Streetwise Professor

April 1, 2013

Speakers at the LSE Russian Biz Conference: Clueless or Gulling the Gullible?

Filed under: Economics,Politics,Russia — The Professor @ 7:27 pm

The LSE recently hosted the 6th Annual Russian Business Conference, which was well stocked with apologists and whataboutists.  Kudrin was there, and said some sensible things, especially regarding the Russian energy industry.  Others, well . . .

For instance, Presidential Commissioner for Entrepreneurs’ Rights Boris Titov.  Titov was defensive about the Magnitsky case, and cautioned the audience against generalizing from that case:

Titov admitted that the protection of business rights in Russia was a thorny issue, but asked that the situation not be dramatized.

“Such high-profile cases exist in many countries, but investors should look at the overall [investment] environment: how do the law-enforcement agencies and the prosecutor’s office operate? Is the problem of raiding being tackled or not? Conclusions must not be drawn on the basis of scandalous politicized cases that do not reflect the actual state of affairs,” remarked the ombudsman.

And just what would the “actual state of affairs” be? Just how do law enforcement agencies and the prosecutor’s office operate?  Tell us, Boris, is the problem of raiding being tackled?  Magnitsky aside, the answers to all of these questions-answers that Titov does not provide, but are well known-make it plain that “business rights” in Russia are in a parlous state indeed.

Scotsmen (based on the name) are willing to play along, if they are in the employ of a Russian bank, anyways:

Titov’s position echoes the opinion of VTB Bank’s Neil McKinnon, who points out that corruption and double standards are not the exclusive preserve of Russia. McKinnon cites some recent criminal scandals in Britain itself:

“In the UK there is a problem with corporate governance and I think… and in the City where I work. There have been a number of world-publicized cases – The London Whale, JP Morgan […] A whole host of problems.”

“HSBC and Standard Chartered have been fined 1.9 bln dollars for money laundering. If I was to money launder, I’m walking into a maximum imprisonment of 14 years and I’m not allowed to work in the City ever. If I’m on board of HSBC or Standard Chartered, I pay a 1.9 bln dollar fine, collect my bonus and I stay in my job. I think that is a disgrace. But I think that the City elite don’t get it,” he added.

Uhm, HSBC’s money laundering, the Whale, etc., are completely off-point in this context.  It’s not an issue of the misconduct by private business: it’s an issue of private business being preyed on by the state, “law enforcement”, security services, and criminal syndicates affiliated with the above.

Another speaker bemoaned the lack of long term funding:

In addition to the stereotypes surrounding Russia, the mood of foreign investors is clouded by the lack of cheap sources of financing within the country. According to experts, growing companies in the Russian market find it hard to attract long-term funding, whereas Western financiers are willing to wait a little longer for their investments to bear fruit.

“Russia has money, but no capital,” says Alexander Galitsky, renowned entrepreneur and owner of the venture fund Almaz Capital Partners.

And why is that, Alex? Why aren’t people and institutions willing to invest long term?  This is endogenous, after all.  Could the insecurity of property rights and the risks of expropriation make investors reluctant to provide long-term finance?  Just askin’.

Are these three actually this clueless?  Or are they just gulling the gullible?

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  1. [email protected]

    Ah yes, a variation of the “Khodorkovsky was the exemplar of Western management and business practices in Russia until eeevul Putin stole Yukos for no reason at all.”

    I recall how that bullsh*t dominated The Economist, Financial Times, The Times, The New York Times, The Wall Street Journal, The Washington Post…

    Then the mouthpieces for “Saint Mikhail of the GulAG” took their claims to the European Court of Human Rights, which exposed that Khodorkovsky was a fraud of galactic scale.

    And now we hea the same sort of bleating about Magnitsky.

    “…it’s an issue of private business being preyed on by the state, “law enforcement”, security services, and criminal syndicates affiliated with the above”

    That’s what your sort told us for years about fraud Khodorkovsky.

    Why should anyone believe you now?

    Comment by wanderer — April 2, 2013 @ 6:57 am

  2. Swedbank to discontinue operations in Rasha:

    Swedbank will cease all new business in Russia and wind down its existing operations.

    Swedbank’s net lending in Russia (including leasing) is approximately SEK 2.6 billion ($0.4 billion).

    Comment by elmer — April 2, 2013 @ 7:23 am

  3. The reference was to Magnitsky.

    The screen name Wanderer is quite the misnomer in this case used by someone who does not wander but stays adamantly in one place namely in a single room of the Khodorkovsky case.

    Comment by pahoben — April 2, 2013 @ 5:20 pm

  4. Dr. Pirrong:

    I am not sure if I can agree with large risk of expropriation you mention as the main contributor to poor investment climate. Rather, I believe corruption is the true cause. The levels of corruption in Russia are so outrageous (30%+ last I heard) that only those with support from the very top can “afford” to invest as they otherwise will be “milked” at every possible level.

    To support my point: there are investors who are willing to invest in Russia once such support at the top is gained. An example would be recent round of talks between Russia and China and anticipated $30 billion in financing coming from Chinese as result of those (here is a link to NYTimes article on this:

    And No, those three are not naive, rather they are playing along with the system that benefited them so much.


