The Ruble Stopped Crashing Today. Russia Is Still Screwed.
After two days of financial chaos, Russia is enjoying a tiny bit of respite. The country’s currency has stopped crashing for the moment—in fact, the ruble is up roughly 11 percent against the dollar today. Apple may have shut down its online store in the country until it can figure out how to properly price iPhones and iPads. Shoppers may be rushing to buy furniture and cars before prices go up. The country’s business press might be worrying about a possible “full-blown run on the banks.” But at least the markets are (relatively) calm.
Don’t expect it to last. Russia’s currency seems to have stabilized today for a handful of mostly fleeting reasons. Early Wednesday, the country's finance ministry announced that it would sell dollars and buy rubles to push up their value, which perked up investors. Unfortunately, it only has about $7 billion to spend—not enough to make a long-term difference. Meanwhile, Reuters reports that the country’s major exporters swept in and purchased rubles today “in preparation for monthly tax payments due this week.” And, perhaps most importantly, Russia’s central bank said it would inject money into the country’s banks to keep them financially sound.
In the end, Russia is still facing the same bleak scenario that set off this week’s panic. Its economy is stuck in a vice between low oil prices and Western sanctions over its invasion of Ukraine. Cheap crude is killing the economy, while the sanctions have cut off banks and energy companies from the credit markets.
That combination is crushing for Russia, because, as Carl Weinberg of High Frequency Economics points out in a client note this morning, the country’s public and private sectors owe roughly $680 billion worth of foreign debt, which has gotten harder to pay off as the ruble has fallen. There’s certainly not enough oil money flowing to safely cover those loans. And without full access to the world’s financial system, Russian companies can’t count on borrowing to roll them over either. As Weinberg writes, some businesses “may fail. Others may default.” All of Russia is starting to look like one giant subprime borrower, which may well drive even more investors away from the country, and drive its currency lower. The central bank’s promise to support Russian financial institutions helps. But unless it turns on the printing press (which would hurt its oh-so-fragile currency), it doesn't have unlimited resources to spend.
Propping up the ruble would help. But how to do it? The Central Bank has tried the shock and awe approach of a massive interest rate hike this week, meant to tempt people to keep their money in Russian deposits. The move did nothing. And the higher rates go, the deeper the country is bound to sink into a recession, which will exacerbate its debt problems.
Some are hoping that the central bank will come to the rescue more directly, by using some of its $416 billion worth of cash reserves to simply buy rubles, much like the finance ministry said it would. Traders are already gearing up for it to start unloading some of its sizable gold reserves for that purpose. But that, too, doesn’t seem like a solution so much as a stopgap. The Central Bank has already spent $80 billion buying rubles in a vain attempt to stop its slide. Maybe even more money will help (the Financial Times quotes one estimate that $20 billion to $30 billion per day could add 15 percent to the ruble’s value). But as long as oil prices stay low—which could be a while—and sanctions stay in place, spending down the country’s reserves looks a little like burning furniture to keep the house warm. It can’t go on forever.
Many, like the Washington Post’s Matt O’Brien, are arguing that this all leads to one inevitable conclusion: Russia needs to put capital controls in place, which would essentially ban Russians from selling off their rubles. But that seems, at best, like a partial cure. Assuming they were successfully enforced—and in Russia especially, it’s an open question—it would stop money from leaving the country and keep the ruble stable. It wouldn’t fix the basic problem that, without expensive oil to rely on, Russia has lost its growth engine.
As long as Russia is stuck with cheap oil and painful sanctions, its economy will only get sicker, and its ability to repay its debts will remain in question. There’s no exit here. Except, maybe, getting out of Ukraine, and getting somewhere close to the West’s good graces.
Court Rules Walmart Must Pay Up for Inadequately Compensating Workers
A week after a National Labor Relations Board judge ruled that a Walmart manager in California could not legally threaten to "shoot the union," a Pennsylvania court handed down another decision against the mega-retailer. The Pennsylvania Supreme Court ruled on Monday that Walmart must pony up $188 million to employees whom it failed to compensate properly during breaks and total hours worked.
