Streetwise Professor

October 3, 2009

Will the Real Vladimir Putin Please Stand Up, Please Stand Up

Filed under: Economics,Financial crisis,Politics,Russia — The Professor @ 9:45 am

Nice Vladimir is welcoming with open arms foreign investors to share in Russia’s bounties:

Russia’s prime minister, Vladimir V. Putin, whose government took control of several oil companies when he served as president, gave a speech Tuesday saying the state must now step back from the economy and let private enterprise take the lead in pulling Russia out of recession.

The speech, at a banking forum in Moscow, echoed recent assurances by his ministers and economic advisers that Russia is becoming more attentive to the concerns of investors. Mr. Putin also reiterated their suggestions that a new round of privatizations could be in the cards for Russia, Andrew E. Kramer of The New York Times writes from Moscow.

The speech on economic policy was noteworthy for its exceptionally warm endorsement of a role for private investors. That had not been the case in recent years.

“We understand how deceptive blind faith in an omnipotent state is, how illusory are the hopes that total intervention in economic life might fix everything and put everything in its place,” Mr. Putin said.

He went on to praise private enterprise. “To the extent that the situation stabilizes, that the effects of the crisis are overcome, we plan to consistently and purposefully reduce state intervention in the economy,” he said, adding that a new round of privatizations could follow.

The government already has been extending an olive branch to the petroleum industry, offering new investments and a greater role in a sector at a meeting with oil company executives last week.

Bad Vladimir is telling foreign investors who responded to his past blandishments to shut up and pay up or else:

Russian prime minister Vladimir Putin on Friday gave  Renault an ultimatum to either help fund  Avtovaz or see its 25 per cent stake in Russia’s biggest carmaker reduced.

“Either they (Renault) participate in funding the enterprise or we will have to agree with them on dividing up our stakes,” Mr Putin told government officials.

More from Lex:

Vladimir Putin’s warning that  Renault must provide further financing for  Avtovaz, the Russian carmaker, or see its 25 per cent stake diluted will send Siberian shivers down investors’ spines. These may prove unwarranted. Arguably, Avtovaz’s Russian state owners have in effect funded an $800m capital increase, so minority investor Renault should also contribute.

Investors will worry, however, that this could become another example of Moscow renegotiating a deal with a foreign investor under duress, as happened with Royal Dutch Shell.

One possible scenario is that the Kremlin wants to unite Russia’s lumbering automakers into one holding company, merging Avtovaz with Oleg Deripaska’s Gaz. And with Russia’s state-controlled Sberbank set to take 27.5 per cent of Germany’s Opel alongside Canada’s Magna, Opel – rather than Renault – is the favoured foreign partner.

An analogy might be United Aircraft Corporation, into which Russia combined several aircraft makers in 2006. EADS, the Franco-German parent of Airbus, became a UAC shareholder as it already had a stake in one of its constituents. In a hamfisted attempt to draw it into a closer partnership, another state-owned Russian bank then bought 5 per cent of EADS.

Yet trying to sideline Renault in Avtovaz would be worse than the Shell debacle. Shell’s agreement governing the Sakhalin-2 project was arguably unfair to Russia. Renault’s $1bn-plus investment in Avtovaz, by contrast, came only in late 2007 – after the state had retaken control of Avtovaz.

It seemed to be an example of the new model of state-dominated economic development, with minority foreign investors, favoured by Mr Putin. Moscow can hardly expect to rewrite the rules yet again.

Uhm, Lex, dude:  Wanna bet?

Lex tries to put the best gloss on Putin’s predatory threat, but Russia’s unilateral decision to pump funds into Avtovaz doesn’t obligate Renault to do the same.   If Putin wanted to negotiate an arrangement with the French automaker, he could have done it.  To take an action, presumably based on calculations of his/Russia’s self-interest in no way justifies a demand that Renault take similar actions–again based on Putin’s/Russia’s self-interest.  (Similarly, any “unfairness” in the Shell Sakhalin II deal in no way justifies the thuggish and high-handed way in which Russia wrested control from the Anglo-Dutch group.)

Note to GM (that is, to US taxpayers): What is happening to Renault is likely a harbinger of your future as a minority shareholder in Opel.  Good luck with that.

All those listening to or reading Putin’s siren call in his speech about Russia’s “becoming more attentive to investors” should ignore his words, and heed his deeds.  The precipitous drop in foreign investment is the main reason for Russia’s appalling economic performance over the past year–one of the worst in the world among major economies, and far worse than its ostensible BRIC peers.  (Yeah, yeah.  Spare me the “Whatabout Ukraine?  Whatabout Lithuania?”  If that’s your standard of comparison, than you’ve effectively proved my point about Russia not being a real, genuine “major economy,” but just another, dysfunctional, post-Soviet relic.)

Russia–under relatively rosy scenarios–will be lucky to achieve growth rates in 2010 that are half of what it experienced before the crisis.  Very lucky.  It is desperate to attract investors back.  Putin and his clique will say anything–anything–no matter how risible to do that.  Things as risible as:

“We understand how deceptive blind faith in an omnipotent state is, how illusory are the hopes that total intervention in economic life might fix everything and put everything in its place,”

“To the extent that the situation stabilizes, that the effects of the crisis are overcome, we plan to consistently and purposefully reduce state intervention in the economy,” he said, adding that a new round of privatizations could follow.

Pay no attention to the little man in front of the curtain.

There will be no doubt a new round of privatizations to get new Western money rolling in from whatever suckers foolish enough to overlook history and believe Putin’s conversion to his newfound religion.  Putin would be more than glad to sell the same horse two times, three times, whatever.  Just look at Renault and see what happens when he’s got your money.  Like I wrote before: he’s always asking more, more, more.

Until Russia credibly protects property rights, investing there is a very good way to lose.

By now everyone should know who the real Vladimir Putin is.  He’s the one that threatens to steal property–and does–not the one who dresses up as Adam Smith.

Don’t say you weren’t warned.  Again, and again, and again.

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2 Comments »

  1. I understand that Pepsi has already taken the bait and thinks it would be great to expand their opperations in Russia. Maybe they should ask Ikea how that worked out for them. Those who don’t learn from history become board members.

    Comment by Snake Oil Baron — October 3, 2009 @ 4:54 pm

  2. There’s one born every minute. In some parts of France, every ten seconds.

    Comment by La Russophobe — October 4, 2009 @ 8:20 pm

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