Putin is on a collision course with change
By Jason Bush The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
For 12 years, Vladimir Putin has presided over a Potemkin democracy. And everyone, especially Putin himself, seemed strangely convinced that he could keep up the charade indefinitely. But in 2011, Russians’ patience with Potemkin politics unexpectedly snapped. In 2012, the big question will be how Putin responds.
The recent mass protests against election-rigging reflect a deep yearning for change. Young Russians, and the growing middle class, are especially disgusted with the absurd parody of politics and the system’s flagrant corruption. The fledgling movement is still too immature to prevent Putin winning presidential elections in March 2012, in which he will probably run as the only credible candidate. The more salient question is whether Russia’s strong man will be able to reinvent himself in response to society’s demands for democratic reform.
No one should hold their breath. The next government, which is expected to be headed by outgoing President Dmitry Medvedev, may well have a more reformist flavour. But it’s hard to believe that this reconfiguration of the same old “tandem” heralds any breakthroughs. The changes will be superficial and disappointing – just as they were after previous Russian elections.
Old autocrats seldom learn new tricks. And Putin has already wasted too many years, during which he could have built a modern political system. If anything, his methods of manipulation and control have become more crude and desperate. The Russian prime minister’s first, Pavlovian reaction to popular protests was to blame the West.
Faced with rising popular discontent, the Russian government will react not with outright repression, but with its usual tactics of legal chicanery, political manoeuvres and disinformation. But these Soviet-style methods are rapidly losing their power in the face of 21st Century technology. The rapidly-spreading internet has provided the opposition with a potent tool for bypassing the state’s smothering control of information.
Having exposed electoral fraud to such devastating effect, it will turn its attention to the corruption of the ruling elite. Putin’s third term will be punctuated by scandals that will create a vicious circle of mounting public anger, declining investor confidence, and stagnating economic growth. Only with Putin’s departure will real modernisation in Russia become possible.
Russia withstands euro zone contagion but risks rising
MOSCOW (Reuters) – While rising internal political risks in Russia have grabbed the spotlight, the most serious economic threats are external and a shock would complicate Prime Minister Vladimir Putin’s bid to return to the Kremlin.
Russia is showing economic resilience amid international financial turmoil, which it is better able to withstand than in the past. But contagion effects from the euro zone threaten an already shaky recovery through weakening exports and capital flight as banks cut exposure to Russia.
If the euro zone does not get its house in order and an economic slump leads to a sharp and sustained drop in oil prices, Russia will feel much more than a chill.
“Europe is extremely important for Russia,” said Vladimir Tikhomirov, chief economist at Otktitie Securities in Moscow.
“The consensus is that the euro zone will manage to muddle through. But the reality is that we’re being gradually dragged into a crisis that could become deeper and deeper.”
So far, Russia’s economy, which is expected to grow by around 4 percent in 2011, has shrugged off the euro-zone blues. But it has been helped by temporary factors, including a much-improved harvest and a boost in election-related expenditures.
Most economists anticipate slower growth next year. In its most recent economic forecast for Russia, the International Monetary Fund anticipates “subdued” growth of 3.5 percent, with “significant downside risks”.
Analysis: Russia withstands euro zone contagion but risks rising
MOSCOW (Reuters) – While rising internal political risks in Russia have grabbed the spotlight, the most serious economic threats are external and a shock would complicate Prime Minister Vladimir Putin’s bid to return to the Kremlin.
Russia is showing economic resilience amid international financial turmoil, which it is better able to withstand than in the past. But contagion effects from the euro zone threaten an already shaky recovery through weakening exports and capital flight as banks cut exposure to Russia.
If the euro zone does not get its house in order and an economic slump leads to a sharp and sustained drop in oil prices, Russia will feel much more than a chill.
“Europe is extremely important for Russia,” said Vladimir Tikhomirov, chief economist at Otktitie Securities in Moscow.
“The consensus is that the euro zone will manage to muddle through. But the reality is that we’re being gradually dragged into a crisis that could become deeper and deeper.”
So far, Russia’s economy, which is expected to grow by around 4 percent in 2011, has shrugged off the euro-zone blues. But it has been helped by temporary factors, including a much-improved harvest and a boost in election-related expenditures.
Most economists anticipate slower growth next year. In its most recent economic forecast for Russia, the International Monetary Fund anticipates “subdued” growth of 3.5 percent, with “significant downside risks.”
Russian delay adds to Polyus UK listing concerns
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By Jason Bush
MOSCOW, Oct 28 (Reuters Breakingviews)- Polyus (PLZL.MM: Quote, Profile, Research) must wait. The Russian goldminer’s plans for a premium London listing and FTSE 100 inclusion suffered an unexpected setback after the Russian government failed to sign off on Polyus’ change of address. The delay may be politically motivated. It should remind London regulators that it is unwise to waive their rules for Russian companies.