    Comment by Mikhail (Russian Houstonian) — April 3, 2013 @ 11:28 am

  5. More competition for Rogozin:

    — There is an opinion that it is just a “bubble” that will burst soon,” Miller said in an interview aired on the Rossia channel Saturday.

    Comment by Ivan — April 3, 2013 @ 2:31 pm

  6. Alexei Miller and FSBs conspitacy theorist F. William Engdahl. So who’s crazy here? Two highly effective self-promoters who love to emphasize their background as degreed geologists in order to attract media attention, or thousands of very smart professionals who quietly work their butts off behind the scenes to make sure their respective companies produce maximum returns to their shareholders?

    If there is a “bubble” that’s about to burst here, it is the nationwide campaign to demonize shale oil and natural gas, as well as hydraulic fracturing, in which David Hughes , Art Berman and Jane Dale Owen, are all unfortunate participants.

    Comment by Anders — April 3, 2013 @ 4:19 pm

  7. @Mikhail. Point taken, though one could interpret corruption as a different form of expropriation. Your assets are not seized and nationalized, but parasites expropriate some of the cash flows that your investments generate. Another way of putting it: expropriation is a tail risk, relatively unlikely but hugely costly if it occurs. Corruption is just the daily drag of doing business in Russia.

    @Ivan & Anders . . . Miller’s desperation re shale is palpable. The louder he squeals, the more I know that he’s truly frightened. Whistling very loudly past the graveyard.

    Note Gazprom’s market cap fell below $100 billion. So much for Miller’s boast, circa 2008, that the company would be the largest market cap in the world. P/E ratio=2.9! LOL! No wonder he’s frightened.

    The ProfessorComment by The Professor — April 3, 2013 @ 7:52 pm

  8. Assume an American stealthily opens say a bar in Moscow that is quite successful. He takes the position that he is bound by FCPA and will pay funds only into registered government accounts and so no bribes. What is the over/under on his retaining ownership of a viable business?

    Wanderer’s implication is that supportive government agencies would applaud his entrepenurial spirit and fulfil their obligations justly to ensure a nurturing environment for this admirable start up enterprise.

    I think he may bele to hold out a year if his security is very good.

    Comment by pahoben — April 4, 2013 @ 6:33 am

  9. He takes the position that he is bound by FCPA and will pay funds only into registered government accounts and so no bribes.

    The system is sophisticated enough to get around that. For example, MChS (the emergency service branch which must check your fire safety compliance) will come to your premises and condemn them, and helpfully provide a list of equipment and modifications which will ensure you get your certificate. Even more helpfully, the MChS officer will provide you with the name of a company which you can…erm, must…use to do the works, which will total around $2k say. This company is, of course, owned by the MChS officer or a close relative, so he gets a substantial cut. And in Russia, the MChS officer will *always* find you non-compliant and threaten to close you down *immediately* unless you do as he says. This is the case even if you have built your new building to the *exact* design which was approved by the *same* MChS department previously, as I blogged about here. I know one chap running a small nail salon in Sakhalin who found the authorities threatening to shut him down there and then because…the cable on his fridge was too long.

    Comment by Tim Newman — April 4, 2013 @ 8:54 am

  10. > Note Gazprom’s market cap fell below $100 billion.

    Well, Bill Browder’s business model used to be based on the assumption that Russian equity was discounted too heavily. For whatever reason, fewer buyers for that notion now, it seems.

    Comment by Ivan — April 4, 2013 @ 2:24 pm

  11. I will start a business in Russia as an experiment. It will be a set of Matryoshka nesting Voodoo dolls. The Papa doll will be Putin and then his babies-Sechin, Ahmedinejad, and lastly Chewing Gum or whatever his name is from NOKO. Manufacturing in China (if necessary-can’t find a willing manufacurer in Russia)and market in Russia, Ukraine, Georgia, Israel, and the US. Comes with silver pin and blessed by a priestess in Haiti that works by teleconference. I know Sechin is not in the logical sequence but he is such an a wipe that I can’t leave him out.

    Comment by pahoben — April 4, 2013 @ 8:04 pm

  12. ““Such high-profile cases exist in many countries, but investors should look at the overall [investment] environment: how do the law-enforcement agencies and the prosecutor’s office operate? Is the problem of raiding being tackled or not?”

    Sure. Those, who like Magnitsky, reveal the raiding of private companies, especially foreign-owned, by the Russian tax and CheKa services are not only tackled but also beaten to death.

    Comment by Vlad Rutenburg — April 5, 2013 @ 9:08 pm

  13. “Why should anyone believe you now?”

    I agree with you that average Russians like you should agree with the propaganda that they hear from their TV set and not with the news about the Russian government’s full-scale expropriation of Western-owned companies, as well as numerous companies owned by Russians.

    The only people who should continue not to invest in Russia are the businessmen and other people with money to invest.

    Comment by Vlad Rutenburg — April 5, 2013 @ 9:14 pm

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