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Monthly Archives: October 2012

According to reports in the media, the Sistema holding company is on the verge of closing a deal to acquire 100 per cent of Rotterdam-based Argos Group, an independent group in the downstream oil market in Europe, subject to the results of a due diligence.

Argos Group was founded a year ago from a merger of North Sea Group and Argos Oil. It has estimated revenues of approximately USD 14 billion a year.

Sistema already has exposure to the oil business through its ownership of Bashkortostan-based Bashneft and Russneft. The deal could generate synergies for Sistema, as it could subsequently export oil to Europe through Argos, thereby cutting out intermediaries.

As reported by Reuters (31 October 2012), Richard Branson’s Virgin Group has formed a USD 200 million investment fund together with Russia’s state-controlled nano-technology corporation Rusnano. The VGF Emerging Market Growth fund will invest in mid-cap companies operating i the resource efficiency, consumer sustainability and renewable energy sectors.

Branson also says that Virgin Group may end up investing about USD 1 billion in Russia and stresses the company’s aspirations to establish a mobile phone company in Russia.

 

As reported in the most recent report from the World Economic Forum issued in October 2012, Moscow still ranks 39th in a list of international financial centres, the same position as last year. Moscow ranked worst as institutional environment (59th), banking financial services (58th) and financial access (50th).

According to the report, Moscow is held back by some continuing negative perceptions, with Russia allegedly still “plagued by a weak institutional environmenta, with weaknesses identified in a number of areas, including “corporate governance, legal and regulatory issues, and financial sector liberalisation.”

So while the politicians may talk the talk, nobody is being taken in. If the Kremlin wants the situation to change, it will have to do something about rampant corruption and the poor state of the judicial system, which is so derided by even Russian citizens that they prefer to stipulate arbitration in other jurisdictions for disputes and to litigate more and more frequently in the UK.

Meanwhile financial liberalisation will require even more change: it is clear to all but the short-sighted that the Russian stock market is not representative of real interest in blue chip shares, given that most companies are still either state-controlled or controlled by various oligarchs to such an extent that the percentage of shares on sale on the market rarely exceeds 10 per cent of the total number of shares – in the rare exceptions this is due to the fact that  25 per cent of such a company is already traded on a European stock exchange.

So the Potemkin “democracy” is accompanied by a similar artificial financial centre. Unfortunately, if the authorities want that to change, they will need to introduce real reforms to persuade Russian companies to list in Russia – expecting the world to pay lip service may work when it comes to politics, but global investors will expect at the very list some level of financial transparency.

As reported in the Russian media, on 31 October 2012 the Federation Council, the upper house of Russia’s Federal Assembly, approved amendments to the law on treason that effectively makes virtually any interaction between Russian citizens and international agencies, such the Organisation for Security and Cooperation in Europe, Amnesty International and Human Rights Watch, a treasonable offence.  A number of international organisations have already taken the hint and shut up shop. Naturally such developments are negative for investment, signalling as they do that independent thinking is tantamount to betrayal.

So now it will become even harder to criticise the powers that be. The Kremlin may believe that it has now found a way to silence all opposition to its policies and thereby pacify the population through continual propaganda on state TV channels. However, this will merely push the protest movement underground and brings back memories of the Soviet Union and double speak, with the people spouting the party line in public, but the truth back home in disputes and discussions in their kitchens.

And as everyone knows, the Soviet Union collapsed like a deck of cards, luckily without significant bloodshed. The next time round could prove more bloody, as protesters have seen how former Soviet citizens have exploited the system to the benefit of a few and the detriment of the majority.

So President Putin should think twice before signing such amendments to the law. Surely it is better to know what people think and thereby release the tension, rather than to  seek to silence opposing voices and thereby legitimise protest in the people’s eyes?

The much maligned former head of RAO UES Anatoly Chubais, who played up the role of democrat under President Yeltsin and morphed into a leading government figure under President Putin, before accepting a cushy position as head of Rusnano, a state corporation tasked with investing in nanotechnologies, appears to be hedging his bets.

In an interview with Itogi magazine in October 2012, Chubais said that the protest movement, which erupted after the falsified parliamentary elections in December 2011, only to go to ground after the presidential elections, was not dead and that on the contrary it was merely slumbering and would rise with new strength, with future protest meetings attracting up to half a million people.  He also intimated that demand for political transformation and the reaction of the powers that be would play a decisive role in Russia’s future development, adding that a middle class has been formed in Moscow, St Petersburg and Ekaterinburg, but lacks clear leaders.

Chubais did not go any further, so he is clearly hedging his bets. He has in the past harboured political  ambitions, leading as he did the United of Rightist Forces in the 1990s until 2003, before focusing on completion of the reforms at the electrical power monopoly RAO UES until 2008, whereupon he was appointed to Rusnano.

If he still harbours political ambitions, then he would clearly love to lead such a protest movement of a burgeoning middle class and might well understand their concerns and demands. However, he would clearly have to demonstrate independence from the powers that be and criticise the Kremlin.

It remains to be seen whether Chubais is ready to make such a break.

Oligarch Mikhail Prokhorov, who has amassed a fortune worth an estimated GBP 8 billion fortune, has this time declared himself as a politician. At a congress of his Civic Platform party in the last weekend of October 2012, the oligarch said that he would put his fortune in a trust fund and entrust his investment vehicle Onexim Group to oversee his assets in a number of sectors, including mining, financial services and the media.  It remains unclear when this will happen though.

This is not the first time that Prokhorov has made forays in politics. He first campaigned for some kind of political role in the run-up to the parliamentary elections in 2011, with the apparent backing of the Kremlin and favourable TV coverage, only for the publicity and support to evaporate when he mistakenly believed that he could outline the problems facing the country, including corruption and political inertia and citing by contrast the success of much maligned neighbour Georgia.

As a result he was cut back to size. He was then allowed to run in the 2012 presidential elections, provided that he did not criticise the current leadership, a promise that he kept. Despite the significant amount of funds spent on his campaign, he came a distant third, attracting 8 per cent of the vote.

If Prokhorov is going to raise his status nationally, he will have to demonstrate his independence and be overtly critical of the powers that be. It will be interesting to see if he will be ready to make this move, as this will indicate whether he is still a pawn of the Kremlin – part of some game to show the west that Russia has an independent opposition -or is ready to break out on his own, regardless of the consequences.

As reported by Reuters on 29 October 2012, Gazprom has decided to reduce its current dependence on European gas markets by focusing more on Asian markets, as demanded by President Vladimir Putin. Gazprom CEO Alexei Miller duly told Putin on Monday that Russia’s gas export monopoly would be investing an estimated  RUB 770 billion (approximately GBP 15 billion)  in the construction of a 2,000 mile pipeline from its Chayanda gas deposit to Vladivostok. with completion scheduled for 2017. Gazprom has already announced plans to build with Japanese companies a liquefied natural gas plant by 2020.

While these appear to be wise moves at present, provided that shale gas doesn’t become prevalent, as was the case with a previous targeted export market (the USA), the actual cost remains unclear, as in the past Gazprom’s estimates have been wide of the mark, due in no small part, no doubt to the various backhanders and other corrupt practices involved in the process.

At the same time, politics will play a role going forward, as the mutual suspicions of Russia and China are likely to continue going forward.