The Pennsylvania Supreme Court upheld a 2007 judgment in favor of the workers. It affects roughly 187,000 people who were employed at Walmart between 1998 and 2006, and is expected to take a chunk out of Walmart's earnings for the current quarter, according to Reuters:
Monday's ruling on the class-action lawsuit will reduce Wal-Mart's earnings for the quarter ending on Jan. 31 by 6 cents a share, the company said in a securities filing. That amounts to roughly 4 percent of its profit forecast of $1.46 to $1.56 for the period.
On Tuesday, Walmart said it might appeal the court's decision. "We disagree with the decision, and continue to believe that these claims should not be bundled together into a class-action lawsuit," the company said in a statement on Monday. Walmart also said last week that it disagreed with parts of the NLRB judge's decision, and planned to appeal them.
Sweet, Sweet Justice: Russia’s Currency Is Now Faring Worse Than Ukraine’s
Yesterday, I noted that if Russia's ruble continued to fall, it might take the title of poorest performing national currency of 2014, beating out Ukraine's hryvnia.
2014’s Most Horrendous Startup Fumbles
These are boom days for tech startups. But as software continues to eat big, stagnant industries, sometimes the rest of the world bites back.
We've compiled the best of the worst behavior by startup executives, and the strangest user-behavior that ended up reflecting badly on the companies involved. (Note: In order to keep this relatively brief, we are leaving out personal misdeeds by company founders, however egregious, if said misdeeds happened outside of their professional duties.)
We are also not going so far as to catalog actual company failures. These are just the fumbles. Some are massive. Some are small-but-remarkable. Some are absurd. Here's to learning something from 2014, and making 2015 a little less slimy.
Pointing the Spotlight at the Boys Club
Back in mid-March, an engineer at Github, Julie Ann Horvath, accused the software-code startup's leadership of harassing her and creating an unbearably uncomfortable environment for women in their workplace. The online barrage of allegations gained traction online, due in part to an already intense debate about the treatment of women in the boys club of Silicon Valley. A month later, co-founder Tom Preston-Werner, the company's most prominent executive, stepped down from the company after an investigation found "evidence of mistakes and errors of judgment" by Preston-Werner and his wife, Theresa.
Rats, Mold, and a Clone
First there was born a startup to help startup employees go without lunch. Then that startup was named after a 1973 Charlton Heston film that made plenty of people queasy. Then that startup raked in more than $2 million in outside funding. The media tried it. We tried it. Vice tried it. Vice visited the Soylent warehouse and found rats, mold, and questionable practices. Somehow, this news didn't stop the demand, and due to a backlog in orders, a Soylent clone has popped up in San Francisco. It's called Schmoylent. And if that doesn't hurt, we don't know what would.
Even the Government Says This Startup Violated Your Privacy
Although lots of the criticism over the privacy of Snapchat heated up in 2013, it continued this year. As the New York Times reports, in May, Snapchat settled with the FTC and agreed to further improve its privacy features over time. Then, in October, an experiment by three anonymous men to prove that Snapchat's messages didn't actually disappear, called Snapsaved.com, had its servers breached. Details are hazy, but the privacy saga continues nonetheless.
"Orgy." Enough said.
Maybe there's nothing you can't do in New York, but Airbnb hasn't been having an easy time getting established in the Big Apple. Earlier this year, the state called most New York City rentals listed on the site illegal. That's after a report by the attorney general said listings for rentals appeared to violate building codes, safety codes, and tax regulations. More recently, a spectacular single incident seemed to show the other side of the spectrum of what terrible things can happen when one lists their apartment: A renter attempted to stage what was dubbed an "XXX Freak Fest." Airbnb, for its part, acted well and promptly responded to the matter, cutting the tenant a hefty check for damages. But that was too late to erase an image seared into the brains of Airbnb users. At least the man who was attempting to Airbnb his apartment got some traction from surviving the fumble.
