Streetwise Professor

August 7, 2016

If Trump Really Has Deep & Enduring Russian Business Connections, He’s a Machiavellian Genius!

Filed under: Economics,Politics,Russia — The Professor @ 7:45 pm

The drumbeat about Trump’s connections to Russia pounds on, and is mainly sound and fury, signifying nothing. The campaign consists mainly of unsubstantiated theories, insinuations, and innuendo. Further, these appear to be tenuous at best and are often wildly implausible.

The gist of the theory is that Trump has said nice things about Putin. Putin has said nice things about Trump. Trump has criticized Nato. Putin obsesses over Nato. The DNC email was hacked, possibly by the Russians, embarrassing Hillary. So why? Trump business connections, naturally!

This theory has been floated by Democratic operatives, by George Will (heretofore not suspected to be a Democratic operative), and the #neverTrump crowd, and echoed repeatedly in the media. In ironically Russian fashion, the campaign has moved to social media, where reliable little pilot fish plumping for media attention and maybe even an apparatchik role in the Clinton administration (yeah, I’m looking at you @CatchaRUSSpy) are spreadin’ the word.

My basic problem with this is the whole idea of secret Trump business dealings that could only be revealed by looking at his tax returns. “Secret Trump business dealings” is an oxymoron. His whole MO is self-promotion and hype. If anything, he overstates his business successes. He is not the man to hide his light under the bushel basket.

Now if you were talking about Soros, no doubt he has massive number of business dealings that have escaped the public eye. But Trump? He’s all about the publicity. What’s more, litigation and leaks from partners or bankers would have almost certainly revealed any major dealings long ago. If Trump has succeeded in keeping some big deal in Russia completely secret for years, he’s the man we need in charge of our national security! He would clearly be far more capable of keeping secrets than Hillary.

As for his not releasing his tax returns, I can think of 1,000 better reasons than concealing past dealings with Russians. This fact is overdetermined, to put it mildly.

Trump has been quite open in the past about his attempts to get into Russia, and how those attempts came to nothing. And let’s be real here. Every major business in the world looked to Russia as a huge opportunity in the 90s, and into the 2000s. For many–most, arguably–it ended in tears. Yes, look askance at businesses that did well there: many almost certainly succeeded because of corrupt deals. I’m thinking Siemens, or HP. (And to be fair, it seems that Siemens bribed everybody everywhere.) But those who tried and failed (a) can’t have continuing relationships that would be advanced or jeopardized, (b) likely didn’t pay bribes, or bribed the wrong parties, and (c) are likely to have a rather jaundiced view of Russia and Russian politics.

Further, when you are talking about Russia, past business dealings have very little connection with current conditions. One of the most pronounced regularities of Russia is that those who are riding high one minute quite often come to very hard falls somewhat later. Yesterday’s insiders are outsiders and sometimes pariahs today. If you have a connection with someone who is now on the outs with Putin, that connection is a liability to be shed, not an asset to be maintained.

Further, as Russia recovered from the 1998 crisis, and was riding high during the oil price boom, previously successful Westerners were considered less and less necessary, and were sidelined and forced out. Westerners became resented as parasites who attempted to exploit Russia’s weakness. Successful foreign investors had a huge target painted on their backs: look at TNK-BP, or Telenor/Vimpelcom. Once they didn’t need your money, they looked for any way to take the money you’d already made.

In the aftermath of the 2008-2009 crisis, Western financial connections became even more suspect as threats to Russian sovereignty.

And for those who have been paying attention Putin has been dramatically narrowing his circle of insiders, and that circle consists increasingly of those from the security services. Indeed, even some of the various security services are being left out in the cold. And worse: for instance, the head of the customs service was recently raided. Right now, the FSB, the GRU, and Putin’s new national guard are inside the circle. Everyone else dreads the knock at the door.

Insofar as biznessmen are concerned, (a) Putin has always had a deep suspicion of them, and (b) those who were seemingly favored in the 90s and 2000s are clearly on the outs now. The favored business people at present are Timchenko and the Rotenbergs. Show me any Trump dealings with them, and we’ll talk.

But this last point raises one of my pet peeves. Those who now pontificate on Russia and Trump’s connections clearly have NOT been paying attention. They betray a superficiality that would be embarrassing in a comic book. Many of the people and things that they mention became irrelevant years ago.

Further, one should be chary about claiming that they know what goes on in Russia, and in Putin’s pea-picking mind. Riddle, mystery, enigma, and all that. But fools rush in where angels fear to tread. And many a fool is making bold claims about a country and a politician they know little about, can know little about, and which until recently they ignored altogether. But now they’re experts.

