St. Petersburg Economic Forum opens under a cloud

(Business New Europe – bne.eu – Ben Aris in St Petersburg – June 18, 2015)

The St. Petersburg International Economic Forum (SPIEF), dubbed the “Davos of Russia”, kicked off on June 18 to a reasonably heavyweight turnout from the business world despite global tensions over Ukraine. With thousands of delegates from 144 countries, this is one of the biggest events yet, but the agenda holds only one question of real note: does the Russian leadership have a plan to fix the economy?

The short answer is “no”, boiling down to the fact that President Vladimir Putin is preoccupied with his geopolitical showdown with the West, which is largely manifested by events in Ukraine and the vast industrial power and wealth being pumped into building up Russia’s military might.

Economic reform and the people will have to wait until Putin is satisfied this programme is complete. Given that the current military strategy calls for 70% of military equipment to be modernised by 2018, it could be at least another three years before a new comprehensive military programme is launched.

The forum opened with a panel discussion that included Sberbank CEO German Gref, First Deputy Prime Minister Igor Shuvalov and former finance minister and outspoken pro-liberal economic reformer Alexei Kudrin. While the whole event has been themed, “Time to Act: Shared Paths to Stability and Growth”, action and plans are almost certainly going to be entirely missing from this year’s jamboree.

In a sign of what is very likely to come, the opening panel fell at the first fence, when the moderator asked: Are you satisfied with level of political and media competition in Russia?” “No,” Gref and Kudrin replied in unison.

There was no followup as there can be none to this statement. As US banker and Russia investment doyen Bernie Sucher pointed out in an early morning interview with Bloomberg, everything stops with the elite clustered around Putin, who control all economic, bureaucratic, administrative and commercial power in Russia with no checks and balances.

“Political risk trumps economic risk and it all comes down to what is going on in Putin’s head,” Sucher said. “No one can know that.”

Showing at the ball

The need for a large-scale economic reform programme is obvious to everyone and SPIEF has been used in the past to launch some big ideas. In 2008, then president and now prime minister Dmitry Medvedev used the forum to re-launch a large scale privatisation drive that spluttered and stalled six months later in the wake of the 2008 global meltdown. That year, SPIEF was full of businessmen and CEOs and buzzed with optimism as Russia still rode on the crest of a sustained economic boom. Meltdowns notwithstanding, things could only get better as the Kremlin was launching deep and badly needed reforms while it was still ahead of the game.

This year, many of the delegates have come because they have to. It is like attending a ball in Elizabethan England. You go not for the dancing, but because you position at court depends on being seen by the queen.

Still, the mood is lighter than last year’s SPIEF, which was marred by the US State Department’s bullying of US and even European CEOs to stay away. Privately, European bosses and diplomats were outraged after the US government threatened their US assets with trouble in an effort to work a boycott of Putin’s highest profile international forum.

It partially worked. Most CEOs cancelled, but almost all of those companies with significant business in Russia sent their deputies and the Kremlin was understanding. A few like German engineering company Siemens defied the pressure and sent their CEO any way – a stand for which the company will almost certainly be rewarded with lucrative contracts.

This year, the same CEOs will be expected to show up if only to show their face. The forum may be under a cloud and reform may lie in the future, but Russia remains a rich country and the state is pumping billions of dollars into areas like infrastructure to buoy the flagging economy, so there is still a lot of money to be made at SPIEF.

Going East

Russia’s shift to the East was on prominent display in the agenda and the European CEOs that do make the trip will feel less at home than in the past, as the Chinese delegation is large and obvious. The event will offer SCO (Shanghai Cooperation Organisation) and BRICS (Brazil, Russia, India, China, South Africa) business forums, a B20 regional consultation forum, while the Russia-China intergovernmental commission will be devoted to investment cooperation.

Momentum in the latter area has been building fast. In May last year, as Western outrage over Ukraine was transforming into economic retaliation against Russia, Moscow and Beijing signed a 30-year, $400bn gas supply contract to supply 38bn cubic metres of natural gas annually from 2018.

In September, Gazprom launched the construction of the Power of Siberia pipeline to China, due to be operational by 2019, and valued in total with its supporting liquefaction facilities at some $55bn. And during his May visit to Moscow, Chinese President Xi Jinping together with Putin oversaw the signing of 32 contracts involving high-speed rail and other infrastructure loans. More importantly than the cluster of deals worth some $6bn, the Chinese leader sat beside Putin at the May 9 WWII Victory Day parade boycotted by Western leaders, in a firm sign of their countries’ growing alliance.

A major coup at this year’s SPIEF could also come from the Greek delegation, which says it hopes to sign off on a new pipeline deal that extends the mooted Turkish Stream gas pipeline into an EU country. If, or when, this is inked, it will defy Brussels’ attempts to block Russia’s gas diplomacy.

So while a vision for Russia’s future will be missing at SPIEF, there are plenty of deals to be done. In this sense, Russia has gone backwards from the 2008 forum, when it was an emerging European powerhouse developing a rational economy for the long-term. Today, SPIEF has more of a bazaar mentality, where deals are done and money made in the here and now, as the future is uncertain and the nights are dark.