Try to Be Inflammatory Enough Times, Eventually It Will Work
Genius—formerly known as RapGenius—the crowdsourced annotations site, has never been a company known for its decorous ways. Its trio of co-founders curse, brag about drug use, and, worst of all, wear sunglasses indoors. You know, like three responsible Yale graduates with nearly $60 million in venture-capital investment on their hands. In 2013, co-founder Mahbod Moghadam made headlines for outbursts, including telling Facebook founder Mark Zuckerberg and investor Warren Buffett to "suck my dick." (He subsequently blamed a benign brain tumor, which he had removed, for the outbursts.) This year, Moghadam annotated on Genius the 141-page manifesto of Elliot Rodger, the 22-year-old man who went on a rampage near the University of California–Santa Barbara in May, with comments critics deemed "creepy" and "disgusting." He promptly departed the company.
Executive Gossips About Stalking Journalists
It was just last month when Uber senior vice president of business, Emil Michael, suggested Uber should dig up dirt on critical journalists in order to smear and discredit them. In terms of public-relations blunders, it might have seemed minor—it was no alleged passenger assault, kidnapping, or rape. But it was one that touched not just on user-safety issues, but also privacy—and generated tons of speculation on whether Uber as a company is mature enough to handle its own whopping valuation (and the responsibilities that go along with such massive scale).
Revenge of the Freelancers
There's a common practice amongst fast-growth service startups: Use independent contractors instead of full-time employees. It's how Uber, Lyft, and TaskRabbit, to name a few, were able to scale fast. But sometimes, it can backfire. The on-demand house-cleaning and handyman startup Handy was sued in California for violating labor laws due to exerting significant controls over workers (including telling them "how to use the bathroom"), but then classifying them as contractors. How handy.
Disaster Strikes. Then Is Dragged Out
After Whitney Wolfe accused Tinder's internal management (and parent-company IAC) of sexual harassment, the company was slow to respond. Co-founder Justin Mateen was suspended, but it took until November for the company to settle with Wolfe for $1 million—and for co-founder Sean Rad to step down as CEO.
See also: The Worst Brand Disasters of 2014
Russia Is So Screwed
Well, it looks like Russia is in for a long, cold, and economically devastating winter.
With its currency stuck in a disastrous freefall thanks to Western sanctions and plunging oil prices, the country’s central bank announced around 1 a.m. last night that it would jack up its key interest rate from 10.5 percent to 17 percent. This was a desperate decision. The country was already hurtling toward a recession, and the rate hike—the biggest since 1998, when a financial crisis eventually forced it into default on its debt—was sure to make the pain far worse. But the hope was that, with higher interest rates, investors would finally stop pulling their money out of the country—that, as the New York Times's Neil Irwin put it, keeping money at a Russian bank would simply be “too good an offer to refuse.”
It wasn’t. Today, the currency plunge has continued, with the ruble at one point falling 35 percent, at 80 to a dollar. It has rallied a bit since then. A dollar is now worth about 70 rubles, which only looks good compared to the absolute crisis earlier in the day.
A crashing currency is a problem for a number of reasons. For one, it makes imports more expensive and stokes inflation. This is especially a problem for everyday Russians, since their country depends on imports for an outsized percentage of its food. At the same time, it's becoming harder for Russian businesses and financial institutions that borrowed in dollars to pay off their debts, which are getting ever more expensive, and dangerous, as the ruble slides.
But at this point, it’s not clear that Russia has any good options left at its disposal to stop the ruble from tumbling. It could start unloading its own foreign currency reserves to stanch the bleeding, but as Jennifer Rankin of the Guardian argues, those could drain away fast. And such a move wouldn't fix any of the underlying problems that have pushed Russia to the breaking point. The ruble is collapsing, in part, because oil prices are in the pits. Cheap crude is bad for Russia’s economy. It’s terrible for its government, which gets half its tax revenue from oil and gas. And it's terrible for the ruble, specifically, because as the value of a country’s exports plunge, so too does the value of its money. At the same time, Western sanctions have largely cut off Russia’s banks and oil companies from the credit markets by preventing financial institutions from lending to them for more than one month at a time. In other words, Russia’s economy is basically radioactive. Increasing interest rates further won’t cure it and bring the money back.