The very byzantine nature of Russian politics and business over the last 25 years means that very few outsiders have navigated it successfully, even for a time, let alone many years. All I can say is that if Trump was (a) able to survive and thrive in that world, and (b) do it without anybody knowing, he’s a Machiavellian mastermind who would scare Putin to death.

The strained attempts to tie Trump to Putin are also transparently intended to distract attention from the embarrassing content of the DNC leaks–and, methinks, preempt leaks that are likely to come, from the Clinton Foundation, or even from Hillary’s server.  It’s a twofer for Hillary: discredit the message by emphasizing the malign (alleged) messenger, and tie the malign messenger to her opponent.

Beyond the implausibility of the insinuations, I doubt this will affect anyone who is not already a Hillary acolyte. Russian generally and Putin specifically are not bogeymen to most Americans. It’s not 1983. It’s not as if there are many people out there who would say “I liked this Trump fellow, but this Russia business  is just too much.” Those who don’t like Trump have many other reasons to do so; those who do are likely care little about Russia one way or the other; and those on the fence likely rank Russia low on the list of factors that will cause them to jump one way or the other.

So in the end, I find this obsessing about a Putin-Trump bromance to be amusing and embarrassing. I would be shocked that there’s any there there. It runs counter to Trump’s type, and it runs counter to history. The controversy transparently (pants?) suits Hillary’s political needs. Those who are hyping it are clearly partisan, and clearly ignorant. There are plenty of real issues to talk about, involving both Hillary and Trump. Let’s get on with that.

July 27, 2012

The World’s Biggest Home Court Advantage

Filed under: Economics,Energy,Politics,Russia — The Professor @ 12:54 pm

Western companies with the misfortune of partnering in some way with Mikhail Fridman live in fear of the Tyumen Arbitration Court. Funny thing.  Holders of small positions in companies owned by Fridman that are in a battle with a western partner go to the Tyumen court to sue the western company for some breach, and ask for-and win-huge judgments.  The court has tortured Telenor for years.  And now BP is on the Tyumen rack:

A Russian arbitration court on Friday ordered BP BP.LN +1.39% PLC to pay just over 100 billion rubles ($3.1 billion) in damages to its joint venture TNK-BP in a suit bought by an investor, a ruling that the British company called a “corporate attack.”

“We will challenge today’s ruling in accordance with the procedure established by the law, and expect that the court of appeal will adopt a reasonable and fair decision,” BP said. “We consider this claim as an attempted corporate attack and believe that today’s ruling should be canceled.”

The ruling, from the arbitration court in Tyumen, is to take effect in 30 days unless appealed, in which case it would become effective at the end of the appeal process, BP’s lawyer said.

The order to pay damages comes amid rising tensions between BP and its partners in the 50-50 TNK-BP venture—a group of Soviet-born billionaires known as AAR. Earlier this week, BP said it was in talks to sell its stake in TNK-BP to state-run OAO Rosneft,ROSN.RS -10.01% a move that analysts said could put pressure on AAR, which is also bidding for the stake.

This is taking place against the background of maneuvering over the fate of TNK-BP, which appears to be developing into a The Good, The Bad, and The Ugly-like three way standoff between BP, AAR (in which Fridman is a partner and the strongest figure), and Rosneft.  (The only problem with that analogy is that none of these seems well-cast in the role of Eastwood’s The Good.  However, the the roles of “Bad” and “Ugly” are easily filled, and indeed the guy playing one could readily play the other.)

That contest is puzzling on many levels, and I have no idea what is going on.  Nor does pretty much anybody on the outside-and perhaps not so much on the inside either.  But the Tyumen court judgment gives Fridman leverage in this game.  Talk about home court advantage: nothing in sports comes close.

May 30, 2012

No Dividends For You!

Filed under: Economics,Energy,Politics,Russia — The Professor @ 9:47 am

Over the weekend I blogged about the renewed legal hostilities over Vimpelcom, Ltd, which, among other consequences, prevents the company from paying dividends.  Mikhail Fridman’s Alpha Group holds a large stake in Vimpelcom, along with Norway’s Telenor, and the Russian Anti-Monopoly Service which has moved against Vimpelcom is presumably acting as Fridman’s stalking horse. Another Alpha joint venture with a big western company-TNK-BP-is also unable to pay dividends because its board “inquorate” (a new word for me) due to the resignation of Gerhard Schroeder in December, and the to-the-knife conflict between the Russian AAR partners and BP that has precluded the naming of a replacement.  (BP claims that it can force the firm to pay dividends through an arbitration process.)

