Why, for Russia, Turkey is an issue

Discussion over dinner, in Moscow, "we were looking to like Turkey" but... based on this news...

Of course, I am no Turkey expert, but would consider that – in an environment of global credit restriction, ‘religious risk’ is just a punt too far (apropos the recent State Prosecutor’s play) and while these games might seem logical - politically, locally - they have played massively badly, globally. As bad as Russia’s politics can do, of course, but the world is robust to Russia risk these days: and Turkey isn’t 15% of the world’s proven hydrocarbon reserves.

On any meaningful econometric and trade analysis of Turkey we should be saying ‘wow, what opportunistic treasure here lies’. But, in a world where once-mighty Bear Sterns got sold for a song, Wall Street, with its deeply-embedded fear of Islamic-exposed markets, may find global chief investment and credit risk officers will be giving Turkey an investment pass…that hits Turkish inter-bank markets fast and hard.

…logically, IMHO, Turkey should be a neo-BRIC market. Actually, however, I think investment in Turkey in the next 12 months will be tough to obtain, except out of the middle east and, hmm, Russia…. But in the next 8 weeks (for technical reasons) you will read about ‘credit crunch hits Russia’… So don’t bank on that Russian ‘deep pocket’ of last resort, which global banking markets would like to get hooked on, for Turkish banks….

…when global capitalism tries to figure out ‘economic misery’ it tries to refer back, like a prophet to the Old Testament – which is why macro-economists try to make comparisons again to the 1973 oil crisis (high fuel prices + bubble (property-related) indebtedness +‘culture clash + war in the middle east)’. Except this is unknown territory. The primary markers of geo-political-economics are unique, today. For the first time, actually, in my adult life.

Post-modern capitalism has never known High oil price + banks scared to lend to each other, let alone *you* + consumers *drowned* in debt + massive geopolitical (war-related) risk + ‘now is when the cost-base differential of globalization hits us domestically in the west’ + a crisis in western democratic consensus (I mean, if there was consensus, the DEMS, in the US primaries would have a candidate by now)…nor is there the ‘left-right’ western political debacle which, strangely, we see now, as if for the first time, benignly, underpinned 1970s economic risk analysis.

No, there is no handbook for this one.

Sadly, since 1918, it has been Turkey’s fate to be on the shit-end of this, and every, geo-political and economic stick.

On a purely numbers basis? TUR real economic growth is likely this year to be half that of Ukraine’s – inflation however will also likely be half Ukraine’s. Not so bad huh? Way bad! Ukraine isn’t what a Global Risk Officer, in New York or Frankfurt or Zurich, would call ‘at Islamicist risk’, nor are they scared of its long-term macro-social story. That changes the investment dynamics 180 degrees. These (men) are scared of Turkey. Like they were of Russia.1998-2002? 2004?

To be a Global Chief Investment Officer, right now, looking at Turkish stock, would be really interesting. 'Cos I am fascinated, precisely because I don't know if - should I have that job - I would decide buy Turkish or 'avoid exposure to Turkey like the plague'...

I guess, for the good ones, that is how intelligent CIOs earn their money...

“They’re stealing the gas, Nancy, they’re *stealing the gas*”

Gazprom is spending a shed-load on some well-connected PRs right now. Friend-of-Dmitry-Peskov, the US PR firm, Ketchum, runs a global program. Now Ketchum is a well-known consumer PR firm in the USA, but something of an also-ran (IMHO) in the rest of the world (and has, BTW, the most irritating *cutesy* web-vid intro on its website, the "greeters", ugh, which appears to assume the readers, the potential clients, are morons). It was lucky to get this, because this is a big, complicated mandate for a largely consumer PR firm, but its long-standing, Russian partner, Michael Maslov, has solid Kremlin connections.

...and breathes in... But through its Omnicom parent, Ketchum has some partners with clout, like the respected Gavin Anderson, the financial spin doctors. The point is, while I like and admire Michael (we alternate to buy each other dinner), what are all these *global* people doing for their fees?

Get the job done guys and, if you can’t get it done (perhaps because – and I know the score and how this works in Russia – the client was obliged to hire you, on instructions, but now ignores you), then quit the mandate. Big fees or no big fees, in the long run you suffer, or your reputation does, if all you do is bank the cash and merely spectate as a client’s global reputation collapses. But what do I know, maybe they’re actually slaving away and a client fight-back is about to materialize. If so, news cycle, guys, news cycle: are you acquainted with them?

