#24 - JRL 2006-212 - JRL Home
From: "James Beadle" <jamesdbeadle@yahoo.co.uk>
Subject: The Snakes and Ladders of Investing in Russia
Date: Fri, 22 Sep 2006
Basic economics teach us that the most successful countries are those that provide long-term stable and transparent business climates, where the rules are clear, fair and uniformly applied.
Every time that Russia reneges on an international deal, or takes extra-judicial measures to control or eliminate a domestic business, it goes back to square one in the effort to build such a long-term track record. This is what Illarionov spoke of when he talked about Russia choosing to the third world road in its action against Yukos. It was a reference to the erasing of Russia’s post crisis track-record, which had developed considerably over the first four years of Putin politics (199-2003).
Those supporting the decisions that reset Russia’s track-record cite the need to restore order to the playing field before such long-term achievements are possible. There is increasing concern, however, that these decisions are driven more by individual greed and ego, rather than by interest in the public good.
Russia is today comprehensively revising its existing oil and gas development contracts, the largest and most important foreign investments in the country. In doing so, it is penalising the first companies that were courageous enough to put their faith in Russia. Such action is only possible in an environment of cheap money, where more and more players are demonstrating an interest to enter Russia.
The Putin administration mistakenly believes that either the flow of investors coming to Russia will never end, or that greed will always conquer disappointment, so that those being punished today will be back for more tomorrow.
International businesses are not so naïve, any investment they make is motivated by a clearly quantified risk-return ratio. The concept of revisiting this ratio ex post is not consistent with capitalist economics.
Russian oil and gas companies have neither the means nor the interest to develop the nation’s vast resources alone, but current policy risks isolating the country to the extent that they may have to.