The war between the Russian owners and BP is now on the verge of going nuclear with Fridman’s resignation as CEO.

This means something big, obviously.  Just what? I have no clue.  Neither does anyone else, though numerous theories are being hawked.

Pretty much everyone agrees that this has something to do with Putin’s return to the presidency; Igor Sechin; the fallout from the failed BP-Rosneft deal; Russian energy politics; and the operations of the Russian natural state, with its balancing among oligarchical, state, and clan interests.   Just exactly how these pieces fit together is what no one quite gets.  This is Riddle, Mystery, Enigma: The Energy Edition.

A big part of this is due to the fact that no one understands what cratered the BP-Rosneft deal.  Yes, we all know that AAR’s demand that BP adhere to the TNK-BP shareholder agreement that required the British company to work exclusively through TNK-BP in Russia was the proximate cause of the termination of the Rosneft-BP transaction.  But no one knows exactly what went on.  Were Fridman and the other AAR partners defying Putin and Sechin, or acting with their tacit or explicit consent?  Or did Putin side with AAR against Sechin then, but is changing sides now?

What is certain is that this bodes ill for Russian efforts to attract investment.  What I find amusing is that much of the commentary presumes that Putin’s first priority is to implement reforms that improve the investment climate in order to build a stronger Russian economy, and wean it from its dependence on energy and raw materials generally.   He certainly pays lip service to this, but that is not his first priority.  Or even his second.  His overriding concern is maintaining control and the equilibrium between the grasping factions within the elite, and his main means of doing so is managing the distribution of rents, especially those thrown off by energy assets.

Given the virtual lack of any real formal legislative or judicial checks on his discretion, and the obvious glee with which he issues blizzards of ukases ordering this and that in the economy, I see no way for him to credibly commit to reforms that limit his discretion to intervene.  Indeed, the transition from the current state of affairs to such a rule-based would be so fraught with risk for him and the elite, that I cannot see it happening.

May 27, 2012

Home Court Advantage

Filed under: Economics,Politics,Russia — The Professor @ 12:21 pm

The truce in Telenor’s Kafkaesque legal battles in Russian courts over Vimpelcom is apparently over.  You may recall that a small shareholder, Fairmax, a stalking horse for Mikhail Fridman’s Alpha Group owned by his brother, sued Telenor for $1.7 billion in Tyumen (though some accounts put the figure as high as $5.1 billion), claiming that the Norwegian telecom firm had harmed Vimpelcom by refusing to go along with a deal to purchase Ukrainian operator URS.  This followed a series of lawsuits filed against Telenor by Alpha and related entities.  Eventually this resulted in a settlement between Alpha and Telenor in which the companies set up a new joint holding company, in which the two entities would each large shares representing 25 percent of the voting rights.

That October, 2009 deal brought some relative peace, but that is now over.  In February, 2012, Telenor acquired the VimpelCom, LTD stake held by Egyptian Naguib Sawiris, which gave it a 36.36 percent of the voting shares (up from 25.01 percent) and simultaneously ceased its arbitration action against Fridman’s Altimo companies (which held 25 percent).

Two months later, the Russian Anti-Monopoly Service swung into action, filing a suit claiming that the Telenor-Sawiris deal violated Russia’s laws regarding foreign ownership. In response, a Russian court blocked VimpelCom LTD from paying dividends, and enjoined the company from implementing actions approved at its Annual General Meeting last week.  Earlier the court had blocked Telenor from voting its and Sawiris’s shares to change the composition of the board.

In response to the court actions, VimpelCom LTD’s ADRs fell over 16 percent.

This all clearly benefits Fridman by stymying Telenor in its attempt to increase its control over VimpelCom.  The Telenor-Sawiris deal outflanked him, but he had another card-or court-up his sleeve, and that card is likely a trump.

What a surprise.

This should be a warning to anyone contemplating large investments in “privatized” Russian companies.  The means of expropriation are many.  Russian interests have home court advantage-quite literally-and as a result of this advantage, can deprive foreign investors of the benefits of their investments (cash flows and control rights).

Any wonder why Russian companies sell at large discounts?  Like I said last week, Russia won’t get first world prices playing by third world rules.  But Putin et al can’t help themselves.

If you still have your doubts, I have some wonderful investment opportunities for you.  I will treat you better than a Russian court.  Promise!

