Streetwise Professor

May 30, 2011

Would You Buy A (Very) Used Economy From This Man?

Filed under: Economics,Financial crisis,Politics,Russia — The Professor @ 10:49 am

Clearly in restoration campaign mode, Vladimir Putin has declared that Russian GDP per capital will double by 2015, and that Russia will become one of the world’s top 5 economies.  Why anybody would believe such a statement is beyond me.  Recall that Putin made a similar promise early in his presidency, promising a doubling of GDP by 2010.  Didn’t happen then.  Won’t happen now.

Note that doubling in 10 years requires roughly a 7 percent growth rate.  The country is currently lucky to get slightly north of 4 percent, despite a the dramatic rise in oil prices in the past 18 months.  Russia was pushing it to get 6 percent growth during the boom years.  7 percent per year over 10 years is a fantasy, especially in light of the vulnerability of the economy revealed by its experience during the crisis, and the daily revelation of its fundamental institutional weaknesses and political risks.

Putin is an expert at these long horizon forecasts that promise a pot of gold at the end of the rainbow.  He chooses a time horizon long enough that by the time it arrives, people will have long forgotten the promise.

Ironically, Putin’s resumption of the presidency would only reduce the odds of achieving his stated objective.  Twelve more years of stagnant corruptocracy will not generate growth.

Countries with sparkling growth potential do not experience massive capital outflows.  Countries with glittering prospects do not see major IPOs fail with regularity.  The pulling of the Domodedovo IPO is just another example of the toxicity of the Russian business environment.  Did it have to be pulled because (a) the dodgy corporate structure makes it suspect to Western investors, or (b) Western investors fear expropriation based on the pretext of a dodgy corporate structure?:

Domodedovo had been facing an onslaught of media scrutinty in Russia before the IPO on reports that the company’s management could be forced to sell out to a state-connected private investor.

Meanwhile, the prosecutor general recently released a report that deemed Domodedovo’s offshore ownership structure “unacceptable” and asked Russia’s transport ministry to put together a new bill that would essentially forbid Domodedovo’s current owners from managing the business.

Dmitry Kamenshhik, who owns 100 per cent of Domodedov, was named the 86th-richest man in Russia by Russian Forbes with an estimated net worth of $1.1bn

Analysts and investors say they are sceptical that the increased pressure against the airport at home had nothing to do with the decision to postpone the listing.

“Investors are not ready to pay fair value for a company which could face some risks with the state,” says one analyst, who did not wish to give her name because of the sensitivity of the matter.

“I don’t exclude the possibility that Domodedovo will change its shareholder structure very soon.”

Does it matter whether it is Russian business practice or the vulnerability of Russian businesses to the state that makes investors nervous?  And, pray tell, just what is the rationale for the creation of such an offshore structure?  To make it easier to tunnel assets out of the company–and out of the country?  Or to limit exposure to expropriation?  Both? However you interpret it, it suggests that the prospects for a Russian growth spurt are dismal.  Yes, Yandex just had a wildly successful IPO.  But it is the exception that proves the rule.

I haven’t heard much recently about the privatization campaign that is supposed to raise billions to fill the budget hole that Putin needs to meet his lavish campaign-but-not-campaign promises.  Given the rash of problems with Russian IPOs of companies, especially those with connections to the state, is there any wonder?

Ironically, I read of Putin’s promise to double GDP while in Portugal.  You might recall that once upon a time Putin promised that Russian living standards would reach Portugal’s by 2014.  First, that’s not going to happen.  Second, remembering that while in Lisbon brought to life the real implications of that statement, for the Portuguese capital looks very, very tired.   Unrealistic ambitions to surpass Portugal are revealing indeed.*

* Other parts of Portugal are more encouraging, to be sure.  I am currently in Troia, which is quite nice, and extremely reasonably priced for what you get.  But I have had to shake my head several times at the self-defeating economic attitudes here.  These are best summed up by my conversation with the nice woman at the car rental agency, after a frustrating experience relating to Portugal’s bizarre rules relating to declining insurance coverage based on coverage provided by my credit card company and US insurers, just as I’ve done not just in the US but throughout Europe.  (Essentially, they require you to buy the car.)  She said, with an obvious look of pain in her face: “I am sorry.  Many bad things in Portugal.  But the weather is nice!”  And ironically, while sitting here in the lobby discussing some arrangements with the guest services person at the hotel, just had another example of the rather, uhm, dysfunctional attitude towards the concept of customer service.  And I should say, piecing together what I can of the political ads on TV (a national election is being held next week), I doubt things will improve any time soon.  Which is sad, because it is a very nice country with some very interesting things to see (Sintra, for example), and extremely pleasant and friendly people.

