Investors flee Russia despite oil revenue boom

In “Fluent In Foreign Business”, I extensively discuss the need to thoroughly understand the investment climate of chosen foreign markets, as many times booming economic signs mask significant economic, political or social problems.  The article below is a good illustration of how smart money is leaving what on the surface appears to be a terrific and attractive Russian market.

Economic Times

5 JUN, 2011

MOSCOW: The billions of investor dollars fleeing Russia each week offer a stark counterpoint to Moscow’s aspirations of soon becoming a global financial centre linking London with Hong Kong .

The world’s leading oil exporter finds itself in the odd position of being flooded with petrodollars and seeing remarkable ruble strength — two prime conditions for local investment — while also bleeding capital at record rates.

The outflow of investor money abroad reached $30 billion by the end of April to nearly match the 2010 total. The May figure is expected to approach $8 billion and a slowdown is not anticipated for some months.

“It is difficult to give a simple and clear explanation as to why this is happening,” Russian Central Bank chairman Sergei Ignatyev acknowledged.

“But the main reason is a rather unfavourable Russian investment climate.”

Investors may argue that Ignatyev was gilding over a graft problem so blatant it saw Russia rank 154 out of 178 countries on last year’s Transparency International Corruption Index.

The World Bank says Russia is the world’s second-most difficult country in which to get a construction permit while local entrepreneurs often treat law enforcement authorities and the courts as a part of the same system.

“When you talk to investors, that really is one of their biggest points,” said chief UralSib strategist Chris Weafer.

“They say look, the Russians are taking their money out of the country. Why should I come to Russia when the Russians are coming out?”

The real mystery is why this scramble to get out of Russia is getting more frantic at precisely the moment when the government is pursuing one of its most market-friendly programmes in years.

President Dmitry Medvedev is now courting Westerners with a $10 billion joint investment fund and hoping to put meat on the bones of his modernisation effort by dislodging state appointees from their seats on company boards.

Both measures fold into a broader $60 billion privatisation programme aimed at giving Moscow its coveted status of being a centre of global finance.

Uncertainty over whether Medvedev or his mentor and predecessor, Prime Minister Vladimir Putin will head the Kremlin next year, may be one of the factors behind investors’ latest spell of jitters.

But analysts note that Putin’s return has been rumoured since the final day of his second term in 2008 and can hardly explain why the outflow of currency has nearly tripled in recent months.

There are other more technical factors also at play.

Russia’s inflation expectations are rising and squeezing holders of local currency bonds. But the help these investors have been getting from a stronger ruble will expire once oil prices climb off their recent highs.

“I think most of the capital flight is associated with this,” said Renaissance Capital economist Ovanes Oganisyan in reference to ruble bond sales.

Other factors may be the record dividends — sometimes as much as 90 percent of profits — paid by such local giants as the British joint venture TNK-BP.

But analysts say that behind all these immediate variables is buried a more fundamental investor doubt about Russia as a future growth market.

The government is gradually raising tax rates on energy producers to cover the tens of billions of dollars in outlays it has promised ahead of the approaching elections.

Manufacturing growth slowed to just above stagnation level last month while Gross Domestic Product growth has barely reached half the rate seen before the global slump in 2008.

“People are starting to realise that the levels of growth we have seen in the past decade are not sustainable without major reforms and major investment,” UralSib’s Weafer said.

An Oliver Wyman financial service partner who recently compared Moscow to other financial centres, showed the Russian capital ranking behind cities such as Manila and Jakarta.

The survey recommended “strengthening regulatory requirements and oversight, improving disclosure … and modernising corporate governance standards,” the agency’s Robert Maciejko wrote in the Wall Street Journal.

“In the absence of efforts on the part of the Russian government to reduce the risks of investments in Russia, one can hardly expect private capital inflows into the country,” the Gaidar Institute said in an annual report.

Analysts said the only silver lining was that capital flight was putting the breaks on runaway ruble appreciation.

“This is a comfortable situation for the government — they like the fact that something is keeping the ruble from gaining too much,” said Oganisyan.

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About Alexander Gordin
An international merchant banking professional with over twenty years of business operating and advisory experience in the areas of export finance, international project finance, risk mitigation and cross-border business development. Clients include foreign governments, municipalities and state enterprises as well as Fortune 500 and small/medium enterprises. Strong entrepreneurial instincts, combined with leadership and strategic skills. Transactional and negotiations experience in over thirty five countries. Author of the highly acclaimed "Fluent in Foreign Business" book and creator of the "Fluent in OPIC", "Fluent in EXIM","Fluent In Foreign Franchising", "Fluent in FCPA",and "Fluent in USTDA" seminar/webinar series. Currently developing "Fluent In ......" seminars and publications. Co-author of the Fi3 Country Business Appeal Indices. Extensive international business development and project finance transaction experience in healthcare, aerospace, ICT, conventional and alternative energy infrastructure, distribution and hospitality industries. Experience managing international public and private corporations. Co-Founded three companies abroad. Strong Emerging and Frontier Market expertise. Published and featured in numerous publications including: The Wall Street Journal, Knowledge@Wharton, NBC.com, The Chicago Tribune, Industry Week, Industry Today, Business Finance, Wharton Magazine Blog, NY Enterprise Report, Success magazine, Kyiv Post and on a number of radio and television programs including: Voice of America, CNBC, CNNfn, and Bloomberg. Frequent speaker on strategy, cross-border finance and international business development. Executive MBA from the Wharton School at the University of Pennsylvania. B.S. in Management of Information Systems from the Polytechnic Institute of NYU. Specialties Strategic Management Advisory, Export Finance, International Project Finance & Risk Management, Cross-border Negotiations, Structured Finance transactions, Senior Government and Corporate officials liason

One Response to Investors flee Russia despite oil revenue boom

  1. Chris Loomis says:

    Thank you for this clear and comprehensive explaination.

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