When Vladimir Putin took office in 2000 the entire Moscow-based press corps spent the next six months writing the same piece over and over again: “Who is Mr Putin?”
In his final years former president Boris Yeltsin sacked a string of prime ministers in short succession (usually announcing it when I — the Moscow correspondent for the Telegraph at the time — happened to be out of the country), and was on the hunt for a replacement. Putin was hand picked by the Family clique that ran the country in those days headed by oligarch Roman Abramovich, Yeltsin’s daughter Tatyana Dyachenko and her lover and head of the presidential administration Vladimir Yumashev.
At first everyone assumed that Putin was a puppet of the oligarchs who had re-installed Yeltsin in the 1996 elections, led by Boris Berezovsky who paid for much of the campaign. But as Putin began to destroy some leading oligarchs (media magnate Vladimir Gusinsky was jailed, Berezovsky fled into exile) and governors were removed en masse from the upper house of parliament, the “Putin the dictator” line rapidly emerged, led by Economist correspondent Edward Lucas and Guardian correspondent Amelia Gentlemen. This meme quickly gathered momentum, building up to the jailing of Yukos oil owner Mikhail Khodorkovsky in 2003.
My own contribution at the time was an op-ed for EIU Viewswire arguing there were two Putins: an economic one and a political one.
I could see Putin was aggressively asserting his control and ousting the same oligarchs from the Kremlin that put him there in the first place. “Putin just dumped two bodies on the table and explained to the rest the new deal,” Stephen Jennings, CEO of Renaissance Capital explained to me, talking about the famous oligarch meeting Putin quickly organised, where he collected all the oligarchs and set the new rules of the game: "keep what you have but no more stealing from the state”. (Viktor Vekselberg, who is on the US Treasury’s new sanctions list, attended this meeting as he was no Putin animal then.)
But less well reported were the radical economic reforms Putin made in parallel. Everyone knows that he introduced the low flat-tax regime that is still in place today, but he also totally made over the labour code, set up a federal treasury system that took tax collecting responsibilities away from the regions and launched a raft of other business-friendly reforms that laid the foundation for the subsequent decade-long economic boom. The steady rise of oil prices from $10 in 2000 to $150 was an additional bit of luck that made the changes spectacular.
It was impossible to reconcile these two stories (or at least my editors at the Daily Telegraph were not interested in the second one). Putin appears totally different depending on how you look at him. This “wave/particle duality” way of marrying what are two essentially irreconcilable views of Putin matured as the boom wore on in the noughties.
When the stock market started returning 50% a year, the economic Putin story gained a lot of ground in the reporting, but the political Putin was always ahead – especially after players like US investor Bill Browder were thrown out of the country and Khodorkovsky was released from jail.
A divide opened up between investors and the general public/media reporting. Investors don't care about politics. They care about profits. And it is perfectly possible to make profits in corrupt countries run by authoritarians. It’s just the risks of expropriation are higher. That is certainly true for Russia then as it is now, and the price to earnings ratio of Russian stocks has nearly always been in single digits vs the mid- to hi-teens in the other big emerging markets. It’s just the investor’s perspective on the story – their focus on the economic Putin – is underreported if reported at all.
During the current sell off I don't think I have seen one article mention the fact that international investors were heavily overweight in Russian stocks and bonds. Stocks made up 5.3% of portfolios vs the 3.5% weighting in the benchmark MSCI EM index and the spread on Russian sovereign bonds fell to a low of circa 180 basis points. That last number should shock you: it says that bond traders considered Russian bonds to be almost as “no risk” as US government bonds.
But that might have just changed. The question du jour is whether the new US sanctions imposed on Oleg Deripaska in the Specially Designated Nationals And Blocked Persons List (SDN List) is a “game changer” or not. Incidentally Deripaska is married to Yumashev’s daughter, which makes him a blue blooded Kremlin insider.
