Streetwise Professor

April 13, 2009

Hate to Say I Told You So

Filed under: Economics,Politics,Russia — The Professor @ 5:10 pm

Almost exactly a month ago, in regards to the Telenor holdup in a Siberian court, I wrote: ”  The forum shopping opportunities across 11 time zones worth of corrupt and corruptable courts must be pretty amazing.”

The New York Times has just caught up with the forum shopping issue, and the potential dangers it poses for Western investors:

Telenor Ruling Stirs Fear of Court Shopping in Russia

OMSK, Russia — This Siberian city would seem an unlikely place to decide the most prominent civil lawsuit in Russia today.

It certainly seemed an unusual venue to Telenor, the Norwegian telecommunications company that recently lost $1.7 billion in a ruling handed down in a courtroom here overlooking snowdrifts and a stand of fir trees.

But the court, the Eighth Arbitration Court of Appeals, has a history of vexing Western investors in disputes with Russian companies. Rulings in Omsk and other courts in the West Siberian district have gone against  BP, the British energy giant, in a dispute for control of  TNK-BP, the British-Russian oil major;  Deutsche Bank  in a case curbing the bank’s ability to collect collateral for a $2 billion loan; and TeliaSonera, the Spanish cellphone operator, in a shareholder dispute. But even by Russian standards, the ruling against Telenor has set off alarms about the political risks of doing business in this country. The decision, wrote Christopher Granville, a Russia analyst for the investor newsletter Trusted Sources, “made the flesh creep, as usual.”

The outcome rekindled fears, particularly among Western banks that are in trouble at home — and must contend with large exposure to Russian corporate debt — that malleable courts and widespread jurisdiction shopping have become a shield against collecting loans. Western banks and companies are owed $453 billion by Russian corporations, an amount three times as much as they are owed by Chinese, Indian and Brazilian companies combined.

“There’s no question the jurisdiction was created artificially,” Peter O’Driscoll, a partner at the London offices of Orrick, Herrington & Sutcliffe, representing Telenor, said in a telephone interview. “This particular weakness in Russian law exposes any legitimate business, whether Russian or foreign, to being sued in some obscure court far away from Moscow, and having an outcome not dissimilar to ours.”

I can’t say that I’m all that sympathetic to the Western banks.  After all, it’s not as if these developments should be a shock.  Hell, I wrote almost exactly three years ago (20 April, 2006–my 20th post) about fools who invest in Russia getting separated from their money.  Speaking of investing in Russia, I said “I’d rather take my chances on three card monte.”  That holds today, but many Western banks, and firms like Telenor and BP, have found that out the hard way.

It will be interesting to see whether once the economic situation in Russia stabilizes, the fools will again rush in where angels should fear to tread.  I predict that they will consider the bargains to be had in Russia to be so great that they will overlook the huge political and legal risks, and plunge in.  Telenor and forum shopping and the like will be forgotten as potential riches glitter before their eyes: Only to disappear in some other obscure Russian courtroom in the back-of-buggery (to steal a colorful phrase from my colleague Phil Rogers).

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  1. I remember you wrote a few months ago about how Russia is trying to fool OPEC because you said that Russia lowered its oil export tax, while it preached higher oil prices.

    Well, today Russia announced that it will raise its oil export duty, beginning May 1.

    Does this mean that Russia is now in bed with OPEC?

    According to your logic it would be but your logic here, and in so many other ways, is flawed and inconsistent with reality. Russia’s oil export duty is calculated each month based on the price of oil in the previous month. It is like a trailing indicator and it is fully transparent (you can find the equation to calculate it on the web – I am too lazy now to do it for you).

    Comment by lisa — April 13, 2009 @ 5:57 pm

  2. Lisa–

    Yes, it is a trailing indicator. And duh, when oil prices crash a given $ level of oil export tax would, if unchanged, have caused exports to plummet. A revenue maximizing country will inevitably cut its export duty when the price falls, and increase it when the price rises. Basic economics.

    The relevant issue is whether Russia acted as a revenue maximizer acting in its own self interest, or instead followed through on its sweet-talk to OPEC that it would contribute to export reductions in order to prop up the price of oil on world markets. The record there is very clear. As I indicated in earlier posts Russian oil exports actually increased after OPEC announced its output cuts. It is very clear that Russia has not cut its oil exports or output to anywhere near the same degree as OPEC countries, esp. Saudi Arabia, which actually reduced output by more than its quota in order to offset the effects of cheating by other members. It is clear as well that Russia never cut exports by the 2-300K bbl/day that it had suggested to OPEC that it might–a cut that OPEC added to its own previously agreed to cuts when it became clear that the Russians had no intention of cutting their own output/exports.

    I therefore stand by my analysis that contrary to its statements to OPEC that it supported collective efforts to raise oil prices, Russia acted in its own interest, and contrary to the collective interests of oil exporters, in the setting of its export duty. It is perfectly happy to let SA and other OPEC countries cut output to support prices, and then choose its own quantity to maximize its own revenue. It has set, and continues to set, its duty based on its own revenue maximization objectives, rather than as part of a collusive price setting and export setting arrangement. The fact that the duty sometimes goes up and sometimes goes down does not, as you wrongly suggest, contradict that claim, as the revenue maximizing level also changes.

    As a consumer of oil I am happy, by the way, that Russia is not cooperating with OPEC.

    I also stand by my previous criticism of Sechin’s inane remarks regarding Russia’s inability to control oil exports. The duty allows it to exercise close control over those exports. The fact that he could only mount such a risible defense of Russian oil export policy against pointed criticism arising from OPEC makes the justness of that criticism abundantly clear.

