Director of Equity Financing, FINAM Investment Company, Moscow
Earlier this week we were introduced to three interesting articles, all of them posing the same question: is Russia's current model of development sustainable? Kommersant daily published a translation of Saturday’s Financial Times piece titled, "NYSE is left in the cold as Russians flock to London” . A foreign policy blogger republished an article by Alexander Temerko, a former vice president of Yukos titled, “Russia: Buyers Beware”.
Both of these articles question the road Russia is taking in its development. This path probably appears very strange to Western eyes, with state-owned “national champions” growing rapidly alongside burgeoning private entrepreneurship, but all of us should not forget Russian history. With all of the turmoil Russians suffered at the turn of the last two centuries, we are not qualified to do things the nice and easy way. Frank Sinatra sang: “I did it my way”; Russians may also prefer to say: “we do it our own way”. To this end, I would like to introduce another paper that was published in the Vedomosti daily on Monday: “A Model for Development: The Trap of the State Capitalism”. This paper is was produced by A. Abramov, a strategist at Aton Capital and two fellows from the Institute for the Economy in Transition, a Russian economic think tank. The article has been published on the Institute’s web-site.
All three articles discuss the Russian economic miracle. All agree that while their evaluation of the Russian market may be negative in the medium to long term, international investors’ enthusiasm for investing in Russia continues to grow.
While national champions like Rosneft dominate headlines,
the Russian economy continues to quietly diversify
In 2006 the RTS index grew by 70.83% and the MICEX index increased by 67.5%. The trading volume on Russian stock exchanges increased threefold over 2005. Russia became one of the leading emerging markets in the world with the market capitalization of Russian companies at $90 billion. The big news in 2006 was the inflow of private capital investment into Russia - $41.6 billion (as compared to $1.1 billion in 2005).
The authors point out that, setting aside global influences on the Russian stock market, government efforts to consolidate and capitalize the state-owned holding provided strong support to the rest of the markets. All of these IPOs for state-owned companies were part of a plan to transform the structure of the Russian economy. Another input to market success was – the new phase of privatization that relates to the state-capitalistic economy model, i.e. issuing IPOs for companies while still preserving state control. While this idea is not original to Russia (China has its “red chips"), the pace of this restructuring is almost unprecedented in world history.
The Abramov paper analyzes in depth some of the negative aspects that reduce the valuation of Russian market institutions. The authors claim that the 2006 Russian IPO boom in essence was a grand effort to insure Russian businesses from political risks (especially the 2008 elections).
Thus, the authors make the following conclusions regarding Russia’s recent investment boom and the rapid capitalization of the Russian stock market:
(1) Capital flight that is the result of underdevelopment of domestic institutional environment, high risks and few protections for investors– all of these are the main obstacles against a broader distribution of assets within the country.
(2) A considerable part of the raised capital was not directed towards development of business, rather it was associated with the fundamentally political process of re-distributing property.
I would like to skip these deliberations - in my mind, there is nothing wrong with what is going on. When we look back at development of stock markets and world economies (especially in China, a country Western investors are seldom advised against entering due to political risks), we see a lot of strange and questionable things going on.
Russia is still a “kid” in terms of developing a market economy, and of course the birthing and growth of this kid goes on with a lot of “strange and unusual” actions. The current Russian government has done a lot, and Russians see evidence of these profound changes every day. There have been many mistakes and wrong actions, but there is a sense among Russian businessmen and investors that the general forward momentum is right.
In conclusion, Mr. Abramov and the two fellows from the Institute are way too pessimistic about the state-capitalistic economy model. Dare I say it, but perhaps this model is the right one for Russia?
You can read the original post at Vladimir Kuznetsov's blog, Equity Financing in Russia. The views expressed in this post and on his blog are the personal opinions of Vladimir Kuznetsov, and do not necessarily reflect the views of the FINAM Investment Company.