What I do know is that I have worked for a company once described as “the most hated company ever to launch an IPO”, and we did stuff. It worked.

Anyway, my 'outburst' comes as the liberal, anti-Russian media in the UK delivers an astonishingly one-sided reportage of the Gazprom-Ukraine dispute (examples here and here).

The western media isn’t telling you that, quite aside from a payment track-record that makes a sub-prime mortgage holder a good bet, Ukraine is *stealing the gas*, siphoning it off, as it transits Ukraine into Western Europe. Where does Naftogaz Ukrainy let it go to? Well let’s just say that the corporate profits of some Ukrainian oligarchs' heavy-industrial businesses are looking surprisingly robust in the face of fuel cost rises over the last two years…

But the key thing is this, the ‘free press’ of the West just doesn’t like the idea that ‘democratic’ Ukraine (“they won Eurovision, they had a revolution, they can do no wrong”) could be anything other than on the side of the angels. The western, liberal media is so bound up in its hate (and I don't think that word is too strong) and suspicion of Russia, it will (and does) self-edit to bring you the story that always puts Russia in a bad light.

- Ukraine stealing gas? Ignore – our readers/viewers need only know that Ukraine is ‘free’ and is ‘pro-western’
- Russia reacts by reducing the flow by the amount it steals? Boo Russia!

This email conversation, yesterday, with a new political friend in the UK sets this in context (I hope):


From: New political friend in the UK
To: Red Exile

…[…]… Also, I saw that the new President of Russia has cut off gas supplies to the Ukraine. What is life like out there when these sorts of things happen?

From Red Exile
To: New political friend in the UK

“Re: Ukraine – LOL. GAZP didn’t cut them off; just reduced the supply by the amount that Ukraine is illegally skimming it off and siphoning to some dodgy industrial clients on the side. Really, the UKR gas company uses the fact that it transits most of Europe’s gas to hide what Naftogaz Ukrainy, the gaz monopoly, steals. This brokers’ note [it is an extract from one issued yesterday by Renaissance Capital – Exile] explains more:

“Event: Ukraine's dispute with Russia over gas supplies took a turn for the worse on Monday (3 Mar) as Gazprom cut supplies 25%, or around 30 mcm/day, in response to non payment by Ukrainian counterparties. NAK Naftogaz Ukrainy later claimed the actual reduction was 35% (46 mcm/day) though Gazprom has not confirmed this. To put the cut in perspective, Interfax reported that Ukrainian consumption was running at around 150-156 mcm/day last week.

“The Financial Times's Web site reported NAK as claiming it has enough gas in storage after a mild winter to withstand such constraints for a month. Even if this claim is exaggerated, it appears that yesterday's developments are a measured increase in pressure by Gazprom, rather than an outright attempt to force the issue to a crisis. The haggling over gas imports and the division of the spoils from the Ukrainian supply market could go on for some time still. Although we continue to believe that Gazprom chairman Dmitry Medvedev will not want his moment of victory in the presidential elections spoiled by this dispute, it is clear that Gazprom has no intention of surrendering out of deference to the political calendar.

“We are concerned by NAK's claim of a larger supply cut than Gazprom has admitted to. Only one figure can be correct, and NAK's record exposes it to the suspicion that it is preparing to resume illicit siphoning, which would seriously damage the aspirations toward integration with Europe that the government is voicing more and more loudly.”

From: New political friend in the UK
To: Red Exile

… […]…It's really bad news if the UK press is reporting this in such an anti-Russian way. I was also surprised by Gordon Brown's response that the new Russian President will be 'judged by his actions' - hardly warm words for an incoming world leader (who happens to be pretty friendly with Iran!)...


Well, yes, indeed.

The title of this post was inspired by this, wonderful West Wing moment:



PS: Just loving the news that Hilary did so well in yesterday’s Primaries: you go girl!

Declaration: the more I see of Obama, the more I think he is too proud, too-pretty-speech-no-substance and just not the person the rest of the world needs to have in the White House right now.

Viewpoint: McCain beats Obama; but only Clinton can beat McCain

The current market rate for bribes in Russia – an English translation – and Russia: has it got the power?

I had a staffer put this together for me today (posted alongside); the current (alleged) tariff for bribery in Russia (overall I think it is 15-20% light of real costs, but that is IMHO, so there).

