Et Tu, Financial Times?

Filed under: Russia

There is a strong chance that Moscow will become one of the world's top financial centres in the next 10 to 15 years. This would see it overtake both Frankfurt and Paris, and see the Russian capital as second only to London in Europe.

If I showed you the above statement, clever reader that you are, you'd probably begin immediately to pick holes in it. What does "strong chance" mean, exactly, you'd no doubt ask. What's the source of this bold prediction? Reflecting upon the matter, you might well decide it sounds like some propaganda belched out by Russia's neo-Soviet Kremlin.

But what if I told you it wasn't, that it came from Andrew Hayes, head of Mergers and Acquisitions at Renaissance Capital, a brokerage firm, and appeared in the Financial Times newspaper.

"Oh I see," I bet you'd say -- it's an advertisement for his company's services. He must make money by getting foreigners to plonk down their money on Russia, so he's puffing his market. That's why he feels no need to give any source backing up his "10-15 years" prediction, or to define the term "strong chance" in any way.

Close, but no cigar. It's actually an article that appeared in the paper itself, and it isn't marked as an editorial -- nor is there a single word in its text to directly warn readers about the author's conflict of interest and resulting bias.

Mr. Hayes is a totally shameless propagandist, though, so most sophisticated people would certainly realize his admonitions are highly dubious to say the least. He claims that investors will not only make money on Russia, but in the process they will be promoting reform by helping to "transfer international best practices to the Russian market." Like any good stock broker, he asserts his belief that the effect of international financial turmoil will be "relatively modest" in Russia, suggesting it as some type of safe haven, while totally ignoring the horrifying risks.

He doesn't mention, for instance, the Kremlin's recent aggressive move to oust British Petroleum from its Russian stakes (much less does he discuss the arrest and Siberian imprisonment of oil executive Mikhail Khodorkovsky). Nor does he tell FT readers that the Russian stock market has lost nearly 20% of its value in the first three months of this year.

Our current editorial over at La Russophobe highlights how the FT is contributing to a gross misreading of the intentions of Russian "president-elect" Dmitri Medvedev, a wolf in sheep's clothing if ever there was one. But that's simply due to a lack of sophistication about Russia, not an uncommon problem.

The Hayes article is something else entirely. To me, it's deeply disturbing and represents a gross lapse of journalistic ethics, permitting someone with a personal financial stake in the outcome to give advice in what purports to be a professional piece of analysis but is in fact nothing more than an advertisement. If he wants an ad, he should buy one.

This is the sort of thing that allowed the USSR to get out of control in the first place, it's part and parcel of appeasement. If we're not careful, history will surely repeat itself.

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vova says:

Well, if they have New York Slimes in the bag, why not FT?

As to "Kremlin's recent aggressive move to oust British Petroleum from its Russian stakes" a clarification is in order: it has Gazprom fingerprints all over. Sources at the FSB profess ignorance, and they are not being coy.

You might say that this is a distinction without the difference. But there is a difference between a horse and horse's arse.

And the fact that the Nevzlin "case" is collapsing--and it is, Baruch ha-Shem--is another testimony to the total chaos behind the wall. Very much like the Demonazi party stateside.

colleen says:

After being robbed clean by the "oligarchs", indebting itself to the teeth, and going to the verge of bankruptcy, Russia's back.

It's now seventh in GDP (PPP) as measured by the CIA, ahead of fellow G8 members France, Italy, and Canada. This year it will pass the U.K. for sixth place.
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2001rank.html

While the U.S. is accumulating piles of debt and being grossly irresponsible in the fiscal sense, Russia's balance sheet is clean and in the black. It has paid back its Paris Club debt and IMF loans and accumulated tons and tons of gold and f/x reserves.

This last thing insulates Russia a bit from potential downturns and also proves that the regime in charge is working for the benefit of the nation and not their own personal well beings. For example, if you add up the hundreds of billions of dollars in debt Russia has paid back in eight years to the $500b in the reserve fund and the $200b or so in the stabilization funds you come up with a sum greater than $1 trillion, a wealth that would surely have gone to Berezovsky's bank account if he was still calling the shots.

