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Russia BEYOND THE HEADLINES
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Money & Markets
05
Investors Liquidity in the U.S. market is making investment in Russia look more attractive
MOSCOW BLOG
President Vladimir Putin will have to rein in spending to meet his economic goals, according to experts at this year’s V.T.B. Capital Investment Conference.
Is Russia’s Capital Flight Problem All That Bad?
Trying to Capitalize on Potential Special to RBTH
Russian PresidentVladimir Putin and his new government will have to adopt strict budget discipline in allocating the country’s lavish profits from oil and gas exports in order to reach the ambitious goals he has set for the coming years. At least that is the view of analysts and experts in attendance at the V.T.B. Capital Investment Conference in New York in midApril. Since its creation in 2008, conference hostV.T.B. Capital has attracted more than $111.5 billion worth of investment to Russia and former Soviet space; the invest ment bank started operating in the United States last year. At the conference, Russian Deputy Finance Minister Sergei Storchak gave an overview of Russia’s aggressive plans for the future, saying that he believed the current situation was suitable for carrying out major structural reforms. “For the new president and new government there is a favorable condition to new beginnings and start a real movement towards structural changes,” said Stor chak, “We were talking about these changes for a long time, but we were not always effective in implementing them.” Storchak said that the govern ment has adopted a clear goal: To be in the top 20 countries in the World Bank Ease of Doing Business survey. These rankings, issued annually, compare regula tions applicable to domestic firms in 183 countries; the top-ranked country is the one with the most business-friendly laws. Currently, Russia is ranked 120th — just behind Cape Verde. This ranking actually represents
Ben Aris
special to rbth
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reuters/vostock-photo
Anna Andrianova
a slight improvement for Russia, up from 124th in 2011. As part of its justification for improving Russia’s ranking, the World Bank cited the simplification of prop erty registration procedures, a re duction in the number of docu ments needed for import and export transactions, and improve ments in registering property transfers. “[These are] structural chang es: that will bring Russia even tually to 20th place,” said Alexei Kudrin, Russia’s former finance minister and a well-respected ex pert on the Russian economy, who was also in attendance at the con ference.“It is possible, I think, but with very thorough and persis tent policy.” Kudrin’s 11 years as finance minister were marked by econom ic turmoil, and he earned the re spect of foreign and domestic in vestors alike by improving the performance of Russia’s public finances after the 1998 default and by creating of the Stabliza
Former Finance Minister Alexei Kudrin (center) spoke at a recent investment conference in New York.
Kudrin said it was very important that Russia follow strict budgetary rules in using the profits from oil and gas.
“Fund managers want to invest in Russia, as there is a lack of fixed-income products [in the U.S.]” said Artur Oganezov.
tion Fund to compensate for vol atility in oil prices. He left his post last year after a spat with President Dmitry Medvedev. At theV.T.B. event, Kudrin said that it was very important that Russia follow strict budgetary rules in using the profits from sales of oil and gas, but he cited government inefficiency as one of the biggest threats to adher ence to budgetary policy. “The effectiveness of govern ment administration is extreme ly low,” said Kudrin, adding that the need to enact administrative reforms was one of the biggest challenges facing the new gov
ernment. Kudrin also said that more authority should be given to the regions. But these challenges have not deterred companies from invest ing in Russia, which was one of the positive notes the V.T.B. conference attempted to highlight. In particular, global investors have been gaining confidence in Russian government–issued debt. In March, Russia sold $7 billion worth of 5-year, 10-year and 30-year Eurobonds. The issue is the largest in emerging markets sovereign debt since 2000, ac cording to data from Thomson Reuters.
Sobyanin Meets With American Investors
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AmCham initially invited Soby anin to speak to the group at a five-star hotel, but the mayor then offered to host the meeting at the recently renovated Petrovsky Pal ace on Leningradsky Prospekt, according to Somers. Built at the end of the 18th century on orders of Catherine the Great, the pal ace briefly housed Napoleon’s general headquarters before the emperor fled Moscow in 1812. An imposing structure despite its modest proportions, the building now hosts City Hall receptions. Opening the event, which in cluded U.S. Ambassador Michael McFaul as a guest, Sobyanin stat ed that his administration has improved the conditions for doing business in the city. “It seems to me that it has be
come easier to make investments in Moscow compared to what was two or three years ago,” he said. Sobyanin then made the pro posal about consulting with Am Cham on key decisions that could affect foreign businesses. In an other idea, he said City Hall could send public tender invitations to foreign companies directly be cause it is often difficult for them to navigate the bidding terms and procedures. The measure would cut out the middlemen and broad en competition, Sobyanin said. He pointed out that the city hired foreign consultants McK enzie & Company and Boston Consulting Group to help devel op a transportation strategy and said there were opportunities for foreign architects in the planned expansion of the city. Executives of four U.S. com
“Investors are ready to invest in Russia,” said Artur Oganezov, a vice president at Deutche Bank based in the company’s NewYork office.“There is a lot of liquidity in the U.S. after the crisis; that
is one of the reasons why fund managers, insurance companies, pension funds and banks want to invest [in Russia], as there is a lack of fixed-income products here.”