Across my screen today I also saw a Deutsche Bank piece:

Electricity and heat supply outages across Russia
Deutsche Bank

February 14, 2008

There have recently been a number of accidents across the country resulting in temporary electricity and heat supply outages. Interfax reports that an equipment failure at the Carevskaya power substation in the Astrakhan region led to the electricity supply for almost 36,000 people being interrupted. Separately, the Krasnoyarsk governor blamed poor maintenance works at Eniseiskaya TGK for a number of failures in heat supply this winter, Interfax reports. There was also a fire at CHP-1 (TGK-14) in Ulan-Ude.

In our view, nearly all these accidents were the result of more than a decade of underinvestment in the sector [Exile's emphasis]. However, thanks to privatization and the liberalization of the sector, a significant amount of money has been raised for capex needs in almost all of sub-sectors. Nevertheless, such accidents highlight the technological risks of the sector and as most of the grid's and generation equipment is worn out, we cannot exclude there being further outages in the future. -1-140208

Heretofore, Anatoly Cubais’s great ‘unbundling’ of the Russian power monopoly has made middle-ish management, of variable talent (variable, because some are world-class), rather staggeringly rich. It is to be seen if it will be remotely effective in keeping Russian lights or furnaces burning bright (let alone Moscow AirCon systems running cool in summer) in the years to come.

Although not presently (yet) directly a fee-related interest, I am following the Russian GenCo-Distribution systems carefully (I cut my industrial-political teeth, as a lobby-ling, on the European gas and nuclear power sectors).

In 2009, I think one of the more conceptually interesting IPOs will be Inter RAO: the electricity trading arm of the dying behemoth, RAO UES. As I have written for someone elsewhere (not on the web), hydro-power from Kyrgyzstan, grid-linked to Russia, looks a good PPP/PFI investment bet. Ditto, strategic partnerships for foreign firms in the GenCo sector, prepared for an ‘RPI+/-x’ long-term-like concession.

Indeed, if Europeans can put aside their mono-dimensional bleating about ‘energy security’ for just a tiny moment, they will see (as I write in one of those rather dry, slightly neo-con-ish, US geo-political journals next month):

‘Energy security is a two-way street. Although we think of Russia as an exporter of oil and gas it is, and will increasingly become, an electricity importer. Over the three electricity Russian IPOs/privatisations we have worked on [in 2007] during the break up of the RAO UES monopoly, we see how truly inter-connected Europe’s energy markets and energy best interests are.

“Russia’s own electricity needs mean that it is already importing electricity from Kazakhstan; and shortly will import – in scale – hydro-electric power from Kyrgyzstan. The RAO UES subsidiary, INTER RAO (itself a likely IPO candidate in, perhaps, 2009) is the fascinating business that imports all this power, and looks enviously at the possibility of importing electricity from the generators of Central Europe; if only it can raise the billions of Euros necessary to build the inter-connecters between Russia and the CEE nations [Exile: which is now the reason why Gazprom is looking to buy European GenCos -they are buying Russia’s energy security for 2015+ ].

“So let us all conclude that energy security is a two-way street: raw materials in one direction and electricity in the other. In fact, in any debate concerning energy security it is good to remember that very few people come to the debate objectively and without an agenda. The EU institutions want to control one of the largest aspects of the EU combined economy, national sovereign determination of which member states have jealously guarded. Russia is frequently criticised but perhaps should do more to put forward its own case.”

As is unfathomably often the case for hydrocarbon-rich countries, Russia is hydrocarbon rich, but electricity poor (the same is true, BTW, for Saudi Arabia, Iran, Venezuela and even Kazakhstan).

And in Russia, this electricity ‘poverty’ is really beginning to show. This is an area that takes more than six months’ central pump-priming, highly visible, Kremlin investment to cure. Not least as, for Russia, GenCo infrastructure is only part of the challenge. It’s the ‘wires’ and the sub-stations too: now that’s fiddly and relatively expensive to do and… er… becoming really quite vital to medium-long term, Russian economic vibrancy.

PS: understand this sector and you see that Kazakhstan’s interest in buying some of Westinghouse is, actually, very, very clever.

Off topic: Stamina required! But then, On Topic, Russian economics

Since the man who is going to win the Russian Presidential Election, by a landslide, doesn’t really feel the need to campaign, I wanted to post some personal observations about Super Tuesday, since it is the only electoral ‘race’ I am going to witness this year.

