window wasn’t replaced, it wouldn’t be long before all the other windows were broken too. Why? Because, they wrote, “one unrepaired broken window is a signal that no one cares, and so breaking more windows costs nothing.”

The idea that the mere appearance of disorder encourages a deeper form of disorder cuts against the conventional wisdom that crime is a function of “root causes.” Yet municipalities that adopted policing techniques based on the broken-windows theory—techniques that emphasized policing by foot patrols and the strict enforcement of laws against petty crimes and “social incivilities”—tended to register sharp drops in crime and improvements in the overall quality of life.

We are disposed to think that, over time, order inevitably dissolves into disorder. But the drop in crime rates reminds us that we can go the other way—and impose order on disorder. Could it be that there’s a “broken windows” cure not just for America’s mean streets but for our increasingly disorderly world?

President Obama often talks about rules. After Syrian dictator Bashar al-Assad used sarin gas to murder more than 1,000 people near Damascus in August 2013, Mr. Obama warned that “if we fail to act, the Assad regime will see no reason to stop using chemical weapons.” After Russia seized Crimea in 2014, he denounced the Kremlin for “challenging truths that only a few weeks ago seemed self-evident, that in the 21st century, the borders of Europe cannot be redrawn with force.”

The language is elegant; the words are true. Yet the warnings rarely amount to much. The U.S. succeeded in getting Mr. Assad to give up much of his chemical arsenal, but the Syrian dictator goes on slaughtering his people, sometimes using chlorine gas instead of sarin. The president’s immediate response to the seizure of Crimea was to sanction a handful of Russians, send a few fighter jets to Poland and Lithuania, and refuse Ukrainian requests for military support.

This is how we arrive at a broken-windows world: Rules are invoked but not enforced. Principles are idealized but not defended. The moment the world begins to notice that rules won’t be enforced, the rules will begin to be flouted. One window breaks, then all the others.

The most urgent goal of U.S. foreign policy over the next decade should be to arrest the continued slide into a broken-windows world of international disorder. The broken-windows theory emphasizes the need to put cops on the street—creating a sense of presence, enforcing community norms, serving the interests of responsible local stakeholders. It stresses the need to deter crime, not react to it, to keep neighborhoods from becoming places that entice criminal behavior.

A broken-windows approach to foreign policy would require the U.S. to increase military spending to upward of 5% of GDP. That is well above the 3.5% of GDP devoted to defense in 2014, though still under its 45-year average of 5.5%. The larger budget would allow the Navy to build a fleet that met its long-stated need for 313 ships (it is now below 290, half its Reagan-era size). It would enable the Air Force to replace an aircraft fleet whose planes are 26 years old on average, the oldest in its history. It would keep the U.S. Army from returning—as it now plans to do, over the warnings of officers like Army Chief of Staff Gen. Raymond Odierno —to its pre-World War II size.

The key to building a military ready to enforce a broken-windows policy is to focus on numbers, not on prohibitively expensive wonder-weapons into which we pour billions of research dollars—only to discover later that we can afford just a small number of them.

Broken-windows foreign policy would sharply punish violations of geopolitical norms, such as the use of chemical weapons, by swiftly and precisely targeting the perpetrators of the attacks (assuming those perpetrators can be found). But the emphasis would be on short, mission-specific, punitive police actions, not on open-ended occupations with the goal of redeeming broken societies.

The central tragedy of the Iraq war is that it took nine months, at a cost of some 480 American lives, to remove Saddam Hussein from power and capture him in his spider hole—which ought to have been the central goal of the war. Yet we spent eight years, and lost an additional 4,000 Americans, in an attempt to turn Iraq into a model of Arab democracy—a “root cause” exercise if ever there was one. There’s a big difference between making an example of a regime like Saddam’s Iraq and trying to turn Iraq into an exemplary state.

A broken-windows foreign policy would be global in its approach: no more “pivots” from this region to that, as if we can predict where the crises of the future are likely to arise. (Did anyone see Russia’s invasion of Ukraine coming?) But it would also know how to discriminate between core interests and allies and peripheral ones.