Stocks Making Moscow more attractive
panies — Abbott Laboratories, PepsiCo, Hines and John Deere — followed with presentations about their business in Russia and calls for more transparency and clarity about bidding for city con tracts and greater involvement in decision-making. Sobyanin took three questions from the business leaders. In an swering one of them, he said the city selected several former school buildings to offer as premises for
U.S. Ambassador Michael McFaul (left) and AmCham’s Andrew Somers
V.T.B. Capital’s stock price, 2007–2012
Moscow hired McKenzie & Company and Boston Consulting Group to help develop transportation strategy. any investor that would want to set them up as schools for the children of foreign executives or diplomats. Somers said City Hall has been helpful in other ways. He accept ed the invitation to sit on a committee that began work in February to defend the rights of business people and said there had been practical follow-up from his involvement, including meet ings he was able to arrange for AmCham members with city of ficials.“It’s not just talk,”Somers said. But Sobyanin has not managed to shake some of the trappings of his past, including an appar ent dislike for the media. Jour nalists at the event were shep herded off to a first-floor room of the mansion, where they watched the speech on television.
Exchange Wants Foreign Companies to Issue Debt in Rubles Russian stock exchange Micex-R.T.S. is encouraging more companies to list in Moscow as well as issue debt in Russian rubles. Anna Andrianova Special to RBTH
On April 17, the recently merged Micex-R.T.S. exchange hosted a conference in New York called “Russia Is Not About Bears” for funds and individual investors. The goal of the event was to in crease the pool of participants in the Russian market and give an update on progress made since the merger last December of Rus sia’s two largest stock exchang es; the combined exchange gives investors in Russia a one-stop shop for trading equities, bonds, derivatives and currencies. The exchanges had developed sepa rately for almost two decades, and their merger is one step in Mos cow’s ambitious plan to become an international financial center. The combined exchange has an estimated value of $4.5 billion and the company is reportedly planning an I.P.O. in 2013. Micex-R.T.S. President Ruben Aganbegyan said that one of the focus areas for the exchange is liberalizing the security issuance procedures and improving the market for companies to issue an I.P.O. in Russia. Aganbegyan said that Micex-R.T.S. is working closely with local legislators to harmonize procedures in Russia with international best practices.
“The rules are so strict and in flexible,” Aganbegyan said, ex plaining that Russia needs to move beyond just following rigid regulations when it comes to the listings rules. “We are trying to get the country to move as quick ly as possible to the globally ac ceptable principals of corporate governance and information dis closure to all its investors, espe cially the most liquid ones,” he added. While reforming the leg islation will take time, MicexR.T.S. is considering the example of Brazilian exchange Novo Mer cado, which issued its own set of rules that companies can adopt voluntarily in addition to the ones required by law in order for com panies to be listed in a new seg ment of the exchange. This year, Micex-R.T.S. hopes to convince multinational com panies that have operations in Russia to issue debt on the Rus sian exchange in rubles.“We see that the first stage is to attract companies that have a business or investment base in Russia. We are not competing for global list ings; we are fighting for the ones that are in Russia,” Aganbegyan said. Last year Micex-R.T.S. signed an agreement on cooper ation with the Organization for Economic Cooperation and De velopment (O.E.C.D.) to strength en corporate governance in Rus sia. Aganbegyan said that this partnership has brought a lot of experience and best practices from other emerging markets.
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ver the last year, money has been flowing out of Russia for the first time since the chaos of the 1990s. In 2011, a total of $80 bil lion left the country with anoth er $35.1 billion departing in the first quarter of 2012. Commentators have blamed the reappearance of capital flight on fear, assuming that oligarchs, terrified of political uncertainty associated with the demonstrations that began last December, are moving their money to safer havens in Swiss bank accounts, or buying ex pensive property in London or New York.
Half of last year’s outflows — $40 billion — was due to Russian subsidiaries lending to their Western parents. There is a little bit of truth to this — but not much. The irony is that the capital flight is more a function of Russia’s booming economy than fear. The biggest culprit was not the oligarchs, but foreign banks with branches in Russia. Half of last year’s outflows — some $40 billion — was due to Rus sian subsidiaries lending to their Western parents, according to Prosperity Capital Manage ment’s chief economist, Liam Halligan. The sums became so big that the Central Bank of Russia called in the heads of for eign banks and told them to tone the lending down or else it might impose restrictions. A second big source of out flows has been wrought by the economic changes the crisis has created. Before the crisis, it was cheaper and easier to borrow abroad, but post-crisis both in terest rates and inflation have fallen to 20-year lows; many Russian companies have been swapping their now expensive foreign currency–denominated debt for cheaper credits from Russian banks. For once, Rus sia’s financial system is looking a lot more stable than that of Western Europe.
Interest rates and inflation have fallen to 20-year lows; many companies now prefer cheaper local credits. Finally, Russian companies are starting to hit their stride and are increasingly investing abroad. Unknown to most people, Rus sia has always been a net ex porter of capital: Russian com panies routinely invest more in other countries than Russia at tracts as foreign investment. The difference now is that in the past they invested in places such as Kazakhstan and Ukraine, but today they are big enough to move into developed markets: oil company TNK-BP spent $772 million on a Brazilian oil and gas stake; Sberbank bought Aus tria’sVolksbank for $585 million; and tech company Digital Sky Technologies spent $563 million for a 10 percent stake in Twitter in 2011. These three deals alone are worth another $2 billion. In general, Russian companies with branches abroad are rein vesting their earnings locally, which the Central Bank also counts as capital flight, when actually this outflow is simply a function of success.
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