Russia 110419 Basic Political Developments

Russia Welcomes Capitalism…Again

http://blogs.forbes.com/kenrapoza/2011/04/18/russia-welcomes-capitalism-again/

Apr. 18 2011 - 8:24 pm

The Kremlin is rediscovering capitalism. In the process, it seeks to lobby market institutions towards a more emerging nations-friendly approach to managing the global economy after the 2008 credit crisis nearly bankrupted the poster children of free markets: the US and UK.

On the ground, Russia is getting serious about diminishing the state role in big companies.

Russia’s government, led by President Dmitry Medvedev, is forcing all top ministry officials to step down from chairman of the board positions of key government run enterprises (aka “the SEOs”) by July 1. It’s another step towards becoming more transparent. And it opens the doors to privatization, most of it likely going to Russia’s super rich businessmen.

Some famous names have already stepped down or announced they will be doing so this month. Deputy Prime Minister Igor Sechin left his prestigious chairman post at oil major Rosneft on April 11. Finance Minister Alexei Kudrin told reporters in Washington, DC this weekend that he will vacate his chairman post next week at VTB Bank and diamond miner Alrosa.

“The recent removal of ministers from the SEOs is a visible step towards improving the investment climate,” says Vladimir Pantyushin, Chief Economist at Barclays Capital in Moscow. “It is less important from an economic or a technical standpoint, but it is an important and bold political move,” he says.

The country has been undergoing changes since the dismantling of the old USSR in 1991. Next year is an election year, but that is not expected to change Russia’s move towards open markets.

This weekend, a top level Russian official told Forbes that no matter who is elected president in 2012, the policy of market reforms will continue. Medvedev and Vladimir Putin, the Prime Minister, are likely candidates, though neither have stated their intentions. “They don’t want elected officials to start making a play for favors within the new government. We want to focus on the economy. We cannot afford one year of doing nothing,” he said.

This year, Russia created a sovereign fund for the large international venture capital and private equity firms to invest in Russian enterprises. The market came up with the idea in the first place, mostly from private equity giants and some sovereign wealth funds. The $2 billion fund has no projects yet, being less than two months old. The fund will dedicate around 15% of a projects costs in sectors like pharmaceutical and biotech, aerospace, energy efficiency and infrastructure. Some 50 projects are already being considered.

US companies as diverse as Cisco and PepsiCo are expanding in Russia. On February 3, Pepsi completed its acquisition of dairy and beverages company Wimm-Bill-Dann for a massive $5.4 billion, according to government sources, who said the price was not only a once in a lifetime offer, but more than the company was worth.

On April 3, Cisco announced it was manufacturing a virtual private network hardware product in Russia, a deal the government valued at around $1 billion over time. Cisco did not release the investment total.

On December 27, 2010, General Electric formed joint ventures with electric power company Inter RAO and with medical devices firm Russian Technologies Corp.

This July, the country will host the St. Petersburg Economic Forum. It’ll be the usual schmoozefest of corporate elites and investment bankers, but decisively less Anglo-American.

Last year, foreign companies and investors put $41.5 billion in Russia, surpassing Brazil’s $31 billion, arguably a nation most of the Western world sees as more friendly and open than the former bear in the woods.

In short, this is not your momma’s Russia.

US-based Van Eck Global in New York likes Russia so much it launched its second pure-play exchange traded fund for that market. “We like Russia. It doesn’t have the same demographic headwinds as the other big emerging markets, but its society is getting richer overall. It’s a good long term market to be in,” said David Semple, Emerging Markets Director of Van Eck Global, which launched it’s Market Vectors Russia Small Cap ETF on April 14.

Russia’s relatively new to the capitalism game. And it hasn’t always been a friendly match.

Mikhail Gorbachev resigned from his post as leader of the USSR on Christmas Day, 1991. Boris Yeltsin, a colorful if not stereotypical Russian character, took over as the country’s first president. But Yeltsin’s presidency looked more like a Vodka-soaked party for his rich and corrupt mafia friends, who later became known as the Russian oligarchs.

Corruption and other political problems led to Yeltsin’s surprise resignation, ushering in the rule of Putin. The former KGB agent is credited with stabilizing the Russian economy with various tax policies and bringing some clout to Russian politics on the world stage.

It’s working. Russia is closer to becoming a member of the World Trade Organization, a brand that gives Russia a seal of approval for many exporters looking to get into the Big East of the BRICs.

Since the end of the Soviet Union, Russia has had only three presidents, including Medvedev, now up for re-election if he chooses to run. Yeltsin and Putin were both re-elected.  Russian Finance Minister Alexei Kudrin told a gathering of political appointees and economists at the Peterson Institute for International Economics last week that Russia was not complacent in the Putin years. Wheels are in motion.

“Many people ask us why were we so slow at organizing our economy? What was done over the last 10 years (of market reforms) and why was Russia so slow in organizing its economy? We lived through a period of high oil prices and we didn’t use those oil revenues the way we could have. People didn’t think of using these revenues effectively. We didn’t manage to reach the goals we set for ourselves in the 90s (under Yeltsin) and probably the inflow of petrodollars made us more relaxed and less vigilant,” he said during his keynote address at Peterson.

A lot has improved. In terms of GDP, Russia’s economic output was $1.12 trillion in 2000 and in $2.23 trillion in 2010, according to Kudrin. “We will reach our pre-crisis levels of 2008 in the beginning of next year or by the end of this year,” he said.

The living standards of Russians have grown. Productivity has grown among the labor force. Up until the crash of 2008, Russia was growing at an average of 6.9% annually. Exports were growing by more than 22% if oil and gas are included; at 15% if excluded, according to Kudrin.

As far as government spending goes, they’re doing better than the US. Kudrin said the government is on track to have a zero deficit in 2015. This year it is expected to be around 1.4% of GDP.

The WTO entry will make it official, perhaps. Russia, after 17 years, will be part of the club.

“The number one biggest thing to show a credible commitment to advancing trade with Russia is to help Russia get into the WTO this year,” said Michael McFaul, President Obama’s Russian guy in the National Security Council. “Every single government official who has anything to do with this has said that we support Russia’s membership in the WTO, and we support it happening this year.”

Russian reform doesn’t mean that the state won’t play a key role in its biggest companies. Gone are the neoliberal days when reform meant selling government companies to the lowest Western bidder.

Russia has a lot of problems. It partially thinks that getting government out of big business will help curb corruption. Russia is ranked as the most corrupt of the big emerging markets by Transparency International. But one thing is for sure, the market is finding opportunities there as Russia discovers the market…for the third time.

US-Russia Trade Surplus? Nyet! 

Because of high oil prices, the US maintains a healthy trade deficit with Russia. Here’s what we sell, and buy from the country Sarah Palin can see from her office window.

US Top 5 Exports to Russia

1. Animal proteins (beef, chicken, pork)

2. Industrial engines

3. Drilling and oilfield equipment

4. Civilian aircraft, engines, equipment and parts

5. Plastics

2009 Export Value: $5.3 billion                         2010 Export Value: $5.9 billion

US Top 5 Imports From Russia

1.  Fuel oil

2. Crude oil

3. Other petroleum products

4. Nuclear fuel materials

5. Liquified natural gas

2009 Import Value: $18.1 billion                      2010 Import Value: $25.6 b.

Source: Russian-US Trade Federation, New York