August 19, 2008 | posted by Michael Baxter in Russia | comments (0) |

Russia is once again a mighty force. Or is it simply punching above its weight? Its massive size makes it almost inevitable that the country should boast huge natural resources – oil and gas aside, it also has the potential to be the world’s food basket. But Russia has weaknesses. For one thing, it suffers from a more serious demographic problem than most countries.

The Population Reference Bureau estimates that Russia’s population will fall from 129 to 110 million between 2008 and 2050. The fertility rate is 1.4 births per women; the UK, for example, has a fertility rate of 1.9.

But, it is ten years on from the Russian crisis of 1998. Back in 1998 the Russian rate of interest was 150 per cent, and nigh on ten years of recession followed. That is to say it took almost ten years for the economy to recover.

But today, Russia enjoys a stunning growth rate. It has become a major player again. Can this continue?

It seems much of Russia’s growth rate can be explained by vast overcapacity created during the Russian crisis. Since then, the economy has been catching up. But, there’s not much spare capacity left – very soon she may have to settle for similar growth rates as the rest of the developed world.

Inflation, is mounting – and is ever threatening to become a more serious problem. For example, wages are growing at 30 per cent per year. Russia remains too reliant on the price of oil and gas. If the price continues to fall, problems will mount.

Neil Shearing, emerging markets economist at Capital Economics says: “So while Russia has largely recovered from the 1998 crisis, it now faces a new set of policy challenges. Its notoriously outdated infrastructure must be updated in order to boost productive capacity. Mass immigration appears to be the only way to head off a demographic crunch that could see the population fall by almost 10m by 2020. At the same time, the authorities can no longer avoid the huge inequalities that have emerged over the past decade and public institutions remain underdeveloped. Finally, and perhaps most importantly, the economy is still highly dependent on oil and gas production. So while Russia’s recovery since 1998 has been impressive, the next decade is likely to prove just as challenging.”

Russia remains too relaint on the commodity price cycle. The crisis of 1998 had multiple causes – but cheap oil was surely a major factor. If oil falls back, then expect a similar slowdown in Russia. Russia needs to see consumer spending make up a higher proportion of GDP; only then will the economy be more balanced, and less reliant on the wings and arrows of commodity cycles.

August 12, 2008 | posted by Michael Baxter in Russia | comments (1) |

And with the developed economy across the world in crisis, the tanks move into Georgian territory. What light can economics shine upon this latest crisis?

So that was the last thing the world, let alone the people of Georgia and Russia, needed. A couple of weeks ago it was told here about the Kondratieff economic cycle – a cycle which is supposed to last around 54 years and sees four stages – spring, which sees inflationary growth; summer, which sees stagflation and is often accompanied by war; autumn, which sees deflationary growth; and winter, which sees deflation, economic depression, and often ends with war.

If you believe in this theory, then it appears World War II marked the end of the last cycle.

The man behind this theory, Professor Nickolai Kondratieff, a Russian, penned his ideas in the 1920s and 1930s, and was sentenced to death in Russia in 1938.

Now it is easy to ridicule the premise of his theory; if the economic cycle is 54 years long, then exactly when did the present cycle begin? But if you squint your eyes, then help yourself to a large pinch of salt, it kind of makes sense. Clearly the 1950s and early 1960s fall into a spring-like phase, the 1970s and early 1980s – summer, and the 1990s to, say, August 9 2007, autumn. Any similarities with the Kondratieff cycle could of course be a coincidence. But it is all a little spooky.

But that does not mean the current cycle has to repeat all the mistakes of the previous cycle. There is every reason to believe we can avoid the winter phase of the cycle altogether, and instead have a kind of early spring.

Ben Bernanke is a wise old owl, and with him at the helm there are good reasons to believe a 1930s type depression can be avoided. But what is this war that is supposed to punctuate each cycle, both at the middle and end?

It is easy to pinpoint what the two wars were in the past cycle, World Wars I and II. But what about this cycle – what was the mid-cycle war? Was it the Vietnam war, or maybe the Cold War?

