Private equity and the Russia-Georgia conflict

August 15, 2008

PE Hub’s Dan Primack has an interview with Michael Bleyzer, CEO of Ukraine-based private equity firm SigmaBleyzer, on the impact of the Russia-Georgia conflict and investing in the former Soviet Union.

Dan: Is there much of a private equity market in Georgia?

bleyzer.jpgMichael: I’m not aware of anyone activity investing there, although that doesn’t mean there is nobody. It’s a very small market with just a few real sectors for private equity. There’s some energy with hydroelectric you could do, and maybe something in food.

I went there before Saakashvilli became president, and met with the previous one. I liked the country but just couldn’t find things to do there. My general thought was that small markets on their own are difficult, and this was one with political worries as well.

Dan: You invest in Ukraine. Any worries about your business there, given the speculation that it could be where Russia goes next?

Michael: We invest not only in Ukraine, but also in Khazachstan – and all of that is going to be impacted to some extent by what’s going on. But I don’t see an immediate danger to Ukraine, because it is a much bigger country than Georgia… Its population is one-third of Russia’s. Also, Crimea is not technically a disputed area, like South Ossettia is in Georgia.

But what’s happening right now in Georgia is why I’ve never felt comfortable investing in Russia, and have never done so. I’ve got lots of friends who’ve made money there and I was tempted, but was worried that the minute I go in something like this would happen.

Dan: So you think Western PE investors in Russia are in trouble?

Michael: It’s more that they’re stuck. I’d advise them to stay away from certain sectors that are particularly vulnerable to political or oligarchic influence, and just stay beneath the radar screen. The Russian economy as a whole will do fine so long as we keep using oil and gas, and some investors will continue to make money there, but it’s a very difficult situation. Russia has a clear goal of expanding its regional sphere of influence, and is winning that fight while the U.S. and the West is losing it. That means that there could be major pressures on Western investors.

Dan: Is the reason you don’t invest in Russia more one of personal morals or one of economic interest?

Michael: It is a bit of a moral issue, but on the purely economic side I think the risk is higher than the rewards I can get there. If I can get similar returns elsewhere and have the choice, I choose not to take the risk.

4 comments so far | RSS Comments RSS

He thinks Ukraine is a better investment than Russia. Odd! It looks like someone needed a negative report on Russia. Credit Suisse came out and said the opposite, “….investors have taken too conservative a view on Russian market risk ……valuations look compelling…. On the South Ossetia conflict, he says that fundamentally Russia’s economy and infrastructure will not be affected”. Vladimir Savov, strategist at Credit Suisse, August 11, 2008

Posted by Perspective | Report as abusive

He is not talking about any effect on the economy or on infrastructure in Russia as a result of the war. Rather, I believe, he is talking about a high political risk, especially in industries that are strategic for Kremlin – oil, gas, high tech, etc (remember Yukos). In fact, earlier this year Russia adopted a new law limiting foreign ownership of companies in strategic industries. The law effectively limits foreign ownership in more than half of all Russian companies.

Posted by Andriy | Report as abusive

I’d say Russia is safer for private equity than Ukraine or KazaKhstan (I can’t believe Reuters misspelled it!). I’m not saying that it’s safe, though.

Posted by SRG | Report as abusive

Khazachstan is a German way of spelling it i believe. Anyway, apart from risks, as Mr Bleyzer noted NOT all FSU economies are quite “investable”. OK, energy -metals keep drawing an interest but hey, (1) look at commodities prices – Does anyone believe they will keep climbing in the next 2 to 3 years? and (2) governments in those nations are no longer going to allow foreigners grab big stakes in projects like Tengiz or Udokan. Real estate? pfffffff.. This makes me wonder if PE bankers are betting on consumer markets in the region?? Kaz is a nation of 15 million with majority still living below the poverty line. and this said Kazakhstan is the richest in CA..

I live in Astana (moving to study in London this year) and hear a lot about PE funds expanding into the country. Not that I am negative on my country, just trying to understand what sectors PE funds target in the country and how big their investments are.

It is also interesting that Kazakh billionaires on opposite are looking to invest abroad – like Vernyi capital. Not sure if thats a diversification effort as reportedly they keep existing Kazland.

Do we locals underestimate our own potential?

Posted by Ali, LBS student | Report as abusive

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