November 10, 2011

Who Knew They Had Kangaroos in Russia?

Filed under: Economics,Energy,Russia — The Professor @ 11:57 am

Well, not real hoppy marsupials, actually.  But kangaroo courts are definitely native to Russia.  Case in point, a story that is bizarre even by Russian standards:

A Russian judge decided to adjourn hearings on a $2.8 billion lawsuit against BP Plc executives on Thursday for one day, saying there were not enough chairs in the courtroom to accommodate the public.

. . . .

Both cases are now due to be heard on Friday, when the judge said the hearings should resume in a bigger room, according to law firm Liniya Prava, which represents the plaintiff.

A spokesman for a law firm which represents BP’s legal interests confirmed the development, calling the decision “a strange twist of the Russian judiciary”.

So somebody wanted a delay in the hearing, and the judge had to come up with some lame excuse.

In another legal story of a company that like BP is ensnared in Russia’s Kafkaesque legal system, Telenor is trying to get an arbitration panel to prevent Alfa Group from engaging in a legal subterfuge in their battle over governance of mobile operator Vimpelcom:

Telenor has asked an arbitration panel to uphold a key shareholder agreement in mobile phone operator Vimpelcom and thereby effectively block the appointment of a new board, the Norwegian firm said on Tuesday.

Telenor’s power struggle with Russia’s Alfa Group intensified in June when Alfa’s Altimo unit said it had cut its stake in Vimpelcom to less than 25 percent, thereby voiding the shareholder deal and allowing a board reshuffle from Dec. 10.

Telenor said in a statement that it believes Altimo sold the stake to a company ultimately controlled by the owners of Alfa Group and that the shareholder pact should therefore be upheld.

“We’re asking the arbitration panel for a temporary injunction to uphold today’s shareholder agreement,” Telenor spokeswoman Marianne Moe said.

And what a coincidence!  Mikhail Fridman’s Alfa Group is at the center of both the TNK-BP and Vimpelcom disputes.  Beware to investors who get involved in anything with Fridman/Alfa.  For you are likely to see kangaroo justice in its native habitat.

July 23, 2011

You Can Just Feel the Love

Filed under: Economics,Energy,Politics,Russia — The Professor @ 8:52 am

The respite from TNK-BP-Rosneft-related news was broken the other day, with news that the AAR consortium is restarting legal action.  The Gang of Four is demanding $10 billion to compensate for business opportunities allegedly lost as a result of the abortive BP-Rosneft tie-up.  The theory as to how these opportunities are lost and gone forever now that the deal is, well, aborted, is rather difficult to discern from news accounts.

Moreover, minority shareholders of TNK-BP Holdings are suing TNK-BP Holdings, TNK-BP Management and BP Exploration Operations Company, and two BP employees who serve on the Holdings board for preventing TNK-BP from participating in the BP-Rosneft tie up.

AAR denies being a party to the suit, but acknowledges that it had been informed about it, and that the issues raised in the lawsuit are the same as those in the Gang of Four’s actions in the Stockholm Arbitration Tribunal.

Perhaps this is a coincidence, but the private lawsuit is being filed in the same court in Tyumen where a straw plaintiff (a shadowy off-shore investment fund called Fairmex) sued Telenor over Vimpelcom.  The beneficiary of this lawsuit was Alfa Group–the first A in AAR.  Ultimately Telenor capitulated and came to terms with Alfa.

So maybe it isn’t a coincidence: an ostensibly independent group of minority shareholders files a suit in the Tyumen court that benefits AAR.  Telenor’s torturous experience in Siberia shows that the court can exert substantial pressure, enough to compel a capitulation.

In other words, we are seeing a legal pincer movement.  Or perhaps more accurately, extortion by law.  It seems pretty clear that AAR is attempting to compel BP into buying their half of TNK-BP at a very high price.

As I’ve said before, there is a wicked irony here.  BP is being tormented legally for its strategy that relied upon its belief that Russian lawlessness would allow it to flout the TNK-BP shareholder agreement–as long as it had the protection of Igor Sechin.  I still do not understand exactly why BP’s bet failed: whether they got played, or murky backroom politics in the lead-up to the Russian presidential election undercut Sechin, or something else.  But it is crystal clear that its bet failed spectacularly, and now it will pay.  And pay dearly.

