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Tuesday, July 19, 2005

Business in Russia Lucrative Despite Yukos Case - Foreign Investors

Image from MN archive07-19-2005 The Moscow News - Trade groups, PR advisors, business consultants and investors themselves say that even after the gruesome Yukos affair the rewards of investing in Russia can outweigh the considerable risks. The Reuters agency presented a report which shows that despite all the naysay in the Western media, business in Russia is great for many foreign investors.
Life may have got tougher in the natural resources sector as the Kremlin extends its control over areas it deems strategic, but for many consumer-facing businesses Russia's market of 145 million is delivering phenomenal growth. "The facts compel me to say that the investment climate is excellent," Andrew Somers, president of the American Chamber of Commerce in Russia, told the agency.
Somers brought up Coca-Cola's $600 million takeover of juice maker Multon and Alcoa's $260 million purchase of two Siberian alumina plants as prime examples of U.S. companies trying to capitalize on the good investment climate in the country. Coca-Cola and Alcoa are by far not the only ones. As MosNews reported recently, Japan's Toyota broke ground on a $144 million car assembly plant in St. Petersburg and international auto giant DaimlerChrysler is looking for its own construction site.
Retail, financial services and light industry are all luring new entrants into an economy which, driven by record prices for its main export, oil, is enjoying its sixth year of strong growth.
All of this attracts the attention of Western business despite concerns about the rule of law, corruption and a slew of copycat tax audits which have hit top Russian and international firms. The main point for concern is of course the punitive $27 billion back-tax bill which destroyed what was once Russia's most successful private oil company Yukos and put its founder and co-owner Mikhail Khodorkovsky behind bars for nine years. "Was the way the Khodorkovsky thing was handled a phenomenal mistake? Yes. Has it hurt Russia? Yes," Peter Necarsulmer, head of public relations firm PBN and a 15-year Moscow veteran, was quoted by Reuters. "But what we can't do is point to every difficulty foreign investors face and tie everything together into a theory of investment climate doom and gloom. Policy has changed: The old policy was, stay out of politics and pretend to pay your taxes. The new policy is, stay out of politics and pay your taxes."
A recent survey of 158 foreign firms by PBN found 78 percent planned to expand in Russia in the next three years, 20 percent to stay at the same level and just 2 percent to cut back.
While established players are mostly bullish, prospective entrants may have been spooked by television pictures of Khodorkovsky in a courtroom cage and the overwhelmingly critical coverage of the case in the Western media. "I call it post-Yukos stress disorder," said Charles Hecker, who runs the Moscow operation of the consultancy Control Risks. Adding to the uncertainty is Russia's growing assertiveness over its perceived national interest, including plans to bar foreigners from controlling a yet-to-be-completed list of strategic natural resource deposits. "If you are an investor in the oil industry, you have every reason to be nervous," said Hecker. "But if you are a manufacturer of ladies' underwear, you don't need to worry about what's happened to Yukos."
Part of the problem is the tendency of Russia's leaders to resort to Cold War rhetoric when they face foreign criticism, reviving negative stereotypes long held in the West, says Max Gutbrod, a partner at law firm Baker & McKenzie in Moscow. "Russians tend to express themselves very aggressively. There are a lot of understandable points which could be better articulated," said Gutbrod, who is also deputy chairman of the Association of German Business in Russia. Despite the lousy PR job Russia is doing, membership of the German business group has risen by 150 to 500 over the past 18 months. "Things are going fantastically. Growth rates are gigantic," says Gutbrod.
Foreign direct investment in Russia was $9.4 billion last year, up 39 percent. But the absolute figure remains modest by comparison with the $60 billion sucked in by world leader China.
The one major concern which remains despite those upbeat views is the actions of Russia's overzealous tax inspectors who are doing everything to pervert one of the world's most liberal tax regimes. "Russia has an investment-friendly climate based on the taxes that are in the books," said Mike Kubena, managing partner at PricewaterhouseCoopers, pointing to the 13 percent flat rate of personal income tax and 24 percent corporate rate.
As MosNews reported, Russia's President Vladimir Putin has told his tax inspectors to stop "terrorizing" business and it remains to be seen whether he will prevail over his bureaucrats. "I don't think anyone will be satisfied until you see actions that reflect the intent of the law," said Kubena.
In the meantime, there are a few golden rules investors should follow: Check out your local partner, sign watertight contracts, be a good corporate citizen, stay out of politics.

Thursday, July 14, 2005

Russian Stocks Recovering After Yukos Trial, Still Cheap

Image by www.veer.com13.07.2005 16:47 MSK MosNews - Investors were shaken by the state-driven breakup of Russia's leading oil company Yukos and the long fraud trial of its ex-CEO Mikhail Khodorkovsky. But they have recovered their poise and pushed the market towards all-time highs, Reuters reported Wednesday. Fund managers say, Russia is still the cheapest emerging market in the world even after the benchmark RTS index ran up year-to-date gains of 23 percent. "We have called the market positively since the start of the year because we thought the Yukos discount would fade," said Steffen Gruschka at DWS in Frankfurt. "Valuations are attractive and liquidity is enormous." DWS's 500 million euro (345 million pound) Eastern Europe fund has gained 23 percent in euro terms in 2005 and Gruschka, who likes pipeline, refining and fertiliser stocks, has increased his Russia weighting in anticipation of further gains. The demise of Yukos raised profound questions about property rights and the rule of law in Russia. But, after Khodorkovsky was jailed for nine years in May, many investors concluded that the investment climate could only improve and refocused on fundamentals. Russia is trading at around seven times forecast earnings — still lower than Brazil, the next-cheapest market in the emerging markets universe — and well below a historic average of over 10. "The Russian stock market is the cheapest in the world even after the latest move," said William Browder, head of Hermitage Capital Management, the largest Russia-dedicated stock fund with $1.8 billion under management. "There is an enormous amount of liquidity combined with very low valuations. You have the kindling to start the fire as soon as there is some optimism," said Browder, whose fund is ahead 17 percent year-to-date. Morgan Stanley's MSCI Russia index, a more representative yardstick for emerging markets investors, is up 17 percent and stands 10 percent off its April 2004 peak.

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