The noughties transformed Russia from collapsed basket case to an almost “normal” country with a few big problems. At the time of the 1998 crisis Russia had a total of $8bn in reserves. That is lunch money today compared to the $450bn sitting in state coffers. All the macro indicators are also nearly normal: inflation has fallen from over 2,000% to 2.4% now; unemployment from 50% to 5%; and after a decade of contraction in the Yeltsin era, GDP growth is positive albeit lacklustre. The budget used to be funded by Yeltsin twisting Gazprom’s arm to make “special” tax payments, whereas today it mostly comes from VAT and income taxes. And so on…
The biggest change has been that we have gone – to extend my analogy — from an economic/political Putin to Planet Business vs Planet Politics.
The noughties boom created a raft of world-class companies that are as good as – if not better than – their western peers. (Internet company Yandex and consumer electronic retailer M.Video both claim to be more advanced.) These companies operate without reference to the Kremlin, which in turn doesn't interfere with them. They are free to grow and invest as they please and share their profits with increasing generous dividend payments. However, the Kremlin does interfere with the handful of companies that live on Planet Politics, whose names are so obvious it is not necessary to list them.
Reporting on Russia for the last decade, you inhabit one or the other of these planets. Lunch with the fund managers at Blackrock would all be about dividend yields soaring on Planet Business, whereas drinks with a political attaché at an embassy do is all about corruption and Kremlin shenanigans on Planet Politics. What was remarkable is how distinct these planets are; interview a businessman from Planet Business and he would go out of his way to avoid talking about politics at all.
And that is fine. Investors were still happily investing in Russia’s Planet Business. They would have invested more if politics weren’t such a big issue, but I have often heard the comment that the returns would not be so high if the political problems went away. At one investment conference one senior Russia-based fund manager got up and began with: “The first thing you need to know about investing into Russia is don't read the international press. It will only confuse you. You have to go there and meet with the companies. I guarantee you will be impressed.”
This dichotomy was on display again this week after Russia-based brokerages almost universally took the line that the sanctions that falling almost exclusively on one man do not derail the macroeconomic story. The plunge in stock prices is unjustified. Life on Planet Business will go on as usual, except it’s rainy season at the moment so best stay indoors for a few weeks in the same way it rained for six months following Russia’s annexation of Crimea in March 2014. It happens.
But is that true? FT Eastern Europe editor Neil Buckley and Tim Ash, head of strategy at Bluebay Asset Management, both wrote opeds in the last week arguing these new sanctions are a game changer as essentially Planet Business has got caught in the gravitational pull of Planet Politics and won’t be able to escape. There is even a danger the two planets will crash into each other, bringing the total destruction of the smaller Planet Business (a “North Korea with Rockets” scenario, to paraphrase the famous phrase of my predecessor in the Daily Telegraph’s Moscow bureau, Xan Smiley).
By day six of the current crisis — coincidentally April 12 is Cosmonaut Day in Russia marking 57 years since Yuri Gagarin was launched into space — it’s far too early to know how this would play out. In the big stock market sell offs in 1998 and 2008 it took six months for the RTS to hit its low, so despite the current noise big crises are actually quite slow moving.
Personally I don't see Planet Business being destroyed, as there are too many good companies with strong domestically based businesses that are not exposed to sanctions, and Russia’s domestic market is far too large for external shocks to do more than dent their development.
Moreover, with the Russian budget already almost at breakeven, cutting Russia off from the US capital market will at best slow the pace of development. Russia’s main exports are commodities, which are essentially apolitical, and Europe is too reliant already on Russian oil and gas exports to allow sanctions on those.
This means Russia will continue to receive its residual revenues from these things, and they are enough to run the country. And the shuttle arriving from London to Russia’s Planet Business will continue to run on schedule for investors who are already at home there. Russia already receives only pitifully small amounts of foreign direct investment (FDI) or portfolio investment so even a tighter sanctions regime will change little.
To really destroy Planet Business the US would have to ramp up sanctions dramatically, imposing them on the majority of Russian companies and ban trading in things like Russian bonds. That would be an economic act of war with exponentially increased and unpredictable consequences.