A year ago Vladimir Putin declared that at least two Russian universities should jump to the cohort of the world’s leading educational institutions till the end of his tenure. Russian leader usually achieves his goals by concentrating overwhelming resources on his priorities. This time money can’t help Kremlin to buy breakthrough in science and technology.
It's time to go for Vladislav Surkov
According to Vice-President of New Economic School (NES) Konstantin Sonin, “the major problem limiting the development of NES is that we can’t invite strong professors to Moscow for any money”. NES, the only successful non-government educational establishment in modern Russia, offers best conditions in Europe, but loses one by one its best employees. Moscow School of Management SKOLKOVO, failed for the same reason, though Medvedev’s pet project was able to pay literally any money for talent.
SKOLKOVO Innovations Centre received not only money, but also best Kremlin’s managers. Victor Vekselberg, a billionaire, heads the hub, while Vladislav Surkov, one of the creators of the Putin’s political system, supervised the initiative in the government. Both men achieved remarkable results in their spheres before Skolkovo, but now they are in the defensive in the numerous scandals infused by the Investigation Committee.
Neither powerful Vekselberg and Surkov, nor independent Sonin can’t make miracles. They can’t turn Russia, and even small Skolkovo, into an attractive place to work. Though Moscow became a much better place for living in the last thirty years, it loses competition to other global cities. Moscow loses because of the absence of transparent rules, same to everybody. The shadow market of diplomas and scientific degrees includes even best Russian universities. The members of Russian Academy of Science, a privileged self-governed institution, tolerates plagiarism. World-level scientists, no matter of their origin, don’t want to invest their reputations into country which is not able to offer any attractive vision of future. The risks are too high.
A trial against popular opposition leader of a new generation, Alexei Navalny, continues in Kirov. Four years ago a company of Navalny’s acquaintance bought a medium lot of wood and then sold it with a 7% margin. According to the state prosecutor, Navalny and his friend “have stolen all the wood”. This is only one of five investigations against the opposition leader.
Navalny case will determine the investment climate in Russia for many years
Politically motivated persecution of Mr. Navalny will further undermine Russia’s unwelcoming investment climate. Any businessman could be accused of embezzling all his revenue and locked into prison for many years. According to Alexei Kudrin, Putin’s Minister of Finance in 2000-2011, this trial puts at risk the foundations of the market economy in Russia, including the freedom to sell and buy goods and services. Any verdict will influence the willingness to start new and invest in existing ventures, continues one of the most trusted Putin’s allies.
The Navalny case resembles the campaign against YUKOS, when the largest and most efficient Russian oil company was ruined in several months. Ten years ago, pro-Putin liberals hoped that the prosecution of Khodorkovsky would be an exception. However, the conviction of YUKOS owners and management opened the Pandora box of unlawful expropriation. “Siloviki” employed the technology from the YUKOS case to acquire thousands of large and small companies. Thousands entrepreneurs were imprisoned or squeezed out the country by Russian legal system.
The charges against Navalny reproduce the logic of the second Khodorkovsky’s trial, in which former tycoon, his partners and managers were accused in embezzlement of all oil produced by YUKOS. Two processes also share similar politically motivated goals. Nobody in Russia doubts that Kremlin will lock Navalny out of the legal political process. Khodorkovsky’s case ten years ago harmed Russia’s investment climate a lot, but high oil prices, Kudrin’s macroeconomic stabilization and the effect of Yeltsin’s market reforms cushioned all the negative impact. Now Russian economy approaches stagnation and after the government convicts the freedom of entrepreneurship one more time, it may well head to a hopeless recession. Siloviki and state-owned companies will be the only entrepreneurs left in the country.
The New York Review of Books
The economic growth in Russia in January-February fell sharply to 0.9% on the annual basis. To support weak growth, the Central Bank of Russia is likely to ease monetary policy.
The official interest rate is 8.25%, but in reality the Central Bank lends money to banks at 5.5%, almost 2% below inflation. While unemployment reached record low, business faces labor deficit in Moscow and other large cities. Though the price for crude remains comfortably high, the budget lacks scope for expansion. Overall, the government ran out of ideas how to boost economic growth.
