Natalia Orlova

The Moscow Times reports that market analysts in Russia are anxiously awaiting President Vladimir Putin’s picks for cabinet before prognosticating about the Russian economy.

Investors are waiting to see if Putin’s choices for top economic posts are serious about implementing the reforms necessary — stopping corruption, respecting property rights,  tamping down the bureaucracy – to instill confidence in both domestic and foreign investors.

Alfa Bank chief economist Natalia Orlova told The Moscow News’ Natasha Doff:

The litmus test will be the announcement of a new cabinet and how committed the new team will be to reform. Putin has presented his goals, but the question of who will make sure the goals are implemented depends on the composition of the cabinet.

Deutsche Bank economist Yaroslav Lissovolik added: ”A specific list of priorities that may encapsulate a short-term reform program [...] is the biggest question mark for investors and it is something that will probably ultimately decide the overall vector of the stock and financial markets this year.”

After last December’s rigged Duma elections and post-election protests, investors pulled out of the market in droves, citing political uncertainty.

Mikhail Khodorkovsky

In a piece published in TIME magazine in time for Vladimir Putin’s inauguration, jailed former Yukos chief Mikhail Khodorkovsky writes about the lack of rule of law in Russia and how individuals looking for justice there can’t count on the judicial system, which remains under Putin’s influence.

“Perhaps an individual judge may be biased,” he writes,

but the judicial system as a whole can’t ignore both the law and self-evident facts. Therein lies the error in my reasoning. [...] The main feature of the Putin regime, though, is its deceitfulness—from the very top, all the way down. Corruption, stealing from the treasury, persecution of political opponents—all these are consequences of the deep immorality of this government, a government that is more comfortable with smears and evasions than with transparency.

Khodorkovsky closes by saying that more and more, the Russian people are standing up to the regime and that this disobedience will soon bear fruit:

For the [younger generation's] sake, we are beginning to stand taller at last. We are beginning to stand taller in the deceitful courts and on the streets of our cities. Yes, we are still afraid, but now, even more than that, we’re ashamed in the presence of our children. And we can’t be made to bend anymore.

Read Khodorkovsky’s full column here.

President Medvedev

Russia Profile begins an article summing up Dmitry Medvedev’s presidency, which is coming to a close Monday, in a rather stark and negative manner:

Russia’s outgoing President Dmitry Medvedev probably never wished to end his term this way. His economic achievements, after four years in office, were minimal, and often had no visible impact in peoples’ day-to-day lives.

But the truth hurts sometimes. Medvedev came in with all the bluster of a reformer, but that sentiment wore off quickly, as he proved to be unable to enact meaningful economic reforms or emerge from the shadow cast by his predecessor / successor. The British Independent also has a scalding look-back on Medvedev’s tenure, quoting a Russian woman named “Masha,” who oversees the fake “Kermlin” Twitter handle:

[Medvedev's term] was like when it snows in the night and the machines come and clear it up before dawn. When you wake up, there is a vague feeling it has been snowing, but hardly any sign of it. That’s the level of impact he has made.

Read more on Medvedev in Russia Profile and the Independent.

Earlier, the offshore exploration partnership had announced that it would invest upward of $500 billion in developing Russia’s vast energy reserves in the Arctic and Black Sea, where hydrocarbon reserves are estimated at about 85 billion barrels in oil-equivalent terms.

“Today really is a historic day,” said Rex Tillerson, CEO of Exxon Mobil, at the signing ceremony. “It marks the beginning of a new and broader relationship between our companies.” Igor Sechin, former Rosneft chairman and the architect of the deal, pointed out that the enormous potential for the U.S.-Russia cooperation could help the countries “overcome [their] over-politicized relationship.”

While the oil majors celebrated these achievements, some analysts pointed out that the deal represents Rosneft’s official legitimization of the assets stolen from Yukos and its shareholders, including hundreds of American investors.

Founder of the Committee for Russian Economic Freedom Pavel Ivlev has criticized Exxon’s decision to work with Rosneft. In his statement, quoted by the Financial Times, he said: “As it becomes a key partner to a Kremlin-run concern, Exxon can either play a formative role in pushing for much-needed rule of law protections in Russia or it will bear responsibility for abetting the Putin regime as it launders its ill-gotten gains and seeks to expand its personal wealth at the expense of the Russian people.”

Former Yukos CFO and CREF’s expert Bruce Misamore responded to the news with an op-ed in the Moscow Times. “Exxon is investing with a company whose largest assets were stolen from Yukos shareholders by the Russian government. What is ‘legitimate’ about theft? […] There is no doubt that [former Yukos] shareholders would not agree with the Kremlin’s toadies that any form of ‘legitimization’ whatsoever has occurred,” he wrote.

In a letter to the editor of the Washington Times, Misamore also noted that in September 2011, the European Court of Human Rights ruled that the tax and legal actions that led to Yukos’ forced bankruptcy were illegal. Today, former Yukos assets comprise up to three-quarters of Rosneft’s value.

According to Misamore, “The court has asked both sides to begin “just satisfaction” negotiations, which, in effect, means a price tag will be placed on Russia’s penalty. Yukos will soon submit its significant request for reparations, and the ball will then be firmly in Russia’s court.”

