Streetwise Professor

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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  1. depressing thoughts but nonetheless brutally true…think twice before investing your money in the Putin’s backyard

    Comment by Martin Fordbisher — November 22, 2009 @ 7:37 am

  2. I agree with everything you say here, but I’ve always been a bit torn about this topic. I have actually been involved in a very successful foreign venture (thus far anyway)in Russia and it still seems to be solid since I left several months ago. There are areas where you can succeed, but you just can’t be asset heavy and in anything remotely related to what government officials think they can barge into. High-tech is one of those areas where the government thugs are clueless and so they largely leave it alone. Just don’t actually manufacture anything high-tech there, then the story could change. Don’t interpret this as a full endorsement, though. They do manage to find other ways to burrow themselves in. It was an amazing thing to watch.

    Comment by Howard Roark — November 23, 2009 @ 12:44 pm

  3. Howard–

    You are a natural transactions cost economist. “Asset heavy”=asset specificity, which makes one vulnerable to holdup. Do business that relies on human capital that is much harder to expropriate than physical capital.

    The ProfessorComment by The Professor — November 23, 2009 @ 7:19 pm

  4. Wow, what a diagnosis, all this time and I never even knew it. I guess that’s why “Professor” is in your moniker. Yes, human capital is the key. In a way, it’s just another form of commodity in Russia. While they do create finished goods (software) in the case where I worked, it is still a boundary that we did not go beyond so as to avoid too much risk. And even then, as I said, there are still ways they burrow in. You still have to have office space, computers, utilities, etc. All of this is potential leverage for the corrupt.

    Comment by Howard Roark — November 24, 2009 @ 10:03 am

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