Streetwise Professor

June 4, 2013

Russian Corporate Governance Follies: Putin Reaps What He Sows, and Who Trusts a Man With a Mullet?

Filed under: Economics,Energy,Politics,Russia — The Professor @ 8:51 pm

A recurring pattern since Putin’s reelection has been for him to issue some ukase, which results in . . . nothing happening.  Then he vents, and rants and raves, sometimes in public, and . . . nothing happens.

Today’s example, his command to Russian state companies to increase dividends:

Most of Russia’s state-controlled companies have refused President Vladimir Putin’s appeal to raise dividends, providing a fresh reason for investors to avoid the cheapest emerging-market stocks.

Russian stocks’ discount to the MSCI Emerging Markets gauge grew to 2.1 times net assets in May, the highest in four years, as 11 of 17 Kremlin-backed companies included in the benchmark Micex Index (INDEXCF) ignored the government’s November rule mandating a payout equal to at least 25 percent of net income. The Micex is down 9 percent this year, the worst performance of the BRIC markets after Brazil’s Ibovespa. (IBOV) State-controlled OAO Rosneft and OAO Inter RAO UES both fell more than 20 percent.

“The unrealized dividend promises have a negative impact on the market, especially since this was one of the key growth triggers,” Victor Bark, who oversees about $2.8 billion as the head of asset management at Alfa Capital in Moscow, said by phone on May 27. “This is bad news in a situation when there are no sources for economic growth.”

Putin has targeted dividends in a drive to boost budget revenue and lure foreign and domestic investors wary of an economy that grew at the slowest pace since 2009 in the first quarter. Capital outflows amounted to as much as $4 billion in April, according to the Economy Ministry.

Putin wants more of the money from state companies to go into state coffers so he can meet the promises he’d made to increase state spending on everything from pensions to weapons.  The management of these companies, of course, would much rather tunnel out the money using lavish investment expenditures.  Or in Gazprom’s case, pipe out the money-with a good chunk of the money going into the pockets of Putin’s judo buddies, and pipe manufacturers, the Rotenbergs.  So Putin will command, and rant, but he shouldn’t wait by the mailbox for the dividend checks to start rolling in.

This quote from the article is priceless:

“The Russian corporate sector would do almost anything on earth to be seen as modern and transparent,” Eric Kraus, a managing director at Nikitsky Capital in Moscow, where he manages about $200 million in assets, said by e-mail on May 28. “Anything but pay fair dividends, respect minority interests in corporate transactions, or allow truly independent directors. There is a disconnect between the rhetoric and the reality.”

Couldn’t have said it better myself.

In other news of Russian state corporation hijinks, consider this Reuters item:

Banks that helped Russian oil company Rosneft finance its $55 billion buyout of rival TNK-BP have been left waiting for their payback – a share in $15 billion in asset sales expected to follow the deal, sources familiar with matter said.

State oil company Rosneft’s takeover of TNK-BP this year aimed to create a major oil group producing more oil than Exxon Mobil, but it also tightened the Russian government’s grip on the country’s energy sector.

The asset sales promised by Rosneft Chief Executive Igor Sechin would offload less-profitable businesses to turn the company into the major oil player the CEO has said he wants it to be. The delay shows Rosneft has a lot on its plate integrating TNK-BP and that the sales are on the back burner.

Rosneft had dangled the juicy divestment mandates at the banks in exchange for a $29.8 billion loan – the largest in Russia’s history – on good terms, three out of four sources with direct knowledge of the loan talks said.

“All the lending banks are waiting,” said one of the bankers who asked not to be named because the talks are private.

And they’ll probably be waiting a very long time.

I really don’t blame Sechin here.  He is just doing what he does.  But because he’s doing what he does, that should have been perfectly predictable, I do blame the banks for being so gullible-no, make that stupid-for falling for his bait-and-switch.  (And to reprise a theme from above, Sechin has little incentive to unload bad assets because even bad assets can create good tunneling opportunities.)

Perhaps you’ve been asking yourself: Who trusts a grown man with a mullet when billions of dollars are at stake?  (Seriously: have you checked out Sechin’s ‘do lately? Hockey Hair hardly does it justice.)

Well, now you know: executives from the world’s biggest banks.  They think that Sechin is thinking like a western CEO who at least faces some pressure to maximize shareholder value.  In reality, Sechin’s objective function is quite different.  Mirror imaging is a very bad idea when western managers and financiers deal with Russians.  The Russians are marching to a very different drummer.  But Sechin apparently realized that the banks were mirror imaging, and used that to get them to offer attractive financing terms in exchange for future business he had no intention of sending their way.

Of late the news has been full of stories of the stagnating Russian economy, faltering investment, and continued capital flight.  These two stories illustrate a big part of the reason for those headlines: a colossally corrupt and inefficient state corporate sector.

And again, the irony here is too rich.  I noted the other day that Putin’s rant against defense contractors was ironic because he created the behemoth state enterprises that he now rages against.  He has also been a proponent of the huge state enterprises that he now fulminates about because they won’t pay dividends.

There’s an old expression: be careful what you ask for, because you just might get it.  I’m sure Putin could relate to that right now, if he’s capable of honest self-appraisal.

Print Friendly, PDF & Email


  1. That RT piece you link to (the one with the mullet pics) has a revealing passage:

    But whatever his role in Russia’s ruling hierarchy, the one thing that has never been in doubt is Sechin’s fierce loyalty to Putin (himself Time’s Man of the Year in 2007). Throughout their time working together, Sechin was reportedly always the first person to greet Putin when he came into his workplace, and never left before his superior.

    The author equates arse-licking and trying to impress people by staying late in the office with loyalty.

    Comment by Tim Newman — June 5, 2013 @ 5:43 am

  2. @Tim-spot on. Purely opportunistic loyalty, analogous to Himmler’s to Hitler, perhaps. (And no, I am not claiming Putin=Hitler. Just struck me as the canonical example of a toadying henchman feigning loyalty to the supreme leader while the latter was on top, and who then made his own play when the leader was falling.)

    Very Igor-like (in the Frankenstein sense), eh?

    The ProfessorComment by The Professor — June 5, 2013 @ 8:32 am

  3. Throughout their time working together, Sechin was reportedly always the first person to greet Putin when he came into his workplace, and never left before his superior.

    This is verbatim advice from a Dilbert book circa 1997 on how to make your boss think you are hard-working. Be at work 5 minutes before your boss, leave 5 minutes after. That way you create the perception that you are always there.

    Comment by So? — June 7, 2013 @ 1:49 am

  4. The old hands on the oil business tell me leaving a jacket permanently over the back of your chair was a common trick. You wear another one to work and back. I wonder if our translator friend did the same thing?

    Comment by Tim Newman — June 7, 2013 @ 5:33 pm

  5. This seems so destructive to prices in the world’s largest (OK #2) producing nation. These forces are similar to what I’m hearing re BRIC selling of actuals generally.

    Comment by t c phillips — June 9, 2013 @ 7:48 pm

RSS feed for comments on this post. TrackBack URI

Leave a comment

Powered by WordPress