CONFERENCE CALL: The problem with Russia's investment story is there isn't one

By bne IntelliNews October 2, 2014

Ben Aris Moscow -


Leading Russian investment bank VTB Capital held a slimmed-down version of their annual investment conference on October 1-2.

The event, “Russia Calling! 6th Annual VTB Capital Investment Forum” at the World Trade Center Moscow didn't look cut down from the point of view of the number of bodies in the room; VTB CEO Andre Kostin claimed the event had attracted a record number of delegates – over 1,500 from 17 countries. But from the point of view of who came, rather than how many, the leading global fund managers and high net worth investors who used to grace Moscow's investment conferences in the heyday pre-crisis were thin on the ground.

The panels were also less sparkling than usual, albeit still interesting. Last year’s star panel included the likes of former secretary of state Colin Powell who was from a Russian investment point of view completely pointless, but nonethless fascinating to listen to. 

This year’s opening panel was symbolic of the changes the markets have been through in the last 12 months. The focus was on infrastructure, power and transport, represented by Minister of Transport Maxim Sokolov, Oleg Budargin, CEO of Russia's Federal Grid Company, and Vladimir Lisin, chairman of steel mine NLMK, who also owns a large rail freight company.

It is telling that when hunting about for an interesting investment topic where there is real action and billions of dollars being spent, VTB was forced to choose sectors where all the investment is funded not by international investors or the stock market, but by Russian public money.

The panel also included the heads of two of Russia's most interesting and dynamic regions: Kaluga and Vladimir regions.

bne interviewed the governor of the Kaluga region, Anatoly Artamonov, in February this year, holding the region up as probably the best investment opportunity in Russia. But it is again telling that VTB had to highlight two undeniably attractive Russian regions to international investors, as the country story remains an unattractive investment story. Indeed, US investment guru Jim Rogers complained to bne on the eve of the conference in an interview that Russia is probably "one of the most hated markets in the world today."

Finally, the token foreign investors rolled out to crow about their (very real) success of working in Russia were all directly connected to the burgeoning consumer market. It is pretty hard to not make money in Russia if you are an international FMCG (fast moving consumer goods) company thanks to the relentless rise of incomes over the last 14 years.

The first speaker to make the case for investing in Russia caused some smirking in the stalls; Roca Group is a Spanish company that is also the world's biggest maker of toilets. "Russia is a great market for us and we have seven factories working in Russia from a total of 77 around the world," said Antonio Linares, director general of Roca in Russia and the CIS, with obvious enthusiasm for his Russian business. "The great thing about Russia is people general renovate their bathrooms once every seven years, whereas for comparison Germany is a nightmare as they only renovate once every 23 years."

The other two companies were at the other end of the scale, so to speak, in the retail business: Maurizio Patarnello, CEO of Nestle Russia and Eurasia, said his food and beverage company is a big player in Russia, especially in the regions, while Igor Nemchenko, CEO of choclate maker Ferrero in Russia, had a very similar story to tell.

But this is hardly the cutting edge entrepreneurial businesses that Russia should be showcasing. Indeed, the innovative entrepreneurs Russia has were noticeable by their absence. Not even the recent stars of business, like serial entrepreneur Oleg Tinkov, who was outspokenly critical of the government at last year's conference adding a bit of vim to the proceedings, were in attendance in the crowd.

Accolades for the apparatchiks

Indeed, the whole event was noticeably truncated to only two half days and there were a lot of one-to-one meetings with a slew of Russia's best companies. But all the open sessions on financial market development, Russia's IT sectors, infrastructure plans and the like were all missing.

What was on show on the second day was a panel packed with all the top officials from finance: Alexey Ulyukaev, minister of economic development, Elvira Nabiullina, governor of the Central Bank of Russia, and Anton Siluanov, Russia's finance minister.

This was a fascinating panel, as there was a real debate on how to deal with Russia's various economic problems such as low growth, high inflation and faltering financial sector reform – exactly what investors want to know about.

But the fact that the whole conference in effect boiled down to a chance for investors to hear first hand (and pepper with questions) Russia's top financial and economic managers encapsulated the entire investment story: there isn’t one. No one is investing, as everyone is extremely worried by the state of the economy and how Russia's international relations with rest of the world will develop.