As Henry Nau of the George Washington University notes in a perceptive recent essay in the American Interest, we should “focus on freedom where it counts the most, namely on the borders of existing free societies.” Those are the borders that divide the free countries of Asia from China and North Korea; the free countries of central Europe from Russia; and allies such as Israel and Jordan from many of their neighbors.

A broken-windows foreign policy wouldn’t try to run every bad guy out of town. Nor would it demand that the U.S. put out every geopolitical fire. American statesmen will have to figure out which of those fires risks burning down the entire neighborhood, as the war in Syria threatens to do, and which will probably burn themselves out, as is likely the case in South Sudan.

Then again, foreign crises rarely present a binary choice between doing nothing and conducting a full-scale military intervention. A cruise-missile strike against a single radio tower in Rwanda during the 1994 genocide could have helped to prevent Hutus from broadcasting instructions for murdering Tutsis, potentially saving thousands of innocent lives at minimal cost to the U.S. Bomb strikes by NATO to lift the siege of Sarajevo helped to turn the tide of the war in the former Yugoslavia against Serbian dictator Slobodan Milosevic, also at no serious cost to the U.S. Perhaps it is time for a strategy that enshrines the principle that preventing tragedy should enjoy greater moral legitimacy than reactingto it.

In his famous 1993 essay, “Defining Deviancy Down,” the late Daniel Patrick Moynihan observed how Americans had become inured to ever-higher rates of violent crime by treating as “normal” criminal activity that would have scandalized past generations of Americans. “We are getting used to a lot of behavior that is not good for us,” the senator from New York wrote. Twenty years later, the opposite has happened. We have defined deviancy up. But having done so, we have tended to forget how much better things are now than they were before.

Americans have lived in a relatively orderly world for so long that we have become somewhat complacent about maintaining it. Perhaps that explains why, in recent years, we have adopted a foreign policy that neglects to do the things that have underpinned that orderly world: commitments to global security, military forces adequate to those commitments, a willingness to intervene in regional crises to secure allies and to confront or deter aggressive regimes.

In recent months, however, and especially since the rise of Islamic State and the beheading of American journalists Steven Sotloff and James Foley, Americans have begun to rediscover certain truths about Pax Americana: If our red lines are exposed as mere bluffs, more of them will be crossed. If our commitments to our allies aren’t serious, those allies might ignore or abandon us. If our threats are empty, our enemies will be emboldened, and we will have more of them.

In other words, if the world’s leading liberal-democratic nation doesn’t assume its role as world policeman, the world’s rogues will try to fill the breach, often in league with one another. It could be a world very much like the 1930s, a decade in which economic turmoil, war weariness, Western self-doubt, American self-involvement and the rise of ambitious dictatorships combined to produce catastrophe. When President Franklin Roosevelt asked Winston Churchill what World War II should be called, the British prime minister replied, “the unnecessary war”—because, Churchill said, “never was a war more easy to stop than that which has just wrecked what was left of the world from the previous struggle.” That is an error we should not repeat.

To say that the U.S. needs to be the world’s policeman isn’t to say that we need to be its preacher, spreading the gospel of the American way. Preachers are in the business of changing hearts and saving souls. Cops merely walk the beat, reassuring the good, deterring the tempted, punishing the wicked.

Not everyone grows up wanting to be a cop. But who wants to live in a neighborhood, or a world, where there is no cop? Would you? Should an American president?

Mr. Stephens writes “Global View,” the Journal’s foreign-affairs column, for which he won a Pulitzer Prize in 2013. This essay is adapted from his new book, “America in Retreat: The New Isolationism and the Coming Global Disorder,” to be published Tuesday by Sentinel.

Develop, Finance, Supply & Insure Your Way to International Business Success

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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,
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                                                                                                         A. M. Gordin ( ©2011-2014 all rights reserved)
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U.S. Oil Exports Ready to Sail

Tanker of Texas Oil Heading to South Korea in First Sale Since 1970s Embargo

A tanker of oil from Texas set sail for South Korea late Wednesday night, the first unrestricted sale of unrefined American oil since the 1970s.

