Committee for Russian Economic Freedom

The World Economic Forum in Davos wrapped up late last week, with the head of the Russian delegation making some startling admissions about the ineptitude of his country’s political system, writes Anatoly Medetsky in the Moscow Times.

Deputy P.M. Shuvalov

At a meeting hosted by state-controlled Sberbank, First Deputy Prime Minister Igor Shuvalov said the way the state functions in Russia is “backward” and “one-dimensional” and that “Russia deserves a different political system.”

Adding insult to injury, Arkady Dvorkovich, a Kremlin economic aide, stated his belief that the state plays an excessively large role in the economy.

Meanwhile, former Finance Minister Alexei Kudrin, who fell out of the Kremlin’s favor last fall and is considering mounting an opposition campaign of his own, said he thinks businesses should have the right to finance political parties. “Only then,” he added, “will there be [political] competition.”

Read the full article here.

P.M. Putin

In the meantime, Putin was out with a 6,000-word article in Vedomosti (also excerpted in the Financial Times) making the case for why he should be elected for a third term as Russian president.

In it, he acknowledges a number of pervasive problems in the Russian economy and espouses a program of modernization. Yet to tackle Russia’s economic problems and implement an earnest modernization program would compel him to sacrifice the power system that has been in place since 2000.

He may say he wants modernization but it’s clear that any true actions in this direction would inevitably lead to self-destruction.

CREF Founder & Chairman Pavel Ivlev

Writing on CNN.com’s Global Public Square, Committee for Russian Economic Freedom Founder and Chairman Pavel Ivlev writes that the recent push for political reform in Russia is tied to the compulsion for economic reform:

[M]ore than just a rigged election, Russians are protesting the inability of the current regime to lead the nation on a path of modernization. While various statistics show that wages on the whole are rising, millions of Russians are in fact experiencing worsening inequality, decreasing opportunities and a repudiation of basic free market principles.

You can read Chairman Ivlev’s full op-ed here: http://bit.ly/xlZr8a.

He’s stuck between an (alleged) $40 billion fortune and a hard place.

Prime Minister Putin

Michael Bohm writes in the Moscow Times that the only way for Prime Minister Vladimir Putin to ensure his continued economic prosperity – not to mention his freedom – is to stay in power, as the once-and-future Russian president could be subject to “possible corruption and other criminal charges” should he leave office.

Bohm explains:

As long as Putin remains in control, Western leaders will continue to do business as usual with him and his administration, and they will ignore or downplay allegations of corruption at the very top.

Should an opposition leader rise to power, a Putin trial – over the theft of Yukos, or over “corruption […] at Gazprom, VTB, Transneft, Russian Technologies, National Media Group, Gunvor, the Rotenberg brothers’ enterprises, Bank Rossia, arms trader Rosoboronexport and dozens of other companies that make up Putin’s ‘Russia, Inc.’” – would soon follow.

Bohm writes that Western leaders have shown in the last decade they have no trouble turning on a former dictatorial ally (Mubarak) or to go from tolerating a dictator to actively seeking his removal from power (Gadhafi).

“A similar fate could await Putin,” Bohn concludes, unless, of course, after two more presidential terms a 72-year-old Putin flees to friendly Belarus – or finds a way to stay in power into his sunset years.

Read the full article here.

Business optimism in Russia dropped from plus-15 percent in the first quarter of last year to minus-four percent in the fourth quarter of 2011 according to Grant Thornton’s International Business Report. As noted by Russia Profile, this represents the most dour outlook among the four BRIC countries, with Brazilians the downright rosy about their economic prospects (plus-74 percent), followed by the Indians (plus-58 percent) and Chinese (plus-22 percent).

(Ratings are calculated by subtracting the percentage of pessimists from the number of optimists. Negative numbers indicate more pessimists than optimists).

What is causing this lack of confidence on the economic front?

“The sharp drop in economic optimism in the fourth quarter after Vladimir Putin’s decision to reclaim the presidency next year is positive proof that the political situation plays a role,” said Elsa Bikchurina, a senior analyst at the Solid Investments financial company.

“Right now, small and medium-sized businesses are extremely cautious and unwilling to take chances” since they have “no clarity as to what the future holds,” added Dmitry Orlov, the core shareholder and CEO of a mid-sized bank Vozrozhdeniye.

For IBR’s survey owners and directors of 100 small and medium-sized Russian businesses interviewed.

Fiona Rintoul ponders aloud in the Financial Times about whether now is the time for fund managers to look more seriously at investing in Russia. Her article gives a qualified maybe, with a whole host of negative factors to consider:

The political situation is uncertain, and the Russian stock market has been in helter-skelter mode lately. Moreover, the local fund industry is littered with the corpses of fund managers who came, saw and failed to conquer; companies such as Pioneer, Templeton, Crédit Suisse and Deutsche Bank have all at one time or another withdrawn with their tails between their legs.

