More funds leave Russia as state tightens control

According to Russian business daily Kommersant (27 October 2012),  the week ending 24 October witnessed the withdrawal of a further USD 32 million from funds investing in Russia and other CIS countries. Since the start of October 2012 over USD 100 million have been taken out of the CIS.

By contrast other emerging markets attracted in the same week USD 2.65 billion and almost USD 5 billion since the start of October, highlighting further the declining interest in the Russian market. The situation hasn’t been helped by a slight fall in the price of Urals crude to USD 107 per barrel.

While the Kremlin had hoped that the apparent resolution of the TNK-BP conflict between the AAR Consortium and BP would indicate that investors could expect some form of protection from the Russian state for investments, the de facto elimination of a private company, with the impending elimination of TNK-BP once state-controlled Rosneft completes the purchase of the JV from the AAR Consortium and BP, has been perceived as further expansion of the Russian state.

Such a view has been bolstered by the recent announcement that the privatisation of state-controlled bank VTB would no longer involve the sale of a state shareholding, but would instead be performed through an additional share issue. This reflects the fact that the state has no plans to cede control of the financial sector despite recent claims from government officials that the state would be reducing the influence of the state and state companies in the Russian economy.

Even the statement from President Vladimir Putin that he had misgivings about the BP-Rosneft deal, perceived by some as a sign that the President was in favour of the continued existence of TNK-BP as a private enterprise, can also be interpreted from another angle: the Kremlin wants Rosneft to become a trailblazer for the Russian economy globally, but as a company run and virtually 100 per cent controlled by the state: now, however, BP will be playing a bigger role in its management and operations. Hence Putin’s misgivings.

If the Kremlin wants to attract foreign investment to the economy, it will either need to privatise more companies or offer better terms and conditions for investors in Russia, above all greater protection at a time of uncertainty. That means follow up constant talk about fighting corruption with actual deeds and the elimination of the concomitant bureaucratic chaos adversely affecting investments. And also creating a truly objective justice system and investing in infrastructure, as the country’s oligarchs haven’t shown any readiness to do so. Above all, investors want something that Putin has promised for years, but has yet to deliver: clear rules of the game for everyone, and not the chosen few.


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