Okay, forget about the Kondratieff cycle for a few moments – there may or may not be something in this theory. But consider the wars of that period in time which would happen to coincide with a 50-year period starting in 1900. The first war partially caused the second war. World War I ended, the treaty of Versailles heaped economic misery on Germany, the German people saw their pride suffer a deep wound, and we know what happened next. At the end of the Second World War we had learnt our lesson; the Marshall plan helped ensure no repeat of a major war in Europe.

When the Cold War ended there was no concerted attempt to make Russia pay for what it had done. But, even so, the economic misery in Russia and their wounded pride were enormous. At the time there was a joke that it was so bad that things were better under Stalin. So, somehow, through a miracle of science, Russia was able to get Joseph Stalin back and ask him to take control. He said: “Okay, I will do it, but this time, no more Mr Nice Guy.”

The big snag with Russia, though, was what happened next. By 1998, Russia was yesterday’s power, a has been. Even the movie business had reduced Russia to gangland, with cuddly Robbie Coltrane – Hagrid of the Harry Potter films, the most menacing Russian villain they could come up with for James Bond.

But in 1998 Russia really did suffer a huge blow. The economic crisis of that year, which saw the Russian stock market fall such that its total value was barely greater than the valuation of Sainsbury’s, sent the economy back to crisis. Yet more economic misery was the result, pride even more damaged.

This was the time for some kind of modern-day Marshall plan; instead, the IMF enforced an unnecessary austerity programme on Russia that just made things a lot, lot worse. If you wish to know more about the treatment of Russia by the IMF during that period, consult the writings of former chief economist at the World Bank, and winner of the Nobel Memorial Prize for economics, Joseph Stiglitz.

The IMF action of that time was, in a way, akin to the treaty of Versailles.

And the writing had been on the wall for some time. The treatment of Mikhail Khodorkovsky, the way Russia turned the gas pipe to Ukraine on and off, the treatment of Shell and, more recently, BP; be in no doubt, this is a country with big ideas and, more to the point, the government that enacts these ideas has the popular support of its people.

And yet, today, the world needs Russia. It needs its oil and gas, and more to the point, the country has the potential to become the world’s food basket.

And all of a sudden, in contrast to his vice President, George Dubya seems the paragon of diplomacy. “I’ve expressed my grave concern about the disproportionate response of Russia, and that we strongly condemn the bombing outside of South Ossetia,” he said.

By contrast, Dick Cheney said: “Russian aggression must not go unanswered, and that its continuation would have serious consequences for its relations with the United States.”

The trouble is, of course, the US is hardly qualified to condemn one country for invading another without UN approval. So, all of a sudden, hope lies with the diplomats of France – the very people that those same US politicians vilified during the invasion of Iraq.

The Russian regime and its people clearly want the country to regain its status as a global superpower. Whether that means it wants to regain control of the former Soviet Union, or merely exert more influence, can not yet be told. And where this will then lead to is yet uncertain.

But, moving forward, the Russian economy is vulnerable. Right now is its moment of supreme economic influence. If the prices of oil and gas fall, as we have predicted, this will be bad news for Russia. Combine this with Russian inflation that seems to be heading out of control, and all of a sudden it seems the economic prognosis for Russia in the medium term is not so good.

There are parallels with Russia today and Germany before Hitler came to power. But that does not mean the situation has to escalate.

The key to Russia is showing her she can trust the West. The IMF indicated the precise opposite of this in 1998. Economic sanctions will do no good. But when the Russian economic boom goes into reverse – which it will do, then will be the time to repair relations, with support.

July 28, 2008 | posted by Michael Baxter in Russia | comments (0) |

Land matters, and because Russia has an awful lot of land, then she matters a great deal. Not only does the land of Russia hold huge reserves of natural gas, she also has the potential to become the world’s food basket. And yet, increasingly, she looks willing to flex her muscles. Be in no doubt, the resurgence of Russia is highly significant, possibly the most significant development of the last few years.

Russia’s pride was deeply wounded when she lost the cold war, and wounded some more with the Russian crisis in 1998. And during that time of chaos, it was not only the oligarchs who got lucky, so too did western companies – companies such as BP and Shell. This led to huge resentment in Russia.

