Da Vinci December Macro and Strategy Report (Russia)
“To cripple an embryonic civil society, the mighty need only foster an environment where good people: see no evil, hear no evil, speak no evil. Power structures of the State from Prime Minister Putin to Patriarch Kirill are complicit.” Mizaru, Kikazaru, and Iwazaru – Three Wise Monkeys
In December, “Das Boot” came in, all our Christmas wishes came true and Eighth Continent delivered a +17.06% sugar plum pudding, just in time for the New Year’s goose. Exceptional yearend performance more than doubled the benchmark MSCI Emerging Markets Europe which advanced +8.44% for the period.
Crisis, what crisis? Here in 2011, the 2007 credit crunch, the 2008 collapse of global financial markets, and ensuing Russian financial crisis, seem just like yesterday. Memories are fresh in the minds of foreign portfolio investors and asset allocators alike. But performance has rarely been better as the sub-advisor generated a +34.63% YTD return, more than double the benchmark +14.51% and +54% higher than the Russian RTS +22.54%.
As it relates to portfolio construction, the MSCI EME benchmark is sub-optimal and truly any index is imperfect. With a unique long/short, multi-asset class, global investment mandate geared to commodities, credit markets, equities and Fx derivatives, it is remote to rank and contrast Eighth Continent against a long-only, stock-only, Russia-only benchmark. The investment sub-advisor has historically allocated less than 20% to long Russian RTS stock exposure.
It is perhaps more revealing to measure Eighth Continent advised funds by gauging sub-advisor performance stacked against the universe of all publically priced Russia funds and Russian hedge fund peers. The first time we ran these calculations sourcing all publicly available information one year ago, it was discovered that at least 10 funds were either closed or were permanently impaired in the 2008 crisis. 12 months later in repeating the same study, a further five on Bloomberg and at least eight more in total are “road kill”: acquired, closed, or re-organised.
Of the only current 40 surviving funds, Eighth Continent had the top two best performing funds of the last six months on Bloomberg, and Tano Capital Russia (not priced on Bloomberg) was even better: 1 – 2 – 3 “Das Boot” has come in.
“You are what your record says you are.” Bill Parcels
Recent out performance vs. peer group has been pronounced (chart below) beating all competitors with the top two spots (blue left) while Tano Greater Russia Fund, not priced on Bloomberg would have taken the top spot at +63.81% for the period.
Eighth Continent advised funds were the top performing Russia fund vs. all peers for the period of Russia dedicated and Russia related funds priced on Bloomberg for the six month period ending December 31st, 2010. Performance differential vs. all indices expanded in the Q3 and Q4, generating an inspired +59.34% in the last six months ending December 31st, 2010; +82.58% higher than the benchmark +32.50%
Powerful finish, what happened in Q4 2010?
Q4 ‘Das Boot scenario delivered per heightened expectations
From October Macro and Strategy Report 2010: Year end “Boat” scenario plays out like this: Bearish pessimism at highest level since trough crisis throughout the summer, as both institutions and private investors saw stocks climb the “Wall of Worry,” and watched from the safety of the bond market. One after another, the will ‘o the wisps of 2010 misplaced market panic are banished to the bog: Greek contagion, global deflation, demise of the Euro, end of Chinese commodity demand, double dip in the United States derails world-wide recovery, and “currency wars” recede into memory. While walking a lonely road for much of the year and standing friendless on the high side of the boat since April 15th, the sense is that we are now no longer alone.
Das Boot: the markets remain supportive in November and year end, money managers and retail investors alike try to play catch up. Portfolio managers cannot show year-end cash in a rising market or lose their mandates. Having been underweight the market for most of the year, these managers may be forced to chase return, throwing money at the market by Christmas day, so as not to be seen sitting on their hands while the world trades higher. Greed will trump fear driving retail flows and history tells us that memories are short. One by one the tepid have been jumping to the other side of the boat, and we anticipate the market consensus will join us on the starboard side just in time for the Santa Claus Rally; … a rally which the Fund will likely be selling.