Both the Russian government and the company have played down the delay. Still, it’s odd that Polyus’ long-planned move was not better prepared. And the regulatory setback comes not long after Polyus’ largest shareholder, billionaire Mikhail Prokhorov, staged his much-publicised attempt to enter politics, which ended in fiasco. Lately he has become an outspoken critic of Russia’s system of government.
No one should be too surprised if Prime Minister Vladimir Putin, who heads the commission that must sign off on Polyus’ listing plan, has wanted to remind Prokhorov who is boss. In itself this may be no great tragedy for Polyus: it could be more a gentle nudge than an iron-fisted clampdown. Still, it’s a further reminder for investors that strategically-sensitive companies cannot escape the unpredictable regulatory environments of the countries in which they operate.
This is not the first embarrassing setback for Polyus. Its listing plan was previously called into question by an ugly row with former Kazakh owners of KazakhGold, a subsidiary that had a pivotal role in Polyus’ convoluted legal transformation. Having accused theses shareholders of massive fraud, Polyus found itself the butt of regulatory attacks in Kazakhstan. The two sides eventually compromised, but their peace deal is still subject to hiccups. The risk of other such imbroglios won’t disappear with the expedient of registering Polyus in the UK.
All of which lends weight to the arguments of institutional investors who worry the UK Listing Authority is being soft on Russian FTSE-hopefuls. F&C Investments recently expressed concerns that Polyus’ 13 percent free float was below the 25 percent threshold that is normal for premium listings, and criticised the practice of granting waivers to emerging market applicants. Strict listing requirements won’t guarantee against upsets caused by unpredictable politics. But at least, when rules are fully enforced, investors only have themselves to blame when they get burned.
Exxon’s Russian coup rubs salt in BP’s wounds
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By Jason Bush
MOSCOW (Reuters Breakingviews) – BP’s pain is Exxon Mobil’s gain. Just months after the collapse of BP’s much-hyped tie-up with Russia’s state oil company Rosneft, the UK energy group’s U.S. rival has swooped in on the deal. Although not without risks, the latest agreement is a coup for Exxon — and a fresh blow to BP as it struggles to contain the damage from its Russian debacle.
There’s little hiding BP’s humiliation. The Arctic reserves in question are the very same fields that were to be subject of the original BP-Rosneft tie-up. But in contrast to that partnership, with its proposed $16 billion share swap, Exxon and Rosneft are not talking about swapping equity. Instead, Exxon is offering Rosneft access to some of its projects in the Gulf of Mexico.
Exxon, in effect, has been the lucky beneficiary of chance circumstances. Rosneft’s embarrassment following the collapse of the BP deal has enabled the Americans to enter on more favourable terms. While the Russians love the idea of share swaps, the Western partners are keen to get access to Russia’s vast reserves — but not so keen on getting Russian owners.
There’s always the risk of a hidden obstacle. But Exxon is unlikely to face anything like the difficulties that scotched BP’s deal. These resulted mainly from BP’s terrible legal preparation and political misjudgements. Still, any investment in Russia can encounter snags. While Russia is eager to attract Western partners now, there’s the danger of it revising terms in the future. And searching for oil in the remote and inhospitable Arctic is an uncertain business — the envisaged $3.2 billion in exploration costs could overrun. Exxon shares have not exactly leapt with excitement: they were down about 0.8 percent in early afternoon trade on Tuesday.
On balance, though, Exxon looks like an eventual big winner, gaining access to sought-after acreage with an estimated 110 billion barrels of oil equivalent in reserves. Rosneft can be happy, too, that it is getting access to both Exxon’s offshore expertise and North American projects. The only big loser is BP. Not only is its deal with Rosneft now over, but Rosneft is under little pressure to discuss possible alternative projects any time soon. BP’s botched Russian strategy has cost it more than just some upside.
Bank of Moscow’s debacle is profitable for some
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By Jason Bush
MOSCOW, Aug 2 (Reuters Breakingviews)- The mammoth $14 bail-out of the Bank of Moscow (MMBM.MM: Quote, Profile, Research) wasn’t a fiasco for everyone. A month after the embarrassing rescue of the troubled Moscow lender by state-owned banking giant VTB (VTBR.MM: Quote, Profile, Research), the mysterious role played by Vitaly Yusufov, the son of a former Kremlin official, is raising serious questions about the affair.
