In part one we glanced briefly at Russia’s Mafia problem and at the unwholesome blending of Mafiosi with Russian business and political life and posed the question of what this means for the Russian economy. I want to begin part two with a look at a client briefing note from Baring Asset Management (BAM) on FIFA’s decision to give Russia the 2018 Football World Cup, then look at Russian President Dmitri Medvedev’s firing of Moscow’s massively compromised mayor, Yuri Luzhkov. Part three, to be posted shortly, looks at the second show trial of the Yukos Oil pair, Mikhail Khodorkhovsky and Platon Lebdev, where the verdict is due to be pronounced by the lone judge in the case on December 15. QFINANCE has an excellent viewpoint by the former Yukos CFO Bruce Misamore, which more than anything demonstrates the difficulties that confront Russian management when it comes to modernising corporate governance and corporate reporting in Russia.
The brief summary from BAM contains some fairly coded messages to clue investors in to the fact that all might not be well in the great Russian State. However, the two BAM fund managers, Ghadir Abu Leil Cooper, who looks after Baring’s MENA Fund and Matthias Siller, the investment manager of Baring Russia Fund are focused on the infrastructure potential that follows from Russia’s successful bid and see the whole project of staging the World Cup as a chance for Russia to raise standards and “challenge long standing business practices”. (How interesting it would have been if they had taken a paragraph or three to expand upon their sense of those business practices – had they done so, of course, potential investors would, in all probability, have fled the scene).
The successful World Cup bid definitely strengthens the investment case for Russia, they say:
“With strong economic growth and rising demand for goods and services, we have been optimistic over the investment outlook in Russia for some time. While a lack of transparency has discouraged some investors from participating in the Russian growth story, we hold the view that last week’s decision presents an opportunity for the corporate and political spheres to raise standards and challenge long-standing business practices.
Elsewhere, we also believe that infrastructure development will act as a boost to the Russian market with cyclical stocks particularly benefiting. Over the coming years, at least ten stadiums will have to be built across the country while huge investment will also pour into the tourism and transport sectors. The Russian authorities are wholly committed with the federal budget allocating around US$10bn towards the tournament. Moreover, Prime Minister Vladimir Putin has said that he expects the private sector to contribute funding. Russia now has eight years to come up with a sustainable plan for development, if they get it right, the World Cup could prove to be a positive turn for the economy.”
As we all know, the World Cup is a huge showcase for a country. But let us look quickly at the country’s premier city, Moscow, which, until recently, had a massively corrupt crook for a mayor. The world outside Russia discovered this via another of those magnificent “briefing” cables marked “secret” which Wikileaks so magnanimously unveiled to the world at large. The author of the briefing was US ambassador John Beyrle.
Beyrle points out that Moscow’s long standing mayor, Yuriy Luzhkov, presided over a “city hall” where officials routinely expected businesses who wanted to operate in Moscow to pay them bribes and where extortion was an everyday practice. Despite his known connections to organised crime, Luzhkov’s position, right up to his sacking by Medvedev, was regarded as impregnable because of his ability to “ensure that the city has the resources it needs to function smoothly” and because he could bring the votes in for the ruling party when required.
Here is the US ambassador on the subject of Moscow’s criminal links:
“The Moscow city government's direct links to criminality have led some to call it "dysfunctional," and to assert that the government operates more as a kleptocracy than a government. Criminal elements enjoy a "krysha" (a term from the criminal/mafia world literally meaning "roof" or protection) that runs through the police, the Federal Security Service (FSB), Ministry of Internal Affairs (MVD), and the prosecutor's office, as well as throughout the Moscow city government bureaucracy. Analysts identify a three-tiered structure in Moscow's criminal world. Luzhkov is at the top. The FSB, MVD, and militia are at the second level. Finally, ordinary criminals and corrupt inspectors are at the lowest level. This is an inefficient system in which criminal groups fill a void in some areas because the city is not providing some services.”
Corrupt politicians are not exactly a new phenomenon, but Luzhkov’s activities prompted the ultranationalist LDPR opposition party leader Vladimir Zhirinovskiy to call Luzhkov’s government “the most criminal in Russian history" – a comment that was actually carried on Channel One TV, the Kremlin’s flagship channel. Although that was seen as a rebuke to Luzhkov, the US ambassador remarked in his briefing that he had been told that “people are paying bribes all the way to the top (of the Kremlin)”.
Another of Beyrle’s informants told him: “…deputies generally have to buy their seats in the government. They need money to get to the top, but once they are there, their positions become quite lucrative money making opportunities. Bureaucrats in Moscow are notorious for doing all kinds of illegal business to get extra money.”
It is impossible to imagine that commercial enterprises, even those with some scale to them, could escape unscathed from this kind of rotten atmosphere. Protection rackets are the norm. You pay or you get a visit from officials from the fire service or the sanitation service and your business will most certainly not pass their inspection.
Of course it is perfectly possible for investors and fund managers to ignore all this and to make their investments based on the anticipated returns from particular stocks. However, one small question should give them pause – what confidence can they possibly have in reported results when the societal context, the very atmosphere in which Russian companies operate, is so deeply compromised?
If the US, with all its regulatory apparatus, can give us Enron and Madoff, what can we expect from Russia with its "anything goes" approach? The answer, of course, is the black comedy of the two Yukos Oil show trials. (See part three.)
Further reading on Russian economy and emerging economies:
- QFINANCE country profile: Russia
- Political Risk: Countering the Impact on Your Business, by Ian Bremmer
- Where does Wikileaks’ description of Russia as a “Mafia state” leave the Russian economy? Part One, by Anthony Harrington
- Lessons from Russia, by Bruce Misamore
Tags: infrastructure , kleptocracy , Medvedev , Moscow , Russia , Russian economy , Vladimir Putin , World Cup