Page 14 - IFR Opportunities in Russian capital markets

CHAPTER 01
ifrintelligence reports/Opportunities in: Russian Capital Markets
Table 1.2: Russian GDP growth by sector, 2006 (% y-o-y)
Construction 14.0 Fishing 12.0 Hospitality 11.2 Financial services 10.4 Transport and telecommunications 9.4 Trade 8.7 Real estate 5.6 Administrative and military spending 5.0 Manufacturing 4.9 Healthcare and social services 3.8 Electric power, natural gas and water 2.6 Mineral resources 2.1 Education 1.8 Agriculture, hunting, forestry 1.7
Source: Rosstat
Russian oligarchs and the Kremlin's nine commandments for big business
Among the first things President Vladimir Putin did on taking office in March 2000 was to attack oligarchs Boris Berezovsky and Vladimir Gusinsky, driving both into self-imposed political exile. In July he called the first of his so-called oligarch meetings and laid down the informal rules by which oligarchs could retain their companies and work in his Russia.
For the next three years oligarchs were nervous, afraid that they too would come under the Kremlin's scrutiny and lose their assets; fears that were only reinforced when the tax authorities arrested Yukos oil company owner, Mikhail Khodorkovsky, and eventually bankrupted the company and jailed Khodorkovsky for eight years.
At the time, it appeared that the Kremlin was about to launch a pogrom against the oligarchs, but in hindsight it appears more likely that Khodorkovsky was simply being punished for interfering in politics.
Between 2004 and today, Putin has held several more meetings with the oligarchs and the rules have become very clear. The Kremlin has moved beyond simply leaving the oligarchs in peace if they keep their noses out of government affairs, to actively co-opting them into its long term strategy to make Russia a ‘great power’ again.
One-on-one meetings between Putin and business leaders have become a regular feature of big business life, where the owners ‘explain’ their strategy to Putin. According to off-the-record remarks made by businessmen at these meetings, Putin has vetoed initial public offering (IPO) plans but will throw the weight of the Kremlin behind any oligarch who wants to buy assets such as phone companies in other countries. The idea is to create a series of Russian national champions on the global, not just national or regional, market.
State involvement
The Kremlin has not only deliberately blurred the line between business and politics, but Putin is attempting to remove it altogether. Russia is unusual in that senior government officials sit on the board of nearly every significant state-owned company. In the same way the one-on-one meetings with Putin give the president a de facto say in the running of almost all of Russia's two dozen significant private corporations, the Kremlin is attempting to turn the concentration of assets in the hands of the Yeltsin-era oligarchs to its advantage, and so far the projects the state is pushing the oligarchs at havae been profitable and to their mutual advantage.
A concrete example is the state's fluffed attempt to place US$8.8bn worth of Sberbank shares at the start of 2007. The marketing campaign was botched and CEO Andrei Kazmin confused investors with a series of con- tradictory remarks in the run-up to the sale. In the end, the Kremlin was forced to turn to the oligarchs to bail out the flotation, who spent an estimated US$4bn on shares.
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