Yusufov became involved when, in March, he acquired the 20 percent Bank of Moscow stake belonging to Andrei Borodin, the bank’s ex-president, who has since fled to London to escape embezzlement charges. Yusufov is now haggling with VTB, which needs his stake to complete its acquisition. The details are typically murky, but Yusufov is reported to have paid Borodin between $700 million and $1 billion. Now he is valuing the stake at around $1.25 billion. The shares’ current market value is a little over $1 billion.
This looks like a surprising way to make money. Without the massive bailout from the state, Bank of Moscow would effectively be bankrupt, its shares worthless. Even more bizarrely, Yusufov paid for his stake with a $1.1 billion loan from the Bank of Moscow itself. The Russian central bank considers this loan as one of BoM’s riskiest credits.
Yusufov’s luck is a matter for gossip. Borodin claims that he actually negotiated the sale with the young entrepreneur’s father, Igor Yusufov, who was until recently President Dmitry Medvedev’s energy advisor. It’s hard to separate fact from rumour. But just a few weeks later, Yusufov senior was reported to be playing a similar role -– as a sort of unofficial Kremlin fixer -– in relation to Domodedovo airport, the subject of yet another corporate-political battle.
Whatever the truth about the Yusufofs, it should give investors in VTB yet more grounds to question their bank’s involvement in this shady affair. It’s also clear that the burden of the costly rescue package is not being fairly shared. Why should one shareholder be profiting from the Bank of Moscow’s woes, while another, VTB, is paying up to fix them?
Breakingviews-Bank of Moscow’s debacle is profitable for some
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By Jason Bush
MOSCOW, Aug 2 (Reuters Breakingviews)- The mammoth $14 bail-out of the Bank of Moscow (MMBM.MM: Quote, Profile, Research) wasn’t a fiasco for everyone. A month after the embarrassing rescue of the troubled Moscow lender by state-owned banking giant VTB (VTBR.MM: Quote, Profile, Research), the mysterious role played by Vitaly Yusufov, the son of a former Kremlin official, is raising serious questions about the affair.
Yusufov became involved when, in March, he acquired the 20 percent Bank of Moscow stake belonging to Andrei Borodin, the bank’s ex-president, who has since fled to London to escape embezzlement charges. Yusufov is now haggling with VTB, which needs his stake to complete its acquisition. The details are typically murky, but Yusufov is reported to have paid Borodin between $700 million and $1 billion. Now he is valuing the stake at around $1.25 billion. The shares’ current market value is a little over $1 billion.
This looks like a surprising way to make money. Without the massive bailout from the state, Bank of Moscow would effectively be bankrupt, its shares worthless. Even more bizarrely, Yusufov paid for his stake with a $1.1 billion loan from the Bank of Moscow itself. The Russian central bank considers this loan as one of BoM’s riskiest credits.
Yusufov’s luck is a matter for gossip. Borodin claims that he actually negotiated the sale with the young entrepreneur’s father, Igor Yusufov, who was until recently President Dmitry Medvedev’s energy advisor. It’s hard to separate fact from rumour. But just a few weeks later, Yusufov senior was reported to be playing a similar role -– as a sort of unofficial Kremlin fixer -– in relation to Domodedovo airport, the subject of yet another corporate-political battle.
Whatever the truth about the Yusufofs, it should give investors in VTB yet more grounds to question their bank’s involvement in this shady affair. It’s also clear that the burden of the costly rescue package is not being fairly shared. Why should one shareholder be profiting from the Bank of Moscow’s woes, while another, VTB, is paying up to fix them?
Germany should be wary of Gazprom’s overtures
By Jason Bush The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
MOSCOW — Gazprom, the Russian gas group, may be seeking to buy a major stake in RWE. A deal could potentially shore up the shaky finances of Germany’s second largest electricity producer, and boost investment in the country’s power sector. But it would also raise serious competition concerns, and increase Germany’s reliance on expensive Russian gas.
Neither firm has confirmed the rumour, but Gazprom has recently made no secret of its desire to make major investments in the European electricity sector, especially in Germany. Gazprom has long dreamed of acquisitions that would bring it closer to end-consumers. Its interest in Germany’s power market also reflects its eagerness to fill the hole resulting from the accelerated phase-out of nuclear power plants. Gazprom reckons that Germany needs to invest 10 billion euros to build gas-fired replacements — and is more than happy to lend a helping hand. That, of course, would increase Germany’s future demand for Russian gas.
From RWE’s point of view, a big investment from Gazprom would help address financial woes that have seen its share price plummet by 28 percent year-to-date. Heavily-endebted RWE is struggling to fund an $18 billion capital investment programme in greener power generation. A strategic investor such as Gazprom could help shoulder the costs.