And that is exactly what we did. On the last three trading days of the year we executed the below listed portfolio rotation representing a full 50% of AUM. We sold the yearend rally.
|
Net long exposure reduced from
|
153.26% to |
101.39% |
|
Equity exposure reduced from
|
129.37% to |
90.38% |
|
Short exposure increased from
|
(40.72%) to |
(48.49%) |
|
Credit market shorts increased
|
(12.49%) to |
(23.40%) |
|
Fx shorts maintained
|
(23.45%) to |
(23.45%) |
|
Commodities maintained
|
36.30% to |
34.21% |
|
Continent
|
17.06% |
|
|
Eighth Benchmark Index
|
8.44% |
|
|
MTD
|
… Das Boot! |
|
Outlook and Strategy for Q1 2011
- 100% avoidance of all defensive sectors; maintain zero weight since March 2009 in: telecoms, electrical utilities, consumer, food retail and healthcare
- We broadly sold down 40% of long equity exposure while doubling equity short exposure
- Short positions on the long end of the bond market increased from 15.90% to 23.41% of gross AUM. Anticipate up to 40% of gross exposure in this trade by Q3 2011
- Commodity exposure to benefit from anticipated inflationary concerns in 2011. Net long 36.95% maintained in (HGH1) Copper, (PLJ1) Platinum, (PAH1) Palladium, and (TYH1) ICE Brent crude futures, and expected to rise to 40% of gross by Q2
- Fx derivative shorts (23.41%) gross AUM will remain slow growth, low rate, DM, safe haven: USD, GBp, EUR, and CHF vs. long X-rate trades in fast growth, high rate, inflationary, EM and commodity centric Fx: KRW, THB, SGD, AUD
- Continue to raise the Russia country weight vs. R.O.W. (like the macro ex government, but not the micro) from an all-time low of 13.21% net exposure in November 2010 to 18.53% net exposure yearend. Anticipate up to 40% net long Russia exposure by Q3
- Single largest stock position is a short on Mail.ru (MAIL LI) representing a full 6.19% of gross AUM. (See Mail.ru investment rationale below)
- Third largest position 5.72% gross AUM of Riversdale (RIV AU) Mozambique +32.62% MTD is in process of take out Rio Tinto (Rio AU) Australia, world’s third largest miner (although they may draw another buck or two (thanks to Tata Steel TATA IN) out of the dance before it is over), so this position will disappear
- We still favour metallurgical coal, thermal coal, and anthracite (total coal exposure is 10.70% gross AUM) and are currently working to find suitable replacement to complement Mechel (MTL US)
- Concurrently we continue to build out our African “race for raw materials” themes. The Sub-advised Fund currently has meaningful African positions in Riversdale (RIV AU) Mozambique, Bellzone (BZM LN) Guinea, and Sundance Resources (SDL AU) Cameroon constituting 13.52% of gross AUM (7.80% after Riversdale exit)
- Consistent with longstanding investment theme that EM discretionary income rise leads to higher co-efficient of caloric intake from protein consumption, the Sub-advised Fund bought back 5.12% gross AUM position in Charoen Pokphand (CPF TB) Thailand after taking a profit of more than 100% in the name Q3 2010
- The Sub-advised Fund exited the underperforming Dry Bulk theme before month end and finished selling all of Jin Hui (JIN NO) Norway, DS Norden (DNORD DC) Denmark and Golden Ocean (GOGL NO) Norway to zero. Tanker exposure via China Shipping (1138 HK) Hang Seng was cut by 50%
- The sub-advisor has lost some conviction in EE bank theme as EU shenanigans are boring, unending, consume too many precious human hours required to monitor all the convoluted micro-plots and politicians. The sub-advisor never buys on valuation anyway and there are better uses for investor capital elsewhere. As such the investment advisor cut by 30%, weights in OTP Bank (OTP HB) Hungary, Swedbank (SWEDA SS) Sweden, and 50% weights in Bank of Cyprus (BOC GA) Cyprus while holding big rollers in Bank of Georgia (BGEO LI) Georgia 6.33% (first largest stock position) and Sberbank Pref (SBER03 RX) Russia 6.25% (second largest stock position)
Biggest risks to Q1 2011 strategy
- A sudden, unanticipated USD dollar appreciation would be a KOD (kiss of death) to current asset allocation
