Welcome to East of Center, TOL’s new blog. As the best blogs are, we hope this will be a place of discussion, for TOL’s editors and readers. Unlike in our magazine, we are as likely to ask questions here as to try to answer them. We also hope to point you toward things odd, overlooked, or just spot on that appear in TOL or elsewhere. Most of all, though, we hope to hear from you in our comments section. We want this to be the beginning of a spirited, surprising, and civil conversation.
To kick off, I’d like to draw your attention, in case you haven’t seen it, to an excellent piece by Joe Nocera in The New York Times of 31 December. You’ll remember that the Kremlin’s response to international criticism of the guilty verdict in Mikhail Khodorkovsky’s second trial was, literally, “mind your own business.” The irony, surely, was unintended, but that is exactly what much of the business world might decide to do, Nocera warns. Whatever you think of Khodorkovsky, the Kremlin has managed to make a martyr of him, and Nocera writes about his efforts to make Yukos a model company run by predictable and transparent rules. That’s all history now, along with a few other high-profile efforts by Western firms (Ikea, Shell, BP) to do big business in Russia. The stock market and shares of Rosneft are underperformers, and the country is selling minority stakes in state-owned businesses to try to plug the budget gap.
So the conclusion that Russia will pay for its confiscatory approach to the assets of private firms is hard to resist. It’s even echoed in a Bloomberg piece that quotes economists at state-controlled VTB Capital in Moscow saying the ruling could have “unintended repercussions that are more damaging” than the previous verdict.
Then what to make of Russia’s profile in the UN Conference on Trade and Development’s annual World Investment Report, published in July? The report records that foreign investment there tumbled by almost 50 percent from 2008 to 2009, from $75 billion to $39 billion. But while it was one of the biggest losers in the world’s top 20 host economies, it was not the biggest. Proportionately, that would be Belgium, which saw foreign investment drop by 70 percent. The United States suffered a 59 percent drop and the United Kingdom 50 percent. So Russia’s decline hardly makes it stand out in a bad year. But more interesting are the rankings of countries where investors intend to put their capital this year. Russia retains its fifth place showing from last year, behind China, India, Brazil, and the United States (which drops from second to fourth place).
The UN report cites these countries’ “large and fast-growing domestic markets, liberalized industries, and vast natural resources, which have promoted a shift in global production in their favor, and positioned the countries well to weather the global downturn.” In Russia’s case, natural resources, yes. Growing domestic market, yes. Liberalized industries, hardly. The Bloomberg piece paraphrases another economist as saying that “seasoned investors in Russia expected a conviction and have already priced it into the market.” So investing will go on, but doesn’t even that measured assessment seem to say that shares will continue to trade at less than the value they might have, had businesses more confidence in the country’s judiciary?