Published 18-09-2012, 07:45
CEO, Nikitsky Capital, T&B blog (truthandbeauty.ru)
T&B is seen as a vehement supporter of Putin and a perennial Russian bull, perhaps blind to the failings of our adopted land. This is a half-truth at best – yes, we firmly believe that the rise of Vladimir Putin was the best thing to have happened to Russia for the past millennium (not, overall a particularly good one – happily, the millennium now just getting underway appears far more promising…), however we are blind neither to his failings, nor to the weaknesses of the system which he has put into place.
T&B has never subscribed to democratic fundamentalism. Indeed, some of the main weaknesses of the current system may be due to an obsession with at least the outer trappings of Democracy, and thus, the failure to at least pass through a Chinese-style system with continuity provided by a reformed Party, with individuals replaced as necessary, without affecting the continuity of overall policy.
-Our, first, and most obvious, worry is that – despite all appearances to the contrary –Vladimir Putin is mortal; we have no way of knowing who would follow him were he no longer able to govern. There may be a well-thought out plan – or there may not be; it would be interesting to know. We believe that the appointment of Dmitry Medvedev was intended as an experiment to see whether he would make an adequate successor. If so, it was a poor choice – Medvedev had none of the characteristics needed to successfully govern Russia. Perhaps Mr Putin’s greatest weakness is his systematic loyalty to a small circle of men he has known for a long time, and who may or may not deserve that trust.
Fortunately, as Russia grows richer and more conservative, with entrenched economic interests for whom continuity is vital, one would assume that a transition of power would be far less traumatic than those of the previous decades, however some well-articulate succession plan would be reassuring.
-With the exception of the Communists (whom are no longer in the competition for the leading role) Russia has no real political parties. While the Chinese Party has substantial internal democracy channeling local and regional input up to the national level, the system in Russia appears obscure and somewhat dysfunctional. Again, Putin has done an extraordinary job of maintaining stability while the economy self-organizes, but the weakness of the administration and legislative bodies has resulted in very sub-optimal economic development.
-The reintroduction of regional gubernatorial elections gives some hope for the development of a constructive opposition, with some actual experience in governance; this will be, at best, be a long, slow process.
-Whereas in his first term Vladimir Putin managed to be very much all things to all men, as Russian society develops and diverges, this is no longer possible. Instead, as his popularityincreases in the heartland where he has made inroads into the Communist and nationalist electorates, he has lost the cities – in particular, the young, urban elites. Like Western politicians, Putin clearly caters to his own electorate – perhaps reminiscent of Richard Nixon’s play for the "Silent Majority” during the long period of the American reaction against the relative liberalism of the 1960s.
While the realignment probably represents a net gain in terms of votes, it does not advance our hoped-for evolution and transformation of Russian society – not in the direction of some imposed Western model, but rather, towards a reformed, specifically Russian variant.
As regards the macroeconomics, we are very sanguine. Macroeconomic management has been excellent. Russia has extremely low debt, declining inflation, and improving social welfare; the politics are quiet, the banking system a net foreign creditor, with confidence in the banks supported by their performance during the Global Crisis. Both the Central Bank and Finance Ministry proved highly competent during periods of financial stress.
-We think the fashionable obsession with "diversification” and high-tech totally misguided – a waste of both time and money. Russia will not become a major producer of mobile phones or fast-moving consumer goods in our lifetimes – it is simply not in the business culture. While there are several poles of technological excellence ripe of development – software, aeronautics, weaponry, etc. the obvious areas for economic growth are agriculture, services, domestic infrastructure and transformation of natural resources. Agriculture should someday outweigh oil.
-The impact of corruption is real but grossly overstated. The corruption surveys measure not corruption but the perception of corruption, and Russians compete to tell wild tales of official misdeeds. If the surveys were remotely credible, then Russia would simply not have the foreign reserves it does. That said, not just administrative corruption but especially, inefficiency and old-fashioned pig-headedness are a major impediment to the development of the sort of network of small and medium enterprises that have been so important in Northern Italy and Germany.
-Russia, the top agricultural importer for most of the 20th century, is now a world-class grain exporter, and, more impressive still, is set to become a net exporter of poultry; a huge animal husbandry project is now underway aimed at reaching self-sufficiency in beef. Given the deep Chinese market at Russia’s doorstep, this is an obvious pole for development.
-Turning to the financial markets, while we have seen vast improvements in the management of the banking system, of public and private debt, and of the currency, we remain deeply frustrated by the equity market. There are virtually no truly public companies; most firms are controlled by a majority shareholder or group of shareholders, whose interests are frequently not aligned with those of the minorities, about whom they care very little.
-The main weakness of the banking system is the lack of both domestic liquidity and of capital for further growth – regulatory capital requirements are fairly draconian and we see no risk of a banking crisis, however the sector is almost totally dependent upon the Central Bank for the provision of liquidity.
-Any number of recent stories in the oil, mining, banking and telecommunications sectors have left equity investors feeling randomly exposed to machinations by majority owners about which they are generally the last to know. Furthermore, until recently, dividend flows have been niggardly and share buybacks almost unheard of – that, at least, is now changing, as more companies begin to announce transparent dividend policies and to increase their pay-outs.
-As we have been repeating for the past 15 years, the fundamental weakness of Russian financial markets is the absence of deep pools of long-term domestic liquidity. The pensions reforms have been botched, repeatedly, and we see little or no effort at creation of the sort of domestic, long-term investment capital that could begin to render the Russian market independent of global risk-capital flows. Yes, the fusion of the Micex and the RTS, along with the establishment of a single depository are important and long-overdue steps, but without domestic financial institutions, the market will remain something of a casino.
-As a destination for direct foreign investment, Russia is unmatched. The great majority of foreign companies doing business in Russia are performing extremely well, and most are increasing their investments as Russia continues to outperform its neighborhood. A new automobile plant is being opened each year in Russia, as they close down elsewhere in Europe. The generally happy outcome of foreign investment in Russia forms a sharp contrast with the very unfortunate experiences of numerous foreign investors in China…
-We remain somewhat skeptical about the benefits of WTO membership – most of the expected benefits are intangibles… we far prefer the tangible kind!