- A powerful rally in the Russian stock market would be detrimental to “relative” performance as the Fund is underweight at only 18.53% Russian equities vs. 61.23% for benchmark index (MSCI Emerging Markets Europe)
- A significant and unexpected rate of job creation in the United States would hammer EM equities, commodities, and the risk-trade. Short book specifically designed to mitigate some of the downside, in this particular element of risk in present portfolio construction
- Facebook IPO announcement, broad monetising event, or other “value defining mechanism” would likely lead to aggressive share price appreciation on MAIL LI and could trigger a short squeeze
- Greater than expected Asian central bank (primarily) but also DM other ROW central bank tightening to thwart above market inflation fears
- Note: 45.83% gross short exposure is engineered to harness profits and while moderating some of the performance risk, which would be associated with precisely this actualisation
RUSAL and Mail.ru
About this time last year, the sub-advisor broke down the sell rationale case against RUSAL (486 HK), in advance of the Hong Kong IPO for our readers. Investors then watched it trade lower by about 38% over the course of the next 6 months. January Macro and Strategy Report 2010: what else did DA focus on: RUSAL 2010? …get smeltered!
After detailing company financials and pouring through the offering memorandum on an aero plane from Moscow to New York, it was immediately apparent that 8C advised capital would not be committed to Mr. Deripaska’s debt imbroglio
This year we take a reasoned and deliberate shot at Mail.ru (MAIL LI); a recent hot hot hot IPO in the Russian media space. Having built a large position in six tranches over the course of the last four weeks, the short now represents a full 6.19% of gross AUM, and is the single largest equity position in the portfolio. To capsulate, it is our perception that Mail.ru is a collection of second place “me too” and third place “also ran” internet media properties billed as the “facebook of Russia” and valued on assumptions akin to the sugar-glazed 1999 .com bubble. At short initiation, the shares were trading at >$8B USD m-Cap on revenues of $199MM. Mail.ru is now one of the largest publicly traded companies in Russia and perhaps of the most poorly understood (if not by the market then perhaps by us)? … always a risk.
The “Street” values the name on a specious international comp blueprint, taking assumptions from Baidu (BAIDUZ CH) China, and Facebook (private) America which are more than a stretch and simply not applicable. Facebook is preeminent social networking brand, the highest growth global destination of greater 500MM unique users around the world, and 180MM new visitors in just October 2010 alone. From March 2010 Facebook was the most visited website (surpassing Google) and had the highest advertising spend of any site on the planet. Facebook is the third largest web company by implied private market m-cap after Google and Amazon. There are only a total of 142MM Russians and Mail.ru is not even “the facebook of Russia.” Odnoklassniki, Mail.ru’s social networking site, has just 17MM users, a 30% share of Russian market that is dropping. Any likeness to Baidu, Inc., with its $38B m-cap model is also erroneous. Baidu is the dominant player in >1.3B Chinese market. More of a Google than Facebook with search engine and broad range of web based services. By April 2010, Baidu ranked 7th overall world-wide in Alexa’s internet rankings. Mail.ru is not even “the Baidu of Russia.”
Our methodology was designed to split up the tangible business units by revenue contribution to group performance. Financial analysis then determined NPV (net present value) of group operations with focus on sales + growth with the assumption that earnings are N/M (not meaningful). Starting with real 2009 revenues and then out 10 years to estimated 2019 revenues, we derived a 10Y CAGR revenue valuation model instead of inflated SOTP valuations using Facebook as the template.