And now she is regaining that pride, and the Russian people love it when their government strides up and down the world stage, like a huge bear, towering over Europe and the countries of a former Soviet Empire.

At such a time it is important to recount the events of the last few years. So the next few paragraphs will hopefully shine some light on Russia’s thinking. Can she be trusted? Read on and make up your own mind.

The first thing to bear in mind is that Russia wants to participate in global business. She has been taking proactive steps to encourage the development of her domestic stock markets – and not all her wealthy oligarchs who live outside her borders are exiles. The likes of Roman Abramovich are still very much seen as heroes within Russia itself.

And in many ways the BP-TNK saga does not add up, the Russian partners in the business saying that BP’s management team are running the company for the benefit of BP, not its shareholders.

But whether they are right or wrong is probably not the issue. The issue is that they appear to have managed to enlist the state to their side, forcing people like Robert Dudley, the BP man who headed BP-TNK, to leave the country after a visa row.

And yet, if you rewind the clock back to June last year, another row was between the Russian state and both BP and TNK. Back then the British Russian joint venture was exploiting the Kovykta field in Russia. The snag: the company had agreed with the Russian state to supply 9 billion cubic metres of natural gas per year, but failed to get anywhere near that amount.

BP denied the failure to meet targets was its fault. It maintained that the huge state-owned Russian energy giant Gazprom wouldn’t allow TNK-BP access to its pipes. We can produce the gas, but we can’t distribute it, said BP.

At the time Vladimir Putin said: “One can talk about many reasons, including access to the pipeline system. But they knew about this when they went after the licence. They knew about these problems and the possible limitations. Nonetheless … they bought the licence.”

Eventually, control of the field was surrendered to Gazprom. But it came with a massive surge of anti-Russia publicity in the Western press, and anti-Western publicity in the Russian press.

And yet we forget that at that time the Russian part of the joint venture – the TNK part, was very much on BP’s side, and in the process aroused the wrath of Vlad too.

Today, many of these TNK shareholders have big interests in the West. Bear in mind what happened to Mikhail Khodorkovsky, Russia’s richest man before he ended up in the slammer, and you must realise that Russian oligarchs and the Russian state do not always think with one mind.

And the Russian state is denying any kind of heavy handed action. “There is no need for Dudley to arrive at the prosecutor’s office to give any explanations,” says the district prosecutor’s office.

Then again, consider what Lord George Robertson, deputy chairman of TNK-BP has to say on the matter. This is the same George Robertson, by the way, who was secretary for defence in the UK, and then secretary-general of NATO. So he knows a thing about Russian–Western relationships. He said: “It is an outrage that the Russian partners are able to orchestrate a campaign of harassment, using branches of the Russian government, including the [Federal Security Service], tax, immigration, environmental protection, and others.”

But this is not an isolated experience. There was the dispute between Russia and Shell over the Sakhalin-2 oil field. Shell had agreed a profit share with Russia when it, along with its partners, acquired the rights to the field, but then the field turned in losses, and an impatient Russia started talking about removing the licence, but came up with the excuse over fears of environmental damage.

Then there are the regular occasions when Russia gets heavy with its neighbours.

But then remember this. The BP-TNK deal was agreed under Putin’s watch. He can’t blame this one on Yeltsin, so it is harder to him to go back on this deal.

And Dmitry Peskov said: “The state remains aside from this dispute and doesn’t see itself as a part of this dispute…It still doesn’t have the slightest intention to interfere in this.”

So on the one hand, we have BP crying foul play. On the other, it’s all innocent faces on the Russian side of the fence.

Cut through this, and you are left with an unholy mess. Russia appears to say one thing and does something else. Maybe it is a temptation for Western companies to use the Russian state as an excuse.

But in the longer – term Russia can not keep hiding behind subtle nuances of the law to run roughshod over Western investments. She needs to make up her mind whether she wants Western money and know-how or not.

