Russia feels the pain as investors take flight

By Catherine Belton in Moscow - FT

The re-emergence of Vladimir Putin as Russia’s political supremo failed to prevent the country’s markets being buffeted by the global financial turmoil on Monday, with the pressure only set to intensify after the sudden dismissal of the country’s finance minister and leading fiscal hawk.

The rouble fell just more than 1 per cent in morning trade to its lowest rate against the dollar since August 2009, and analysts predicted no end to the capital outflows that have grown to more than $70bn over the past year.

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While the rouble’s slide is seen as mainly connected to global woes, bankers said the downward spiral would strengthen after Dmitry Medvedev, the current president and Mr Putin’s would-be prime minister, sacked Alexei Kudrin late on Monday. Open warfare had broken out over his refusal to work under Mr Medvedev in a future cabinet.

Furthermore, Mr Putin’s imminent return to the top spot in Russian politics is dimming hopes among a section of big and middle-level business for greater competition, kindled by Mr Medvedev’s economic reform plans. Despite expectations that Mr Putin will seek to present a more liberal image, fears prevail that the country is now on course for economic stagnation and continued crony capitalism that has benefited Mr Putin’s friends and allies.

“Kudrin’s departure is just another brick in the wall separating Russia from investors, and that wall is getting higher,” said Steven Dashevsky, the head of an investment fund.

Even though Mr Kudrin has won plaudits from investors for his fiscal conservativism, lately he has been unable to prevent excessive state spending and the growing crony system, Mr Dashevsky said. “Now for rational investors there are just not that many reasons to invest in Russia any more,” he said.

“The capital outflows will not weaken as the biggest part of the business community does not have much faith in Putin’s economic policies and no one ties their hopes with him significantly improving the investment climate,” said Sergei Aleksashenko, a former deputy central banker.

“The country is going down the toilet,” said one senior western banker.

The country’s growing urban middle class could join big business in voting with their cash, analysts said.

“The worst thing is that the middle class, which should be a new driver of growth for the Russian economy, is now starting to take capital out of the country too,” said Yulia Bushueva, head of an investment fund at Arbat Capital, a Moscow investment bank.

“This used to be the prerogative of the oligarchs. But now the middle class are looking to buy property abroad and educate their children abroad. They don’t see much future in their country.”

A recent survey by the independent pollster Lev­ada suggested that 22 per cent of Russia’s adult population wanted to emigrate, compared with 7 per cent in 2007.

Fearing stagnation, some better-known names in Russian big business have quietly been seeking to transfer assets to safer havens.

Mikhail Prokhorov, the country’s third richest man who, until recently, spearheaded the push for liberal party representation in parliament via his leadership of the Right Cause party, this year secured a London listing for his Polyus Gold miner. Together with Oleg Deripaska, he also last year won a Hong Kong listing for the UC Rusal aluminium giant controlled by Mr Deripaska.

Behind the scenes, a group of oligarchs was “clearly backing Medvedev to remain as president”, said another senior banker. “Plan B was for him to stay on as prime minister.”

As a result of Mr Putin’s return to the presidency and an expected shake-up in government, “there are going to be winners and losers,” said a third senior western banker. “There are some oligarchs who are going to have more issues than others.”

Among this group could be Viktor Vekselberg, one of the billionaire owners of TNK-BP, the Russian oil venture half-owned by BP, and a big stakeholder in UC Rusal, who heads a Medvedev initiative to build Russia’s version of Silicon Valley in Skolkovo, the banker said.

Mr Deripaska too had appeared to hope that a raft of corporate governance reforms being prepared by Mr Medvedev would help him in his battle for control of Norilsk Nickel against rival metals tycoon Vladimir Potanin. Though no one expects any of these oligarchs to be attacked over their tacit support of Mr Medvedev, their positions could be weakened.

The position of Igor Sechin, the energy tsar, who had appeared to be under fire in Mr Medvedev’s corporate governance drive amid great rivalry between the two men, is now likely to remain strong, analysts said. Even if Mr Sechin loses his post as deputy prime minister, he could take an equally powerful one in Mr Putin’s new Kremlin administration.

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Putin’s business allies

At least one class of Russian big business has been celebrating following news that Vladimir Putin will be the ruling party’s candidate for the presidency, writes Catherine Belton. Even as Mr Medvedev attempted to pursue plans for a liberalisation of the economy, over the last four years a coterie of businessmen with close ties to Mr Putin have seen their fortunes surge.

This group is led by Gennady Timchenko, a close Putin ally from St Petersburg whose Gunvor oil trading group rose from niche player to become the world’s third biggest with an annual turnover of $70bn during Mr Putin’s presidency. In the last four years, Mr Timchenko has expanded his empire into holdings in a fast growing independent gas producer, sea ports and coal mines, as well as control over gas pipeline construction firm Stroytransgaz. The group denies its rise is connected to Mr Putin’s position.

Others in the group include Arkady Rotenberg, the head of a St Petersburg judo club founded by Mr Putin and owner of Stroygazmontazh, an energy services firm, and Yury Kovalchuk, the head of St Petersburg bank Bank Rossiya and a former neighbour of Mr Putin’s.