Not a very long pause
“Despite the acute situation around YUKOS investors will resume investing into Russia”, believes Michael Calvey, co-managing partner of Baring Vostok Capital Partners.
by Tatiana Gurova
One of the most considerable economic risks of the current political crisis is the risk of a sharp reduction of private non-government investments into the Russian economy. The pre-crisis investment trends in Russia showed that, after the traditional November-January investment pause, we could expect a sharp increase of investments in February-March into the Russian economy that will ensure an annual economic growth of 6-8 percent. Naturally, the old trend has been interrupted today. At present we can only see an increased outflow of capital from the country and a certain increase in interest rates in various loan markets. How do foreign and Russian investors react to YUKOS developments? For how long will the pause last? Which conditions are necessary for them to resume active investments into Russia? The Expert discussed the issues with Michael Calvey, co-managing partner of Baring Vostok Capital Partners. - Mr. Calvey, one of the main economic questions today discussed in connection with the “YUKOS case” is what will happen with investments into Russia? How do you feel the investors are reacting to the political crisis? Will they revise their investment plans? If yes, how long will it take the investors to calm down? - Frankly speaking, such a turbulent reaction was rather unexpected. Nothing of the kind has ever happened. Last week I was in Paris, then in Frankfurt and then in Singapore and met some five dozens European and Asian investors. Each person who I spoke to asked one and the same question: “What is happening between President Putin and Russian richest businessmen Khodorkovsky?” Generally, nobody can understand anything, and when I explained that despite evident economic reasons it is in essence a political conflict between authorities and Khodorkovsky, they calmed down a little bit. It is possible to make conclusions about the fate of democracy in Russia only by comprehending further trends. But if we speak only about business and investments, I believe western investors will forget everything in half a year if things develop along a mild option. - What do you mean by a “mild option”? - There are three key questions which investors would like to have answers to. Firstly: is everything being done lawfully? If people believe the prosecutors are working on orders, that they are completely out of control, then a long-term problem may emerge for business interest in Russia. The second question is whether that concerns only Mikhail Khodorkovsky or it is the beginning of deprivatization or property redivision? If it turns out to be deprivatization, the investment pause will last not six months, but six years and maybe even forever. So far I believe it is a private conflict. The third question also concerns the conflicting parties – to which extent the conflict between the state and Khodorkovsky can develop into a conflict between the state and YUKOS? These are different things. Many western businessmen have invested into YUKOS. And if the prosecutors or the state begin to attack YUKOS and it loses licenses and other assets, then investors will lose big money. And they will not forget their losses quickly. But I believe that will not happen. Maybe Khodorkovsky will lose YUKOS stock and the state will control it. That is bad, but that is not a crisis. These are the three main questions, and there is no clear answer to any of them. But I hope all the three issues will develop optimistically. If that happens, the investment pause from western investors would not last longer than six months, as I said. -You said about lawfulness of actions against Khodorkovsky. But many people believe that although he was arrested lawfully, the very measure was disproportionate. Do they discuss the problem in the West? - They do. And they explain it by politics. Khodorkovsky continued to engage in politics even after he was several times warned against it. Khodorkovsky thought he was invulnerable. Therefore the reaction of the state was so tough. It was believed that when President Putin began his term of office he and the oligarchs reached a certain agreement that they will keep all the assets they acquired due to “not very ideal privatization” if they pay taxes and refrain from interfering into politics by buying political parties and lawmakers. Khodorkovsky clearly violated the agreement. - It is known the investment boom this year took place mostly due to Russian investors and their return on capital. What do you think their reaction will be? - Russian investors are definitely more important for Russia than foreign ones. I believe if Russian oligarchs are afraid of investing into Russia, if they invest only 20 percent of profits into Russia instead of 80 percent, that will be a serious problem for your economy. Much more serious than any indecisiveness of western investors. So far I believed the problem for Russia will be a too rapid inflow of investments that will trigger the rise of the ruble and consequently a decreased profitability of Russian companies. Today the main problem is the renewed capital exodus from Russia. That will definitely have a negative impact on the growth. There will be no six-eight percent. Maybe two-four. However, there will be no slump either. The fundamental engines of the Russian economy are so powerful that the growth will continue even at a lower investment pace. - How long will Russian investors keep the pause? - I think for a year or two. They clearly have a longer memory as they have a chance to find themselves behind the bars in contrast to western businessmen. By in a certain moment, if everything boils down to Khodorkovsky, Russian investors will anyway invest into Russia because potential investment profits here are much higher than in Europe or America. I personally know many oligarchs and they believe there is a risk of investing into Russia, but even a bad investment into Russia yields 10-20 percent annual, while a good investment into America yields five percent annual. -In connection with investments it is often discussed what is more attractive for investors – a super liberal economy, which we used to have so far, or a certain Chinese option with a strong state role, a sufficiently regulated market, etc. Today it is clear the emphasis has been laid on enhanced economic role of the state. How do you think that will tell on the investment process? - I do not think Russia will have a state-run economy. As far as the enhanced role of the state is concerned, that is a natural process – by the state share of the economy you are at present behind not only China, but practically any European country. When Vladimir Putin became president, he controlled some ten percent of the situation in Russia, today he controls some 50-60 percent. But it is a long way to a full state control. Definitely, there is a trend to enhanced state control and I believe that is useful in general. The danger is that “the main business” of many state servants, who believe they have lost the chance to become rich during privatization, will be corruption. And without proper control from the president many of them will abuse office explaining their actions by “enhanced role of the state in economy”. - Let’s return to foreign investments. Regarding strategic investments – which investors, American or European are more ready to become our strategic partners? - European investors are more experienced as many of them had a negative experience five-ten years ago and therefore they are more cautious. The Americans are more optimistic, but they have many problems at home, and they have where to invest inside America. But in general everyone will invest into Russia - There are three countries in the world today that have an immense growth potential in the 21st century – they are China, India and Russia. Each of them has a big market. Each gives the population a good education compared to other emerging markets. And finally, each of the three countries has its own competition advantages. Therefore, I believe many investors will in the coming decade continue to focus on the three countries. Definitely, the political situation there is not the most stable in the world, but investors are more interested in prospects for ten-twenty years. If they know the country will grow, they understand they will lose in the long run if they do not invest into it. Therefore, the concrete situation in 2003, 2004, and 2005 is not that important. The main thing is the long-term trend and long-term advantage. That means that despite the acute situation around YUKOS, it will be difficult for investors to forget Russia.
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