October 5th, 2011

An open letter to members of the U.S.-Russia Business Council, meeting this week in Chicago:

From Pavel Ivlev, CREF founder and chairman:

To the members of the U.S.-Russia Business Council:

The 2011 annual meeting of the U.S.-Russia Business Council offers an opportunity for corporate leaders to strengthen their ties in ways that benefit both countries. I hope that over the next few days you also find ample opportunities to speak frankly about the challenges we face.

This year’s theme – “Russia on the Cusp” – is extremely relevant given what Mikhail Prokhorov recently characterized as the “tectonic” shifts taking place across Russia’s economic and political landscape.

Is Russia on the verge of sustained economic growth and prosperity amid greater certainty, increased foreign investment, robust privatizations and a buoyant equity market? Or will Russia remain mired in the authoritarian rule of Vladimir Putin, which means another two decades of instability, corruption and crony capitalism? While many U.S. and Russian political and business leaders hope for the former, sad reality dictates that we should position ourselves for the latter.

Over the last few weeks, former members of the regime openly acknowledge that Putin’s so-called “return” to power (as if he ever left) is a frightening prospect for those seeking to mitigate investment risk through the rule of law, including enforceable contracts and intellectual property rights.

Meanwhile, everyone from the smallest small businessman to the greatest private equity titan knows that Russia under Putin remains a dangerous place to commit capital, given his regime’s track record for blatant expropriation, commercially inspired arrests and daylight “masky” raids targeting even those companies once singled out as allies.

President Medvedev, who has now been rendered irrelevant, offered some hope to investors by paying lip service to economic freedom and the rule of law. But even under his nominal watch, bureaucrats and strongmen continued to attack successful Western companies without cause or warning. Recall just this past summer when the Moscow office of BP was raided just after Putin announced the ExxonMobil-Rosneft Arctic drilling deal.

Perhaps, as Mikhail Delyagin of the Institute of Globalization Problems told the New York Times, nothing matters because “Western businesses work wonderfully with dictators. For them, it is hardly a matter of principle.”

Is that true? I doubt even the greatest world class cynics among us would agree.

For allowing such a coalition of the corrupt to set Russian economic policy would harm investors, shareholders and board members of private and publicly traded companies who are set to face increased prosecution and civil litigation based on strengthened corporate governance and compliance laws now being enforced in the U.S. and the U.K.

Meanwhile, as oil prices tumble, the ruble weakens, public debt soars, promising businesses remain starved for capital, consumer spending falls and talented young business people, the very life blood of Russian’s economic future, flee in droves to more financially friendly countries.

Ask yourself? Despite the steep discount in asset valuations due to all this risk, is Russia still worth it?

Is it worth getting that call in the middle of the night from your security staff saying your second or third general counsel in Moscow has quit amid threats and intimidation? Is it worth the tremendous financial costs and increased manpower to meet the regulatory requirements to avoid high-profile investigations that erode the integrity of your entire company? Is it worth winding up in prison like our former USRBC colleague Mikhail Khodorkovsky or dead like the respected corporate counsel Sergei Magnitsky?

Meanwhile, those calling the shots in Russia continue to make poor policy decisions in managing the economy. Days after Putin signaled that he was once more assuming the public reins of power, President Medvedev shocked the financial world by firing Finance Minister Alexei Kudrin – a man we all know has served as a calming force for the Russian capital markets. The head of emerging market strategy at Royal Bank of Scotland Group called the dismissal “a body blow for Russia,” and Citigroup’s chief strategist in Moscow said, “The market is clearly not happy with the idea that Kudrin is leaving the government.”

Common sense dictates that poor policy moves like this one will only proliferate. Indeed, for existing investors there remains little hope that Russia’s even more deeply entrenched leadership team will bolster transparency or allow even a token Democratic opposition. You will find yourselves risking more and more financial and human capital in a country where the courts are controlled by the Kremlin, government policies are implemented via bribe, and legal contracts are too often flouted in favor of one man’s personal predilections.  

For first time investors, welcome to Russia where fear is the main currency used by those in power.

Despite all of the challenges, the lure of Russia remains undeniable. With its highly-educated workforce, aging infrastructure and massive unmet consumer demand, investment opportunities abound. Yet investing in Russia requires more than just writing out a check, it also requires that corporations increase their odds of financial success by pressing the Putin regime to impose changes that will preserve and bolster your returns.

If the goal is to truly modernize Russia’s economy, opening it up to the West, Putin in his third term will need to understand that it’s in his best interest to strengthen the independence of Russia’s judicial system and protect intellectual property and contracts; end rampant bureaucratic corruption; and put a stop to the use of Russia’s tax authorities and prosecutors to threaten Western investors and service providers. He will need to end the practice of confiscating private property, re-nationalizing natural resources and punishing political opponents and critics.

All of us should encourage Prime Minister Putin to dramatically boost investor confidence in Russia by releasing our former USRBC colleague Mikhail Khodorkovsky from prison.

These are all basic steps that would make doing business there more tenable, that would bring prosperity to both nations and that would improve your bottom line.

I hope you have the opportunity to discuss these pressing issues in the coming days.

Sincerely,

Pavel Ivlev

Founder and chairman, Committee for Russian Economic Freedom

Categories: Investment Tags:
  1. No comments yet.
  1. No trackbacks yet.