According to the most recent reports, the posthumous trial of Sergei Magnitsky, who died while in police custody, has been delayed further to a request from the defence for more time. What defence you ask? Well obviously defence attorneys selected by the state, so you can be assured of their objectiveness….

It beggars belief that President Putin, Prime Minister Medvedev and other cronies would want to raise the spotlight on one of the most blatant instances of state corruption, when various state officials, including from the police, scammed tax payments to their benefit and then laid the blame with a foreign investor. Magnitsky had uncovered the crimes, only to be arrested on trumped-up charges and to die in mysterious circumstances in prison.

Medvedev, who was President at the time, promised to look into his death and to punish those responsible. Nothing has happened since. This led to sanctions on travel imposed by the USA against various Russian politicians

And now in response, the Russian authorities have decided to try a Russian citizen who died in police custody in Russia, an individual who had uncovered corruption, a well educated lawyer trying to make things better for everyone in Russia, representing a foreign investor (Hermitage Capital).

You would have thought that the Russian authorities, the Sechins of this world, would want to put this episode behind them. You would have thought that the powers that be in Russia would understand the adverse impact on Russia and the country’s investments.

You would have been wrong. This regime doesn’t care. The various clans in power have already stolen so much that they really don’t care what happens to Russia – they have already got their escape routes should they be required, buying property in Florida, the UK, France, Germany, Italy, Spain, Greece.

If they did care, they wouldn’t try a dead man who was killed by the regime.

According to Russian business daily Vedomosti [12 November 2012), the Ministry for Economic Development has submitted a forecast on Russia’s socio-economic development to 2030. According to two versions of the forecast – innovation-based and forced, Russia may overcome the historic gap with the developed world both technologically and in terms of living standards by 2030, with oil & gas accounting for most of exports, with science and knowledge and not production serving as the basis for revenues.

According to Deputy Minister for Economic Development Andrei Klepach, the implementation of large-scale development projects will change the shape of the economy. He claims that this will not require any new innovation, but simple implementation of existing government programmes.

According to these scenarios, Russia will grow more rapidly than the global economy (4.1 or 5.4 per cent per annum from 2013-2030, compared to global growth of 3 per cent). GDP per capita will increase by 2020  from almost 60 per cent of the level of the eurozone to 78-87 per cent, and increase the European level by 2030 and will be 10 per cent less than in the USA.

Klepach admits that this can only be achieved if budget rules are alleviated. Interestingly, the Organisation for Economic Cooperation and Development issued a forecast on the global economy to 2060, which indicates that Russia will not reach European levels, owing in part to the ageing of the population.


According to an article in the Russian business daily Vedomosti on 6 November 2012, the state is increasing its control of Russia’s economy. The article is based on a BNP Paribas report authored by Yulia Tseplayeva and Yury Eltsov. In 1998-1999 the state controlled 10 per cent of the oil production sector. This has risen to 40-45 per cent (and will probably be higher after the closing of the TNK-BP acquisition by Rosneft).

The state also accounts for 49 per cent of the banking sector and 73 per cent of the transport sector. Even according to data from the Ministry for Economic Development, the state accounts for up to 50 per cent of GDP, compared to a global average of 30 per cent.

Rosneft and Gazprom are key players in this game where the state accumulates an increasing share of the economy. In fact in some cases they appear to be discharging the state’s social policies, with Rosneft investing up to USD 1 billion a year in social projects in areas where it operates.

Meanwhile Gazprom is a major investor in the 2014 Sochi Olympics and also spent RUB 300 billion on the APEC Summit.

Meanwhile in banking (putting to one side Gazprom’s banking interests), VTB owns a real estate company (Hals-Development), while Russian Railways came to the rescue of KIT Finance in the banking crisis.

it goes without saying that the increasing state control of the Russian economy is having an adverse impact on investments, as the rules of the game are changed and competition favours companies with state guarantees and political assistance, and other forms of leverage.

As reported in Russian business daily Vedomosti (2 November 2012), the growth in the banking system has slowed significantly in 2012 – according to the September statistics of the Central Bank, corporate loans have increased by only 10 per cent since the start of the year (compared to 18.6 per cent in the first nine months of 2011). Growth in corporate deposits is also down – 4.6 per cent compared to 20.1 per cent in the same period last year.

Bankers asked by the newspaper say that the situation stayed the same in October as well. Companies are reluctant to take out loans, while the level of corporate bond issues is insufficient to influence asset growth.

The bankers point to a liquidity shortfall. Banks are also cutting lending as it becomes harder to generate a profit from the business, with the Central Bank setting more stringent requirements on risk assessment.

Everything appears to indicate that the economy is stagnating, as can be seen from the behaviour of corporate borrowers, with loans taken out primarily by trading companies.

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.


As reported by UNCTAD (United Nations Conference on Trade and Development) on 23 October 2012, foreign direct investments into Russia contracted by 39 per cent in the first half of 2012 to USD 16 billion compared to the same period in 2011.

According to the audit and advisory firm KPMG, globally M&A transactions are down to their lowest level since 2005.

So in the circumstances, the abrupt volte-face of the Kremlin and Russian government to back BP’s exit from TNK-BP and deal with state-controlled oil & gas behemoth Rosneft makes more sense. The Kremlin is desperate for some good news about investment, desperate for someone to praise its attitude to foreign investors. That was not going to happen as long as it allowed BP’s partner in TNK-BP, the AAR Consortium, to constantly undermine one of Russia’s biggest foreign investors and company that has expertise needed by Rosneft.

So now BP can be the figurehead for a campaign to promote investments in Russia and can also be expected to toe the line with Rosneft, as it has a minority interest and needs to build up its reserves.

According to business daily Kommersant, new statistics from Rosstat [Federal State Statistics Service] released on 15 October 2012 demonstrate that industrial growth has been slowing, which would appear to indicate that any growth can be attributed to the oil sector, and first and foremost to high oil prices.

The statistics provide further clear signs that consumer demand is tanking and that demand would appear to have driven in part in the second quarter of 2012 by abrupt growth in consumption by the state (up by 1.1 per cent).

High oil prices have adversely impacted growth by raising company costs and leading to cutbacks on the investments required for to promote development and boost the Russian economy.

It would appear that only state investments (net of erosion attributable to inevitable corruption costs) could alter the picture.