Keep it simple:
2009 2019 E 10Y CAGR
Odnoklassniki SN $49MM $268MM 18.5%
18.5% is a glass pipe dream. Odnoklassniki social networking also ran / share loser may likely not exist in 10 years
Online games MMO $65MM $360MM 18.8%
18.8% is dirty bong water. $47/m ARPU for online gaming addicts is maximum and they are already all online. There are no more. DM ARPU at $8/m, drops to $10
Headhunter.ru $17MM $36MM 7.8%
Real business but will be face increased competition from multiple domestic comps and international such as Monster.com, but 7-8% is believable
Mail.ru banner ads $61MM $514MM 23.7%
Just don’t see it. Already have 60% of market in the area. Free e-mail address ad model is specious and vs. Google’s Gmail? Where +++ growth?
Other $13MM $163MM 28.7%
May or may not fly eggs in the hatchery – okay credit full value, does not matter
Revenues $199MM $1.34B 21.1%
Even if we credit the full 20% 10Y rev CAGR all the way to $1.34B (we don’t), what NPV to justify $8B M-cap in 2010?
At short position inception, M-Cap of $8B on about $250MM in sales and real L.T. growth rate of maybe 15%? Priced at $27.70, we think the stock might be worth about $10/share or $2B M-Cap based on $1B revenues in 10 years plus 2.38% of Facebook, 1.47% of Zynga and 5.13% Groupon
After initiating initial tranche of short at $42.09 (top-tick yes) lucky this time, the Sub-advised Fund waited until end of quiet period and then set out to speak with the underwriters. Following a quiet period, it is unusual to see the sell side come in with six different numbers: CS a sell, BAML a sell, GS neutral i.e. hold (underwriter), MS market weight i.e. hold (underwriter), VTB and JPM big buys with $50+ price targets.
In our meeting, the Moscow-based joint book runner offered an animated defence for about 45 minutes and then finally capitulated. Point blank 1: how do you justify $8B? “We don’t really know, no one knows … foreign buyers just gave us money (AmeriKa) without asking.” Only “smart” Russians who bought were flippers and kicked it back to the desk. Point blank 2: Are there more of these buyers: “Yes, but they are really confused as to how to value the stock.” Point blank 3: At $50 per share price target, you value the company at >$11B in market cap. Based on all we discussed today, where do you come up with that? “I am Russian, we are a Russian firm, and I have to like the story.”
Insider lock up ends early February … if insiders were happy to sell shares on an all-you-can-eat basis at $27.50, I suspect there will be more happy sellers next month at $36.00 so we will keep shorting more until proven wrong.
Original investment rationale November: “the key risk to the position would be any announcement a regarding Facebook IPO or other $60B whisper valuation.”
This risk just realised last week. Goldman Sach’s $450MM investment gave an implied $50B M-Cap (less than $60B) and the company discussed 2012 possible IPO. Mail.ru rallied for three days and then … not much follow through and as of yet, little conviction. In fact Goldman Sachs is not making “an investment” in Facebook but rather creating an equity-linked derivative structured product which they will sell to high net worth investors. It was disclosed that Goldman Sachs “might hedge or sell its own investment without warning clients,” meaning that the firm may bet against the long side of the $1.7B is shadow Facebook shares it puts on client books. In any case Mail.ru is not Facebook and ironically, it may be Facebook’s ultimate success (in penetrating the Russian market where it was +376% 1H 2010 YoY), which may definitively illustrate the Mail.ru short investment rationale.
At the time of this distribution, the investment sub-advisor covered this position at a large loss on January 12th. Although the macro and strategy was written in the week leading up to January 7th, we don’t strip out the bad news or try to restate the past. This trade remains part of the written record to learn from or even revisit in the future. We send this to investors and potential investors and remain credible with no edits, revisions or spin.
Why don’t you like any “Russian” stocks?
Well we like at least one Rouble-denominated Russian large cap stock in Sberbank Preferred (SBERP03 RX). Sberbank Preferred is in fact the only one of 63 line items that trades locally in Russia as all other securities are either commodities, foreign listed ADR’s, Fx X-rate NDFs, credit market futures or CDF equity-linked derivatives (except at Wermuth).
