Want to Invest in Russia? Here's Why You Shouldn't

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Includes: CEE, FXRU, RBL, RSX, TRF
by: Craig Pirrong

After Putin elbows him aside in 2012, Russian president Dmitry Medvedev should move to Branson and open a theater. His standup routine is priceless. (At least I think he’s standing up–with the diminutive Medvedev it’s always hard to tell.)

Yesterday’s routine was delivered before a group of U.S. venture capitalists. It’s a howl:

Boosting Kremlin plans to transform Moscow into a global financial center, President Dmitry Medvedev told visiting U.S. fund managers that his country was a haven for equity firms suffering from stricter financial regulation at home.

Medvedev said tough policies enacted by a host of governments after the financial crisis should raise the appeal of the Kremlin’s plans.

“We invite all those who suffer at home to come to Russia,” Medvedev said, according to a transcript posted on his web site.

Suffering at home? Come to Russia, where they really know about suffering! They consider it a national virtue!

I agree Europe and the U.S. are slouching towards far less free capital markets (although the egregious Dodd “angels” provision died a merciful death). But things would have to get worse by orders of magnitude for the situation to be anywhere near as bad as they are in Russia. Let’s just come up with a little list about the dangers of investing in Russia: (a) lack of a rule of law, (b) no secure property rights, (c) constant risk of expropriation, (d) no real protection of intellectual property, (d) corporate raiding a la Russe, (e) corruption, (f) crime, (g) mafia shakedowns, (h) government shakedowns, (i) decrepit infrastructure, (j) declining working age population, (k) decaying educational system (hopefully later I’ll comment on a story documenting the massive bribery in Russian education–starting in pre-school (!), (l) acute dependence on raw material exports, which hold the country’s economy hostage to world economic conditions (meaning that if things go bad in Europe and the U.S., they’ll go even worse in Russian), (m) relatedly, the resource curse in all its manifestations. I could go on, but you get the point.

One of Medvedev’s best one liners: "I will not take time listing specific advantages of the Russian economy today.” Why not? That wouldn’t take much time at all.

Captain Obvious also made an appearance: ”As regards the mood of American and foreign investors in general, who are often guided by the negative experiences of their predecessors.” Who knew?

I actually sympathize with Medvedev. He knows, I am sure, of Russia’s debilitating handicaps–virtually all self-inflicted–as a market for investment. Indeed, he acknowledged some of these handicaps in his remarks. But he offered nothing concrete in the way of palliatives. Indeed, he cautioned against expectations that the only specific measure discussed–an agency to protect foreign investments–would actually accomplish anything:

As regards the possible creation of an agency for protecting foreign investments, Medvedev noted that the powers of this body were at issue, as judicial protection or intervention by prosecutors is often needed due to business conflicts. He said that all such an agency could do is give “a political impulse, which is sometimes a good thing”.

“There should be a body which reports to the country’s leadership about what is happening, but the question is its scope, because there are arguments both for and against,” Medvedev said.

He rather pathetically argued that Russia’s laws “are quite reasonable” but “often this legislation may not be properly observed by business entities and may not be always interpreted accurately in judicial proceedings. Besides, there is a problem of court awards enforcement.” Other than that, things are great!

But Medvedev is actually powerless to do anything to address these problems. He can point them out–and bully for him for at least acknowledging them–but the fact that he can diagnose but cannot cure only points out his basic irrelevance. In the end, Medvedev was reduced to the Tinker Bell Strategy (has he been talking to Krugman?): “It is the position of those investors who admit positive changes in the Russian investment climate that could be used to change the view of foreign businesses with regard to investment in this country, Medvedev said.” Problem is, if the dogs don’t like the dogfood, all of the happy talk advertising in the world isn’t worth a damn. Especially since everybody knows that Putin is making the dogfood, and that Medvedev is just the pitchman.

Medvedev’s words count for little when corporate raiders who work for him and the jailers–murderers–of Magnitsky- walk free.

The fact is, long after Medvedev retires to take up residence near Yakov Smirnov, the Osmond Brothers, and Silver Dollar City, investors would be well advised to pay little attention to his blandishments, or those of his successors, and instead pay heed to the warning of American venture capitalist David Kronfeld:

There is a widespread feeling that there are thousands of ways to steal your money in Russia.

Yes, that’s the punchline, but it’s no laughing matter.