Russia faces economic costs from Navalny's conviction

By bne IntelliNews July 19, 2013

Ben Aris in Moscow -

The Kremlin was hit with what is like to be a serious of extremely expensive bills following the conviction of opposition blogger Alexei Navalny to five years in jail on corruption charges by a court in Kirov on July 19.

Russia's stock market tanked as the news broke, with the RTS Index dropping from around 1400 to 1375, or 1.5%, in a matter of a minutes wiping just shy of $3bn off the market's capitalisation.

The stock market has bounced back again somewhat this morning, but investors have been badly shaken by what they see as yet another example of the blatant misuse of the courts by the government for its political ends.

However, equity investors have a notoriously short-term memory and are a fickle bunch to say the least. The impact of the Navalny decision is going to cost a lot more amongst Russia's own business elite.

According to bne market sources, Russia's liberal oligarchs and leading businessmen were also shocked by the Kirov decision. They had been hoping for at least a suspended sentence, but the Kremlin chose instead to throw the book at Navalny.

The upshot is that capital flight will almost certainly continue unabated and may even increase, causing the ruble to weaken further.

"Domestic investors have been badly unsettled by this result," says Roland Nash, head of strategy at Verno Capital. "They need some hope that this country will change eventually, but this decision suggests that nothing will change so people are thinking about taking their money out."

The Central Bank of Russia was optimistically predicting that capital flight would slow this year to a total of $10bn, but over the first half of this year $38bn has already left and shows no sign of slowing down. The final bill for the Kremlin at the end of the year will probably amount to at least $60bn this year.

The decision will also unsettle foreign direct investors, who are not very keen on Russia anyway - unless you are a German retailer. FDI was a low $51bn last year, but the bulk of this was actually Russian money returning from places like Cyprus. Apart from the odd $3bn-deal by the likes of Pepsi, Russia doesn't really have any FDI to speak of, so actually spoiling Russia's image further doesn't really cost the Kremlin anything at all.

However, it will cost them on the privatisation front: the state was hoping to sell RUB300bn ($10bn) worth of state-owned assets this year as part of the privatisation programme, but more recently admitted it will be lucky to raise half that amount. Given Russia's poor investment image has already cost the state $5bn in failed privatisation, you could probably knock another billion or two off that figure following this latest fracas and the field day the international press are having over the case.

All this comes at a time when the Kremlin says it wants to improve Russia's investment image. But it have chosen a funny way to go about it.

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