Streetwise Professor

September 22, 2008

Does Orwell’s Ghost Ghost Putin’s Speeches?

Filed under: Uncategorized — The Professor @ 6:58 pm

From the Washington Post:

Mikhail Berger, a professor at the Higher School of Economics, said two factions in the Kremlin are competing to set economic policy, one interested in further market reforms and integration in the world economy, and the other favoring greater state control and a more isolationist line against the West.

Putin appeared to lean toward the latter group in the aftermath of the war in Georgia, repeatedly declaring that Russia’s economy could continue to thrive without the United States or Europe. But since the stock market crash, he has adopted a softer tone and courted foreign investment.

“We are becoming more dependent on each other through mutual investments,” he said Friday, adding that Russia was “banking on private initiative, entrepreneurial freedom, openness and rational integration with the global economy.”

Private initiative? Entrepreneurial freedom?   Openness?   Rational Integration?   Orwellian doublespeak, all of it, including “on” and “the.”   If you wanted an accurate description of Putinism, collect the antonyms of each of these terms: government control; pervasive state restrictions and favoritism of large enterprises; a closed, opaque system; integration on parasitic, opportunistic, and asymmetric terms.

Only fools will take such tripe seriously.   Unfortunately, when investment in Russia is considered, past experience tends to support P.T. Barnum’s judgment about the demography of fools.

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1 Comment »

  1. Count me as one of the “fools.” ))))

    Couple things to remember about Russia:

    1. There is almost no consumer debt. Some people have taken store loans for white goods but there’s almost no pure credit cards. Many people have debit cards but not credit cards.

    2. A huge percentage of the population owns their apartments and homes outright. No mortgage. There is a small developing home equity loan market developing. The primary mortgage market continues to grow and just one drive through any large city and one will see dozens of billboards advertising ipoteka (mortgages). The application process is still quite slow and cumbersome (trust me).

    3. Average wages continue to rise year to year on average of 20%. Your average middle class college educated Russian in Krasnodar earns approximately 15,000 Rubles a month ($625). While that sounds VERY low to many Americans, it’s important to remember that most Russian families have 2 incomes with both parents working. Schools and health care are free (versus $500+ for average American family’s contribution towards health care premiums). Personal tax rates are flat at 13%. Public transportation is extensive if still uncomfortable and “fully depreciated.” An interesting study would be to compare the disposable incomes in Russia versus other countries. I would suggest that the gap would be much smaller than simply comparing gross incomes.

    4. Consumer demand is huge. After many many decades of consumer goods shortages Russians are all hungry for a taste of the good life and are snapping up lots of products. Home improvement is a huge growth area. In Krasnodar we have 2 Baucenters, 2 Leroy Merlins, and couple local home supply big boxes (Baucenter is German and Leroy Merlin is French. Think Home Depot).

    5. Russians in general, excluding the bottom 20% of the population like in Western countries, is happy, hopeful, and motivated. When you think of Russia during this decade think of the 1950’s in America after the war. Very similar dynamics.

    6. There’s lots of creativity manifesting itself. I have a bunch of young (late 20’s and early 30’s) acquaintances who have started their own companies in web design, public relations, local publishing, food & beverage, car rental, real estate brokerage, etc. These folks are living lives unimaginable just 10 years ago. They travel to Turkey, Egypt, Israel, and Europe. They attend trade expos in Moscow and bring back new ideas and contacts. The quality of their work is first rate. The graphic design work done recently for us was truly impressive.

    7. The government under Putin and Medvedev is quite professional. While many may disagree with Putin’s positions on some issues, there’s little doubt that the quality of government officials at the top has dramatically improved. They way these top officials spoke about and handled the mini-crisis last week speaks volumes of their understanding of the critical underlying causes of how market economies work.

    8. The Russian market economy is not an Anglo-American model (i.e. heavily focused on financial markets). The model in Russia is much closer to that of Asia. The emphasis on size is quite smart when one considers that with a global economy the old domestic market share tests for monopolies is no longer relevant. Russia may never have the high flying public markets that have flourished in the West over the past 20 years but ultimately, that might just be a good thing. The key is to focus investment on the real physical economy and not on the speculative economy. Ever Ruble/Dollar that goes into the public markets is one less Ruble/Dollar available for investment in production. Jobs should be the central focus of any economic plan. In Russia job growth is expanding rapidly. This is important.

    9. Russia has tremendous natural resources.

    10. Russia bureaucracy is insanely bad. The burden on small businesses is crazy. Yet….. small businesses continue to open and grow. If Medvedev can bring some sanity into the business environment the economy will only become that much stronger. This goal is the test by which Medvedev will be judged. Putin stabilized the country and now Medvedev will position it to grow.

    11. Russia is not expansionist. Saakashvili pulled a fast one and Russia responded. Russia has no designs on Eastern Europe, the Baltics, etc. Hell, Russia ALREADY has 1/6th of the world’s land mass… it doesn’t need more land.

    So, with all that being said, were someone looking for a great investment opportunity s/he should look at the Russian ADR’s traded in NYC – Lukoil, Norilsk Nickel, and Gazprom.

    Let’s touch base again in a year and see how these 3 stocks do compared to any 3 you pick. Loser buys dinner at the GQ restaurant in Moscow.

    Comment by Timothy Post — September 23, 2008 @ 5:23 pm

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