Perhaps most indicative of Russia's economic and financial rise is the growth of the Russian middle class, renewed optimism in the streets (as can be perfectly measured by the spike in births), and enormous infrastructure and development projects, ongoing, that will transform Russia into an unparalleled first-class nation.

Russia's consumer boom is also fascinating. Since housing, utility, and tax costs are so much lower in Russian than in the west, Russian people end up having more disposable income than many of their western counterparts. The comparison is ironic since people earn more in the west, yet need home equity loans and credit card charges just to get by.

If you think Renaissance Capital is not a reliable souce, then you ought know that Goldman Sachs has said essentially the same thing.

La Russophobe says:

COLEEN:

I asked two questions in the first paragraph of this post, and you totally ignored both of them, trying instead to change the subject to GDP, which has NOTHING to do with this post (whose point, about conflict of interest, you likewise totally ignored).

Meanwhile, as for GDP, Russia's per capita purchasing power GDP is not in the world's TOP FIFTY nations. You conveniently ignore that fact as well.

So much for your gibberish.

vova says:

Brava, Kim! You actually read this gibberish. I skip hers as I do with Misha's.

misha says:

With oil hovering at a record $110 a barrel, due in part to the continuing turmoil in "Iraq, Russia is rolling in money. Also Russian gas is sold to Europe under long-term contracts that stipulate a variable price for gas which is 80-85% of the price of oil (based on BTU energy equivalence). So whenever the price of oil rises Russia automatically gets more for its gas too. Currently Russian gas is selling for about $320 per 1000 cubic meters, a new record.

The Russian government has handled the influx of cash extremely well, first by paying off Russia's external debt and then by building massive reserves of gold and hard currency.

The Putin government created the "Oil Stabilization Fund" into which funds are put when energy prices are high, and from which funds can be taken if energy prices fall. The fund now contains enough money to stabalize the Russian federal budget, even in the face of a substantial decline in energy prices. But if energy prices stay high then Russia's cup will just continue to runneth over.

Energy is the most important sector in the Russian economy, which continues to be largely natural resource based. Since Russia has such massive reserves of natural resources it follows that this sector is the logical place for people to work and invest, as it offers the highest return per input unit of capital or labor.

Putin government has also initiated large investments in infastructure and created venture capital funds for technology industries in Russia. These investments are viewed as having a long-term payback.

Russia will be getting a new president in May but this is not expected to affect political stability. Medvedev has indicated that his administration will continue to follow the trajectory of the present Putin government, which is broadly popular with the population, if mildly authoritarian.

Temporary low stock prices should be viewed as a remarkable buying opportunity for Russian stocks. Russian stocks offer a risk premium (an extra return to compensate the investor for the perceived higher risk). However the perceived risk of investing in Russia is substantially higher than the actual risk, due to widespread public misinformation about Russia. The large investment houses such as Goldman Sachs and Morgan Stanley are already plowing substantial amounts of money into Russia as they seek to expand their presence there.

A recent Morgan Stanley report says, "We think Russia will remain well insulated from the current global growth slowdown and domestic demand should remain strong."

"Prices for Brent Crude oil have increased 75 percent over the last 12-months while Russian oil stocks have gained 16 just percent... Another three months of US$100-a-barrel oil and favorable natural gas prices would add 13 percent to earnings for Russian producers, for a 45 to 50 percent increase in profits over last year," Morgan Stanley said. [1]

Sources:
[1] http://www.chinapost.com.tw/taiwan/%20business/2008/03/16/147421/Morgan-Stanley:.htm
http://www.russiablog.org/2007/04/goldman_sachs_welcome_back_to.php
http://www2.goldmansachs.com/worldwide/russia/index.html
http://www2.goldmansachs.com/careers/our-firm/locations/russia/benefits.html
http://www.russiablog.org/2007/04/building_out_the_future.php

Thomas McShane says:

Oh god, the Financial Times is giving people advice on where to invest their money! THE HORROR. Russia is clearly an awful investment unlike the United States, which we all known is the world's largest, strongest, and most dynamic economy!

vova says:

Yes, Thomas, but the rooskies pay well, and this is absolutely corrupting. Their girls are out of this world. Forget the investments, just let go. Ыыыы

misha says:

The Russian government has signaled its displeasure with some of the deals that were done during the "wild west" days of the Yeltsin administration, especially in the energy sector. President Putin's policy has been to set off "strategic sectors" in the Russian economy, such as energy and weapons production, and to bring those sectors back under the control of state-managed groups by restricting foreign investment in those sectors.