While the Russian macro is both compelling and attractive, Eighth Continent is oft-challenged to find enterprise-specific “Russian” line items which do not raise one or more deal-breaking red flags; thus it has been difficult to raise the Russian country weight for equities to the desired level. Sberbank is the single best proxy for the Russian market (ex Oil and Gas sectors which constitute +/- 50% of the indices). The shares have historically been able to outperform (or sometimes underperform) when index heavy-weights such as Rosneft (ROSN LI), Gazprom (OGZD LI), Lukoil (LKOD LI), Surgutneftegaz (SGGD LI), Novatek (NVTK LI), TNK-BP (TNBP RU) and others have moved in a different direction. As the Sub-advised Fund has no position in these aforementioned names, we are thus significantly underweight “the market.”
Sberbank Preferred has historically traded at a 9% to 38% discount to the common stock at 30-32% represents an attractive spread
The last of the “blue chips” without one; when Sberbank eventually succeeds in listing a USD denominated foreign ADR – anticipate Q3 2011, it is possible that the Preferreds will be eliminated entirely as with the other large caps. While the swap ratio is unknown, the Prefs will likely be converted at a +/- 5 to 10% discount to ordinaries and not 30%. Therefore investors “sell” worthless (to us) voting rights for a 30% discount plus increased distribution of free-cash-flow potential as according to Russian law (although not always enforced) preferreds must pay out 10% of RAS profits in dividends or be converted 1-to-1 with voting common stock.
While the sub-advisor cut EM equity weight by 40%, long commodity weight was untouched. In the face of real and present EM inflationary risks, hard assets will likely benefit. Eighth Continent maintains that the confluence of industrialisation, urbanisation, EM population growth, resurgent demand, rising extraction costs and scarcity of resources indicate that commodities have entered into a period of a “super-cycle”: a decades-long period of higher prices driven by the emerging middle classes, rising living standards, and eventually American-style individual consumption levels in a one directional shift in power, prestige, and demand moves from West to East.
Unwavering in our perception since March 2009, our perception remains that we are in the midst of a post-crisis global recovery which is largely consistent with historical post-crisis recoveries. Investment climate for “Russia” maybe fairly characterised by world-wide growth, inventory restocking, urbanisation, industrialisation, and associated demand for raw materials.
Top performing stocks for the December reporting period:
|
1. Sundance Resources
|
SDL AU |
Cameroon |
Mining |
+69.21% |
|
2. Riversdale Mining
|
RIV AU |
Mozambique |
Coal |
+32.62% |
|
3. Hyundai Mipo Dockyard
|
010620 KS |
Korea |
Industrials |
+32.51% |
|
4. Mirland Development
|
MLD LN |
Russia |
Real-estate |
+27.13% |
|
5. Mechel
|
MTL US |
Russia |
Coal |
+24.62% |
|
6. Bellzone
|
BZN LN |
Guinea |
Mining |
+24.43% |
|
7. Temenos
|
TEMN SW |
Suisse |
IT |
+23.99% |
|
8. Dragon Oil
|
DGN LN |
Turkmenistan |
E&P |
+23.11% |
Eighth Continent remains long and not-so-leveraged to Russia-related assets, the risk trade, basic materials, and emerging market equities. Advised funds are short long dated bond futures (Aussie, Canadian, US); G7 and safe haven Fx. Largest long holdings include March Brent ICE futures, April Comex Platinum, March Palladium and March Copper futures. Favoured stock sectors remain metals, financials, industrials, coal, construction, real-estate, and agriculture. As such we have zero exposure to defensive sectors of healthcare, consumer staples, telecommunications, food retail or electrical utilities.