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27 Comments »

  1. fyi, russia’s economy is already the 6th largest in the world:

    http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)

    I remember that a couple of years ago it was behind both England and France, but now it’s blown them in the dust.

    Can’t see why they won’t make it to 5 soon.

    Comment by jennifer — May 30, 2011 @ 4:17 pm

  2. think this is interesting:

    http://www.businessspectator.com.au/bs.nsf/Article/Shell-Kazakhstan-Kashagan-oil-energy-Eni-ExxonMobi-pd20110530-HC48G?OpenDocument&src=sph&src=rot

    way to go western oil majors, you guys are da best

    Comment by jennifer — May 30, 2011 @ 4:48 pm

  3. “to shake my head several times at the self-defeating economic attitudes here.”

    We set up a little business here a couple of months back. Nothing grand. But with a dual structure. The UK LLP took 7 days (including postage) and £20 to set up and be legal. The Portuguese side €3,500 and 10 weeks.

    Another example from the same thing: tried to register the Portuguese company for VAT. Was told that I couldn’t. Hunh?

    No, only your accountant can register a company for VAT. Got to let the professionals take their cut.

    No wonder there’s no growth here.

    Comment by Tim Worstall — May 31, 2011 @ 2:40 am

  4. No Stalin, Il Duce, or even Pinochet, but Salazar. Sad. BTW, back in the old days, language aptitude was a saving grace of the otherwise academically untalented. For Putin it was German (though I’ve been told his accent is strong). For Sechin it was Portuguese.

    Comment by So? — May 31, 2011 @ 2:53 am

  5. JENNIFER:

    Your statement is pretty damned ignorant. Seems like you might be a Russian.

    You cite purchasing-power parity GPD, which is not a real number. It’s a fudge that assumes going to a much less well-educated and equipped and paid doctor, for instance, in Russia offers the same value as seeing one in Germany. That’s simply false. In nominal GDP according to the IMF Russia is exceeded by a numbe of countries with much smaller populations.

    http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

    But the really telling is Russia’s per capita nominal GDP rating, #56.

    http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)_per_capita

    This rating compares Russian productivity and wealth to the rest of the world on a per-person basis. That Russia doesn’t even rank in the top 50 in the world says all you need to know about the Putin dictatorship. Putin doesn’t talk about real improvements in the lives of the Russian people, he only talks about doing things for Russia’s prestige as a nation. Small comfort to a mother with a sick child. Thus, Russians don’t rank in the top 130 nations of the world for life expectancy, and Putin couldn’t care less.

    Comment by La Russophobe — May 31, 2011 @ 4:13 am

  6. @Tim. Interesting. Re language, I have noticed that there is relatively broad English penetration, at least in Lisbon and in the resorts at Troia. I know there is some selection bias, given that I am interacting with people (hotels, taxis, restaurants, etc.) where such skills are most useful, but benchmarking against similar interactions elsewhere I would still wager that more Portuguese speak English than is true in most European countries (esp. southern European countries–notably Italy–and France). One would think that this, plus the longstanding connection between Portugal and Britain, would be a valuable asset. I think it is, but that it is being squandered by the inane, quasi-Russian policies that prevail here, and which you mention.

    The ProfessorComment by The Professor — May 31, 2011 @ 6:15 am

  7. Jennifer–how many Russians are moving or trying to move, to the UK, or France? How many Brits or French are trying to move to Russia?

    The ProfessorComment by The Professor — May 31, 2011 @ 6:16 am

  8. Jennifer–re Western oil majors. They are realists. They have to go where the oil is, but even given that they can tolerate only so much jerking around.

    The ProfessorComment by The Professor — May 31, 2011 @ 6:18 am

  9. Re: Shell and Kazakhstan.

    I’m not sure where STRATFOR are getting its information from, but the article seems to be nonsense. Shell’s offices in Kazakhstan are not closing, and it remains part of the NCOC consortium. I have a Shell mate working in NCOC’s office in Paris as we speak, albeit not on the Kashagan project.