BP was offered a fair price to sell its stake and move on, but when they failed to get the message it was necessary to gradually make life in Russia a bit more uncomfortable for them until they got it. All the methods used were legal and within the panoply of normal arrows found in the quiver of any state (environmental inspections, tax audits, visa questions, etc.)

Such high-profile interventions are rare exceptions and not the norm in Russia. By and large property rights are well protected in Russia now, which is one reason Russia is experiencing a foreign investment boom. Ask yourself what Morgan Stanley, Goldman Sachs and so many others might know that you don't.

Saul Wall says:

"BP was offered a fair price to sell its stake and move on, but when they failed to get the message it was necessary to gradually make life in Russia a bit more uncomfortable for them until they got it."

They made them an offer they can't refuse.

misha says:

All countries reserve the right to nationalize private property for public purposes. In the US such actions generally go under the heading of "eminent domain." It's happening now on the US-Mexico border, where the US government wants to build the "border fence" but where many private property owners are resisting the fence. Homeland Security Director Michael Chertoff is aggressively using "eminent domain" to promote the perceived public interest over the rights of private property owners.

There is no intrinsic right of private property owners to trump the public good, however that good may be defined by the the authorities (rightly or wrongly in yours or my opinion); the key element is whether reasonable compensation is paid to the property owner, or whether there is simple expropriation (theft) of the private property.

BP was offered a fair price to sell their stake and move on. It was made clear to them in no uncertain terms that this was what the Russian authorities desired and even insisted on, based on new Russian government policies and laws which restricted foreign investement in Russia's "strategic industries."

There is a strong suspicion in certain circles in the Russian government that BP ("British Petroleum") was acting as a virtual arm of the British Government, as the recently expelled British Council also obviously was; BP personnel were actively engaged in various espionage activities against Russia, as Russian security services discovered. Indeed, the moves and actions of BP--which were so obviously against its commercial interests and that of its stockholders--would seem to leave little alternative explanation.

Anyone with a brain knows that the way to make money in Russia is by cooperating with the Kremlin, not by openly defying it. (Ask Goldman Sachs.) So why would a publicly traded company act in a way so obviously contrary to its interests and that of its stockholders? It was not Russia's desire to harm BP, but simply to eject it from sectors where Russia no longer wanted it to operate, but with due compensation. The oppositional-defiant disorder on the part of the company is evidence of something far more sinister, which vindicates the original decision by Russian authorities to evict the company from the Russian space in the first place.

By the way, laws and polices that restrict foreign commercial operations exist in almost all countries, including the United States, as we've seen in recent US government efforts to block the activities of "sovereign wealth funds," such as China's, and the move to block a Dubai-owned company from getting the contract to operate US ports.

The argument can be made that the Putin Adminsitration was acting lawlessly with such dealings, but it is a moot point. Putin enjoyes 80% public approval ratings, a fact not disputed by Russian or foreign pollsers (such as Gallup Organization, which has been conducting polls in Russia for years). Putin's United Russia party dominates Russia's parliament, and it is fair to say that Putin would be able to pass whatever law he wants (within reason). It's sort of like George W Bush with a Republican House and Republican Senate, and $1 trillion in deficit spending for the war in Iraq (if you're really looking for an analogy).

So Bush was popular with American rednecks and hillbillies, as we all know. But if the American elections involved the whole world, not just Americans, then Bush would have had a snowball's chance in hell of being elected. The world might hate Bush (and they absolutely do, trust me), but Americans can arrogantly say "in your face - he's our president not yours." Russians largely feel the same way about Putin, and the good that he's done for Russia is universally acknowledged in Russia itself, even if that self-same good is the source of deep angst on the part of all those who hate Russia and wish her and her people ill.

The fact that Putin has such power might be something that you wish wasn't true, but it still remains true, and it's something that you can't do anything about. The fact that Russia has a government that 80% of it's people approve of cannot be taken as evidence of the "lack of democracy" in Russia, but rather it is evidence of the fact that there is something like a democracy there (however imperfect or crude it may still be).

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Et Tu, Financial Times?

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