July 7, 2011

Pointillism Not Payback, Apparently

Filed under: Economics,Russia — The Professor @ 7:53 pm

It looks like the travails of partly-Alfa Group owned Avianova are not payback for Alfa’s role in torpedoing the Rosneft-BP deal, but are instead just another example of corporate governance a la Russe:

On the surface, the story seems to have all the trappings of every Alfa conflict of yore. (Think BP vs Alfa-Access-Renova, or Telenor versus Alfa-subsidiary Altimo.) But what do these stories actually say about the Russian investment climate?

The two shareholders are preparing to face off at a board meeting in London next week to determine whether Avianova, Russia’s 13th biggest air carrier, should be run by Andrew Pyne, its holding company’s British chief executive, or Konstantin Teterin, a Russian airline executive hired to take his place.

As the FT has reported, Pyne, who has served as chief executive of Whitefish Aviation, Avianova’s holding company, for the past four years, was suddenly barred from entering the company’s Moscow offices last week after Teterin, an Aeroflot veteran, was appointed first deputy general director.

And speaking of Russian corporate governance, this is an absolute riot.  The new chairman of that paragon of efficiency and good management, Rosneft, shared this gem with the world:

“To make this decision [to give up a controlling stake in the company] the government should be guided by a certain calculus, not an abstract notion that the public sector is bad and the private sector is good,” said Nekipelov, who is also vice president of the Russian Academy of Sciences.

According to the privatization plan for Rosneft, which pumps nearly a quarter of the country’s oil, the state will first lower its stake from 75.16 percent to 51 percent and after 2015 sell off more shares to be left with minority ownership.

“Rosneft’s assets are huge. Its capitalization is around $90 billion. To allow some independent directors to manage such assets is a very exotic point of view,” Nekipelov said.

Let’s see.  ExxonMobil market cap: $405 billion.  Chevron: $214 billion.  Shell: $143 billion.  BP: $140 billion.  ConocoPhillips: $130 billion.  How exotic: they are all far bigger, they all have outside directors, they all are privately owned–and they are all far more efficient than Rosneft.  Note that Rosneft pants after all of them for joint ventures.  Rosneft dreams of playing in the same league.  But it never will when it thinks corporate accountability is “exotic”, and that it is an “abstract notion” that privatization can enhance the efficiency of a commercial enterprise.

Two stories.  Two points in the portrait of a dysfunctional “business” culture.

February 8, 2011

Back to Nature

Filed under: Commodities,Economics,Politics,Russia — The Professor @ 10:14 am

This article from John Helmer’s Dances With Bears provides a fascinating case study on the operation of the Russian natural state.  He describes how the government, in the forbidding form of Oleg Sechin, guides (to put it euphemistically) negotiations between consumers and producers of metals:

Deputy Prime Minister Igor Sechin, who supervises the Russian metals and mining sector, convened a meeting with the federal government’s industry administrators and price regulators, along with representatives of the steel and carmakers. Mordashov attended for Severstal, along with Igor Komarov, chief executive of AvtoVAZ, Russia’s largest carmaker. Others attending included the two other domestic auto sheet suppliers, Magnitogorsk and Novolipetsk, and other automakers — GAZ, Sollers, and Kamaz, which builds mostly trucks, buses, and utility vehicles.

Sechin listened to the applications, and then issued his orders. Steelmaker Severstal was told to reopen negotiations with AvtoVAZ over the former’s proposed 30% price hike for auto steel supplies. The Federal Antimonopoly Service (FAS), which had earlier ruled that the Severstal price was in line with raw material cost growth and international price benchmarks, was also ordered to reopen its inquiry with different comparative criteria.

That last touch, with Sechin directing the FAS to get its mind right and revise its methodology in order to generate the politically approved results, is priceless (no pun intended).

Note too how the government is more than willing to use tax and trade policies in order to manipulate domestic prices in order to achieve the desired allocation of rents between consumers and producers;

The cane wasn’t mentioned or waved about. But Sechin didn’t need to remind everyone in the room that the government is considering a tax or duty on exports of steel, maybe iron-ore too, unless the producers curb their appetites and make an agreement on a new domestic price.

Documents leaked fron the federal Ministry of Economic Development, and published in a Moscow newspaper on January 27, reveal that two options for the export duty level have been proposed — one fixed at 10% for steel and 30% for iron-ore; and one a sliding scale tied to international prices for these commodities. The more the Russian exporters try to capitalize on rising international steel and iron-ore prices, the bigger the margin the Kremlin plans to take from them as their cargoes leave the port, possibly to add as cost and sale price subsidies to the carmakers.

According to Vladimir Zhukov, steel analyst for Nomura in Moscow, “we have been told that the prime cause for the government thinking in this direction is an attempt to help the domestic car industry which struggles to achieve decent profitability levels (if any profitability at all).”

