Streetwise Professor

The Russian equity market is in freefall in the aftermath of Vlad the Expropriator’s most recent outburst–this one directed at steel and coal giant Mechel, whose COO (chief oligarchic officer) had the temerity to decline the honor of attending an audience with His Eminence. For this dis , Putin sicced prosecutors on the company to investigate allegations of . . . who cares? The specific allegations are meaningless. The new oprichniki will find something, and Igor Zyuzin and his company will soon sample the delights of “the dictatorship of law.” And this in the same week in which BP’s Robert Dudley decided that discretion was the better part of valor, fleeing Russia rather than try another spin at Russian Legal Roulette.

Western investors were Shocked! Shocked! upon hearing the news:

Investors said Thursday’s events underlined the risk borne by Russia that, until now, had largely been masked by record-high prices for the commodities and oil that Russia produces in abundance.

“The place looks rotten to the core. It always did, but it was masked by high commodity prices,” said one fund manager who asked for his name not to be used.

WRONG! Russia’s rottenness was never masked by anything, let alone high commodity prices. It was there for anyone with eyes to see. Those that didn’t see it, didn’t want to see it. Salivating at the prospect of getting a seat on the Russian Rent Express, these investors, investment bankers, and fund managers ignored the stench of corruption that one can smell clearly here in the heart of the US. Like the classic mark in any con, they let their greed overcome their common sense.

Indeed, this fund manager’s diagnosis is 180 degrees from the truth. High commodity prices did not mask the rottenness–they fed it! The stream of rents flowing from Russia’s oil and gas empowered a corrupt elite to do anything it willed; these rents freed the siloviki from the constraints of domestic politics and permitted them to undermine totally Russia’s already weak legal safeguards for person and property. And the enabling behavior of fools like the wisely-anonymous “fund manager” only moved the process along.

Another anonymous codependent, a “sales trader at a major Western bank,” offered this pearl of wisdom: “The Russian government doesn’t care about foreign investors. It cares about its national security and, if foreign investment gets stomped on, then so be it.”

WRONG AGAIN! National security hasn’t a goddam thing to do with it. It’s all about one thing, and one thing only–the wealth and the power of Putin and the clans. It’s about their personal security, their personal wealth and power, the country be damned. All this yammering about making Russia strong, about restoring Russian greatness, is a joke. It is the Russian equivalent of boob-bait, intended to exploit the prejudices of the Russian populace and distract their attention from the accumulation of power and wealth by the ruling clique.

I have no sympathy whatsoever for any investor in Russia who, post-Yukos, post-Sakhalin II, post-Hermitage, post-corporate raiding, tried to get rich in Russia on the hope that the crocodile wouldn’t eat them. In one of my earliest posts, A Fool and His Money, I wrote:

[W]estern banks insistence that “their participation means that the deal will meet their exacting standards” won’t amount to squat if Putin decides to flex his muscle.

This raises the question-what are the incentives to expropriate, and what incentives cut the other way? If Putin were interested in building a reputation for avoiding expropriation in order to attract western capital, he might abstain from aggressive action. However, if anything, Putin seems fixed on-indeed, almost obsessed with-using control of Russian energy assets to exert geopolitical influence. He seems far more interested in control than attracting foreign capital. Moreover, revenues from $70 oil and expensive gas are filling Kremlin and Russian oil company coffers, limiting their need for external capital. Given these circumstances, the lure of increasing Kremlin control over Russian energy production and distribution, likely through its chosen vehicle Gazprom, seems irresistable-especially if it also allows the fleecing of foreigners to the tune of tens of billions of dollars. Even though commodities/energy are hot now and likely to get hotter, all in all, I’d rather take my chances on three card monte.

Sadly, I predict that soon enough those pigeons who avoided being the crocodile’s lunch this time around will be back, cash in hand, and that soon enough I will be able to write another told-you-so post.