| Geographic Dispersion |
| Russia |
18.41% |
| US |
17.94% |
| Australia |
8.50% |
| UK |
7.44% |
| Switzerland |
4.85% |
| Kazakhstan |
4.52% |
| Canada |
3.92% |
| Thailand |
3.90% |
| China |
3.77% |
| South Korea |
3.24% |
| United Kingdom |
3.19% |
| Singapore |
3.15% |
| Georgia |
2.88% |
| Mozambique |
2.13% |
| Guinea |
1.80% |
| Cameroon |
1.47% |
| Ireland |
1.45% |
| Hungary |
1.26% |
| Finland |
1.20% |
| Ukraine |
1.06% |
| Sweden |
0.90% |
| Turkey |
0.88% |
| Philippines |
0.85% |
| EU |
0.75% |
| Turkmenistan |
0.55% |
| Cyprus |
18.41% |
| Total |
100.00% |
|
| Sector Allocation |
| Commodities |
17.24% |
| Credit Markets |
11.80% |
| Metals & mining |
11.47% |
| Financials |
10.42% |
| Cash |
9.64% |
| Fx |
9.52% |
| Coal |
5.39% |
| Agriculture |
4.13% |
| IT |
3.78% |
| Construction |
3.67% |
| Real estate |
3.17% |
| Industrials |
3.06% |
| E&P |
2.22% |
| Media |
1.31% |
| Conglomerate |
0.97% |
| Ports |
0.88% |
| Shipping |
0.77% |
| Chemicals |
0.55% |
| Total |
100.00% |
|
| Asset Class |
Long |
Short |
Gross |
Net |
| Equities |
96.57% |
-6.19% |
102.76% |
90.38% |
| Commodities |
34.21% |
0.0% |
34.21% |
34.21% |
| Cash assets |
19.06% |
0.0% |
19.06% |
19.06% |
| Credit market |
0.0% |
-23.40% |
-23.40% |
-23.40% |
| FX |
0.0% |
-18.83% |
-18.83% |
-18.83% |
| Total All |
149.89% |
-48.49% |
198.38% |
101.39% |
| Leverage |
147.84 % |
|
|
|
Addendum I
“You are what your record says you are.” Bill Parcels
The sub-advisor is now +214.97% from market trough 22 months ago. Eighth Continent advises one of only three Russia funds* to have taken back the prior November 2007 high water mark, while the benchmark index MSCI Emerging Markets Europe is still needs an additional +59.46% advance, and the Russian Stock market MICEX would require a gain of +50.12% to reach their pre-crisis highs.
Importantly, the great swath of the Russia fund peer group is still mired in the thick of it. * Russia dedicated and Russia related funds priced on Bloomberg through December 31st, 2010.
Eighth Continent advised funds: 1, 2, and 3 top performing of all Russia funds six months; #2 best performing of all Russia funds three years and one of only three Russia funds to have taken back the prior high water mark (November 2007) …
… while the benchmark index which would still require an additional 60% retracement to summit old high (December 2007)
Not only the top performer in the up market and during the recovery; Eighth Continent managed fund is the second best performing of all Russia dedicated and Russia-related funds priced on Bloomberg for the three year 2008 crisis to present December 31, 2010.
Eighth Continent advised fund #2 of all “Russia” funds 56 original constituents, crisis to yearend (2008, 2009, and 2010)
And for investors, our best ever returns have come in the last 22 months. +215% since calling the bottom March 2009; the Sub-advised Fund is 32.89% better than the index (MSCI EME); 40.11% vs. the Russian stock index (MICEX), 64.60% vs. MSCI Emerging Markets, and 205.01%% higher than MSCI World for the period (chart below).
|
Name
|
22 Months |
|
|
Eighth Continent
|
(DIAMRUS KY) |
214.98% |
|
MSCI EME Benchmark
|
(MXMU) |
161.76% |
|
Russian Stock Index
|
(MICEX) |
153.43% |
|
MSCI Emerging Markets
|
(MXEF) |
130.60% |
|
MSCI World
|
(MXWO) |
70.48% |
Addendum II
Eighth Continent performance track record Diamond Age February 2005 to May 2010, Greater Europe Fund (Wermuth) June 2010 to present. Manager was out of the market in cash 2008, all comps are like-for-like periods
Addendum III
The World’s Largest Dying Power
28 December 2010
By Vladimir Ryzhkov, a State Duma deputy from 1993 to 2007
As 2010 and the first decade of the 21st century wind to a close, the dominant social, political and economic trends of the year raise serious doubts about Russia’s future survival as a sovereign country. Chinese analysts, who have been closely observing Russia for the past 20 years, perhaps put it best: Russia is the world’s largest dying power.