How that $40 million shipment avoided the nearly four-decade ban on exporting U.S. crude is a tale involving two determined energy companies, loophole-seeking lawyers, and an unprecedented boom in American drilling that could create a glut of ultralight oil.

The Singapore-flagged BW Zambesi is the first of many ships likely to carry U.S. oil abroad under a new interpretation of the federal law that bars most sales of American oil overseas. Analysts say future exports appear wide open: as much as 800,000 barrels a day come from just one of the many U.S. oil fields pumping light oil.

Though U.S. policy on oil exports hasn’t changed, production of this kind of oil, known as condensate, is surging. This early shipment “is the wedge that’s pushing the door open” for more ultralight oil exports, said Daniel Yergin, vice chairman of consulting firm IHSIHS -1.71%

Under rules Congress imposed after the Arab oil embargo of the 1970s, companies can export refined fuels like gasoline and diesel but not oil itself except in limited circumstances that require a special license. Such licenses, often for oil destined for Canada, are issued by the Bureau of Industry and Security, the unit inside the U.S. Commerce Department.

Until recently, domestic oil production had been declining and exporting oil wasn’t a hot issue. All that changed as new techniques for tapping oil from shale formations have sparked an oil boom in Texas, North Dakota and elsewhere. Since the end of 2011, U.S. oil production has jumped by about 48%, to about 8.4 million barrels a day, according federal data.

That has been good news for companies including Enterprise Products PartnersEPD -2.90% LP in Houston, a $47.7 billion company that processes, ships and stores oil and gas. Last summer, the company noticed a troubling trend: ultralight oil flowing from South Texas was flooding the market and pushing down prices. It predicted volumes would swell and prices could fall further as oil companies ramped up drilling and production.

Energy companies and lobbyists had started advocating for ending or at least relaxing the ban; Exxon Mobil Corp. XOM -4.17% , the nation’s biggest oil company, openly supported lifting export restrictions in December.

But neither Congress nor the Obama administration appeared willing to do more than study a change, which some lawmakers fear would result in higher gasoline prices in the U.S.

The industry embarked on a subtle, behind-the-scenes review of the regulations, discovering an opening for exports under existing definitions of the law. Enterprise and its lawyers found language that they believed would allow them to argue that the processing to remove some volatile elements from oil would be enough to make the resulting petroleum qualify as exportable fuel, even though it is a far cry from the traditional refining process.

The processing, which peels off fuels like propane and butane, is commonly done in oil fields across the U.S. Companies that manufacture the equipment involved say it costs between $500,000 and $5 million, a fraction of the expense of building a refinery.

When Enterprise made its case to the government, it said the equipment that its customers use to treat oil for shipment on its pipelines chemically alters the condensate in a way that makes it an exportable fuel. However, several industry executives say the equipment is not special.

“Early this year, we became very confident, extremely confident, that this was indeed a petroleum product that could be exported,” Bill Ordemann, a senior vice president at Enterprise, said in an interview.

In late February, Enterprise representatives gave a private presentation to Commerce Department officials and answered a battery of questions.

Oil executives who have met with Commerce say five to 10 department officials are involved in the talks and decisions on export rulings. When energy companies began to plead their cases with the department in earnest, an official asked one company representative how to spell condensate, said a person at the meeting.

“I look for practical solutions. I looked over the regulations, said, ‘What is my client trying to do, what windows do we have?’ ” said Jacob Dweck, a partner at Sutherland Asbill & Brennan LLP hired by Enterprise to press its case.

Pioneer Natural Resources Co. PXD -2.49% executives also were looking for a way around the ban. Pioneer, which drills across Texas, hired a former deputy secretary of the Commerce Department to represent it.

Ted Kassinger, a partner at law firm O’Melveny & Myers, zeroed in on existing oil field equipment and asked whether it might meet federal regulatory criteria. “We suddenly realized we had existing infrastructure that, at least in part, goes through a distillation process and is producing a product that’s not crude oil,” he said.

