INSIDERS: Forecasting the future in St Petersburg

By bne IntelliNews July 3, 2012

bne -

Russia held its annual Kremlin-sponsored investment jamboree on June 21-23 in the northern capital of St Petersburg. It is now the premier event on the Russian calendar and attendance by everyone who is anyone is mandatory. bne vox popped delegates to Russia's ultimate insider gabfest on what the future holds.

In general the mood was upbeat. The main event was President Vladimir Putin's speech, which set the tone for the coming year with a message of stability. "Naturally, everything that we say is easier said than done," Putin said as he started on the obligatory ruminations dealing with reform, before adding: "I would like therefore to emphasise once again that macroeconomic stability has always been our special priority."

The emphasis on stability was perhaps disappointing to many observers who had been hoping for more details on the reform programme and hints that their pace will accelerate. It was only last year that then-President, now Prime Minister, Dmitry Medvedev outlined his ambitious privatisation programme - a significant step up in reform efforts. Whilst Putin repeated his commitment to privatisation, it was not a central point in his speech.

Still, at least he promised a clean process. "I want to emphasise straight away that [this round of privatisation] must be a fundamentally different privatisation, one that has nothing to do with the practice of loans-for-shares auctions and other dubious deals that were widely used in the 1990s, when state-owned assets created by the previous generations of our people were acquired in corrupt deals, which involved the abuse of power and markedly lower prices - often simultaneously - and with the use of the state's own funds," the president stated.

Putin clearly outlined his concerns in the first part of the speech, highlighting the fact that the world remains in a volatile state, on top of which he has an increasingly unhappy relations with the traditional powers in the west. BY way of contrast, from his perspective things at home are going very well. Inflation is at 20-year lows as is unemployment. Economic growth is a respectable 3%-4% and lending and consumption are rising. The only danger is a crash in Europe, over which he has no control; hence the emphasis on stability.

Unsurprisingly, business people dependent on the domestic economy march in step with the president. Dennis Ludkovskiy is the CEO of Svyaznoy, Russia's second largest phone retailer and has more recently been setting up a bank. "The European crisis has barely touched the mobile phone market in Russia," he beams. "At the peak in 2009, sales went down by only 10% but quickly rebounded. Since then sales have continued to grow by about 30%, and the rate of profit growth has been even faster."

Svyaznoy is clearly in an advantageous position for the moment, like many companies facing a domestic market apparently full of consumer confidence and rising credit. "We feel the European crisis but it is muted as our business has almost zero dependence on the West. The only way a real crisis could transmit itself to Russia is through falling oil prices," he says.

Yet the Russian banking sector is in the front line and has been hit far harder than the real economy. Todd Berman, Head of Investment Banking at Troika Dialog, said: "The original problems were caused by excessive leverage, but it has become a crisis of confidence. Now I think we are close to the bottom but it will not be a smooth recovery from here; we are going to bounce along the bottom and there will be more ripples or waves to come. Still, the hard part is behind us."

However, the man with the longest perspective on the crisis that be spoke with in St Petersburg was Anatoly Karachinsky, President and founder of IBS Group, the biggest software development company in Europe. Karachinsky set up IBS in 1987 when the Communists first permitted private business and has grown the company into a European leader with 10,000 employees and $650m turnover last year, writing software for pretty much every major corporation in Europe and Russia.

"There are always crises in Russia," says the bearded and ebullient Karachinsky, who rattles off crisis years as if there were wine vintages. "1998 was a very tough year, but then so were 1996 and also 1993. But 2004 was ok and 2006-2007 was a good time like 1997 which was also a great year -- before 2008 of course or the struggle in 2009. When there is a boom everyone forgets the last crisis, but I know if there is a boom this year then there will be a crisis next year - its always the case."

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