Zhukov’s report for Nomura’s clients suggests that rises in coking coal, scrap and iron-ore are likely to engender a steel price rise over the year of about 15%. Zhukov adds that “we understand from industry sources that Russian auto manufacturers are already buying galvanized steel (the main steel product supplied to car manufacturers) at some 10-15% discount to Europeans (approximately $850/t vs $930-1000/t). Therefore, introducing export duties on steel will widen this discount even further.”

States like Russia use state power to fine-tune the allocation of wealth between different individuals, firms, and sectors.  (Yes, this happens in the US too, but the process is quite different; in particular, it is fenced in with a variety of political and legal constraints that make Sechin-like interventions impossible.)  This is a linchpin of a broader strategy to maintain political equilibrium.  Creative destruction is an anathema there: these efforts to maintain stability are antithetical to economic dynamism and innovation.  Hence, the actual operations of the government undermine the soaring rhetoric about modernization.

The process Helmer describes also provides an illustration of a point I’ve made several times before.  Namely, that the Russian government relies heavily on  export and import taxes as a means to manipulate rent distribution for political purposes.  This is incompatible with WTO obligations, meaning that when Russia joins the organization it is almost certain to be involved in chronic conflicts with it.  (For corporate analogies, just look at the ongoing warfare between AAR and BP over TNK-BP, and between Telenor and Vimpelcom.)

And speaking of broad strategies to maintain political equilibrium, another element in this strategy is information control.  Along those lines, Russia has denied entry to Guardian reporter Luke Harding, a consistent critic of Putin specifically and the Russian government generally.  The beat goes on.

November 17, 2010

Russia Quick Hits

Filed under: Economics,Politics,Russia — The Professor @ 8:39 pm

A few interesting things on Russia that deserve some comment.

Item 1.  This article from the FT Beyond Brics blog notes that although other emerging markets are worried that Uncle Ben’s Quick Bucks AKA QE2 are putting upward pressure on their currencies, and are experiencing substantial capital inflows, Russia is the laggard, with a declining currency and net capital outflows:

At a time when most emerging markets are struggling to stem the tide of liquidity from the developed world, Russia stands virtually alone in anticipating more capital flowing out of the country than coming in this year.

On Monday, Russia’s central bank raised its forecast for net outflows in 2010 to $22bn. Although this is much lower than the outflows of $134bn in 2008 and $57bn in 2009, the contrast with the emerging world as a whole – which the International Institute of Finance expects to experience net private capital inflows of $825bn this year – is striking.

The weak ruble is particularly amazing, given that other commodity currencies are very strong.  That is a very telling commentary on Russia and its economic prospects.

The net capital outflows reflects two things: (a) relatively little money flowing into Russia, and (b) a lot flowing out.  The former is readily understood, given the very weak investor protections, and the horrible experiences of many foreign investors (Shell, BP, Telenor, Ikea, and on and on).  The latter is very revealing too, though.  The distribution of wealth is highly concentrated in Russia, so net wealth outflows mean that even the extremely wealthy–those that have investible wealth and the ability to move it overseas–perceive that the risks of investing in Russia are extreme.  Even given the vaunted discounts in Russian equity prices, they put a lot of their money overseas.  They realize that they have their wealth at the whim of Putin and the siloviki.  Better to get it (and in many cases, their families) in a place where it’s harder for the state and the power structures to get at it.  They have more influence in the system than foreigners, but “more” doesn’t mean “a lot.”

The BB post links to this article from the FT in October (which I had missed).  It gave me a chuckle:

Russia: Laws do exist but enforcement is patchy [!]

. . . .
The government, meanwhile, is making a concerted effort to do something about the bad reputation Russia has in the business world. Legislation is planned and there has already been some progress.

But the laws are not the main problem, say most experienced investors.
“The biggest problem is not the law itself, it is the implementation of the law,” says the president of a big investment bank in Moscow. Most serious legal wrangling is done in London courts, as few trust Russia’s legal system to deliver an impartial verdict.

Yes, Russia, in theory, has laws to protect investors.  And the USSR had a democratic constitution.  But as the article notes, the formal protections don’t mean bupkus in a country with a court system that gives new meaning to the words suborned and corrupt.

