Streetwise Professor

January 27, 2009

That’s the Way to Encourage Foreign Investment!

Filed under: Commodities,Economics,Politics,Russia — The Professor @ 8:51 pm

The financial crisis has increased Russia’s need to tap foreign capital markets.  Not only do Russian companies need money, they often need foreign expertise.  Particularly in the aftermath of rough treatment of numerous foreign investors, this is hardly calculated to build confidence and encourage direct investment in the Russian economy:

Russia has the power to stop foreign companies developing “strategic” deposits, Natural Resources Minister  Yuri Trutnev  told Kinross Gold Corp. Chief Executive Officer  Tye Burt  in a meeting today, according to the ministry.

“This doesn’t mean the power will be exercised,” Trutnev said in a statement e-mailed by the ministry today.

The minister and Burt discussed the Canadian company’s plans to develop the Kupol gold field and a venture with OAO Polyus Gold to mine Siberia’s Nezhdaninskoye deposit, the statement said.

Russia last year passed a law that limits the holding of a foreign company in developments of Russia’s biggest deposits of oil, natural gas, gold and other minerals. Kupol, which is 75 percent owned by Kinross, is exempt from the legislation because it was acquired before the law came into effect.

Fields with more than 50 metric tons of gold are considered strategic and must be controlled by Russian companies.

“That doesn’t mean the power will be exercised.” Boy, that inspires confidence!  Where do I sign up?  Having the sword of Damocles hanging over one’s head adds a little frisson to the investment process, no?

And it’s not just foreign investors.  Arbitrary state action is also used to expropriate domestic firms:

Russian electricity producer Mosenergo (MSNG3.MM:  Quote,  Profile,  Research) is suspending plans to build four new turbines after regulators capped the price of power from recently-installed plant, a company spokesman said.

A company source said that at the tariff allowed by the regulator, it would take Mosenergo more than 20 years to see a return on an investment of some $2 billion.

Power-hungry corporations such as steel and oil firms buy capacity offered by utilies at auction. But they face intense cost pressure amid the global financial crisis and are lobbying hard for state watchdogs to rein in growing electricity costs.

At the most recent capacity auction in December, Mosenergo, which is controlled by gas export monopoly Gazprom (GAZP.MM:  Quote,  Profile,Research), offered the output from two existing state-of-the-art turbines.

The Mosenergo source said the industry watchdog capped prices at 370,000 roubles ($11,490) per megawatt for one proposed turbine and at 402,000 roubles per megawatt for the other.

The source spoke on condition of anonymity as the regulator does not make the prices public from power auctions.

“We think that our (initial) offers were capped. On average the price set for the new capacity is about a third lower than what we first offered. Aside from that, there was no clear methodology for making these adjustments,” Mosenergo spokesman Vitaly Koskovetsky told Reuters in seperate comments.

The firm’s investment committee has already approved the partial suspension of its spending plans, which must still be finalised by the board of directors at its next meeting.

The power sector’s regulator, known as the Market Council, insisted last August that Mosenergo lower its asking price at the first ever capacity auction. After days of negotiation, they agreed on a price cut of 20 percent on Mosenergo’s original offer. The watchdog at first demanded a 30 percent cut.

Near the top of the government’s economic agenda in recent months has been controlling inflation, which topped 13 percent last year.

Even though the power sector underwent sweeping free-market reforms in recent years, the Energy Ministry and the Market Council still reserve the right to cap power prices at the auctions if they deem them unjustified.  

Although the economic collapse has led to sharp drops in electricity consumption and prices,  going forward, Russia needs massive investment in its generating capacity.  Arbitrary, opaque actions such as those described above are hardly the way to encourage such investment.

And for those who would argue with my assertion that the Russian economy is collapsing, a couple of data points.  First, even the Russian government, which for months had been denying the possibility that the country could experience negative growth in 2009, now admits that the economy will contract in 2009.  (This sounds like another attempt to tell the truth slowly/boil the frog.)  Second, industrial output declined 13.2 percent in December, after a 10.3 percent fall in November, and Markit group projects that December 2008 GDP was below December 2007 GDP. Third, real wages and investment fell for the first time in 9 years in December, and unemployment rose by 500,000 (per official stats–so it’s likely worse than that).  

There’s an interesting quote in this last article:

Prime Minister Vladimir Putin has vowed there will be no repeat of 1998 and the latest polls show his ratings remain high in a financial crisis stretching back to September.  

What would de Custine say about that?  How about this:

The popularity of an autocrat appears to me as suspicious in Russia, as does the honesty of the men who in France preach absolute democracy in the name of liberty–both are murderous sophisms.  To destroy liberty while preaching liberality is assassination, for society lives by truth; to make tyranny patriarchal is assassination also.

More words to ponder.  

 

 

 

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