Jeff Navin, a partner at Washington, D.C.-based policy consultants Boundary Stone Partners, said that the final decisions rested on specific language in the export ban that didn’t define a refined product but rather said oil had to pass through a “distillation tower,” traditionally found at refineries, before it could be exported.

“So the question became, ‘What constitutes a distillation tower?’ ” said Mr. Navin, a former acting chief of staff to the Energy Secretary. “The more narrowly you define that question, the easier it is to get the administration to side with you.”

Commerce gave Enterprise the green light for exports at the end of March and Pioneer received its ruling soon after. Both companies said their applications weren’t coordinated.

The decisions mean unrefined ultralight oil can now be exported from the U.S. in some cases, because the processed condensate that comes from field-level equipment is considered chemically altered enough to skirt the ban.

The White House was caught off guard by the news of the department’s actions, which weren’t coordinated with other parts of the administration, according to senior White House counselor John Podesta.

Pioneer said its ruling is narrowly drawn to fit its own operations. But Enterprise said its ruling isn’t specific to its own operations or processing equipment. Any company that processes condensate in a manner that adheres to Commerce’s ruling can sell it to Enterprise for export, the company said.

As many as 10 other companies have since applied for their own rulings on oil exports, according to people familiar with the matter. All those requests are on hold for now.

The 400,000 barrel shipment leaving the U.S. from Enterprise’s terminal in Texas City, south of Houston, was purchased by GS Caltex Corp., a South Korean refiner. Oil traders and executives say negotiations are already under way for additional sales to Asian buyers.

— Amy Harder, Eric Yep and Alison Sider contributed to this article.

Write to Christian Berthelsen at christian.berthelsen@wsj.com and Lynn Cook atlynn.cook@wsj.com

What’s In A Name? If it’s “Made in USA,” Quite A Lot.

By TIMOTHY AEPPEL, WSJ.com

Deciding when something can be called “Made in USA” is harder than you might think. You can thank both the Federal Trade Commission and the state of California for that.

Reuters

Federal law says goods that are “all or virtually all” manufactured in the U.S. qualify, though the FTC doesn’t define what “virtually all” means, leaving some wiggle room. The FTC decides on a case-by-case basis when disputes arise over use of the phrase. That can be frustrating for producers, many of whom would prefer it spelled out.

But a bigger problem is California. State law there is explicit and clashes with the federal standard: If a product contains just one imported screw or rivet, it cannot carry the label. California is the only state with such a rule.

That’s not a big problem for something simple like bath towels or plastic lawn chairs. But with more complex goods, such as electronics or machinery, it can be difficult to assure the domestic pedigree of all the raw materials and component parts. In some cases, there are no domestic suppliers or their cost is prohibitive.

Element Electronics Corp., a television company based in Eden Prairie, Minn., is just one U.S. company that’s had to wrestle with this issue. Element is trying to revive the industry at a factory in South Carolina. Its solution is to label its goods “Assembled in the USA.”

Manufacturers have tried to get California to relent. In 2011, the California assembly unanimously approved a bill to amend the law so it would harmonize with the FTC rule. But the move eventually floundered in the face of staunch opposition from consumer and trial lawyer groups.

California has become a minefield for producers like Lifetime Products Inc., a Clearfield, Utah maker of portable basketball hoops. Lifetime recently settled a class-action suit brought against it over labeling hoops that were sold at Sports Authority stores in the Golden State.

“We make everything in Utah—including our own metal tubing and the plastic parts,” saysRichard Hendrickson, the company’s chief executive. The woven netting that came with the hoops in small plastic bags, however, is imported from China and ran afoul of the law.

Many companies today follow the California rule, even when they have no intention of selling there. The risk is simply too high, since complex distribution networks sometimes send goods to markets where they were not intended. In the meantime, companies including Lifetime have shifted focus to the FTC, hoping to get legislation passed that would give the federal law priority over state regulations.

