The Russian bear is back, with extra weight, a throaty snarl – and cash to burn. No longer the servile beast that limped through the chaos of the former Soviet Union during the 1990s, Russia today roams the world with almost unrecognizable self-confidence, thanks to soaring oil prices and a booming domestic economy.
But Russia’s return to global prominence has been marked by a growing belligerence toward western corporate interests, suspending licenses or threatening criminal action for companies that don’t toe the line. There’s also a growing authoritarianism toward its own national media: more than 160 journalists have met violent deaths in post-communist Russia. President Vladimir Putin is even talking of a new cold war, turning nuclear warheads on western Europe again.
Should western investors be worried? Is Russia’s new stridency a short-term blip in its journey toward democracy and a full market economy, or is it more serious? Amid the rhetoric, what is the IR message emerging from Russia, and how reliable is it? A professor of finance at Cass Business School in the City of London, Gulnur Muradoglu, doesn’t think the current antagonism between Russia and the West will last. ‘In the last decade the direction of [the Russian] economy is about integration with the rest of the world. I haven’t observed any deviation from this.’ Russia’s boomtown
Ekaterina Stolkin is director of IR at Moscow-based Delta Private Equity, which has assets of more than $400 mn invested in small and medium-sized Russian businesses. She says Russia’s attitude toward the West can only be good news for investors, and thinks the IR message from Russian firms – particularly those focused on non-energy operations – is positive.
‘When you’re outside Russia and reading the newspapers, [Putin’s rhetoric] may sound frightening,’ Stolkin concedes. ‘But when you’ve had such huge changes in 10 years, you’ve got to understand that as the country gets stronger, the government feels more confident, and that’s a natural thing. Just a few years ago we had only two big supermarkets; now there are more than 2,000. Mobile-phone penetration is growing at the highest rate anywhere in the world. It’s boomtown. If you want the big returns, this is where you have to be. Everyone is here: Goldman, Merrill, JPMorgan, Morgan Stanley.’
Stolkin’s own fund has produced an impressive return of more than 220 percent since its inception in 2005. Yet the Russian economy as a whole remains perilously over-reliant on natural resources: 71 percent of Russia’s exports are raw materials. Moscow is awash with petrodollars. But how long oil prices can remain at current levels is anyone’s guess.
‘The Russians are behaving as if they no longer need foreign investment, because they have enough oil-and-gas cash for themselves,’ says Justin Urquhart Stewart of Seven Investment Management. ‘This is shortsighted, and has frightened off inward investors at all levels. Add to this the claw swipes at Georgia, Ukraine, Belarus, Lithuania and Estonia, and the story is pretty torrid.’
But Peter O’Brien, vice president of Russian oil giant Rosneft, insists Putin’s change in tone is more about perception than reality. ‘Russia is working hard to get its own house in order,’ he says. ‘It is improving its economic performance with a new fiscal approach.
It’s working hard to diversify the economy, too. It’s also got the largest budget surplus in the world. Ask the Russian people: are their lives better than eight years ago? The vast majority will say it’s a lot better. The priorities for the last few years have been to stabilise the economy; Russia has been doing this for 10 years – the West has been doing it for 300.’
Tim Brenton, an analyst at asset manager Renaissance Capital, agrees Russia’s investment trajectory remains upward. ‘Russia receives major direct western investment and is one of the EU’s trading partners, as well as the ninth-biggest economy in the world,’ he notes. ‘It’s not a country that’s about to isolate itself. That’s what the IR guys are trying to remind investors. If you’re not on the ground and just read the Wall Street Journal or FT, then you get a distorted view. Russia has an impressively educated workforce and there are plenty of gaps in the market.’
Investor wobbles
Others are less confident. James Nixey, Russian foreign policy expert at London think tank Chatham House, says several large western investors – some of which have invested so heavily it would be almost impossible for them to pull out – are deeply worried about Putin’s Russia. ‘There’s a huge difference between what they say in public and what they say in private,’ he says. ‘When big investors meet Putin they say at the press conference afterwards that everything is on course, and profess to be happy. But if they were to be in any way critical, they know they risk raids from the Russian tax police, or having computers or hardware confiscated. It’s extraordinary. They sing the praises of the president, yet Putin is simultaneously cutting off one of their hands.’
Nixey accepts that the standard of living has risen for many Russians, but says their democratic freedoms have been curtailed. ‘What are the yardsticks of a liberal democracy?’ he asks. ‘Free and fair elections, a free press, and separation of the judiciary from the state – none of which you have in Russia.’
Another big western investor admits off the record that it too is concerned about the Kremlin’s heavyhanded reaction to dissent and its allusions to a new arms race. ‘But Russians have a historical appreciation for a strong hand; they respect it,’ it notes. ‘I agree it’s not a great long-term model, but it will happen over time. The priorities for the last few years have been to stabilize the economy.’
Of course, the sheer unpredictability of investing in Russia is just what investors hope will give them an edge in the long term. Yet recent accusations fired at Bill Browder, a pioneering UK fund manager who campaigned for better shareholders’ rights in Russia, epitomizes the hazardous path investors need to tread when investing there.
Browder runs Hermitage Capital, one of the largest foreign portfolio investors in Russia with assets of £1.6 bn ($3.24 bn). He has campaigned for better governance at companies like Sberbank, Russia’s largest state-controlled bank, and energy company Gazprom. Now barred from Russia, Browder is being investigated by the Kremlin’s interior ministry in a criminal investigation for alleged underpayment of up to $44 mn in taxes. Many western investors suspect the charges are trumped up. Hermitage is reducing its Russian investments, shifting to the Middle East, Latin America and Asia. Others may be tempted to follow. Another mauling by the Russian bear could just prove the limit.