What will? Perhaps nothing. But some, like Bloomberg View’s Leonid Bershidsky, say that it may be time for capital controls, which are basically rules meant to at least keep money from fleeing the country. There’s some precedent for this; Malaysia used them to save its economy from a meltdown during the emerging markets currency crisis of the late 1990s. But currency controls are also tricky, because the second anybody starts seriously talking about them, there’s a risk that investors will start trying to get their money out the door before it slams shut. Plus, the sorts of billionaire oligarchs who dominate Russia don’t like being told where they can and can’t send their money.
Also, they just might not work. “The Russians are more skillful at escaping capital controls than anybody else in the world,” Anders Aslund, a senior fellow at the Peterson Institute for International Economics, told me. I asked Aslund what Russia could do at this point to save itself. “The only thing Russia can do is to have the sanctions ended,” which would restore some normalcy to the financial system, he said. “I don’t see any other options.”
Of course, that would require giving in to the West’s demands regarding Ukraine, which seems unlikely, to say the least.
Uber Surged Prices During the Sydney Hostage Crisis. It Needs to Do Better.
Uber, no stranger to outrage, has stirred up more of it for hiking fares in Sydney as a hostage crisis played out on Monday. As people sought to flee Sydney’s business district, Uber reportedly quadrupled its fares until a single ride cost a minimum of $100 Australian, or $80 U.S. While it at first seemed possible the increase was a mistake—Uber’s pricing algorithm responding to a spike in demand—the company soon made clear that the increases were intentional. “We are all concerned with events in CBD,” Uber’s Sydney account tweeted. “Fares have increased to encourage more drivers to come online & pick up passengers in the area.”
We are all concerned with events in CBD. Fares have increased to encourage more drivers to come online & pick up passengers in the area.— Uber Sydney (@Uber_Sydney) December 15, 2014
Obviously, that reasoning didn’t go over too well. Within an hour, consumers' incredulous and disgusted cries of price-gouging had prompted Uber to backpedal. “Uber Sydney trips from CBD will be free for riders,” the Sydney team declared. “Higher rates are still in place to encourage drivers to get into the CBD.”
The situation in Sydney is the latest reminder of an issue that has proven singularly difficult for Uber: setting prices during crises, disasters, and emergencies. Uber's car-hailing service, you'll remember, is built on a “surge pricing” system. Also called “dynamic pricing,” surge pricing is designed to increase efficiency by bringing supply in line with demand. When more people need rides, fares rise until a sufficient number of drivers is servicing the area. Generally, customers tend not to be fans of surge pricing (who wants to get hit with 3x fares on a Saturday night?) but find it acceptable enough. When Uber raises prices during emergencies, though—like it did during Hurricane Sandy in 2012—that makes just about everyone furious.
So, the question: Is it wrong to raise prices during an emergency? Here’s what Uber has said in the past, and repeated in Sydney on Monday: Surge pricing in times of need is important—even beneficial—because it encourages drivers who might otherwise stay safely at home to hit the streets. This is a fair point. If there’s any time that people should want drivers to be incentivized to pick up passengers, it’s during a disaster or emergency. Raising fares helps make that happen. Of course, the flip side is that as fares goes up, Uber becomes less and less reliable for anyone who can’t afford to drop $100 on a single cab ride. Surge pricing doesn’t make Uber more accessible to everyone during an emergency—just the people who can pay for it.
In an effort to resolve this dilemma in the U.S., Uber announced over the summer that it had instituted a national policy to cap surge pricing during disasters and states of emergency. For each market, the company said, the “state of emergency price” would be set based on the surges of the previous two months, and 20 percent of the total fare would be donated to the American Red Cross’s disaster relief efforts. Until now, though, Uber doesn’t seem to have had a similar policy in place for the other 52 countries where it operates.
When I contacted Uber on Monday to find out whether any sort of global protocol existed for pricing rides during emergencies, the company said in a statement that it “is committed to ensuring users have a reliable ride when they need it most—including and especially during disasters and relevant states of emergency.” Uber, the statement continued, “is working to standardize a global policy to ensure we’re serving communities in the most efficient, effective and helpful way possible.”