Elvira Nabiullina can't say no to Putin
Monetary policy uncertainty mounts as Sergei Ignatiev to resign from the position of the Chairman of the Bank of Russia. During his 11 years in the office he managed to preserve the Central Bank’s independence, quite unusual feature in the Russian centralized political system. His successor Elvira Nabiullina is already confirmed by the State Duma as the next head of the Central Bank of Russia. Unlike some other economic liberals in the Putin’s team, she has never publicly argued with her boss. Luckily, her economic views evolved simultaneously with Mr. Putin’s. She already stated that she wouldn’t sacrifice economic growth in order to curb inflation.
The lower interest rates won’t help to speed up economic growth. The underdeveloped financial system and full employment make Russian economy not sensitive to the interest rate cuts. Higher inflation is likely to be the only outcome of loose monetary policy.
The government has exhausted safe options to stimulate economic growth in the short term. Structural reforms are the only answer to stagflation. The country needs to rebuild its juridical system and limit the role of government in the economy. Alas, the government lacks legitimacy and popular support to initiate any substatial reforms.
Swedish Tele2 sells its Russian arm to VTB, a state-controlled bank, for $3.55 billion while consortium of Vimpelcom and MTS, two leading mobile networks in Russia, offers up to $4.25 billion for the asset.
In a free market economy, sellers maximize price by organizing transparent auctions between potential buyers. Through the auction procedure, buyers improve their offers and a seller gets the highest possible price for his asset while shareholders control the process and push company to shop for the best proposal.
Andrei Kostin is famous on serving Kremlin's special interests
Things are different in Russia. Transparent, competitive procedures are rarely observed in the Russian market. In many cases sellers have no other choice but to sell their assets, and do it urgently. The only possible acquirer is usually known beforehand. The sum of the deal often depends on the goodwill of a buyer and “merits” of a seller. Those, who risk stepping in with a counter offer, are ignored or severely punished.
The acquisition of Tele2 Russia, the fourth largest cellular network in Russia, fits well into a pattern of a typical Russian deal. Two largest Russian telecom companies complain that they have not been allowed to participate in negotiations with Tele2. According to VTB, the parties already signed a legally binding agreement and the deal can’t be reversed. Head of VTB Andrei Kostin makes no secret of the bank’s intentions to sell Tele2 Russia in the nearest future. Most likely, the assets will be used to form a larger company with state-controlled Rostelecom or/and Megafon, the third largest mobile network provider.
Tele2 sells its Russian assets because the company’s further development has been effectively blocked by the Russian government. In the telecommunications industry regulator can easily kill a company as happened many times in the Russian wireless market. The Swedish company was allowed neither to build 4G network nor to use its 2G network for LTE.
The economic impact of the deal will be mainly negative. The effective government control over the economy will increase as well as the capital outflow from Russia. The real beneficiaries of the acquisition will be revealed pretty soon. Non-transparent, non-competitive deal procedure demonstrates Russia’s unfavorable investment climate. Investors don’t receive fair price for their assets while the growth of non-government controlled companies depends on the relationships of their owners with the Putin’s team.
Banking crisis on Cyprus became the major concern for Russian leaders during last two weeks. Both Putin and Medvedev several times publicly commented the situation around the island. Kremlin-controlled TV-channels even broadcasted the emergency session of the Cyprus parliament, constructing from the island’s story an important myth and even a tragedy for all Russian TV-viewers.
According to Dmitry Medvedev, Cyprus continues to "rob the loot"
Nevertheless, Russia refused to bail out Cyprus. No surprise, since possible cumulative losses of the Russian state from 10% deposits cut would have been much less than additional 6 bln euros Cyprus needed to receive financial aid from EU.
The Cyprus crisis was exploited by Kremlin’s propaganda for several reasons. First, the story of a financial disaster in a faraway land helps to distract citizens from domestic issues. Second, the collapse of Cyprus offshore economy fits well with the Putin’s strategy of economic self-isolation.