U.S. Seeks to Revise Rules on Gas-Export Projects

Proposal Could Push Back Approval Process for Some Companies’ LNG Permit Requests

By ALICIA MUNDY and ALISON SIDER  WSJ.com

Cheniere is well-positioned to export liquefied natural gas. Pictured, its LNG terminal in Louisiana last year. Cheniere Energy/Bloomberg News
The Obama administration said it would perform a more rigorous upfront review of proposals to export liquefied natural gas, offering a mixed bag for the roughly two dozen projects seeking federal approval.

The U.S., which is enjoying a natural-gas boom, is expected to start exporting LNG in significant volume next year. The administration has only approved one export facility, but about 25 additional proposed projects are under review. A few projects far along in the approval process could benefit from the proposed rules change because they could be cleared as others are delayed by the new requirements.

The Energy Department said Thursday that the proposed revisions would require export-terminal proposals to first undergo a more expensive regulatory review by the Federal Energy Regulatory Commission involving an environmental impact assessment before the DOE reviews the permit application. The DOE previously was granting conditional approval either parallel to or before completion of the environmental review, a process that allowed companies to get a project started with a smaller financial commitment.

The proposal could push back the approval process for some companies’ LNG permit requests, while more-advanced proposed projects are expected to be able to jump forward in the queue.

“The proposed changes to the manner in which LNG applications are ordered and processed will ensure our process is efficient by prioritizing resources on the more commercially advanced projects,” DOE Assistant Secretary Christopher Smith wrote in a blog post on the department’s website.

Kevin Book, of ClearView Energy Partners LLC, said under the proposal, energy companies will need to clear the environmental review before they can raise capital or secure loans to build LNG export terminals.

Houston-based Cheniere Energy Inc. LNG +8.94% is the only company that has already attained all the required permits to export natural gas from the U.S. to any country in the world. Its Gulf Coast plant in Louisiana is under construction and on track to begin shipping LNG in late 2015.

Oregon LNG’s proposed export facility in Warrenton, Ore., is the next one in the Energy Department’s queue. Chief Executive Peter Hansen said the company’s request for conditional export approval is probably just weeks away, based on how the department has processed other applications. He said it wasn’t clear whether the revised procedure could change the timeline. Oregon LNG is in good shape to move forward with Asian and North American partners, once the permits are in place, he said.

Mr. Hansen said the DOE’s proposal makes sense; as it stands, coordination between the DOE and FERC could be improved. “When you do sort of look at the fact that a lot of the projects that are fairly high up on DOE’s list—some of those haven’t done much yet. They’re barely real. And yet there are projects that are clearly real much further down,” he said. “Maybe the DOE queue wasn’t really reflective of the real world.”

The proposal is subject to a 45-day public review and comment period before the rules can be made final.

Write to Alicia Mundy at alicia.mundy@wsj.com and Alison Sider at alison.sider@wsj.com

US Businesses Are Freaking About Sanctions Against Russia

BusinessInsider CARL SCHRECK, RADIO FREE EUROPE/RADIO LIBERTY

When thousands of fans packed Helsinki’s Hartwall Arena this week to rock out to the music of U.S. industrial metal band Nine Inch Nails, they likely gave little thought to the Russian industrialists who own the venue.

Not so the organizers of the concert, who had to reckon with the fact that the arena’s three owners — billionaire associates of Russian President Vladimir Putin — have been hit with U.S. sanctions in response to the Ukraine crisis.

Ensuring the show can go on is something many U.S. companies and entrepreneurs are wrestling with as they try to determine whether they are unwittingly violating U.S. sanctions. In doing so, they often find themselves entering a legal minefield as they try to make sense of the Russian business world’s often Byzantine ownership structures.

“It is a huge concern,” said Serena Moe, a sanctions expert with the law firm Wiley Rein in Washington.

The complex chains of ownership and control that permeate the Russian economy are causing jitters among U.S. businesses in a range of sectors, including energy, banking, and entertainment, according to Washington-based sanctions lawyers who spoke to RFE/RL.

The attorneys say current and prospective clients — ranging from small firms to multinational corporations — have been peppering them with Russia-related inquiries ever since the Kremlin’s annexation of Ukraine’s Crimean peninsula in March.

“We’re getting probably five or six a week,” said Rebecca Hartley, a sanctions lawyer with the law firm Bingham in Washington.

