Committee for Russian Economic Freedom

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to conquer; companies such as Pioneer, Templeton, Crédit Suisse and Deutsche Bank have all at one time or another withdrawn with their tails between their legs.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.

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.

Russian citizens took more than $500 billion out of the country in the decade since Putin rose to power, according to a new report from Global Financial Integrity, significantly hurting the economy and preventing even stronger growth.

As Russians grew wary of how their money would be handled at home, they took out more than $50 billion per year between 2000 and 2009. According to GFI economist Sarah Freitas, this trend is not likely to be reversed any time soon:

In a country where tax evasion and transfer pricing are commonplace pastimes, Russia is finding that its revenues are not quite up to par for debt repayment – especially when one considers the projected drop in oil prices. A global recession has caused investors to look to the dollar as a safe haven, implying a fall for weaker currencies like the ruble.

GFI points out that with growing income inequality, Russia cannot continue to hemorrhage scarce capital without serious consequences and recommends that the citizens demand, among other grievances, that their government strengthen anti-money laundering laws and fight tax avoidance to mitigate this phenomenon.

A man protesting the results of the Duma elections is arrested. Credit: Reuters

Tai Adelaja of Russian Profile notes that this week’s demonstrations in Moscow “may have started to take a toll on the country’s economy,” as state bank VneshEconomBank canceled its Eurobond placement and two Russian mining companies have completed their escape from the MSCI Index to the FTSE 100.

VEB’s bond postponement is the first of its kind since the early 1990s, as “bond investors who initially showed interest in buying VEB bonds have started to withdraw their applications, as uncertainty clouds political future in Russia.”

Meanwhile mining companies Polymetal and Evraz became the first Russian firms admitted to London’s FTSE 100, with analysts seeing “a political undertone in their decisions.”

Two other Russian companies, Russian Railways and TNK-BP,­ are planning to meet with investors next week, the results of which could signify how money managers feel toward Russia after the election.

Read the full article here.

Transparency International has once again ranked Russia as one of the world’s most corrupt major economies.

Russia placed 143 out of 182 nations in TI’s Corruption Perception Index, a few slots below Pakistan, Syria and Iran.

Russia is also perceived to be more corrupt that its fellow BRICS, as Brazil (75th), India (95th), China (75th) and South Africa (64th) all finished ahead of it.

Additionally, Russia companies were rated as the “most likely to bribe” when doing business abroad, according to a TI survey of 3,000 business executives also released today. TI wrote in its report:

Given the increasing global presence of businesses from [Russia], bribery and corruption are likely to have a substantial impact on societies in which they operate and on the ability of companies to compete fairly in these markets.

 TI Russian director Elena Panfilova added: “Unfortunately… there are no islands of integrity in Russian public and business life.”

The report called for more to be done at the international level to outlaw companies from paying bribes in foreign countries.

The Corruption Perceptions Index ranks nations based on how corrupt their public sector is perceived to be, using data from more than a dozen surveys that look at kickbacks in public procurement, embezzlement of public funds and questions that probe the strength and effectiveness of public-sector anti-corruption efforts.

Garry Kasparov

Newsweek writes about today’s world premiere of “Russian Visionaries. Into the Light,” a photography exhibit showcasing Russian opposition leaders at the 25CPW Gallery at 25 Central Park West in Manhattan. The show runs from Nov. 29 until Dec. 12 and is sponsored by the Institute of Modern Russia, a non-profit organization dedicated to advancing democracy, civil society and the rule of law.

With the Duma election just days away, “Russian Visionaries” introduces the nascent but growing Russian opposition movement to the American public in a stark and intimate way. Fifty-three austere black and white portraits taken by renowned photographer Kirill Nikitenko show the gripping gaze of prominent writers, actors, politicians and activists, brought together for this unique exhibit by Elena Khodorkovskaya, curator and former wife of political prisoner Mikhail Khodorkovsky. 
  
LOCATION:   25CPW Gallery, 25 Central Park West, Manhattan, (212) 203-0250, www.25cpw.org
DATES:          November 29 – December 12, 2011
HOURS:         11 a.m. – 8 p.m.