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Gulf-Times: Fear and greed on menu at Russian investment bash

Published: Wednesday, 25 April, 2007, 08:43 AM Doha Time
LONDON: With Russia’s economy and financial markets booming, deal makers attending the biggest business conference on the calendar this week have every reason to be as bullish as ever.

But, in contrast to recent years, concern pervaded the Russian Economic Forum in London over how long the good times can last. Cancellations by a string of top speakers, apparently on Kremlin orders, dampened the mood and could herald a chillier climate as parliamentary and presidential elections loom.

“This is a credit boom – Russia is reaching the limits of its capacity in people and equipment. It is a boom which is not sustainable,” said Hans-Joerg Rudloff, chairman of Barclays Capital and a veteran player on the Russian financial scene.

“Financial markets reward excessively and financial markets will equally punish excessively.”

Investors have had a terrific run in the seven years since President Vladimir Putin was first elected: the stock market has risen 20-fold and the government has paid off virtually all of its foreign debts.

Russian firms have launched an unprecedented foray into capital markets, raising tens of billions of dollars in debt and equity financing.

But, even as economic growth accelerates on the back of strong consumer demand and investment, bankers predict a pause in the frenetic pace of deal making, as Russians elect a new parliament in December and a successor to Putin in March 2008.

As tributes poured in following the death on Monday of Boris Yeltsin, Russia’s first post-communist president and a rare example of a Russian leader to cede power without a struggle, some worry over the still-uncertain succession to Putin.

Putin has pledged to observe the constitutional limit that requires him to serve no more than two consecutive terms.

Informal campaigning has already begun, with first deputy prime ministers Dmitry Medvedev, a liberal lawyer, and Sergei Ivanov, like Putin a former spy, the undeclared frontrunners.

Speaking at the conference, Jean Lemierre, president of the European Bank for Reconstruction and Development, urged Russia to stay engaged with the West and not to become absorbed in its own affairs.

Britain’s Trade and Industry Secretary Alastair Darling also worried that the West may be losing its influence over an increasingly protectionist Russia. “It won’t work. Protectionism dressed up as patriotism is still protectionism,” he said in a keynote speech on Tuesday.

The biggest setback to foreign investment over the past year was Anglo-Dutch oil major Shell’s decision, under intense state pressure, to cede control over the $21.4bn Sakhalin-2 gas project to state-controlled gas monopoly Gazprom.

Concerns, too, have been raised by the embroiling of auditor PricewaterhouseCoopers (PwC) in a tax investigation into fallen oil major Yukos. And, while PwC has had its licence to operate in Russia renewed, the case is still before the courts.

Roger Munnings, Moscow head of another “big four” auditor, KPMG, said he was following the case closely and hoped it would not lead to PwC being barred in Russia at a time when auditors are already running flat out.

“To take a player out of the caliber, size and professionalism of PwC would be a mistake because the market capacity is not there to take it,” he said.

While appreciating the risks, Munnings was still positive on Russia and said that KPMG’s practice could grow as much as 20-fold if it extends it presence to the two dozen cities with populations of over 1mn in his area of responsibility.

And new investors are still coming in: Texas Pacific Group TPG has become the first global buyout fund to set up an office in Moscow and is ready to make a bet on Russia becoming a top-four global region for private equity investment over the next five years.

Issues such as a lack of transparency boil down to “risk and pricing issues”, said TPG partner Stephen Peel, highlighting Russia’s vast need for investment to modernise its economy and infrastructure.

“Many commentators say this is a bubble,” said Peel. “I’m not so sure.” – Reuters 

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