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.
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to conquer; companies such as Pioneer, Templeton, Crédit Suisse and Deutsche Bank have all at one time or another withdrawn with their tails between their legs.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.
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.
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.
Reuters chief Russian financial correspondent Douglas Busvine writes that the price of Russian securities thought to have ties to Prime Minister Vladimir Putin, or to have profited the most under his economic policies, “have sold off hardest” in the days following this month’s rigged Duma election.
Russian companies mostly deeply in the red since Dec. 4 include gas firm Novatek, tied to Putin’s friend and oil trader Gennady Timchenko; potash miner Uralkali, which Suleiman Kerimov, backed by state banks, won control of this year; and gold mining company Polyus, in which Mikhail Prokhorov owns a major stake.
Busvine writes:
With the opposition crying foul over alleged fraud in the December 4 election, which cut the majority of Putin’s ruling United Russia party, investors have slashed their exposure to stocks whose prospects they see as tied to the stability of the regime.
Utilities stocks, like state-controlled Federal Grid Company, InterRao and RusHydro, are also underperforming, as analysts note that the Russian stock market is now trading at roughly a 40 percent discount to its emerging markets peers.
Read the full article here.
The cover story in the Russian Weekly New Times gives a well-constructed overview of how Prime Minister Vladimir Putin and his cronies have “divided up the country” to create an all-powerful “Russia, Inc.” that controls 10 to 15 percent of the nation’s annual GDP. Yevgeniya Albats and Anatoliy Yermolin write that the process begun after the arrest of Mikhail Khodorkovsky in 2003 has continued through a series of hostile takeovers, questionable auctions and security service intimidations, as huge industries have returned to state control.
Essentially, a vertically integrated holding company has been created in the country’s expanses – it has its own credit organizations that provide working capital, its own cash factories that pump oil and gas from the land, its own pipeline systems, its own transport of all possible kinds, its own structures that ensure security and weapons for it, its own communications, its own social amenities, its own services, including media services, and its own instruments of political control.
Vladimir Putin
Putin’s strategy was to completely control the political process, remove Yeltsin-era elites from government and replace them with loyalists and audit to death the private companies created in the aftermath of the fall of Soviet Union.
With the Yeltsin-era business leaders out of the picture and his own cronies in place, wresting control of major industries – finance, energy, military and infrastructure – became possible.
The full article, in Russian, is available here.
Nadia Popova and William Mauldin write in the Wall Street Journal about a Norilsk buyback program that has left thousands of Russian investors out in the cold – literally – as they’ve waited in line for hours to tender their shares. These types of obstacles tend to be common for the emerging investing class:
Even as semi-occupied skyscrapers rise up in Moscow’s new financial district, in hopes of luring large numbers of institutional investors, the country’s individual shareholders and bondholders face logistical issues ranging from required hand-delivered paperwork to limited redress for disputes with brokers or trading partners.
Retail investors often face bureaucratic red tape, and few are prepared for the volatility inherent in the Russian market, which has fluctuated between being the world’s best- or worst-performer in the past decade.
According to Alfa Bank the estimated number of investors participating in the buyback program has dropped from 60,000 to 18,000 due to “constraints at the registrar’s office [that] reminded us of lines that formed in the late 1980s for fresh food.”
Full article here: http://professional.wsj.com/article/SB10001424052970204777904576651081541236992.html.
The Kremlin’s human rights council earlier this week called for an amnesty for economic crimes in order to attract foreign investment and boost economic growth, according to Bloomberg News.
Kremlin observers say that putting this proposal into action, which is unlikely, would improve President Medvedev’s standing ahead of the 2012 elections. According to a top Russian business lobbying group, one in six entrepreneurs has faced criminal charges.
Medvedev set up the human rights panel back in February.
The Russian government is setting up a $10 billion fund aimed at boosting foreign investment by overseas private equity firms in the country. According to Bloomberg data, so far this year Russian companies received $1.5 billion in investment from foreign private equity firms, about half the amount that China received in the same period. Despite the new Kremlin initiative, PE firms are wary. Co-Founder of Carlyle Group David Rubenstein was quoted last week saying,
Russia has not proven to be a place where Western private equity investors can have the returns and realize the profits commensurate with the risks they’ve had to take.
One reason the Russian government is trying to perk up foreign investment of all kinds is that capital outflows continue in 2011. The central bank’s first deputy chairman Alexei Ulyukayev explained that the outflow by Russian corporates investing abroad, as well as by some investor caution towards global emerging market risk.
Finance Minister Alexei Kudrin chalked it up to political risk:
Whenever there are elections in a country such as ours, in which a lot depends on the leader, there are higher risks, so investors are hedging their risks.
Russian businessmen are familiar with these political risks and have chosen to invest outside of Russia. That leaves the leadership tandem to think of new ways to get foreign investors back in the Russian investment groove. President Medvedev announced the creation of “special sovereign funds” at Davos in January a month ago. It is unclear if the private equity firms would be investing in these funds or something different all together.
With oil approaching two year highs, the Russian government is still facing budget shortfalls and looks to foreign investors to shore up the budget. One drain on the economy is Russia’s pension system. With parliamentary elections coming up in 2011 and presidential elections in 2012, Putin needs to increase pension payments to maintain his hold on power much like the authoritarian Middle East regimes looking to prevent political change.
Cloudy Precipice / Tom Burgher Gallery
Despite the recent spate of international news over the past week, from the hamburger summit in DC to the G20 in Toronto to Russian spies in Suburbia USA, underlying global economics has not changed and talk of a double-dip recession has revived. Even the dreaded “d” word was uttered by NYTimes’s Paul Krugman in his assessment of the US economy. Signs of a global weakening is evidenced by the fall in world equity indices, weak US home sales and China’s manufacturing growth is weakening as its government reduces stimulus. Debate rages on the effects of deficits on the economy. While the two sides debate the merits of deficit reduction over stimulus spending, the world economy feels like it is again at a precipice.
In the most recent Reuters’ Russian analysis, three factors remain unchanges from their last report in April: oil prices, political risk and insurgency. For the 2010 budget the Kremlin used a $75 barrel estimate, but with crude oil prices falling under $73 a barrel, the Kremlin may have to return to the capital markets trough and isuue more debt to cover budget deficits.
Medvedev understands the need for Russia to diversify its economy and made a major international push last week with his visit to Silicon Valley. However, it still remains to be seen how the power struggle is resolved. The 2012 presidential election presents political risks for investors and many anaylsts predict that:
Russia is unlikely to lure the level of investment or international support it deserves as long as Putin and his ensemble remain publicly engaged.
With the tandem leadership jostling for advantage, it remains to be seen if Medvedev’s push for modernization can resist the pull of Putin. In addition to a change of guard in the Kremlin, Reuters cites the release or acquittal of Mikhail Khodorkovsky as a sign of liberalization and a “bellwether” of Russian policy.
However, current signs point to the status quo as the authorities refuse to investigate into the suspect death of Hermitage Capital’s Sergey Magnitsky in pre-trial detention.