    The ProfessorComment by The Professor — April 13, 2009 @ 6:39 pm

  3. Russia has a history of cheatng on OPEC quotas. It’s why they are regarded as outsiders and unreliable. It’s not like the Saudis haven’t been through boom and bust cycles before. The difference is that their society isn’t at risk of folding like Putin’s mafia under the pressure. That’s the big picture.

    My bet is that when there is a global recovery of the BRIC countries Russia will get the least re-investment unless there are significant changes demonstrated by Putin’s collapse, an acquital for Khodorkovsky and serious contract laws developed as part of a reform of the judicial system. Next time around there won’t be as much investment capital sloshing around the globe.

    Comment by penny — April 13, 2009 @ 8:53 pm

  4. I think most companies discount for perceived risk depending on which country they’re investing in. Given the negativity of Western coverage of Russia, it is particularly likely in its case.

    I remember reading an economics paper which tried to calculate the amount of “dark matter” flowing into and out of the US (and several other) economy. The US had about +500bn $ of “dark matter” flowing in annually – a positive amount of dark matter indicates that investors invest there for lower returns on their investment for the premium of safety, sanctity of contracts, etc, that the US is perceived to guarantee. The UK had +250bn $ (a significant portion of its GDP) and Russia had -50bn $. This implies that in NET terms, if anything, investment into Russia is actually more rational than into the US.

    I think penny’s view is an extremely naive one, irrespective of one’s opinions about Putin or Russia. The facts of the matter are that investors generally appreciate Putin for bringing stability, which is far more important to capitalist development than the kind of revolutionary politicking practiced by Khodorkovsky.

    Comment by Sublime Oblivion — April 13, 2009 @ 9:31 pm

  5. SWP,

    You might enjoy this article published in The Province (published out of Vancouver, BC):

    It seems that RUSNANO representatives are scouring the planet to find places to invest in nanotechnology. An excerpt:

    “A state-owned Russian venture-capital fund is poised to pump millions of dollars into Canada’s fledgling nanotechnology industry, Canwest News Service has learned.

    Senior officials from the Russian Corporation of Nanotechnologies — which calls itself RUSNANO — were in Windsor, Toronto, and Ottawa last week meeting with scientists and entrepreneurs as well as provincial and federal officials as part of their global search for promising nanotechnology companies that need some seed money.

    “What we saw we liked,” said Alexander Losyukov, RUSNANO’s deputy director general for international co-operation, in an interview in Ottawa. “Scientists are getting engaged.”

    Losyukov and other senior RUSNANO officials have also travelled to Germany, Israel, Finland, the U.S. and elsewhere as they look for startups in which to invest. With $5 billion US to work with, RUSNANO is one of the largest technology capital funds on the planet.

    Losyukov said it has identified more than 100 Canadian firms involved in commercial development of nanotechnology. Later this spring, RUSNANO officials in Moscow will decide which firms or startups it wants to fund. RUSNANO’s minimum investment in any of these firms will be $10 million US.”

    It is nice to see that Rusnano is thinking of investing in Canadian small and medium-sized businesses, but it is perhaps indicative that even Russian government corporations are seeking to invest money outside of Russia 😉 Perhaps they consider it a safer bet to invest in Canada that Russia? 🙂

    Comment by Michel — April 14, 2009 @ 11:42 am

  6. According to people in the know, it’s because Canadian (US, Israeli, etc) companies offer up good opportunities to alleviate the lack of business process (specifically marketing) expertise that is currently the bane of Russian hi-tech enterprises. Done right it could make Rusnano profits and help indigenous Russian nano-technologists go beyond just the research and proto-typing, which are the only areas they perform well in today.

    Comment by Sublime Oblivion — April 14, 2009 @ 9:19 pm

  7. Or, RUSNANO will invest in the United States and Canada and in return these countries will recruit any competent Russian nano-technologists who will later immigrate to our countries 😉

    Comment by Michel — April 14, 2009 @ 11:11 pm

  8. Unlikely, since the US has a shit immigration system. More likely for Canada though, I admit – your’s is quite impressive and rational.

    *checks Rosstat*

    Still, considering that annual net migration to the US from Russia was around 1500 for 2007, and Canada didn’t even appear separately, extremely unlikely.

    Comment by Sublime Oblivion — April 15, 2009 @ 9:55 pm

  9. Well, according to Canadian statistics, there are 64,130 immigrants born in Russia now living in Canada, and there is a growing Russian community (source: The Russian Toronto website estimates that “over 15 thousand people come to Canada from Russia and other countries of the CIS each year” (source: So, we can gather that many thousand Russians from Russia immigrate to Canada every year. True, these won’t be al highly-qualified immigrants, but it is still part of a larger “brain drain” out of Russia. Novaya Gazeta had a good piece a while back about the hundreds of thousands of Russians who quietly left Russia even during the relatively good economic times of the Putin bubble, I only expect the numbers to grown as the crisis is likely to hit Russia harder than other countries such as Canada and the United States.

    Comment by Michel — April 16, 2009 @ 1:25 pm

  10. Perhaps. Another thing I didn’t mention…why bring in Russian technologists to Canada, when you can pay outsource the work to Russia and pay them half as much?

    Comment by Sublime Oblivion — April 16, 2009 @ 2:59 pm

  11. Outsourcing works well for computer software and call centers. If you were developing new technology, why would you outsource to Russia where it would be too easy to steal whatever is developed as copyright and patent are poorly protected at best.

    Comment by Michel — April 16, 2009 @ 3:08 pm

  12. PS. for people seriously interested in Russia’s nanotech…

    Comment by Sublime Oblivion — April 16, 2009 @ 8:53 pm

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