For their part, Russia's financial and economic leaders gave a very competent and convincing account of themselves, reassuring investors that Russia's economic and financial management, at least, remains in very competent hands.

Their message can be boiled down to: "Everything is a bit screwed up now and we have missed our targets, but the economy remains solid and we are not going to undermine that by trying to spend or borrow our way out of the current hole. Next year will be better."

Putin applause

Then came the final session, "Russia’s development agenda – exploring new opportunities", which would have been better entitled, "Meet Putin as he has all the answers."

Russian President Vladimir Putin's speech is always the highlight of VTB's event, but this year it was the entire event. Everyone in the standing-room only hall had come to hear what Putin had to say, because currently whatever he decides to do next will determine the investment case going forward.

And he gave (as always) a masterful performance. He was relaxed, chatty and attentive, and even cracked a joke about his KGB past.

This year he skimped over his usual rundown of the state of the economy where he reels of the latest macroeconomic results, and this year admitted the Russian economy has received various shocks, but put a stoical face on the problems.

"This forum was founded in 2009, after the global shock. But that didn’t stop our work and plans, many of which turned into concrete businesses. Many of those investors have increased their investment and continue to invest… We continue to adhere to the principles of the [World Trade Organization], unlike some of the WTO's founders, and develop an open market," said Putin in an obvious swipe – one of several in his speech – at the US.

But Putin didn’t have much new to add to the official statements on Russia's problems in recent months. Inflation is too high (it’s the fault of rising food prices). The government will not spend or borrow its way out of this mess. Taxes will not be raised. The privatisations of the 1990s will not be revisited (although he seems to suggest that the privatisation of oil company Bashneft could be). There will be no capital controls, he added emphatically, after a Bloomberg report to the contrary sent the ruble tumbling at the start of the same week. Relations with the Chinese are good and trade will increasingly be settled in rubles and yuan (annother swipe at the US). The Eurasian Economic Union will be founded in a few months that will bring new economic opportunities for the members of the current Customs Union. And so on.

In the Q&A session several investors brought up the question of privatisation and that of Bashneft in particular. Russia's Investigation Committee has opened an investigation into the 2003 privatisation of Bashneft and a 2009 deal that sold the oil company to Russian conglomerate AFK Sistema. Vladimir Evtushenkov, the owner of Sistema, has been placed under house arrest in connection with the acquisition deal and the case was the main topic of conversation in the conference's coffee breaks. Russia's international investors have been seriously freaked out by the case, which some have dubbed Yukos II, referring to the jailing of Mikhail Khodorkovsky and the expropriation of his oil company’s assets.

Putin's comments on the case were not very reassuring. "We are not reconsidering in scale the results of privatisations, but it is different in individual cases. If the law enforcement agencies have questions about a deal, then there has to be an investigation," said Putin. "I hope it will not be criminal but a civil case, but I won't give instructions [in this case]. However, the state is not reconsidering privatisations – I can assure you of that."

Reading between the lines and various interesting points come out. Putin was careful to stress that while Russia is building up relations with Asia (pointedly two big investors from India and China were on the podium with Putin), it has not given up on Europe and wants to maintain relations. "The EU is our leading trade partner and we are not going to abandon it," Putin said before adding, "but we need to look to the future too."

However, he also brought up several examples to underscore Russia's policy of import substitution and developing the industries where it remains heavily dependent on imports – highlighting agriculture and machine building in particular. On several occasions he mentioned that the sanctions on EU agricultural products were causing domestic food prices to rise (and hence inflation), but this was also an excellent stimulus for the domestic agricultural sector.

Finally, Putin reiterated the policy that most of the investment and recovery is going to be state-led, with more money being pumped into Russia's sovereign wealth fund, the Russia Direct Investment Fund (RDIF), and other institutions like the state-owned development bank Vnesheconombank, which will be recapitalised this year.

All this is a far cry from last year's conference when the talk was of infrastructure bonds and setting up a working pension system that would create badly needed domestic institutional investors and long-term capital, which could transform the Russian economy.

Instead, Putin announced a new website that will "provide business with all the information on inspections, checks, investigations and the stage they are at." Not very encouraging at all.


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