High fear factor among Russian investors a temporary phenomenon
MOSCOW, Jan 28 (Prime-Tass) -- Over the past three months there has been a 'bump in the road' in Russia's economic transition in the form of the Yukos affair, but the tense atmosphere among domestic investors should ease before long, Michael Calvey, co-managing partner of Baring Vostok Capital Partners said in an interview with Prime-tass Tuesday. 'You can definitely smell in the air now among Russian investment groups a much greater fear factor than you could three months ago. But I think that is a temporary change of mentality or increase in caution that is not going to last more than several more months,' he said. And whether or not that is the case will largely be down to the government and Kremlin and how they handle the outstanding questions around Yukos and the mooted increase in oil producers' tax burden. Calvey said he thinks the Russian oil industry can afford to pay higher taxes, but added that it is important the government sends clear signals on the issue and does not create an environment in which the owners of oil businesses are constantly having to worry about the short term risk of tax changes. 'What's important for investors in the oil sector, because the capital investment cycles are so long term, is to have an understanding of what the rules of the game are going to be for a long term period. So while I think that an increase in taxes is justifiable and can easily be afforded by the oil sector, I think it needs to be done in a very careful way so that it doesn't send mixed signals to the owners of oil assets in Russia and so it won't have a longer impact on investor confidence.' But as to whether President Vladimir Putin will actually succeed in bringing the Yukos affair to a relatively benign conclusion, Calvey said the verdict is still out. 'It depends on what happens from here. What I hope will happen is the prosecution will focus on crimes which actually did happen and not invent crimes or invent evidence against the (core) Yukos shareholders. And I hope that the prosecution will be focused on the Yukos shareholders rather than Yukos itself - there have been some disturbing investigations into Yukos itself, which I think would be a very negative result if followed through. I also hope the prosecution will be limited principally to the Yukos shareholders without a significant widening to include other oligarchic groups. To some extent I think Putin has won already, and has succeeded in his objective of sending a signal not only to Khodorkovsky but to all of the oligarchs. He doesn't need to go further than what he has already done so far. I hope that his team understands that. But, the verdict is still out.' Baring Vostok Capital Partners is owned principally by seven individuals, including Calvey, who are the key managers of the company's investment funds. Baring Vostok is also part-owned by Baring Private Equity Partners, a member of the ING Group. Baring Vostok has around U.S. $400 million of capital under management, making it a significant component of Baring Private Equity Partners, which manages around $2 billion. Calvey said that the management of Baring Private Equity Partners intends to purchase the stake which ING Group holds in their company during the first quarter this year. Although ING will remain the largest investor in all of Baring Private Equity Partners' funds after the buyout, it will cease to hold a stake in the management company itself. Baring Vostok has two funds, the First NIS Regional Fund, launched in November 1994, and The Baring Vostok Private Equity Fund, launched in December 2000. Calvey outlined some of Baring Vostok's main achievements in 2003. 'One of our biggest investments in our first fund is a company called Burren Energy, a U.K. oil and gas company that we founded together with its initial chief executive and a couple of other shareholders in 1995. Originally it started as a shipping company that operated river/sea petroleum tankers operating in the Southern Russian rivers and the Caspian Sea. Over the years it evolved into an oil exploration and production company and has developed a very successful project in Turkmenistan, and then a couple of years ago acquired and developed a successful business in West Africa in the Republic of Congo.' Calvey said that the success of the projects in Turkmenistan and the Republic of Congo was a major factor in allowing Burren to complete an IPO on the London Stock Exchange in December 2003. Baring Vostok did not sell any of its shares in the company at IPO, since it believes the potential return is much greater over a further two or three-year period, Calvey said. 'We acquired 100% of Delta Leasing last year, which is the number one equipment leasing company in Russia. It was a management buyout where we effectively backed Nikolai Zinoviev and the other top managers of the company to buy the business from Delta Capital. We have big expectations for Delta Leasing and for non-bank financial services in Russia in general. In leasing, consumer finance, and mortgage finance I think there's enormous growth expected over the next ten years. We plan to invest significantly more capital into Delta Leasing over the next few years to continue to enable it to grow rapidly and to maintain its leadership position in the leasing market.' Calvey said Delta Leasing has roughly $40 million of assets at present, and Baring Vostok expects to grow that to $200 million in assets over the next three or four years. In fall 2003, Baring Vostok announced it plans to sell its 96% stake in confectioner SladCo to a strategic investor, but Calvey said there is no rush to sell. 