But it’s a bigger question whether a deal also makes sense for Germany. There’s a risk that with Gazprom as a strategic investor, RWE may not treat other suppliers even-handedly. In any case, Germany needs to be cautious about any deals likely to increase reliance on Russian gas, which already accounts for 40 percent of German consumption. It’s no coincidence that Germany’s average gas price is among the highest in Europe – double the level for industrial users of the more competitive UK market. Gazprom’s major European customers, including RWE, are losing patience with Gazprom’s stubborn insistence that contract prices remain linked to soaring oil prices.
Perhaps a quid pro quo is in the works, whereby Gazprom would bend over price, in return for being accepted as an investor? There has been little indication so far that Gazprom has changed its mindset. It continues to resist significant changes to its inflexible pricing formula.
That means Germany’s energy companies and their investors should ask whether it is really in these firms’ long-term interests to develop closer ties with such a difficult partner. Competition regulators, meanwhile, should give any tie-up close scrutiny.
Bank of Moscow exposes Russian regulatory void
By Jason Bush The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
The $14 billion rescue of Bank of Moscow shows that something must be badly wrong with bank supervision in Russia. The bailout amounts to almost half the assets of the country’s fifth-largest bank. Reforms are urgently needed. But new laws alone won’t eradicate the cronyist culture at the root of the mess.
Officials say the record bailout is needed because the ex-management of Andrei Borodin, an ally of disgraced Moscow mayor Yuri Luzhkov, blew billions of dollars by lending it to companies affiliated with management – or simply siphoned it offshore. Borodin now lives in exile in London.
While the scale of the losses is astonishing even by Russian standards, the underlying causes are not. The debacle comes just months after the collapse of another politically connected bank, mid-sized International Industrial Bank, exposed similar lapses in regulatory oversight. In typically complacent fashion, most analysts dismissed that bank’s collapse as a one-off.
In fact, the risky related-party lending in which both banks engaged is commonplace. Last year, ratings agency Moody’s estimated such loans at around 10 percent of the sector total and 50 percent of bank capital. This is allowed by current Russian regulations, and is twice as high as what’s practiced in the Middle East, or five times higher than in Central Europe. One obvious lesson is that Russia needs to introduce tighter restrictions on such lending. Loans to related parties are typically restricted to 20-30 percent of tier one capital in western Europe.
The debacle also underscores the urgency of proposed new rules that would give the central bank greater powers to investigate companies that are affiliated to banks, and make bank shareholders liable in the event of asset stripping.
But new rules will mean little unless they are enforced. This will long be the main problem in Russia. Russian bank failures usually have political causes: well-connected banks often have more clout than regulators. In this respect, the recent expansion of state banking giants, such as Kremlin favourite VTB, may ultimately make matters worse. Russia’s latest banking fiasco is unlikely to be the last.
Breakingviews-Bank of Moscow exposes Russian regulatory void
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By Jason Bush
MOSCOW, July 5 (Reuters Breakingviews)- The $14 billion rescue of Bank of Moscow shows that something must be badly wrong with bank supervision in Russia. The bailout amounts to almost half the assets of the country’s fifth largest bank. Reforms are urgently needed. But new laws alone won’t eradicate the cronyist culture at the root of the mess.
Officials say the record bailout is needed because the ex-management of Andrei Borodin, an ally of disgraced Moscow mayor Yuri Luzhkov, blew billions of dollars by lending it to companies affiliated with management – or simply siphoned it offshore. Borodin now lives in exile in London. While the scale of the losses is astonishing even by Russian standards, the underlying causes are not. The debacle comes just months after the collapse of another politically-connected bank, mid-sized International Industrial Bank, exposed similar lapses in regulatory oversight. In typically complacent fashion, most analysts dismissed that bank’s collapse as a one-off.
In fact, the risky related-party lending in which both banks engaged is commonplace. Last year, ratings agency Moody’s estimated such loans at around 10 percent of the sector total and 50 percent of bank capital. This is allowed by current Russian regulations, and is twice as high as what’s practiced in the Middle East, or five times higher than in Central Europe. One obvious lesson is that Russia needs to introduce tighter restrictions on such lending. Loans to related parties are typically restricted to 20-30 percent of tier one capital in western Europe.
The debacle also underscores the urgency of proposed new rules that would give the central bank greater powers to investigate companies that are affiliated to banks, and make bank shareholders liable in the event of asset stripping.
But new rules will mean little unless they are enforced. This will long be the main problem in Russia. Russian bank failures usually have political causes: well-connected banks often have more clout than regulators. In this respect, the recent expansion of state banking giants, such as Kremlin favourite VTB, may ultimately make matters worse. Russia’s latest banking fiasco is unlikely to be the last.
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