Thursday, July 31, 2008

Back In The USSR?

Many moons ago I was in the military, the Royal Air Force, to be exact. It was a funny time to be a serviceman in 1985; we had just finished the Falklands conflict and seemed as if we were just waiting around for the next dust up.

By far the biggest concern for us, which was drummed into troops everyday, was the threat of attack from Russia. We were told 'loose lips costs lives'. We were shown bad training videos of how woman would be used by the 'communists' in bars to trap us. We were even supposed to report any sightings, wherever we were, of diplomatic cars.

Then, suddenly, the RAF Regiment were straightening trees, everyone was painting everything for days and Gorbachev rocked up at our air base for talks with Maggie. A decade later Yeltsin was getting drunk, dancing like your dad and the Berlin wall was torn down. We were all astonished to find, when the iron curtain was pulled back, not a technological wizard but a nation on the brink of bankruptcy and a country over-run by the Russian Mafia.

Years passed and the Bear clambered out of its poverty to become a power house once again. Sure we still had, affectively, a dictator in the form of Putin but the country needed someone tough enough to sort it out, in my opinion.

Investment flowed in, changes started to happen and the image of Russians became not some dour, grey, sullen people but a newly invigorated generation of rich, confident 'new Europeans'.

I met several Russians and found them to be amusing, interesting and charged with the spirit of entrepreneurship that somehow had faded in the UK and, I have to admit, my views of the country and its people changed dramatically. No longer the cold war threat but a land of opportunity.

I still have a soft spot for the Russians but I worry, these days, whether we are entering a new 'cold war', this time based on economics rather than ideology.

Foreign investors have become extremely wary of the Russian stock market after the Kremlin moved yet again to tighten its noose around the country's energy and mining sector, launching anti-trust probes against London-listed Evraz Holding and Raspadsky Coal.

The bare-knuckle fight for control over BP's Russian TNK-BP has also deeply shocked investors in the City and New York. The joint venture had been launched in 2003 with the personal blessing of Mr Putin, making it quite different from the foreign resource grab during the Yeltsin era that so enrages Russian nationalists.

"The market is panicking and foreign investors are pulling out of equities," said Michael Ganske, a Russia expert at Commerzbank.

"People fear that the rule of law is breaking down. I think this is an overreaction, but the Russian government has to be careful in the way it uses rhetoric in this investment climate," he said.

Mr Putin has already pre-empted the findings of the Mechel investigation, accusing the company of engaging in illegal price-gouging and abuse of the tax system by selling to their off-shore companies at a "quarter" of the world price. "This is a reduction of domestic taxable income. This is tax evasion," he claimed

Mechel's share price has fallen by half since the Federal Anti-monopoly Service (FAS) knocked on the door last week, shedding $8bn of market value. The company insists that it merely took advantage of uneven pricing at home and abroad in the coal-coking market and has done nothing illegal.

The FAS is now investigating whether Evraz - part-owned by Chelsea proprietor Roman Abramovich - and Raspadsky Coal have abused their "dominant position" in the coking sector. The two companies declined to comment. Along with Mechel, they control half the Russian market.

Investors are watching with a jaundiced eye, alert to the "Yukos risk". The Yukos oil group was hobbled by tax probes and effectively expropriated by the Russian government in 2004. Its former chief, Mikhail Khodorkovsky, is serving an eight-year sentence in a Siberian prison. The trial was widely criticised as a mockery of justice.

Robert Amsterdam, Mr Khodorkovsky's lawyer, said there is probably an ulterior motive behind the latest wave of probes. "We have reached a point in Russia where nothing can be treated as a one-off affair. There is a systemic raiding-mechanism directed by the top," he said.

"These types of attacks are usually combined with 'short-trading' by people inside the government, or they are a hard-ball tactic for extracting contracts. More broadly, I think foreign investors need to ask themselves whether they can trust the audited books of any company in Russia. It is impossible to conduct an independent audit," he said

Maybe Mr Putin is seeing this as an unfinished part of his project to make Russia the powerful nation it once was, but the problem with alienating investors is that this brings back the old mistrust of the Russian state and that is a downward spiral to building the wall again.

It is surely a good bet that Russia will never return to the old communist days, but the lessons that might be being learned from China is that you can still operate a totalitarian regime and create a vibrant capitalist style economy.

I just hope that this is not the beginning of the end for the fun loving, globe trotting Ruskis that at I have come to regard as a welcome addition to my friends and colleagues.

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