Acclimatization
// Foreign investors are learning to earn on “strong Kremlin”
Roots of Economic Nationalism
Many foreign investors who put money into Russia understand now that Russia-West relations will keep getting worse, and will boost those sectors of economy which the Kremlin considers strategically important. However, they also realize that the fear of political instability due to the presidential election in March 2008 is exaggerated, and that non-strategic sectors might bring considerable profits as well. Investors will have to choose in 2007 whether they should rely on the Kremlin’s strength and current stability in Russia.
More and more foreign investors see much better now how Russians understand the reasons of the cooldown in the relations with the West. Thus, they are able to adjust their risks and opportunities to that understanding. Investors have discovered that the Kremlin is used to thinking that Western companies have profited well due to Russia’s economic weakness of early 1990s, and that Western governments took advantage of Russia’s political weakness to limit its presence in its traditional zone of influence. NATO’s expansion, bombings of Belgrade, building the Baku-Ceyhan pipeline for transporting Caspian oil detouring Russia, the decision of US administration to reconsider the Anti-ballistic missile treaty, and other steps have negatively affected Russia’s readiness to acknowledge the political and economic leadership of the West on the whole and the US in particular.
Oil prices, which have grown almost three times, are now securing further strengthening of President Putin in Russia in general, and are constantly expanding the Kremlin’s power in Russia, and Russia’s weight in the world. Russian foreign debt fell from 57 percent of GDP in 2000 to 4.5 percent. Reserves of golden and hard currency increased from $36.6 billion to $300 billion. Meanwhile, inflation fell from 18.6 percent to 10 percent only. Russian economy has a turnover of trillions of dollars now. All this predetermines its acting as a more self-confident international player.
Now when Russia became stronger both politically and economically, we might suppose that the Kremlin will try to correct the mistakes of the 1990s. So, Putin’s administration has already challenged Western influence in former USSR, trying to use the decrease in US geopolitical dominance to expand Russia’s own international influence.
On the other hand, international corporations like British Petroleum, Shell, Exxon-Mobil, Mitsubishi, have discovered while being inside Russia that their international weight does not help in talks about access to those economic sectors which the Kremlin wants to keep under its absolute control. Besides, the Kremlin’s decisions to classify certain economy sectors into “strategic” often surprise those corporations.
What the Kremlin Can Do
Investors realized that Vladimir Putin is now holding power quite firmly in his hands. Majority in the State Duma secures support to his legislative initiatives; disobedient regional governors are daunted, the upper chamber is filled with pro-Kremlin politicians. Investors see that courts, political parties, and mass media have little weight in governing the country. The main thing is that it is Putin and his loyal team who are managing the lion’s share of riches and privileges which can be obtained in modern Russia.
More and more foreign investors in Russia have realized that political power in the country goes together with economic power, and that state control and decision-making process are extremely personalized. So, they now rely on personal relations when dealing with consolidating Russian bureaucracy. They have discovered that personal investment often provide a better guarantee for their interests, that legal or financial guarantees. Anyway, more investors now know that it is necessary to watch attentively the changes inside the Kremlin to predict the changes in Russia’s investment climate on the whole. And vice versa, it becomes unreasonable to try the patience of Russian officials and major businessmen with strong connections in the Kremlin. Thus, in November 2005, William Browder, the founder and CEO of Hermitage Capital Management, the premier investment advisory firm specializing in Russian equities, discovered his entry to Russia is banned when he had already arrived to Moscow airport. No official explanation was given to this day. This might have happened to him because he criticized Russian corporate management. Foreign investors who keep ignoring Browder’s experience, are taking great risks.
We can generally say that investors ready to profit from the Kremlin’s further strengthening and the adjacent political stability in 2007 will have good chances for making considerable profits. Despite the growing nationalism in such sectors as energy, natural resources and metals, there are many other sectors which give large revenues to investors. For instance, those who earn on software outsourcing will discover that the risk of coming across a state company stealing technology and using it to force foreign companies from the market is considerably lower in Russia than, for example, in China.
Stake on Stability
However, Russian political stability remains the main issue on the agenda. Despite his popularity, Putin will probably not change the Constitution to be re-elected for the third term. Yet, the danger of the capital flight from Russia becoming dramatic in 2007 is minimal. High prices on raw materials will secure GDP growth. Markets with fixed revenues will keep growing.
In their turn, political stability and economic growth lead to the increase in the purchasing capacity of Russian consumers. Shopping malls, service sector, consumer durables, -- these markets profited from the growth of the population’s real income and the inflation’s fall. Banking sector keeps growing, and it is unlikely to suffer system instability in 2007. The trend of growing presence of foreign companies in the banking sector will remain, and the WTO agreement with Washington will raise the share of foreign capital in Russia’s banking sector.
Thus, foreign investors staking on the Kremlin’s stability might earn well in 2007. Staking on instability might, on the contrary, cost them dear. Even the direct consequences of 2008 presidential election, when Putin’s successor will take up his duties, and when various groupings inside the Kremlin will be upgrading their new positions, will hardly cause political instability. Yet, the long-term future is not so clear. However, it is the subject for the next annual forecast, after 2007.
Ian Bremmer, president of Eurasia Group consulting company
All the Article in Russian as of Dec. 18, 2006
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