Vladimir Kirillov

The last time Russia looked ripe for investment was 2007, right before the financial crisis hit. Many more pre-crisis ventures failed than succeeded. Wealthy Russians retreated to funds based in Zürich or London, and the regulatory framework since has remained an obstacle for international investors.

Vladimir Kirillov, chief executive of TKB BNP Paribas Investment Partners, has a warning to those looking to get in:

The Russian fund industry is interesting for international companies but only those that are ready to develop this business in the long term. We don’t advise companies to come in and catch up.

Read the full article here.

Economist Ed Dolan

Writing in his “Econ Blog” for Nouriel Roubini’s EconoMonitor, economist Ed Dolan cautions readers that Putin’s regime may no longer be able “to offer growth and rising incomes in exchange for a monopoly of political power, as it has in the past.”

During his first term, for example, Putin promised that economic output in Russia would double in 10 years, and while Russian GDP increased by 82 percent from 1999 to 2008, the situation has not been as rosy since then, with the IMF forecasting growth of less than four percent for the next five years, meaning the next doubling of the Russian economy may take closer to 20 years than 10.

Oil exploration in E. Siberia

Additionally, Renaissance Capital reports that Russia must drill 5,000 to 6,000 new oil wells each year just to keep output from falling. Increasingly these wells will have to be drilled in more treacherous areas like Eastern Siberia or offshore in Arctic waters. Higher production costs also means the price of a barrel of oil needed to balance the state budget is climbing.

This phenomenon, Dolan writes, may also lead to the so-called “Dutch Disease,” where large natural resource exports “drive up a country’s real exchange rate, making the rest of its economy uncompetitive on world markets.”

Dolan closes by wondering aloud if a weaker economy, and a weakened level of personal popularity, will compel Putin to change his political strategy when he returns to the presidency this spring, either through privatization or by focusing attention on industries outside of the natural resource sphere. Don’t count on it, Ed.

Read the full article here.

While the state of the Eurozone remains the most pressing economic issue on the Continent, post-recession Russia isn’t expected to accelerate its growth either, according to John Bonar of British-based Business Special Report-Russia, with the challenges that marked 2011 not likely to abate any time soon:

All the leading investment banks predict more-or-less the same thing for Russia in 2012: a poor and volatile first quarter of the year with growth, investment and stock markets picking up and gathering momentum in the second half of year, barring a train wreck in the rest of Europe.

Moscow rings in the new year. Credit: AP

Bonar reports that capital flight of roughly $6 billion a month is predicted through the first quarter, with some 150,000 Russians looking to emigrate to improve their economic standing.

Lack of investor confidence in Russia also means “there is little prospect of any significant Russian IPOs” on the London Stock Exchange until the second quarter or later.

Economists, Bonar notes, are anxiously awaiting the March 4 presidential election, which, although the winner is predetermined, will be more interesting given recent demonstrations across the country.

Prime Minister Vladimir Putin declared this week that he earned about $570,000 over the last four years from his government salary, KGB pension and dividends from a minority stake in Bank Saint Petersburg.

Putin also declared that he has $180,000 in his savings accounts; in Russia, presidential candidates must state recent earnings and savings figures.

These numbers, of course, pale in comparison to multi-billion fortune Putin has allegedly accumulated since rising to power in 1999, mostly from his stake in state-run and natural resource-based corporations. The Guardian and other media outlets have reported that the prime minister has much of his wealth hidden in Switzerland and Liechtenstein.

In 2007 Russian political expert Stanislav Belkovsky reported that Putin has secretly amassed more than $40 billion during his first eight years in power, which would make him the richest man in Europe.

Among his suspected holdings: 37 percent of the shares of Surgutneftegaz, Russia’s third biggest oil producer, worth $20 billion; a 4.5 percent stake in Gazprom, the world’s largest natural gas extractor and largest Russian company; and 75 percent of Gunvor, a Swiss-based oil trading firm.

Protestors gather in Moscow on Sat., Dec. 10 (Credit: Reuters)

Street protests in Moscow are to blame for Russia’s stock exchanges plummeting “faster than any other major equity market in the world over the last two weeks,” according to the New York Times.

Russian securities peaked the day after the Dec. 4 Duma elections and fell as the protests began. The Micex index had dropped 11 percent by Dec. 12, compared to a six percent decline for other emerging markets.

Businesses are now compelled to “ask questions that never really occurred to them before,” according to equity strategist Andrew Risk, including assessing how political instability would affect companies. Adds the Times:

Foreign investors, who drive the market here, have been grumbling for years about the same problems of pervasive corruption, judicial fraud and political stasis that [have] angered the protesters.

Read the full article here.

After more than 18 years of negotiations, Russia has finally been accepted into the World Trade Organization, making it the last of the world’s major economies to join the international body.

The Russian parliament has six months to ratify the responsibilities that are part of WTO membership.

For more information on the WTO accepting Russia, read this.