The FT article also states that corporate governance is a problem because “companies tend to have highly concentrated ownership – a legacy of high cash flows and low share prices when most were born.”  Uhm, not really.  Indeed, this has cause and effect reversed.  The concentrated ownership is the effect of legal weakness.  Who wants to be a minority investor in Russia?  (If you answered “yes” to this question: please just send me the money.  You’ll have as much as if you invest in Russia, and I’ll be better off.)  The lack of effective (as opposed to formal) legal protections is why (a) publicly traded Russian stock prices are so low, and (b) ownership is concentrated.  Owners of big stakes would like, most probably, to sell off some of their shares, but they can’t precommit to protect small shareholders, and the courts won’t make them do it, so the small fry only buy at a discounted price that makes the sales less attractive.

Item 2.  Foreign policy.  Stephen Blank writes a typically excellent analysis of Russian foreign policy, and the Obama administration’s delusional Russian policy.  The whole thing is worth a read, but the conclusion hits the nail:

This absence of discernible quid pro quo in return for U.S. concessions casts serious doubt on Obama’s new approach to Russia. The current administration has not shown why improved ties with the other side are important, what the positive gains may be, what the limits of this reset policy may be, and why it should command serious domestic support. Here, Washington’s silence on these important questions has opened the door to a likely Republican and conservative Democratic assault on the forthcoming treaty, which would jeopardize the continuation of the overall policy. Indeed, the same is true in Russia—and Medvedev’s lack of control over his own government should also cast serious doubt on the reset: Putin’s faction, after all, has already tried to organize military alliances with Latin American states like Venezuela and Ecuador, alliances hostile to the United States and designed to secure Russian air and naval bases in those counties (as well as in Bolivia) to support Hugo Chávez’s Bolivarian Revolution.

Clearly, pushing the reset button, from Russia’s point of view, means one thing: getting a free hand to pursue policies that are in many respects fundamentally driven by anti-Americanism and its own sense of Great Power entitlement. The fact is that Russia has long since decided that we are its prime adversary, and its model for relations with the U.S. is not far removed from the peaceful coexistence model of the Brezhnev era, another period in which détente only succeeded to a limited degree and foundered on missile placements in Europe and Soviet adventurism in the Middle East and the third world. The recent episode of the twelve Russian “sleeper” agents caught and deported by the United States illustrates the problem of the current Russian mind-set. The scope and scale of this operation (and who knows how many other such operatives are “out there”) underscore Moscow’s guiding assumption that the U.S. is its prime adversary, which in turn illustrates Russia’s addiction to Cold War tactics and thinking. Medvedev may call for “modernization alliances” with the U.S. and Europe, but his government’s actions indicate that it sees us as anything but a friend.

We should indeed take Moscow and its plans seriously. For the most part, unfortunately, those aims and interests are antithetical to the cause of stopping Iranian proliferation and preserving peace and security in Europe. A realistic understanding of Russian intentions, rather than the vacuously optimistic view shared by many commentators who should know better, ought to be the true basis for engaging Moscow diplomatically. Any reset in relations should come from a cold-blooded calculation of our interests, not sentimentality or illusion—and certainly not with a trusting (and unreciprocated) acceptance of Moscow’s self-serving definition of its bottom line or its “sphere of influence.” Getting real about Russia does not mean taking Moscow lightly or rejecting cooperation when it is desirable, but it does mean advancing our own goals as seriously as Russia is advancing its own.

Relatedly, earlier this evening I saw Hillary Clinton reading a statement advocating the passage of the new START.  It was painful for many reasons.  First, her shrieking, shrill voice.  Second, her statement that “some people say we should hit the pause button.”  I mean, give the effing button metaphors a rest, OK?  It’s not like the original button thing (in Latin type, not Cyrillic; mistranslated; dorky) worked out so well for you, Hillary.  (Steven Hayes said on FNC Special Report that listening to her makes him want to reach for the mute button.  I hear you, man.)  Third, on the substance her remarks were weak.  Fourth, she was just reading, and obviously so–kind of mailing it in.  (And for those who lament the fact that she lost to Obama–she would have been a disaster in her own special way.)

Item 3.  There are many stories about plans in the works to re-engineer Russia in order to solve the “monogord” problem.  (Monogorods are single industry or single company towns, many of which are in dire straits because the town industry/firm is itself in dire straits.) In a nutshell, the plan is to induce people to  leave the monogorods, and concentrate in 20 large urban areas.

This is the antithesis of recent Putin initiatives, which involve injecting financial support into the monogorods, mainly on an ad hoc, squeaky-wheel-gets-the-grease basis.

