Medvedev Courts Davos Skeptics With Better-Than-China Pitch
(Bloomberg – bloomberg.com – Henry Meyer, Scott Rose and Ryan Chilcote – January 22, 2013)
Russia has a $10 billion sales pitch for investors at this year’s World Economic Forum: give us your money and we’ll worry about corruption for you.
That was the line from First Deputy Prime Minister Igor Shuvalov in an interview with Bloomberg Television last week and that’s what Prime Minister Dmitry Medvedev will try to convince skeptical investors of tomorrow with his keynote address at the conference in Davos, Switzerland, the third by a Russian leader in five years.
Russia plans to raise a record $10 billion from asset sales this year as it seeks to stem capital flight and reverse the state’s creeping hold over the economy, Shuvalov said. The government failed to reach a similar goal last year, when it retained its ranking as the most corrupt country in the Group of 20, an organization it leads this year.
“Russia, regardless of what people are saying, is a place that people can invest, can earn,” Shuvalov said on a Jan. 18 train ride to Moscow from Kaluga, a region that has attracted investment from companies including Volkswagen AG (VOW) and AstraZeneca Plc. (AZN) “If you talk with investors, they say they invest maybe less than in China, but lose less than in China. They say people don’t know Russia.”
Medvedev used his Davos speech in 2011 to highlight the “new opportunities” for foreigners “for doing business with success” in Russia. The message was more upbeat than the one then-premier Vladimir Putin delivered in 2009, in which he said the global crisis had shown the dangers of rampant greed in the U.S.-dominated global financial system.
Russia’s presence in Davos will be the biggest ever this year because the country holds the rotating presidency of the G-20, Deputy Prime Minister Arkady Dvorkovich told reporters in Moscow today.
Though improving the investment environment, strengthening the rule of law and expanding the role of private business were centerpieces of Medvedev’s agenda then and now, the government still isn’t doing enough to attract the amount of foreign capital it says it needs to meet growth targets, said Christopher Granville, managing director of Trusted Sources, a London-based emerging-markets research group.
“For a country that desperately needs higher investment rates, the overall investment climate is far too weak and the real cause of this is there is too much parasitism tolerated,” said Granville, a former Deutsche Bank AG strategist in Moscow, by phone from London. “There is naked corruption in state procurement and straightforward extortion from businesses.”
Shuvalov said that while corruption continues to be a problem, it’s less of an issue for foreign investors who have already committed to Russia.
“People are complaining about the investment climate, but when we speak now with existing investors, they are not complaining anymore,” Shuvalov said. “For those who are not investing yet — for them it is an issue of investment image, not climate.”
Those perceptions are partly why Russian stocks are the cheapest of 21 emerging markets tracked by Bloomberg. The Micex Index trades at 5.6 times estimated earnings, about half the ratio for the MSCI Emerging Markets Index. The Russian benchmark has gained 3.4 percent this year, beating MSCI’s EM Index’s 2.2 percent advance. Russia’s ruble-denominated equity gauge retreated 0.8 percent to 1,524.68 by 4:44 p.m. in Moscow.
Corruption, weak corporate governance, oil and gas dependency and a dearth of long-term domestic investors all drag down valuations, said Roland Nash, chief investment strategist at Moscow-based Verno Capital, which manages about $200 million in Russian equities.
Russia, the world’s largest energy exporter, is becoming increasingly dependent on commodities, failing to prepare for falling oil output in 20 years, according to the European Bank for Reconstruction and Development.
Oil and natural gas account for about two-thirds of exports and about half of budget revenue. The economy’s dependence on energy is greater than in the mid-1990s, when it represented less than half of exports, the London-based EBRD said in a report last month.
Russia’s position as a “petro-state” encourages authoritarian rule and rentier behavior and limits the need for equity markets because “money comes in regardless of how investors are treated,” Citigroup Inc. (C)’s Russian unit said in a report in September.
Putin, who’s been either prime minister or president for more than 13 years, ordered the government last year to improve Russia’s standing in the World Bank’s Doing Business rating to 20th by 2018. The country climbed eight positions to 112 in the latest study, issued in October. That was better than BRIC peers India and Brazil, though Russia is still the worst among major economies in terms of corruption, Transparency International said in its annual Corruption Perceptions Index last month.
The death in custody in 2009 of lawyer Sergei Magnitsky, who accused officials of stealing $230 million of budget money, and the lack of a single conviction in the case is a symbol of the government’s failure to tackle corruption, said Granville. The U.S. in December imposed a visa ban and asset freeze on Russian officials implicated in Magnitsky’s death. Russia in retaliation banned the adoption of Russian children in the U.S.
“The Magnitsky case is a very emotional black mark against the Russian investment environment,” Verno’s Nash said by phone. “It harms sentiment.”
While Medvedev promised as president to combat corruption and improve corporate governance through privatization, state control over the economy has only increased, according to BNP Paribas SA (BNP)’s Moscow unit. State-owned companies now account for about half of Russia’s economic output, up from 42 percent in 2008 and 38 percent in 2006, the lender said in October.
This doesn’t take into account the $55 billion acquisition by state-run OAO Rosneft (ROSN), the country’s biggest oil producer, of TNK-BP, BP Plc (BP/)’s venture with a group of billionaires, which is scheduled to be completed in the first half of this year. Once that deal is over, London-based BP agreed to buy 5.7 percent of Rosneft for $4.8 billion in cash, almost half of this year’s privatization target.
Without sufficient capital from abroad, the government won’t be able to complete its modernization effort to reduce commodity dependency, a plan that requires continuous 5 percent growth, Shuvalov said.
Foreign direct investment fell 40 percent in the first half of 2012 from the same period last year and was 63 percent lower than in 2008, when the country attracted a full-year record $75.2 billion, central bank data show. The pace of economic growth slowed to 2.9 percent in the third quarter, the weakest expansion since a contraction ended in 2010.
Russia will be looking for investors in infrastructure, particularly in Moscow and other cities scheduled to host matches during the 2018 World Cup, Dvorkovich told reporters. Other key priorities include power generation and agriculture, particularly meat production, he said.
Even so, Russia is expanding faster than in developed countries and is on a trajectory to overtake Germany as Europe’s largest economy by 2020, PricewaterhouseCoopers LLP said in a report on Jan. 16. That expansion may start to reverse in a decade, though, without a new economic model, John Hawksworth, PWC’s chief economist, said by phone.
“For any economy, having a strong rule of law and strong property rights is an important confidence factor in encouraging investments,” Hawksworth said.
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