Around this time last year, Matt Yglesias suggested in Slate a solution to Uber’s surge-pricing problem. “What Uber ought to do,” he wrote, “is simply take 20 percent of the base fare and give all the surplus to the driver.” Uber, in fact, did essentially this in 2012 during Sandy, raising prices on the condition that 100 percent of the fare would go to the drivers. It was a good start, but it didn’t resolve the rider’s problem of how to afford an Uber when prices became extravagant. That’s why I’d suggest Uber should do in all emergencies what it eventually did in Sydney on Monday: Give one ride to each customer free of charge while paying drivers the surge rates out of its own pocket to keep more of them on the road.
Is this financially reasonable? Maybe. Probably. Uber has $2.7 billion in financing for a valuation of $40 billion. It's also expected to net $2 billion on $10 billion in gross revenue in 2015, according to at least one report, and emergencies, we can all hope, don’t come along every day. More important than the money in this case, though, are Uber’s ambitions. The company, as its starry-eyed investors are happy to discuss, has the long-term goal of replacing most other means of transportation. Instead of taxis and privately owned cars, Uber wants there to be Uber. In this world, during a disaster or emergency, Uber isn’t one of several possible exit rides—it’s the exit ride. And so a world in which Uber is the dominant form of transportation and uses surge pricing during emergencies is a world in which the wealthy are disproportionately able to get where they need to go during times of extreme need. If Uber cares at all about its public image, that shouldn’t be the world it’s aiming to create.
It Costs 1.66 Cents to Make a Penny in 2014
The cost of producing a penny fell 31.1 percent in the 2014 fiscal year, but still exceeds a penny, according to a new report from the United States Mint. Whereas last year it cost $0.0241 to manufacture a penny, it now costs only $0.0166. The price of making a nickel, dime, and quarter also decreased in the latest year, though the nickel, like the penny, still has a production cost that exceeds its transaction value ($0.0809).
The penny is a topic of perennial debate in the U.S. because, as the Wall Street Journal stated succinctly in September, it is "easy to lose and expensive to produce." Two years ago, Matt Yglesias made the case in Slate that the U.S. should follow Canada's lead and ditch the penny entirely. He's not alone. Citizens to Retire the Penny, a group founded by an MIT physics professor, says the penny drains "almost $900 million from the national economy every year."
But since we haven't ditched the penny, what are we still using it for? It's a little unclear. In May, NPR's Planet Money had a pair of reporters wander around Manhattan in search of anything they could buy for a single cent. Spoiler alert: They failed to find it. One woman said that she might be able to sell a single sequin for a penny but that the transaction wasn't "worth her time." The main arguments for keeping the penny these days seem to come from the zinc industry and relate to vague fears that getting rid of the single-cent will cause merchants to round up all their prices.
Could better technology bring a solution to the penny problem? Unfortunately, getting the coin to cost a cent or less may be an unattainable goal. The Mint warns that "there are no alternative metal compositions that reduce the manufacturing unit cost of the penny below its face value."
How Much Is “Free Starbucks for Life” Actually Worth?
Caffeine addicts rejoice! If you make a purchase at Starbucks this month using a gift card or the chain's mobile app, you could win a hammered gold card entitling you to "free Starbucks for life."
But what's a lifetime of Starbucks actually worth? And how how can you make the most of your winnings? Hint: You'll want to add shots, and you may need to bring your own mug.
The Wealth Gap Between Blacks and Whites Is Even More Enormous (and Shameful) Than You Think
"Perhaps no statistic better illustrates the enduring legacy of our country’s shameful history of treating black people as sub-citizens, sub-Americans, and sub-humans than the wealth gap," the Atlantic's Ta-Nehisi Coates wrote in his masterful essay, "The Case for Reparations." That gap, enormous and awful as it already was, has been growing since the recession. Last week, the Pew Research Center reported that the median white household was worth $141,900, 12.9 times more than the typical black household, which was worth just $11,000. In 2007, the ratio was 10 to one. The divide between white families and Hispanics was similar.
Depressing as those numbers sound, they may actually be a bit too upbeat. Pew is arguably overstating black wealth.