Cortney O’Toole Morgan, a lawyer at Husch Blackwell, said her firm has received three or four calls from companies concerned about murky Russian ownership structures, including from a talent company staging performances throughout the world.

“They’re trying to figure out whether those can still go on and where the funding’s coming from,” she told RFE/RL.

So far the United States has sanctioned senior Russian officials and wealthy businessmen seen as close to Putin, as well as several companies, while holding off on broader sanctions targeting sectors of the Russian economy.

But the wealth and influence of the sanctioned individuals alone has prompted U.S. businesses to examine their connections in the country.

“Typically…my clients don’t transact with a Vladimir Yakunin. They transact with entities in which he may have an interest,” said Richard Matheny, a partner at the law firm Goodwin Procter who has been contacted by about a dozen clients about the Russia sanctions.

Yakunin, the influential head of Russian Railways, is among the 45 individuals and 19 firms that the Obama administration has slapped with asset freezes and U.S. visa bans in response to the Crimea annexation and what the Obama administration calls Russia’s destabilization of the situation in Ukraine.
ALSO READ: From ‘Darth Vader’ To ‘The Wolf’ — A Who’s Who Of Putin’s Sanctioned ‘Insiders’

Others include billionaire brothers Boris and Arkady Rotenberg and oil trader Gennady Timchenko, who together purchased the Hartwall Arena in Helsinki last year. The U.S. Treasury Department has said the three men, whose wealth has soared during Putin’s 14 years in power, are part of the Russian president’s “inner circle.”

“Where you’ve got the individuals who are themselves extraordinarily wealthy and invest widely, any potential investment has to be looked at hard,” said Moe, a former deputy chief counsel with the Treasury Department’s Office of Foreign Assets Control (OFAC), which administers and enforces economic sanctions.

The 50-Percent Rule

Once an individual is placed on an OFAC sanctions list, it becomes illegal for U.S. citizens and businesses to engage in transactions with entities in which that individual has an ownership stake of 50 percent or more.

If the sanctioned individual’s stake is less than 50 percent, U.S. citizens and companies are allowed to do business with the firm, even if even it is owned by several sanctioned persons whose cumulative stakes exceed 50 percent but whose individual stakes are less.

The Treasury Department nonetheless has the authority to sanction entities it deems to be controlled by sanctioned individuals, even if they do not formally own a 50 percent stake.

For U.S. companies, the key question is often whether the efforts and resources — from surfing the Internet to employing on-the-ground investigators — required to nail down details of ownership are worth the effort, sanctions lawyer Erich Ferrari told RFE/RL.

“The difficulty is determining: ‘How far do we go with this, and at what point does it become too cost-prohibitive for us?'” said Ferrari, adding that his firm is receiving “a few” inquiries a week from companies concerned about the Russia sanctions.

Rock On

In the case of the Hartwall Arena in Helsinki, the Internet appears to be sufficient to provide basic information about how the venue’s ownership is structured.

The website of the Finnish company Arena Events states that the company owns 100 percent “of the C-shares of Helsinki Halli Oy, which owns and operates the Hartwall Arena,” thus giving Arena Events “control and voting rights in shareholder meetings.”

Arena Events, meanwhile, is 50 percent owned by Langvik Capital, a Finland-based investment company owned by “the Rotenberg family,” and 50 percent owned by a Luxembourg-based company owned by Timchenko, according to the site.

A presentation given in early March by Boris Rotenberg’s son, Roman Rotenberg, provided a visual of the arena’s ownership structure.

The presentation, dated March 4, features a flow chart indicating that Langvik Capital and Timchenko’s Luxembourg-based company each own a 50 percent stake in Hartwall Arena.

However, Roman Rotenberg, chairman of the board of Arena Events, told RFE/RL in a May 10 e-mail that Hartwell Arena has “several hundreds of other shareholders.”

Rotenberg provided a breakdown showing that Arena Events — the joint venture owned by Timchenko and the Rotenberg family — owns 45 percent of the shares in the Helsinki venue.