    There have been rumours that Shell will pull out of Kashagan, mainly because they are struggling there like hell. But this is unlikely, as Kashagan represents too big a production figure for all consortium members. The reason they are struggling is because Eni, the previous operator of Kashagan, ensured that it had all the Kazakh immigration (and I suspect other) authorities on their payroll. When they got kicked off and Shell brought on board, Eni made sure, via their “staff” in the Kazakh immigration offices, that no Shell person would get a work permit. The overiding issue I hear from my friends on Kashagan, most of whom are stuck in The Hague, is that it is impossible to get work permits. here are other issues too, not least the spiralling costs of the Phase I development, but the visa issue is the main one I hear about. Quite where this will go from here I don’t know, but Shell could not simply walk off the project. Firstly, it means too much to them, and secondly they would need to sell their share, not merely walk away from it. Finally, there is no mention of this in Upstream Online, which is the best source of information in the oil industry. Jennifer should revise her sources.

    Comment by Tim Newman — May 31, 2011 @ 10:06 am

  10. Hi Craig,

    Glad you made it here and you’re enjoying it! You’ll eventually realize that the state structures in Russia and Portugal bear striking similarities in due proportions. Albeit a much less violent place, Portugal is also run by a kleptocratic elite diverting state funds to benefit a handful of companies with political connections. State corruption is rampant and funnily nobody dares even to murmur the “C” word. The press is far from independent and journalists are also intimidated, not at gunpoint but with the loss of their jobs. And I’m not even gonna comment about the judicial system.

    Your encounter with the car-rental clerk illustrates the defeatism pervading the common mortal here. We feel that there’s nothing we can do since we’re victims of a dysfunctional civil society. So we look up and console ourselves with the good weather and the beaches. And now try not to think of the day we’ll be faced with debt restructuring.

    Anyway, if you’re on wheels, don’t miss the Azeitão-Arrábida-Setúbal drive across the mountain. It’ll make you feel you’re vacationing in a tropical island :)

    Comment by Antonio — May 31, 2011 @ 2:38 pm

  11. from what I see Putin never caimed he wants to double real gdp per capita, but just “to double the gdp per capita”, what could very well be understood as nominal gdp per capita, and this is exactly what the IMF basically forecasts, Russia’s nominal gdp per capita will double by 2015 on a nominal basis http://www.imf.org/external/pubs/ft/weo/2011/01/weodata/weorept.aspx?sy=2009&ey=2016&scsm=1&ssd=1&sort=country&ds=.&br=1&pr1.x=69&pr1.y=15&c=922&s=NGDPDPC%2CPPPPC&grp=0&a=

    Comment by noone — May 31, 2011 @ 4:35 pm

  12. so probably you should direct your anger this time towards the IMF and not the messenger who conveys the funds forecasts…

    Comment by noone — May 31, 2011 @ 4:38 pm

  13. Stratfor, LOL!

    Comment by So? — May 31, 2011 @ 7:18 pm

  14. No wonder there’s no growth [in Portugal].

    As opposed to the UK, where there has been no growth for the last half year and output levels remain well below 2007’s.

    fyi, russia’s economy is already the 6th largest in the world:

    Indeed, and according to the World Bank’s latest revisions, only 10% below Germany’s.

    Comment by Sublime Oblivion — May 31, 2011 @ 7:38 pm

  15. SWP wrote: “ Clearly in restoration campaign mode, Vladimir Putin has declared that Russian GDP per capital will double by 2015, and that Russia will become one of the world’s top 5 economies.

    Surely, you mean year 2021, not 2015, right?

    Note that doubling in 10 years requires roughly a 7 percent growth rate. “

    Indeed. But, according to the IMF, Russia will grow at the average annual rate of 11% for the next 5 years:

    http://en.wikipedia.org/wiki/List_of_countries_by_future_GDP_%28nominal%29_estimates
    List of countries by future GDP (nominal) estimates

    Russia: 1,894.473 in 2011 and 3,237.246 in 2016. That’s a 71% growth in just 5 years.