This part gets the tiniest bit technical, but here's the overarching question to consider: Do you consider your car an asset? Or is it a consumer good?* Because if you don't count it as an asset, the median black household has virtually no "wealth"—which is what a family owns minus all of its debts—to speak of. Pew's analysis is based on the Federal Reserve's 2013 Survey of Consumer Finances. And when the central bank tallies up America's net worth, it adds vehicles, along with some other durable goods, to the asset column, right along with things like houses, stocks, bonds, and savings. According to the Fed, the median vehicle is worth about $15,800.
In some respects, it makes sense for the government to count cars and trucks toward wealth. After all, if you're really pressed, you can sell your pickup. Insurance companies consider these things assets that can be insured. They're worth something in a pinch. But there are also good reasons why we shouldn't count consumer durables as wealth (for those wondering, Thomas Piketty doesn't). For starters, families often need them. Most Americans probably can't survive without a car. Second, they lose value over time. Home prices (often) go up, plus owners save on rent. Stocks appreciate. Bonds pay interest. But every extra mile you drive your car takes a bit off its resale price. It's a depreciating asset.
What happens when you remove vehicles and other durables from the picture? For minority families, it gets much, much bleaker. According to New York University economist Edward Wolff (whom I cited in a recent post) the median black family, minus cars and the like, is worth just $1,700 (40 percent have zero or negative wealth). The median white family is worth, roughly, 69 times more.
This doesn't fundamentally change the story Pew is telling about the racial wealth divide. It just shows that the median black household lives even closer to the edge than the official numbers might suggest. The reasons why have to do with far more than relative poverty (as Matt Bruenig has written at Demos, white households are worth far more than black households even when they have similar incomes). Because of racist policies like redlining, midcentury black families were regularly cut off from the housing market, forced into predatory lending arrangements when they did buy, and settled in neighborhoods that were eventually decimated by white flight and urban decay. For the American middle class, homeownership is wealth, and without it, blacks weren't able to save and build assets to pass on to the next generation. In more recent years, subprime lenders specifically targeted minority communities with the risky loans that later led to the foreclosure crisis.
The story is complicated. But the upshot is simple: When it comes to finances, the U.S. has left the typical black household with just about nothing.
*Correction, Dec. 15, 2014: Based on an interview with Pew, this article incorrectly stated that the Survey of Consumer Finances counts common household furniture and appliances as assets. It does not.
Low Oil Prices Are Absolutely Killing Russia’s Currency
Battered by economic sanctions and low oil prices, Russia's currency is plunging yet again today. The ruble has lost 18 percent of its value just this month, and as this chart from Jeroen Blokland tells us, if the slide continues it might just end up as the worst performing currency of the year—even worse than the Ukrainian hryvnia. Oh, the sweet, sweet irony.
Currency prices are all about supply and demand. And just about everything that's transpired in the past year has made the world far less interested in buying Russian money. The invasion of Ukraine drove away foreign investors who might have done business in the country, both because of the sanctions imposed by the U.S. and Europe and because it's not particularly enticing to set up shop in a nation headed by a belligerent, authoritarian government. But over the past several months, the crashing price of oil triggered by a global oversupply has become the main story. Here's another very telling chart from Blokland:
Last year, one-third of Russia's exports came from crude oil. When the value of your exports collapse, so does your currency. Worse yet, the Russian government, ever dependent on oil revenue, needs about $100 per barrel to balance its budget. With Brent crude trading at near $62, and possibly headed lower, the country is looking at a deficit and potential spending cuts that could further hurt the economy. And if low oil prices last, it will likely compound the situation, because a Russia without high crude prices isn't a country where any foreigners will want to invest for the long term.
For the most part, a weak currency is bad news for Russia, because it means more expensive imports and more inflation. However, there is a tiny silver lining. Because oil is priced in dollars, a falling ruble makes each barrel worth a little bit more money in local currency. That's helping Russia's budget picture a bit, though not necessarily enough to offset the overall collapse of petrol prices.
In any event, it's looking like the most powerful economic weapon we have against Russia may turn out to be all the oil flowing out of North Dakota and Texas.