Russian State-Capitalistic Model - Is This Right For Us????

THIS POST WAS ORIGINALLY PUBLISHED APRIL 09, 2007

Russian State-Capitalistic Model - Is This Right For Us????

This morning we are introduced to three interesting papers that are all interrelated.

Kommersant Daily has published a translation of the Saturday’s FT piece “NYSE is left in the cold as Russians flock to London” .
One of the bloggers published an article of Mr. Temerko, a former vice president of Yukos - Russia Buyers Beware .

Both of these publications are questioning in some way the road Russia goes in its development. This way looks strange to a certain extent, but all of us should not forget the Russian history. With all turmoil at the beginnings of last two centuries we are not qualified for a nice and quiet way. Frank Sinatra sang: “I did it my way”; we may say so: “we do it our own way”. To this end I would like to introduce another paper that was placed in VEDOMOSTI daily today: “A Model for Development: The Trap of the State Capitalism”. This is presented by A. Abramov, ATON strategist and by two fellows of The Institute for the Economy in Transition, which was promptly listed on the Institute’s web-site.

Why I think that they are all the intrinsic part of the picture – all discuss the Russian miracle. While the valuation of the quality of the Russian market institutes seems to be negative, the investor appetite for Russia is growing.

In 2006 RTS index grew by 70.83%, MICEX index – by 67.5%. The trading volume on the Russian stock exchanges increased three times as compared to 2005. Russia became one of the leading emerging markets of the world with the general capitalization of Russian companies of $ 90 billion. The breaking news in 2006 was the inflow of private capital to Russia - $ 41.6 billion (as compared to $1.1 billion in 2005).

The authors point that taking aside the global influences on the Russian stock market, the strong support to its flourishing were in the government efforts to consolidate and capitalize the state-owned holdings; all of them being planned to transform into the new structure of Russian economy. Another input to success was – the new phase of privatization that relates to the state-capitalistic economy model, i.e. IPOs of the companies while preserving the state control.

The paper analyzes in detail the negative dynamics in valuation of the Russian market institutions. It points also that 2006 Russian IPO boom in essence was the effort to insure the business from political risks (esp. 2008 elections).

Thus, the authors make the following conclusions regarding specifics of Russian investment boom and rapid capitalization of the Russian stock market: (i) repatriation of capital, that is the result of underdevelopment of domestic institutional environment, high risks and low investor protection rights – all these are the obstacles against re-distribution of assets within the country; (ii) considerable part of the raised funds was not directed towards development of business, rather associated with new process of re-distribution of property.

I would skip all deliberations, but in my point there is nothing wrong with what is going on. When we look back at development of stock markets and world economies, we see a lot of strange and questionable things going on. Russia is still a “kid” in market economy, and of course the birth and growth of this kid goes on with a lot of “strange and unusual” actions. Current Russian government did a lot, and we here see these profound changes every day. There are mistakes and wrong actions, but the general forward momentum is right. ATON and two fellows from the Institute are way too pessimistic about the state-capitalistic economy model.

But, maybe this model is right for Russia???