Committee for Russian Economic Freedom

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.

Reuters

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.

NASDAQ

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.

FT

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.

Bloomberg

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.

LaRouchePAC

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

“Economic freedom, private property, competition and a modern market economy, rather than state capitalism, must be the core of a new growth model”-, proclaimed Vladimir Putin in the annual Presidential Address to the Federal Assembly of the Russian Federation. However, as Mr Putin himself once mentioned, words are given to a spy to hide his real thoughts. No surprise that the most important messages of the address are hidden between the lines.

Kremlin's imperial beauty emphasizes the sacrality of the Putin's power

Despite the liberal economic rhetoric, the structure of the address reveals Putin’s paternalistic approach to solving the problems of the Russian economy. According to the President, the government should create 25 million of jobs, provide people with housing, raise salaries in healthcare and education and build infrastructure. Vladimir Putin fails to understand that it’s the private sector, not the government that hires people and builds houses. He ignores any economic policies other than direct intervention of the state.

Mr Putin defines the role of the businesses in his world: “Businesses should work to achieve their own success as well as that of the nation; and should breed talented, sensible organisers, patrons and patriots.” In fact, the President believes that business people owe a lot to the country. He downgrades entrepreneurs to “organizers”, who fulfill somebody else’s will, not generate their own initiatives. Vladimir Putin can tolerate business only when it is loyal (“patriotic”) and generous. If businessmen don’t spread their wealth around and pledge to love their motherland they can’t “gain widespread public respect”.

Whatever Vladimir Putin says, the most liberal economy he can imagine is the state capitalism. In his world, the government directs the economy, delegating to the private sector some tasks and requiring in return loyalty and generosity. Perhaps, Mr President is also willing to recommend businessmen best places to donate their money.

The Economist

After almost 10 years of negotiations with Turkey and Southern European countries Russia finally outmaneuvered EU. Last week Vladimir Putin gave a start to the construction of South Stream pipeline, which will deliver Siberian gas directly to the Southern Europe bypassing Ukraine. Nabucco, a EU pet-project, is now officially dead as well as hopes of Central Asian countries to export their natural gas to Europe.

The total cost of South Stream is estimated to be around 26 billion dollars. This number can only grow as it happened with other Gazprom’s elephant projects. The company won’t see any additional income from this investment, since Gazprom will just redistribute natural gas from the Ukrainian pipelines to South Stream. Nevertheless, the giant will save up to 2 billion dollars a year, a transit fee that Gazprom currently pays Ukraine. These mediocre savings obviously don’t justify huge and risky investments.

South Stream will destroy the value of Ukrainian pipeline system and Azerbaijan natural gaz reserves

In the absence of any substantial financial benefits, Gazprom can long for broader strategic advantages as a result of South Stream.

First, South Stream will help Gazprom to corner the European market by blocking the export of Central Asian gas to Europe. Though five years ago this was a rational strategy for the Russian energy giant, now it doesn’t make a lot of sense. Liquid natural gas combined with shale gas technologies will make European market more competitive anyway.

Second, South Stream will help to reduce the bargaining power of Ukraine, the largest Gazprom’s customer. After North and South Stream will reach their project capacity, Gazprom will be able to shut down natural gas transit through Ukraine. The situation of 2005-2009 when gas supply to Southern Europe was interrupted because of the Russian-Ukrainian conflict over the transit fees and gas price won’t be possible anymore. Again, this achievement doesn’t look as significant as it did five years ago. Ukraine already pays the highest price for Russian natural gas and rapidly cuts its consumption.

In sum, the project, which looked essential for Gazprom five years ago, now doesn’t bring neither financial nor strategic benefits for the company. However, Gazprom and the Russian government fail to recognize changes on the world energy market and still fight with the ghosts of the past. Influential Gazprom’s contractors won’t allow stopping the construction as well. The drop in natural gas prices combined with hopeless investment projects might destroy the monopoly sooner than EU finishes its antitrust probe against the company.

FT

State conglomerate Russian Technologies is selling control stake in the world-largest titanium producer through a management buyout. The deal that totals almost one billion dollars was priced at a 16% premium to VSMPO-Avisma’s average share price over the last three months. Russian Technologies will still hold 25% of the company, retaining a certain control over the company’s strategy.