If Russia continues down its current path of autocracy, monopolization, corruption and overall economic, political, cultural and technological degradation, it may prove the Chinese correct in their terminal diagnosis.
To be sure, the country’s degradation began before Vladimir Putin’s rise to power, but the nature and causes of this degradation are much different than under Putin’s degradation. During the 1990s, Russia found itself in complete political and economic ruins after the collapse of the Soviet Union and was hampered even further by low world oil prices throughout the decade. But during the 2000s, Russia enjoyed record-high oil prices. Nonetheless, the oil windfall was not used to modernize, diversify or reform political and economic institutions. Instead, the lion’s share of oil revenue was stolen or wasted on huge pork-barrel projects.
There are four main areas that made 2010 a record year for Russia’s degradation:
The country declined on the 2010 United Nations Human Development Index 1. from 57th place five years ago to 65th place this year. This was because of the gap between the rich and poor widened and because the middle class has remained at only 10 percent to 12 percent of the population for the past decade. In addition, education dropped nine positions in the index to 41st place among 60 countries at a time when Russia plans to reduce its investment in education and human capital. The share of gross domestic product spending on science, education and health care will continue to decline, while spending for the military, police, intelligence services and other siloviki structures will increase.
The state has become more corrupt and criminalized. The most striking 2. example was the Kushchyovskaya massacre in early November that unmasked the complete fusion of organized crime and the local government, including the regional legislature, the court system and law enforcement agencies. It is no surprise that Russia fell 12 places in the most current World Economic Forum’s Global Competitiveness Report from 51st to 63rd place among 134 countries. Russia’s state institutions were ranked among the very worst in the world at 118th place. While the Kremlin pronounces empty words and slogans about “modernization” and “nanotechnology,” Russia has fallen to 80th place in the ranking for innovation, 126th place in terms of protection of property rights, 125th place for development of the financial market and 128th place for the high burden of state regulation on business. As a result, Russia again had the worst economic performance among the BRIC countries in 2010, including indexes for direct investment and economic growth, with capital flight from the country reaching $29 billion over 11 months.
The economy has become more state-controlled and ineffective. The share of 3. the raw materials sector in the economy continued to grow in addition to its already oversized share in the country’s export budget revenues. With the state’s share in the economy now at 50 percent according to government sources — and even higher if you count businesses owned or controlled by state officials — and with state workers now accounting for every second employee, the level of economic competition is woefully low, which means a rise in prices and overall inflation and a drop in quality, productivity and quality of goods.
Most Russians are overcome by cynicism and anger over their declining 4. standard of living and the fact that the ruling elite abuse their power and continue to embezzle money and assets from the people and businesses with impunity. In short, Russians have lost all hope for the future under the current leadership. This is reflected in rising crime, xenophobia and violence. The most striking evidence of the people’s growing anger and intolerance and the disintegration of Russian society was the riot by ultranationalists on Manezh Square in early December.
To make matters worse, Moscow’s practice of appointing Kremlin-friendly yet highly unpopular governors from outside the regions only intensifies the provinces’ sense of alienation from the federal center. The Kremlin has taken an imperial approach to governing the regions, laying the foundation for an increase in separatist sentiments, particularly in the North Caucasus, Kaliningrad and in the Far East.
Putin’s desire to remain in power for another 12 years after the 2012 presidential election spells disaster for Russia. In the best case scenario, we can expect long-term economic stagnation and social decline. This will be coupled with a continued rise in corruption, drop in foreign investment and the flight from Russia of both capital and millions of its best and most talented citizens. In the worst case scenario, the continued degradation caused by corruption, monopolization and lawlessness could result in a total collapse and disintegration of the country, and if the country’s leadership doesn’t change this happen in the next decade.
Vladimir Ryzhkov, a State Duma deputy from 1993 to 2007, hosts a political talk show on Ekho Moskvy radio.
Da Vinci December Macro and Strategy Report (Russia)
Februar 2nd, 2011 by admin | No Comments »