Before proceeding last month with the latest ludicrous charges against Russian former oil kingpin Mikhail Khodorkovsky, the Kremlin seriously weighed granting the jailed onetime tycoon a pardon. Such a move, its backers argued, would be an ideal symbolic gesture at a time when Russia is embarking on an ambitious modernization scheme that requires massive amounts of foreign investment.
But one voice at the table said no. And as it belonged to Prime Minister Vladimir Putin, the trial of Mr. Khodorkovsky – essentially for stealing every barrel of oil ever produced by the company he founded – proceeded to its inevitable conclusion. The ex-oligarch’s mistake was not in engaging in the same practices as every other newly minted billionaire who emerged from the wreckage of the failed Communist state. It was in his decision to deploy his wealth in the political arena against Mr. Putin. And for that, he will stay in prison.
Mr. Putin has shown once again that he doesn’t particularly care about fostering goodwill in the West or of proving to smaller foreign investors that their money will be safe in a Russia that has a renewed commitment to the rule of law. He reasons, quite correctly, that the major Western companies whose money and expertise he does need, will be more than satisfied by the major legal changes and new investment rules that have already been set in motion.
The plan is to bring in global heavyweights to revamp leading Russian companies in transportation, infrastructure, mineral extraction, telecommunications and other key sectors, in exchange for minority stakes. But unlike the Wild West days of the 1990s, all the deals will be done directly with the Kremlin, with whatever guarantees that implies. Another 5,000 small state companies and assets, including airlines, ports and shipping firms, will be auctioned off between now and 2014.
The massive reform offers plenty of opportunities for Western companies, on remarkably favourable terms, by Kremlin standards. But only the bravest, or most foolhardy, of small investors would consider wading into the Russian swamp.
“Russian law, when it comes to portfolio investments, is at best inconsistent,” Russia watcher Peter Zeihan says dryly. “I don’t think we’re ever going to see a rebound of activity to the levels we saw in 2006-07. Too many people have been burned.”
Indeed, more than a few Russia-centric funds went down the drain in the crash of 2008. The financial conditions were bad enough, but the fallout stemming from the Russian invasion of Georgia made things that much worse.
In any case, big Russian companies won’t need your money, because the Kremlin is ensuring they will have plenty of access to most of the capital and technology they crave. “There isn’t a belief, in the Russian system, that they need it [further outside capital],” says Mr. Zeihan, vice-president of analysis with Stratfor, a global intelligence firm based in Austin, Tex. “As a result, they’re not actively courting it.”
Russia doesn’t deserve its status as one of the high-growth emerging markets – which stems from its inclusion as one of the four BRIC countries. When Goldman Sachs economist Jim O' Neill came up with the clever concept in 2001, the idea was to identify for investors emerging countries – Brazil, Russia. India, China – with the greatest potential to surpass the West and lead the world economic tables by the middle of this century.
No doubt, it hasn’t hurt Goldman’s efforts to market its investment banking expertise in those markets. But by now it should be plain that, for all its vast energy and mineral wealth, Russia just isn’t going to make the cut. That’s not to say the country is about to disappear as a power any time soon. It remains a major energy exporter and a big producer of steel, diamonds and other minerals. It also happens to own the world’s largest nuclear arsenal. But it is saddled with a shrinking skilled work force and serious demographic challenges, among other drawbacks.
Mr. Zeihan argues that it’s all downhill from here. “Russia is not a global player economically in any way, with the exception of energy sales to Europe. That’s all they’ve got. I don’t mean to say it’s small, but it’s certainly narrow. And the Europeans, to be perfectly blunt, are pretty sick of the Russians. So any time there’s a decrease in demand in Europe, the first importer that gets cut is Russia.”
The country, he says, is “in a long, slow twilight. They’re going to have a couple of great years while the Europeans are in a mess. And they have relative strength because the Americans are distracted in the Middle East. But they realize that they’re on borrowed time.”
That probably won’t be much consolation to Mr. Khodorkovsky. But it’s a good reason to stay well clear of that market.