In other words, Exxon and other foreign investors must be very brave to be doing business with the Kremlin. They seem well aware of the risks. They should keep in mind that if justice is restored and the stolen assets are ever returned to Yukos, the reparations for its shareholders could be collected from Rosneft’s partners.

ExxonMobil CEO Rex Tillerson (left) and Russian Prime Minister Putin (GETTY IMAGES)

Pavel Ivlev, founder and chairman of Committee for Russian Economic Freedom, released the following statement today on the Exxon-Rosneft alliance:

Through today’s agreement with Exxon, Rosneft has finally managed to give an aura of legitimacy to its theft of assets stolen from Yukos and its shareholders, including hundreds of American investors, as well as its CEO, Mikhail Khodorkovsky, who languishes in a Russian prison for crimes he did not commit.

Perhaps more than any other company, Exxon understands the pitfalls of conducting business in Russia, and while it is willing to assume the risks, the company must also seek opportunities to advocate for the pro-business reforms needed to make Russia a safer, freer place to invest and conduct business.

As it becomes a key partner to a Kremlin-run concern, Exxon can either play a formative role in pushing for much-needed rule of law protections in Russia or it will bear responsibility for abetting the Putin regime as it launders its ill-gotten gains and seeks to expand its personal wealth at the expense of the Russian people.

“There is a 50 percent chance that any entrepreneur doing business in Russia will sooner or later end up behind bars,” he writes, citing a conference speaker.

Not helping the situation is the fact that in the last few years the Russian government has enacted only two laws to help improve the country’s business climate (banning pre-trial detention for economic crimes suspects and requiring an audit before tax evasion charges are filed), while the acquittal rate for economic crimes has remained less than one half of one percent.

Other data that the conference speakers pointed to while explaining the disappointing state of the Russian economy:

• Two million Russians have lost their jobs over the past several years as a result of systematic persecution of businessmen by state officials. (Leonid Grigoriyev, Higher School of Economics professor)
• Only about four percent of Russians said they are planning to open new businesses within the next three years, compared to about 25 percent for other emerging nations. (Global Entrepreneurship Monitor)
• While about 60 percent of Russians see entrepreneurship as a desirable career choice, only eight percent consider it worthwhile. (Olga Verkhovskaya, St. Petersburg University professor)
• Without rising global oil prices and changes in legal policy toward businesses, the Russian economy may only grow by 1.2 percent annually. (Yevgeny Yasin, former Russian Minister for the Economy and Higher School of Economics professor)
• Bribery and corruption have forced manufacturers to raise the price of food 15 percent.

“There is a perception in government that business people are dishonest,” Yasin added. “Sadly, this appears to be the prevailing mindset.”

Read more about the conference here and here.

Alexander Morozov, chief economist at HSBC in Moscow, told the Wall Street Journal, “This is coming from domestic businesses people sending their money out of the country, either to avoid corruption or because they have no place to invest it here.”

At the current rate, more than $140 billion would leave Russia in 2012, outpacing the record of $133.7 billion during the economic crisis of 2008.

Read more about capital outflows in Russia here and here.

Last week Medvedev gave signals that the state would relinquish its controlling stakes in Sberbank and VTB, which would signal a major policy shift. But Iskyan’s not buying it:

[I]t’s not going to happen. Everything that Medvedev says has the half-life – and credibility – of a snowflake in May. More important, President-elect Vladimir Putin is more likely to ride a candy apple-red tricycle in Red Square clad in a pink tutu than he is to allow his government to relinquish control over state banks. […] Since 2001 Sberbank (57.6 percent held by the state) and VTB (75.5 percent state-held) have [been] reaping the benefits of sleeping with the state – including too-big-to-fail status, political favoritism, access to cheap capital and a work-with-us-or-work-with-no-one approach to garnering business.

Iskyan says the state’s large role in banking hurts economic competitiveness and stifles the economy as a whole.

Private capital is driven away, with state banks gaining access capital at much lower interest rates.

Read more of Iskyan’s analysis here.

Some 81 percent of the respondents to a national poll conducted mid-March said the level of corruption in the country is “high,” up from 75 percent in 2010. Forty-three percent believe corruption cannot be eradicated, as opposed to 39 percent who said it can be eliminated one day.

Meanwhile more than a third (35 percent) of the Russian electorate said they could not judge the work of President Dmitry Medvedev after nearly four years. (Imagine a third of the U.S. population not being able to judge a president’s job after even four months.)

Even more telling, 72 percent of the respondents said they saw no difference between the policies of Medvedev and his presidential predecessor / successor, Vladimir Putin.

Read more about the polls here.

Mikhail Khodorkovsky

Deutsche Bank’s head of research and strategy for Russia Yaroslav Lissovolik wrote in a note that the odds of Khodorkovsky being granted parole are “significantly higher than any time in the past,” according to Bloomberg News.

“Releasing Khodorkovsky would boost Russian stocks five percent to 10 percent,” he added. The chief strategist at Troika Dialog also said he puts the odds of an early release for Khodorkovsky at 50-50.

Earlier this month Russia’s Presidential Council on Human Rights urged President Dmitry Medvedev to pardon Khodorkovsky ahead of Prime Minister Vladimir Putin’s inauguration, scheduled for May 7.

Medvedev did order Prosecutor General Yuri Chaika to review the guilty verdicts against Khodorkovsky. Chaika has until April 1 to present his findings.