'We will eventually sell. We are in no hurry to sell, and right now we have tried to focus the management team on executing a three-year business plan, of which one year has now passed successfully and we have two more years to go. We will probably sell it sometime within that period, but haven't made any specific decisions. We have been approached by several potential buyers, but we are not interested in entering into any exclusive discussions with any buyers at the moment.' U.S.-registered telecommunications provider Golden Telecom is another of the major companies in Baring Vostok's stable. Calvey said it has been busy with acquisitions during 2003. 'First of all, last year they completed the integration of Sovintel. Previously Sovintel was 50%-owned by Golden Telecom and 50%-owned by Rostelecom, so the acquisition of Sovintel was a major step forward for Golden Telecom. It took place in 2002, but the actual merger/integration phase took place in 2003 and that was a major reason for the substantial improvement in Golden's profitability and cash flows during 2003. Golden also undertook two different initiatives. The first, and most important strategically for Golden, was the acquisition of a few small companies that are private operators in some of Russia's leading regional markets.' 'The second major initiative of a strategic nature was the merger with Combellga, which is the number three operator for business telecommunications in Moscow after Golden Telecom and the various Sistema Telecom companies. Combellga's business is very complimentary with Golden's, the merger valuation was very attractive, and there should be significant synergies in the future. Calvey also mentioned other successes with companies focused on the domestic market, and said he expects to see a continuation of the consumer boom in Russia for the next couple of years, albeit at a slower pace than in the past, but still at growth rates of 15-20% in dollar terms. Baring Vostok receives around 200-250 serious business proposals annually and generally makes about three or four acquisitions and divests itself of one or two companies a year. Calvey said the areas of most interest for investment in 2004 and beyond are independent oil and gas businesses, consumer products - especially food and beverage goods, media, financial services - especially non-bank financial services, and building materials. Comparing the business environment to that of four years ago, Calvey said the biggest difference today is that there is considerably more Russian money around than previously. 'There's been a continuing trend in Russia over the last ten years that businesses in Russia become more sophisticated, management teams more experienced. So some companies we looked at several years ago and decided not to invest in have become very serious businesses today. They have become investable over that period of time whereas before they weren't really. But I think the phenomenon of the increase of Russian capital is the most significant change that wasn't a trend four or five years ago. Russia has really become a very Russian market. : It is much more of a domestic market than anywhere in Europe. If you are in a Russian's shoes, why go and invest in the United States or Europe or Asia when you can stay at home in Russia and earn two times the rate of return?' With incumbent President Vladimir Putin all but guaranteed to win reelection at the March 14 presidential election, attention is turning to his plans for the coming four years. Calvey said the most critical areas in need of attention are administrative and judicial reform to reduce corruption within the administrative structure in Russia and make the judiciary more transparent and objective. 'Those are the most important things to improve the business and investment climate in Russia. Within the next four years it is not possible to 'solve' those issues, but Putin can make a real start in that direction and pass on a legacy to his successor which will make it much easier for his successor to maintain that momentum. I really do think that you have to look at those two issues as being decades-long problems to solve, not just a couple of years or four years. But if Putin fails to take action in those areas, then I think Russia may be doomed to a corrupt and non-transparent business environment for a very long period.' 'The third thing is maintaining fiscal discipline despite having a huge budget surplus, and/or investing the surplus wisely into infrastructure projects that are going to benefit Russia long term, rather than just squandering or wasting the surplus, which is what most oil-producing countries do. So far, Putin has a great track record in that respect. There's probably room for Russia to significantly increase infrastructure spending, like America during the Depression and the New Deal : The infrastructure around the country is decaying. The total investment in infrastructure in Russia over the last ten years has been much lower than the depreciation rate of assets, so I think that wisely using this budget surplus over the next few years to both maintain Russia's solid fiscal and financial position and also to invest some of the surplus into infrastructure is going to require political statesmanship and political discipline. This will be a big challenge for Putin.' Calvey said the last of the major issues Putin will need to address during his second term of office - although in the very long term less important than those mentioned above, is reform of Russia's natural monopolies. 'One way or another, these natural monopolies touch the lives of everyone in Russia, and they certainly touch the lives of every businessman in Russia. Reform is needed, but it could go badly, and reform just for the sake of reform could end up with a repeat of some of the disasters of the mid-1990s in Russia. I think Putin has an opportunity and a mandate to carry out reforms of those organizations in a very prudent manner, and that would significantly benefit Russia's economy for the very long term.'
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