What looks like an example of a successful privatization case might well be a large-scale fraud.

Sergei Chemezov is selling VSMPO-Avismo to his friends after orchestrating a fall of Anatoly Serdukov in a corruption scandal

First, in 2006 private owners sold their shares to Russian Technologies with 30-50% discount to the market price. The deal took place soon after the YUKOS case triggered a nationalization campaign in Russia. Most likely, VSMPO’s owners were forced to sell their shares to Russian Technologies, headed by Sergei Chemezov, one of the most influential figures in the Putin’s team.

Second, the current management buys the controlling stake without any competition from outsiders within a non-transparent procedure. Russian Technologies didn’t bother to organize a competitive auction in order to maximize the selling price. The status of a state corporation grants the conglomerate a right to avoid any privatization procedures prescribed by the Russian laws. Were they invited, Russian and international majors would have been definitely keen to bid for a company controlling 30% of the world titanium market. Within an auction, the premium for control typically mounts to 70-80% over the market price. In the VSMPO’s case the premium to the market price could have been even higher because the company’s current market price reflects the low liquidity of its shares and non-transparent corporate governance procedures.

Third, the management obtains control over the company with the help of the government-controlled Sberbank and Gazprombank, which provide funds for the management buyout.

To put it simple, officials first forced one group of private owners to sell VSMPO for half of its market price and then sold the company to new owners with a great discount to a fair value. Insiders’ benefits from managing and acquiring the company probably count in billion dollars. In the context of this deal the recent corruption scandal in the Ministry of Defense looks just like a media campaign to distract public attention from a real large-scale corruption.

Reuters

Stephen Jennings is giving up control over Renaissance Capital, once a leading Russian investment bank, to Mikhail Prokhorov’s Onexim Group. In his farewell letter Jennings expressed hope that with the new ownership structure the bank he founded 17 years ago “will be much more part of the ‘system’ in Russia”. Most likely, after Jennings’ departure, Renaissance Capital will concentrate on serving the business of Onexim group.

Financial institutions are in rough waters everywhere in the world. The Russian government took advantage of the financial crisis to tighten its grip on the investment banking industry. When in 2007 state-owned VTB entered the booming investment banking industry, its aggressive recruitment practices were a first blow to the run-for-profit investment firms. Soon after that, the government unofficially instructed state controlled companies, comprising about a half of Russian economy, to hire VTB Capital as a financial adviser for important transactions. Many Russian oligarchs, often dependent from the government, also were advised to work with VTB Capital whenever possible. Besides direct backing from the government, VTB also leveraged its unrestricted access to the government funds to win business from its capital-deprived private competitors.

Jennings quits Russia after 17 years of largely successful work

Faced with decline in revenues, independent investment firms either quit the market or were acquired by state-controlled institutions. In 2011 state-controlled Sberbank acquired Troika Dialog, a leading Russian investment bank. Explaining the deal, Troika Dialog’s founder Ruben Vardanyan admitted that there was no room for non-state controlled banks in the Russian market. Last week, after several years of losses, Stephen Jennings followed the suit.

The alliance of bureaucrats, state-controlled companies and investment banks creates the machinery for structuring high-scale fraud and corruption into legal financial transactions. Now investment bankers can take any risks, knowing that the government will always back them if something goes wrong.

Besides that, monopoly in financial services could be useful in punishing bold businessmen. Recently VTB-Capital refused to underwrite bonds for National Reserve Bank just several days before the issue should have taken place. Alexander Lebedev, the politically active owner of the National Reserve Bank, had to sell his assets and cut financing of Novay Gazeta, the last but one newspaper not controlled by Kremlin.

Having access to the most intimate information about their clients, investment banks could be instrumental in tightening control both over business and corrupted officials. No surprise that nowadays all major Russian companies prefer to work through their own investment firms. Igor Sechin recently hired several prominent bankers in order to create one for his Rosneft. Likewise, Gazprombank is in charge for most of its parent company financial transactions.

Open and competitive financial markets could have foster the diversification of the oil-dependent Russian economy by enabling the flow of money from cash rich natural resource industries to new sectors of the economy. Alas, Russian investment banking is becoming both fragmented and monopolized. The quality and availability of financial services for Main Street will deteriorate, limiting the investment and economic growth.

Bloomberg