Financial tragedy turned into a comedy after Medvedev’s serious proposal to found an offshore on the Russia’s Far East Kuril islands. Alas, the prime-minister fails to understand that low taxes were neither the only nor the most important reason for Russian business to register on Cyprus. Above all, Russian businessmen run to Cyprus and other jurisdictions in order to protect their property rights that can’t be fully guaranteed in Russian courts. Besides, Russian companies, including state-controlled monopolies, need flexible instruments in order to structure their M&A deals. Cyprus inherited its law system from Britain, and the island’s juridical system, unlike its banks, still works well. In order to see Russian companies returning home, the Russian government needs to restore the independence of courts and parliament, improve the corporate law and create friendlier business environment. Until it happens, Russian companies will depend on the news from offshore havens.
Mr. Brauder attracted many billion dollars on Russian stock market
On March 7 Russian police brought criminal charges against Bill Brauder, the head of Hermitage Capital, once the largest investor on the Russian stock market. The American-born investor is accused in illegal operations with Gazprom shares. Before 2004 only Russian residents were allowed to buy stock of the Russia’s natural gas giant.
The ban for non-residents on transactions with Gazprom shares created plenty of opportunities for arbitrage. Bill Brauder successfully exploited them. Back then, selling Gazprom shares to international investors generated easy money for many leading financial companies on the Russian market. The Russian government never seriously tried to stop this semi-legal trading, though schemes to outmaneuver the formal ban and operators of these schemes were well-known.
Ten years ago Mr. Brauder championed Vladimir Putin’s economic policy. Later, when Mr. Brauder switched to criticizing Gazprom for its non-transparent corporate governance, he suddenly found himself with cancelled visa in Moscow’s airport. Soon after that his shells were stolen and his lawyer, Sergei Magnitsky, died in Moscow’s police custody after he refused to cooperate with investigators. Now, as a revenge for the advancement of the Magnitsky Act in US and Europe, Russian authorities initiated investigation against Brauder himself. Even more important, major TV channels, controlled by Putin’s clan, accused the financier not only in unlawful operations with Gazprom shares, but also in tax evasion typical for all Russian companies before the YUKOS case.
The criminal prosecution of Mr. Brauder is just one more vivid example of selective and politically motivated justice that prevails in Russian courts. The timing for the investigation of the case, well-known for more than ten years, is self-explanatory. Bill Brauder, who no longer praises Mr. Putin’s wise policies, still remains his sparring partner. This time Russia’s authoritarian leader doesn’t try to lure international financial markets. Russia’s new course is self-isolation and tight control over the national elite. Mr. Brauder, an international speculator with controversial reputation, suits perfectly for anti-western propaganda. Russian authorities won’t really try to arrest him, but Russian state-controlled TV-channels will make movies about Magnitsky’s boss in order to popularize Putin’s new political and economic course. Russian businesses and citizens will bare all the costs of self-isolation. Meanwhile, international investors will find other places with risky assets to gamble on.
Sergei Ignatiev, the head of Russia’s Central Bank, estimates the volume of illegal capital outflow from Russia mounted to around $35bn. He believes that almost half of this sum left Russia through identical schemes organized by one interconnected group of individuals.
Sergei Ignatiev knows more than he reveals publicly
Central bank spots illegal capital outflow by financial transactions of legal entities that have no economic activity other than these transactions and don’t pay any taxes. Sergei Ignatiev explained that this illegal capital could be formed by proceedings from drug traffic and corruption.
$35bn is around 2% of Russian GDP. Most countries have a bigger share of shadow economy. More important is that almost $20bn of illegal outflows is controlled by one group of beneficiaries, and they are not shy to be visible to the Central Bank clerks. Sergei Ignatiev rarely gives any interviews and he is even more careful in his statements than his colleagues from western countries. According to Sergei Aleksashenko, a first deputy central bank governor in 90ies, Sergei Ignatiev couldn’t have made his statement without reporting his findings first to the Russia’s political leadership and legal authorities. However, no official reaction followed the interview.