The promoter of the May 8 Nine Inch Nails concert at the Hartwall Arena, Live Nation Finland, did not respond to an inquiry routed through its California-based parent company, global concert giant Live Nation Entertainment, in time for publication.

Live Nation Finland chief executive Nina Castren told Reuters last month that the promoter was “examining the possibility whether this could have an impact on American artists’ shows.”

Days later she said the U.S. sanctions “will not have an impact on Hartwall Arena nor our business there,” Reuters reported.

The Treasury Department declined to comment on the matter.

U.S. pop star Justin Timberlake is scheduled to play the 13,000 seat Hartwall Arena on May 11, while American acts Aerosmith and Miley Cyrus are slated to perform there later this month.

Representatives for Nine Inch Nails and Timberlake did not respond to requests for comment.

Read more: http://www.rferl.org/content/sanctions-american-companies-jittery-russian-business-ties-us/25380189.html#ixzz31PdQKHGj

U.S. Trade With Russia Grows in March Despite Ukraine Crisis

By ERIC MORATH, WSJ.com

Rising U.S.-Russian tensions and escalating threats of sanctions didn’t derail trade between the two Cold War rivals in March, the same month Russia annexed the Crimea region of Ukraine.

Exports of U.S. goods to Russia rose 9% in March from the prior month, compared to a decline in the same month last year. That’s according to non-seasonally adjusted figures deep within Tuesday’s report from the Commerce Department on international trade.

Meanwhile, imports from Russia rose 36% in March from February, stronger than the 25% monthly gain a year earlier.

Exports to Russia were up 10% from March 2013, while imports rose 2% from a year earlier. Much of the monthly change came from a surge in exports of civilian aircraft and autos.

Month-to-month figures on trade with individual countries can be extremely volatile and are not always representative of current economic and geopolitical conditions. Still, the March developments in U.S.-Russia trade were more in line with global trends than a falling out between trading partners.

For example, U.S. exports to the European Union rose 17% in March, and imports increased 20%.

Russia doesn’t rank among the top 15 U.S. trading partners, according to the Commerce Department. So far this year, total trade with Russia ranks just ahead of Ireland, and behind that of Colombia and Thailand.

Russia supplies oil, metals and fertilizer to the U.S. and imports American machinery, vehicles and food. U.S. trade with Ukraine is much smaller.

(Ian Talley and Ben Leubsdorf contributed to this post.)

 

In Manufacturing, the U.S. Is Surprisingly Competitive

By Peter Coy, BusinessWeek

Forget what you think you know about high-cost and low-cost countries for manufacturing because there’s been a dramatic shakeup over the past decade. According to a report by Boston Consulting Group, the U.S. has shot up the ranks of competitiveness, while Brazil has foundered badly.

The report ranks the world’s 25 biggest exporters of manufactured goods in terms of direct costs of production—factoring in wages, productivity, and electricity and natural gas. Indonesia and India are the cheapest and next-cheapest in terms of those direct costs. But they have other problems such as poor infrastructure, says Justin Rose, a co-author of the report and partner at BCG. Brazil’s costs have gotten as high as those of Western Europe. Mexico, on the other hand, has made big productivity gains.

The 10 biggest exporters account for about 70 percent of global manufactured exports–and are therefore destinations of choice for most companies locating new plants. China is still No. 1, though its lead has narrowed. The U.S. has moved into the No. 2 spot, followed by South Korea, the United Kingdom, Japan, the Netherlands, Germany, Italy, Belgium, and France.

It’s worth noting that the consultants’ ranking doesn’t line up too closely with countries’ trade performance. Despite its No. 2 ranking, the U.S. runs a huge trade deficit in manufactured goods. Germany, ranked No. 7, is a manufacturing powerhouse. Rose says Germany is hurt in the ranking by its high labor cost, but says that the country has managed to minimize that disadvantage by focusing on goods that have relatively low labor content and require high skill to make. Also, he said, the superior ranking of the U.S. could be a preview of things to come. “Part of the point of this work is this [relative competitiveness] is evolving quickly over time.”