But from the West’s point of view it is very much in our interests that Russia does play ball. Over the next few years her massive natural resources could make Russia the most important country on earth.

Some kind of détente, is now desperately needed.

February 4, 2008 | posted by Michael Baxter in Russia | comments (0) |

It’s a funny thing, but if you read the Western media you could be forgiven for believing Russia is to return to its bad old ways. Vladimir Putin is seen as little more than a former KGB man stuck in the rhetoric of the cold war era, and his decision to appoint Dmitry Medvedev as his successor, while Putin himself stays on as Prime Minister, is seen by many as an example of just how poor the Russian President’s democratic pretensions are.

But those views are apparently not shared by business and the markets.

In fact, The Russian stock market did something of a wobble in the weeks before Putin announced his big idea. Once Dmitry Medvedev had been confirmed as his choice for President, and once Putin announced his intention to stay on as PM, markets soared.

The truth is, that while Putin may be seen as something of an impaler to democracy, when it comes to being pro free markets, he is seen as the quite opposite of Vlad the Impaler – more like Vlad the Hailer of markets.

As for Medvedev, well, he is seen as even more of a market man.

Recently, the IMF revealed its latest set of projections for global growth – and while it was predicting growth of just 1.5 per cent for the US next year, it was projecting growth in the Commonwealth of Independent States (CIS – that’s the former Soviet Union) of 7 per cent.

As for Russia, recently the World Bank predicted growth of 6.5 per cent this year and 6 per cent growth in 2009.

Turning to the markets, the Russian State is seen as keen to develop them. It is now mandatory for Russian companies launching an international IPO to list at least a third of the shares on a domestic exchange. At the same time, it’s become a lot easier for a firm to IPO in Russia, with the levels of bureaucracy cut right back. It is also thought that the Russian Government wants to see Russia itself become the financial centre of the CIS region – and it is introducing measures to make it easier for firms based in neighbouring countries to list in Russia.

But then, last week, Dmitry Medvedev, opened a can of worms when he called for Russian firms to copy Chinese business, and buy up western businesses.

“This will allow us to re-tool Russian enterprises with technology, boost their production culture and grant them the opportunity to diversify investments and win new markets,” said the Russian President-in-waiting.

As for growing suspicions aimed at Russia, he said, “This is not a reason for hysteria. We should quietly and measuredly forward our interests and convince people that investments from Russia are effective, transparent and necessary for the countries involved.”

In fact, Russia is currently sitting on a $157bn Oil Stabilisation Fund. It seems a lot, but actually, look a little deeper and the amount of money involved is not so great.

Under new rules set by the State, 10 per cent of Russia’s GDP must be invested into AAA-rated sovereign bonds and, as things currently stand, that leaves just $32 billion available for more-risky corporate investments.

The question, though, is will this grow? Well, most estimates out there seem to suggest investment by sovereign funds is set to balloon But, much depends on the future movements of the price of oil. If oil stays up there in the $90-plus region, then sovereign fund investment will indeed expand. But if oil falls back, then it will be a different story.

Capital Economics, for example, looked at this and said, “Growth of sovereign wealth funds is likely to taper off sharply over coming years as commodity prices moderate, and the global imbalances which have driven up Asian surpluses unwind. While that will still leave many of them as major players, they will not change the rules of the game. As the events of the last few weeks have shown, Sovereign Wealth Funds should be welcomed as a source of capital for ailing Western banks rather than feared as a source of nationalist investment.”

But, for Russia, its ability to invest abroad may only be a short-term phenomenon.

Russia knows there is no guarantee that oil will stay high in price. So by investing now, diversifying its interests, it knows that if things take a turn for the worse, it has at least built up these valuable overseas assets.

That’s what you are supposed to do of course. Save when times are good, Alas, it’s where the US and UK have been going horribly wrong. We have experienced years of remarkable growth, and yet debt levels are at an all-time high.

Maybe the real lesson from Russia, is to learn prudence.

Sovereign Wealth Funds might be providing essential funding to western business, but in the long term, it means dividends will be flooding out of the UK and US. That’s what happens when you spend, spend and spend.