According to the unnamed source of Financial Times, the financial schemes Mr. Ignatiev is talking about are identical to those discovered by Sergei Magnitsky, a lawyer who died in Moscow’s police custody after attempting to investigate the case of financial fraud. People familiar with the Russia’s autocratic regime assume that such high-scale and transparent to Central Bank capital outflow could have become possible only with the help of somebody from the Putin’s inner circle.
Sergei Ignatiev has a lot of reasons to be cautious both in his words and actions. Perhaps, the most important of them is his deputy Andrei Kozlov who was shot dead after initiating a bold crusade on money-laundering schemes in Russian banking system.
The Siberian oil fields already passed their production peak
According to Rosstat, the governmental statics agency, industrial output in January shrank by 0.8% year over year. Adjusted for seasonality and calendar effects, the output fell by 1.5% comparing with December.
Rosstat reported negative figures for industrial production for the first time since November 2009. Though many analysts explain the figure by combination of several one-time events, the slump in year over year growth rate continues the trend of 2012. Over the past year the pace of industrial expansion slowed down each month. The oil output, crucial for the stability of the Federal budget, dipped in January by 1.7%.
The Russia’s GDP most likely will continue to grow thanks to the expansion of the public sector and growth in the service sector. However, the country’s oil industry won’t be able to contribute to the economic growth anymore, dragging down the economy in the midterm. Hence the entrepreneurial activity is suppressed by the state, there is little room for any new business development in Russia. Any economic growth in such circumstances will be weak and fragile. Alas, Medvedev’s government has no power, no public support to improve the country’s poor investment climate.
The report titled “On a Set of Measures to Ensure Russia’s Stable Development under Conditions of Global Instability” will be prepared by a group of academicians chaired by Vice-President of the Academy of Sciences Alexander Nekipelov, recently accused in plagiarism. This report was preceded by the memo of Sergey Glaziev, newly appointed President’s adviser known for his radical economic views.
Sergey Glaziev knows magic recipe for economic growth
Sergey Glaziev doesn’t believe in efficiency of capital markets and argues that only the government-led investments could foster a technological breakthrough. He warns that western investors’ shouldn’t be welcomed because they often act according to the political and military interests of their homelands.
Comparing with his new adviser, Vladimir Putin can portray himself as a liberal. Soviet-era PhD Sergey Glaziev is qualified enough to present his orthodox ideas in a scientific way. Kondratiev waves will be instrumental in justifying nationalization while Leontief’s Input-output model will help to explain any extravagant government investments.
However unusual Glaziev’s rhetoric is, the real economic policy won’t change much. The fortune of the President’s friends will continue to grow. Government expansion means new profitable contracts to them. Putin’s appointees will continue to manage state-controlled corporations as if they were their own property. By including Sergei Glaziev to a short list of candidates for a high-profile job of Bank of Russia Chairman, Vladimir Putin demonstrates that he has an alternative to the liberal-minded economists in the Medvedev’s government.
Show your passport or pay a fee
Vladimir Putin proposed a set of amendments to Russian migration laws. According to the new regulation, Russian citizens will have to inform the government about the place of their residence as well as about all inhabitants living in their real estate. Otherwise homeowners will face charges of up to $230 for individuals and up to $26,500 for legal entities. Even more, in some cases property owners could be imprisoned for three years for violation of registration laws.
In the Soviet Union tough migration regulations (“propiska”) restricted people’s mobility. After the collapse of communism, the rapid development of large cities was one of the important forces beyond the economic growth. Moscow still needs more people: the unemployment rate is 0.5% while average salary in the capital is two times higher than it is in Russia. Soviet propiska prevented the formation of any agglomerations competitive with Moscow.
New rules will tie the citizens of small depressive cities to their flats. The new law is a clear signal to all Russians: the government doesn’t welcome any mobility.
The real impact of the law is remained to be seen. Russian state doesn’t have a totalitarian machine of Soviet Union and is not able to impose complete control on the country’s citizens. Most likely, the strict law will be enforced only on some special occasions. The police and migration authorities are likely to boost their cash flows from corruption. Muscovites, protesting against Putin’s third tenure, will be divided into two castes: those, who have all legal rights to live in Moscow and those who could be stopped by every policemen.
Russia Beyond The Headlines