    Notice that Russia will grow much faster than the rest of the World, which will on average grow by 32% or 3% annually. Russia will move from being 9th in the world in 2011 to being 6th in 2016, just a tiny bit behind Brasil. And if we extrapolate into 2021, we shall see that Russia will, according to the IMF projections, easily overtake Brazil for number 5 and maybe even Germany for number 4. Germany’s economy is projected to grow at 1% per year, while Brazil – by 3% per year.

    Comment by Ostap Bender — May 31, 2011 @ 11:00 pm

  16. Moreover, Russia’s GDP has been growing at 7% since 1998:

    https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html

    WORLD FACTBOOK

    RUSSIA

    The economy had averaged 7% growth since the 1998 Russian financial crisis, resulting in a doubling of real disposable incomes and the emergence of a middle class.

    Comment by Ostap Bender — May 31, 2011 @ 11:24 pm

  17. As opposed to the UK, where there has been no growth for the last half year…

    That’s not correct.

    Comment by Tim Newman — May 31, 2011 @ 11:30 pm

  18. @Antonio–yes, made it. Having a great time in Troia. That was a wonderful recommendation. Sintra was also great. Had to take a pass on Serra Sintra and Linhas Torres Vedras. The wife isn’t too keen on winding roads. I’ll have to do it solo some time. It is a beautiful country, which makes it all the more discouraging to encounter the attitudes you mention, and to read what you wrote about “C”, etc.

    I’ll catch up you later with more on our trip. Suffice to say for now–obrigado!

    The ProfessorComment by The Professor — June 1, 2011 @ 12:23 am

  19. Re languages here. We live a bit rural……among the older generation French is more common than English as the second language. To do with the great migrations away from Salazar (and conscription into the African wars) than anything else.

    Re Russians learning Portuguese. Portuguese tends to be the easiest of the romance languages for a Russian speaker to learn. For all of the sounds that are used in P are already there in R. This isn’t true of French or Spanish (or even English). Russians tend to get very confused about th, h, and the “sth” in cerveza in Spanish. That last, in P, becomes more like zh in English….just like zhiguli in Russian.

    An oddity, but many like me who have lived in both Russia and Portugal hear that (note, “hear”, not actually believe) that Portuguese is really Spanish spoken with a Russian accent.

    Comment by Tim Worstall — June 1, 2011 @ 3:20 am

  20. I remember watching a movie thinking the actors were speaking some kind of Yugo language, frustrated that I could not make out a single word. It was Portuguese.

    Comment by So? — June 1, 2011 @ 6:58 am

  21. “Yes, Yandex just had a wildly successful IPO. But it is the exception that proves the rule”

    didn’t mail.ru ipo recently in lse or something. think that was wildly successful too

    Comment by jennifer — June 1, 2011 @ 9:35 am

  22. @Tim,

    Note that I said “no growth for the last half year.”

    Now look more carefully at your link. Note in particular that the 0.5% growth in Q1 comes after -0.5% growth in Q4 2010.

    If you’re going to nitpick (my general point is that the UK economy has been doing crap), then at least make sure you get the facts right.

    Comment by The Sublime One — June 1, 2011 @ 12:04 pm

  23. Note that I said “no growth for the last half year.”

    But there has been growth, so you’re wrong.

    Comment by Tim Newman — June 2, 2011 @ 10:22 am

  24. It’s pretty ridiculous to speak of growth when your GDP falls by 0.5% and then rises by the same amount, basically remaining at the same level (and not to mention declining in per capita terms because the UK has 0.6% population growth), but okay, I will indulge your pedantry and clarify that it’s net growth for the past half year.

    Comment by Sublime Oblivion — June 2, 2011 @ 3:57 pm

  25. It is not pedantry to point out somebody confusing growth with net growth. As an engineer, if you confused movement with net movement, you’d think vibration is never a problem.

    Comment by Tim Newman — June 3, 2011 @ 1:35 am

  26. So the British economy is vibrating, falling one quarter and rising the next.

    How does this materially change my argument that the UK economy is doing crap?

    Comment by Sublime Oblivion — June 3, 2011 @ 1:39 pm

  27. You are free to offer your opinion on the UK economy, personally I could not care less what you think of it. However, you are not free to make stuff up without it being challenged.

    Comment by Tim Newman — June 4, 2011 @ 11:12 am

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