How GE and IBM are Playing Global Development to Win

by Jonathan Berman, HBR BLOG

Most big corporations follow global development trends. Where there is economic growth, there is opportunity, and the companies that can predict where growth will take place are better positioned to take advantage of it. That is the reactive approach to economic development.

In the last few years, a more powerful dynamic has gained traction. CEOs are proactively engaging with emerging market government to spur economic development and create opportunities for their companies. In the fast growth markets of Asia, Africa and Latin America, national governments are responding to a more empowered citizenship, and looking for corporate partners to achieve their development goals. Companies that fill that need effectively are doing more than reacting to development. They are playing development to win.

General Electric is a good example. Four years ago, GE initiated a strategy to compete more effectively in Africa, one of the fastest growing regions in the world in terms of GDP. GE did more than take advantage of growth as it came. The company’s leadership moved proactively to accelerate it and shape it. “If we see a country where reward outweighs the risk, we want to invest,” CEO Jeff Immelt says in Success in Africa. GE spent months understanding the development priorities of countries where it planned to invest. Partnering with those governments, the company sought out discussions at the ministerial and head-of-state level to identify and work on the country’s most significant infrastructure challenges. The results are encapsulated in a “Country-Company MOU,” which describe key challenges the country faces and the role GE will play in helping meet them. For example, the two parties identified the challenge of national electrification and committed to work together to bring $10 billion of investment and 10,000 megawatts of new power online, along with local manufacturing and training. Emerging market infrastructure is a segment many Western companies have ceded to China, but GE is winning contracts because it is playing development to win.

IBM is doing something similar in data analytics. CEO Ginni Rometty took the top job in 2012, and identified Africa as a locus of technological growth early in her tenure. IBM identified a set of “Grand Challenges” facing the continent that could be addressed through superior data analytics, including water and sanitation, energy management, financial services, transportation, public safety, healthcare, and agriculture. Last month, IBM launched a dialogue with the government of Nigeria. It was co-hosted by the Minister of Technology and included ministers from the cabinet charged with meeting the Grand Challenges IBM identified. Rometty, on her second trip to the region in three months, led the session for the company. IBM is speeding the region’s growth, and helping shape its direction. That is playing development to win.

I recently spent some time with Bob Diamond, the former CEO of Barclays. Now head of Atlas Mara, he’s positioning the investment company to play development to win. Earlier this year, they raised $325 million in the public markets and this month acquired BancABC, a bank with operations in Botswana, Mozambique, Tanzania, Zambia and Zimbabwe. “Governments want banks who will lend to businesses and homeowners,” Bob explains, “That’s what we intend to do. The private sector is growing in Africa and we plan to enable that in multiple countries.”

Playing development to win does have costs. It requires an up-front investment of money and time to understand the growth challenges within each host country or region and to establish the government and civil society relationships needed to act on those challenges. It also demands senior management and board involvement. Companies playing development to win have CEOs traveling to the region 2-3 times per year, supported by engagement of the full management team. Furthermore, the returns on investment are long term. For a large company, it’s common to invest for a decade or more before shareholders see material earnings. The anticipated scale of new business has to be large enough to warrant that.

Playing development to win should not be mistaken for corporate social responsibility (CSR). Sustainability and core values support any great company, but expanding long-term earnings by meeting big development challenges takes more. At a company that’s playing development to win, business units are leading the effort, enabled by sales, marketing, finance, supply chain management, CSR, and social investment.

Some might see playing development to win as cynical or undermining the cause of inclusive growth. It’s neither. Cynicism would be to bet against development. The companies playing development to win need the institutions and policies with which they are engaging to yield tangible results. If the government of Nigeria fails to deliver widespread, low-cost power, the fallout for GE will be significant.

Playing development to win will be the hallmark of great companies operating in emerging markets. Over the next decade, they will be the companies addressing the most pressing challenges in countries where the potential for growth is ripe. As a result, they will shape the landscape in which they compete, attract and retain superior talent, build stronger brands and enjoy stronger relationships with customers in the fastest growing global markets.

More blog posts by Jonathan Berman

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