Foreign Investors Flee Putin’s Russia

Since August 6th when Russia invaded Georgia in a wanton act of imperialist aggression, the Russian stock market has lost a stunning one-sixth of its  total value

Since August 6th when Russia invaded Georgia in a wanton act of imperialist aggression, the Russian stock market has lost a stunning one-sixth of its total value

Investors Business Daily reports:

In contrast with the West’s otherwise tepid response to Moscow’s new nationalism, one group has taken a tough stance — investors, who are leading the march out of Russia’s markets.

On Friday, Russia’s central bank announced that its foreign currency reserves — a key part of its economic stability and an indicator of foreign investor support — had plunged $16.4 billion in the most recent week, to $581.1 billion (see chart).

Until Russia’s move into Georgia, there seemingly had been only massive capital inflows, thanks mainly to the rising price of oil, which makes up 20% of Russia’s gross domestic product.
Now, it seems, investors are fed up with the rampant militaristic nationalism, red tape, corruption and anti-investor sentiment in Vladimir Putin’s Russia. Some have decided to head for the door and take their money with them.

Last week’s decline was the largest since Russia’s 1998 currency crisis, which led to a collapse of the ruble and rampant triple-digit inflation. So far this time, there’s no major visible impact on Russia’s economy. But if the flow of money leaving Russia turns into a flood, it could send Russia’s markets into a tailspin, creating massive problems for Prime Minister Putin and his handpicked president, Dmitri Medvedev.

No doubt, foreign investors weren’t cheered by another signal sent by Russia’s regime last week. Without comment, Russian authorities decided to keep oil tycoon Mikhail Khodorkovsky, whose biggest crime seems to be he became Putin’s political foe, in prison — despite his being eligible for release.

Any continued movement of capital out of Russia could prove disastrous. As we noted above, Russia really is a hollow economy, its growth kept afloat by soaring oil prices and a commodity boom which have both boosted investment in Russia and made its overall economy look much better than it is.

In fact, Russia is an economic nightmare in slow motion. Due to poor health care and widespread alcoholism, its population is declining by 500,000 a year — a trend that’s expected to accelerate in coming years. Inflation is revving up again, after declining for several years, and now is growing at about a 14% yearly rate — and rising.

Moreover, data from the European Bank for Reconstruction and Development show that, despite the oil-fed boom, Russia’s GDP per capita is just 2% above where it was when the Berlin Wall fell.

That means, essentially, there has been no growth at all for 20 years. Of the 15 former Soviet republics that got their freedom after the collapse of communism, 11 are growing faster than Russia.

This is Russia’s big vulnerability under Putin. With oil prices falling, Russia’s reserves will come under more pressure — and the import boom that has kept the new class of Russian oligarchs happy will come to a screeching halt.

This year, foreign investment is expected to fall for the first time in six years — just as lower oil prices kick in. Russia could be in real trouble, and it couldn’t happen to a nicer regime.

Putin needs his hard-currency earnings from oil sales to bolster his military. With grand designs on controlling key choke points in the world economy via a revived Russian military, he’ll need lots of money in the coming years.

Can he do it? Without a sustainable economy, it’s doubtful. With just twice as many people, the U.S. economy is 29 times as large as Russia’s. There isn’t an area of technology we’re not ahead in. Russia will spend about $31 billion this year on defense, and has planned a $189 billion, 5-year expansion. Even so, that’s about what the U.S. spends in five months.

Based on its demographic implosion and lack of a non-oil economy, our guess is Russia is in for a rough couple of decades, not the boom times many have predicted. If foreign investors keep looking for the exits, Russia’s good times may be over for good.

Putin may seem menacing now. But he’s likely to discover the same thing Mikhail Gorbachev did — no matter what he does, he’s still going to be too far behind the U.S., both militarily and economically, to challenge us. He’d be better off worrying about China.

6 responses to “Foreign Investors Flee Putin’s Russia

  1. If this is confusing to your loyal russophiles, I’ll try to explain it in simple terms.

    If I am a foreign investor, doing bussiness in your country. The moment that I have to worry about the state abdicating my company, I will move, at any cost in order to secure the feasability of continued opperations.

    If I am a big business owner I am grateful to you for increasing my market share, and eliminating my competition.

    While you are stifling small bussiness, I have the resources to move somewhere that is a little more bussiness friendly(ie. lower taxes).

    There are many eager countries that will entice them with lower taxes. In effect, Creating jobs for for the “proletariate”. Of course they are not greatful, because everyone has to complain about something.

    You can whine and complain about loyalty, but I was a foreign investor, and you tried to screw me.

  2. Sean, even as foreign investors shy from Putin’s KGB credentials, they continue to eye the incredible pool of oil and natural gas residing beneath the Siberian permafrost. I’ve never met a businessman–American or otherwise–who’ll freely turn down a potential surplus dollar simply because of politics. Particularly in a world which the U.S. wants to globalize and lead.

    I’ve a good many European friends who, while they love doing business with the U.S., are anxiously looking eastward to Russia’s record-abundance of natural resources, hoping for a slice of the pie. As so many American businessmen love to say, “It’s all about the money!”

  3. General Khlynov

    Sean, which country offers lower taxes than Russia? I mean, I’m not talking about two-bit countries with one big city and no natural resources.

    It’s not that hard to do business in Russia, as long as you are smart enough to play by the local rules, and don’t pretend – and expect – to be in America or the EU.

    If Russia is too hard for you, don’t even think about China. The BRIC countries are where the men are seprated from the boys.

    Doing business in Russia takes more than asking your consultants and accountants to compare labor costs and calculate the transportation expenditures.

    Doing business in Russia is first and foremost about being willing to take risks, big risks. If your business is not absolutely swell at home, don’t even think about going to Russia (or China) – you won’t make it.

    If you can’t handle it, please go away – there are plenty of more patient and smart foreign investors more than happy to take your place and make some serious money in the long run.

  4. I once read an interesting article in Newsweek (I think it was titled A Tale of Two Russias) in which it talks about essentially two diametrically different business environments. One being very restrictive almost 100% state controlled (de facto and de jure), the other being considerably more open and free in which investors (claim) to be able to function relatively normally. The latter, according to the article, is found is the retail, housing sector and any sector less directly related to energy.

  5. I’m confused, The Big Investor is going to buy into russia, because…

    1. russia will nationalize the industry in which I own part.

    2. russia will nationalize the industry in which I am employed.

    3. russia will nationalize any industry that Putin deems as “too profitable.”

    I see a win, but where is the other “win.”

    I’m sure that you personally benefit from Big Business, in which case you would be charged with malfeasance at the very least, general.

    A truly free market is not operated at your descretion, but it is something that will show you to be the oppressor that you are.

    In my country we have a term for people like you, “You’re the Man,” It is not a good thing.

    Merry Christmas.

  6. A wartorn investor is not going to bet on Russia simply because it’s russia.

    They will if they see a profit potential, they will most likely put money down. Once they see an overinflation of the value of that particular market, they will cash out(as we see today).

    The real value of the soviet/russian economy will be evident when investors start buying again. Can you convince me of when that will be. I’ll wait till the bottom drops out again.

    Beware of what is called a “dead cat bounce.”

    I hope this explaination was helpfull, if not, my advice is buy american. It is undervalued and has already started its upward trend. The typical 3.3% increase in american GDP is almost as large as China’s total GDP.

    I say almost as large in order to clear any inacuracy, in 2003 a 3% increase was larger than China’s GDP with a 30% increase.

    Where do you think your investers are going?

    Business friendly?

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