The articles are rather unclear on exactly how this is to be accomplished.  But it is clear that it is to be a state-directed effort:

The authors warn that new urban centers must not evolve spontaneously, so as not to pose “serious risks” for the state and create imbalances in regional development. Among the factors that could trump the novel ideas is that Russian laws do not currently allow the formation of agglomerations, as this contradicts the system of intergovernmental relations. The suggestive boundaries for such agglomerations also do not correspond to the country’s current administrative divisions, which could be a potential problem when distributing budget funds.

Spontaneous order?  Nope.  Can’t have that now, can we?  That would be so un-Russian.

There’s an irony here.  The monogorods were largely a creation of Soviet social engineering.  The de-monogorodization of Russia is to be latter day offsetting social engineering.  That’s not likely to work out any better.  The government doesn’t have the information to determine what the “right” configuration is, and what’s more (apropos Item 1), any government effort will be distorted by corruption and rent seeking.  It would be better that the government create a rational framework of laws and regulations, and (again apropos Item 1) a relatively uncorruptible enforcement system that will support the flow of resources–including, crucially, human resources, to their higher value use.

But that’s the problem.  That isn’t going to happen any time soon.  It is very hard, and the powers that be have little incentive to make it happen given how well the current system works for them.  So, again, they’ll try to reverse the perverse effects of the previous policies of treating people like animals and shunting them about to meet state purposes by creating new policies that treat people like animals and shunt them about to meet the new, improved state purposes.

If it even happens.  It looks like this is a Medvedev initiative (the policy document comes from the Presidential administration) and as noted above, clashes with the Putin approach to the problem.  And if that’s the case, bet on Putin and his approach.

November 21, 2009

Who You Gonna Believe, Putin or Your Lyin’ Eyes?

Filed under: Economics,Politics,Russia — The Professor @ 6:40 pm

Bloomberg reports the grim news on foreign direct investment in Russia:

Russia’s foreign direct investment plummeted an annual 48.1 percent, the most on record, to $10 billion in the first nine months of the year after the economy slid into its worst crisis in a decade.

Overall foreign investment, including credits and flows into the securities markets, was $54.7 billion, 27.8 percent less compared with the same period a year earlier, the Moscow- based Federal Statistics Service said in an e-mailed statement today. The office started collecting the data in 1999.

Gross domestic product of the world’s biggest energy producer eased its decline to 8.9 percent last quarter from a record 10.9 percent in the three months through June. Energy products make up about 70 percent of export revenue, with this year’s 82 percent increase in Urals crude driving Russia’s recovery. The government has said Russia is relying on investment to sustain its recovery as some of the world’s biggest brands reduce their presence in the country.

KBC Groep NV, Belgium’s biggest bank and insurer by market value, said this week that it intends to sell its banking unit in Russia as it revises plans for regional expansion. Wal-Mart Stores Inc., the world’s biggest retailer, has yet to open a single store in Russia since it started to look into entering the market more than a year ago.

Carrefour SA, Europe’s biggest retailer, announced last month that it will sell its business in Russia, several months after opening its first store in the country. The decision was prompted by the “absence of sufficient organic growth prospects and acquisition opportunities,” the company said

Foreign investment in stocks and bonds tumbled 65.8 percent to $348 million in the first nine months compared with the same period last year, the Statistics Service said.

The decline in foreign investment has been one of the primary contributors to Russia’s 2008-2009 economic decline, which was one of the world’s steepest, particularly when compared to pre-crash growth.   The unwillingness of foreign investors to pursue opportunities in Russia–opportunities that looked so promising, especially for retailers, before the crash–is an ill-omen for the future.

It is no surprise then, that Putin is putting on a charm offensive, trying to attract foreigners back to Russia.   He has suggested that they would be permitted to participate in future privatizations.   He says risible things like “Russia will remain a liberal market economy,” all in an effort to lure the foreigners who have fled in the past year.

All these honeyed words, however, pale by comparison with the headlines about the travails of foreign investors in Russia.   Telenor.   BP.   Shell.

When evaluating the risks and rewards of investing in Russia, which should carry greater weight?   Putin’s soothing phrases, or the fate of Sergei Magnitski?   The former are pie crust promises, easily made, and easily (and I daresay, inevitably) broken.   The latter is a cold, hard, immutable fact.   Putin will gladly take back what he sold, but nobody can give back Magnitski’s life.

In such an environment of lawlessness and brutality, and relentless nationalist propaganda, a foreigner must be very brave, or very foolhardy, to risk investing in Russia.   Don’t look, therefore, for foreign investment to bounce back anytime soon.

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