As the Democrats seem set for a long-drawn out slog to determine their candidate three factors will become increasingly important.

Money talks: after an initial barn-storming start the Clinton campaign has been slower to raise money; whereas Obama has drawn in millions in the last three months. Using CNN’s last quarterly data, it looks as though Clinton should be pretty safe; but in the last six weeks, Obama has raised more healthily than she. Hillary Clinton did better than ‘Big Mo’ predictions (including mine) suggested; and this may help to shake the money tree some more for her. But in a long campaign for the nomination, Obama may be advantaged by the fact that he will be able outspend Clinton in the later stages of this race.

Clinton as at end Q4 2007 (CNN):

Obama as at end Q4 2007 (CNN):

This Democrat desperate spending spree is great news, BTW, for the Republican nominee, come the… you know… actual General Election.

Lack of downtime can lose elections: I have personal experience of this! The Democrats may find they do not have a clear winner by the end of May. This is a disaster for the party! There is every chance that, when we get to the Democrat Convention (Denver, August), it will be a ‘brokered convention’. The eventual nominee will be exhausted – mentally as much as physically. Meanwhile, the Republican candidate – looking more likely to be McCain – will have had a good 2-3 three months to rest (no need to campaign while the Democrats are still slugging it out) mentally and physically, and hone their national campaign message. Hate Bush as many US citizens do; there is now a growing possibility that McCain can beat Clinton, and I think even more likely, Obama, either of whom may both enter the race weakened.

Money talks here too. As the Democrats soak up more and more cash from their wealthy backers for the Primaries, that necessarily presents an opportunity cost for the General.

The White stuff : Early break-out stats suggest Obama is gaining white votes – and how sad that this should be a factor – but he is still to break 40% of white voters in the Democrat primaries to date. Again, this is good for the Republicans. Especially if McCain – once he has the nomination – campaigns on a ’50-state’, more centrist strategy. The Right will hate this, but they will fund it rather than see Obama in the White House.

US voters enjoy balancing the ticket – one party for President and another for Capitol Hill. I think the odds of a McCain one-term Presidency, albeit with a Democrat-led Senate and House, are looking shorter.

PS: Exile says Huckabee for President in 2012; because even if he can do it, McCain can only be a one-term President. And Huckabee’s knee-capping of the Romney campaign yesterday? That must have earned him the VP-slot in a McCann candidacy (nicely delivering the South as it does too – and keeps Anne Coulter-types off of McCain’s back).

Russia today? Nada caught my eye except: rotten inflation stats for January and a shrinking current account surplus; with RenCap forecasting the current account surplus will fall to zero by end 2009. Like I have said before; supply-side economics are out of kilter with domestic demand and 1-2 years from now, the Russian government is finally going to wake up to this fact, against generally weaker commodity prices: which is 1-2 years too late. As we enter 2010, ‘cheap money’ in Russia is going to be hard to find; the major western economies will still be weak and so where will inward investment in Russia come from then?

Does any of this matter? LOL! Maybe not. But put it this way. If I was the head of a global hedge fund, on a quarter-to-quarter view? I would now be overweight Russian stock to the global equity index I use and would increase my tolerance to Ruble exposure.

But, if I was global chief investment officer of a pension fund? I would be looking at a structural position underweight Russian equities, compared to the global index I use, and much less tolerant of RUR exposure, over the medium term. And, yes, I might be buying some more gold.

Potemkin Economics? And a wry aside way off topic…

A friend and colleague points me to remarks made by Prime Minister Victor Zubkov, at a meeting with the management of the Syktyvkar timber processing business:

"You are in great luck - you run your business in the most stable country. The financial crisis [elsewhere] in the world will, of course, affect the operations of many enterprises abroad.

“You work in a stable country, with a stable political system, stable taxes: that is why your business is on the way up"

And who can blame the Russians for enjoying the economic weakness of America, as they also take advantage of US foreign policy log-jam in Iraq?

But two sets of stats out of Russia give pause for thought and remind us that Potemkin economics is never far away, as a risk. Beyond hydrocarbons – whose pricing can be highly volatile if world demand falters on US consumer-led recession, not least in terms of demand for Russian raw materials from China – I think that the big economic risk for Russia 2010-2015 is that the manufacturing base won’t cope with burgeoning demand and that this will see the benefits of consumer demands leak away to overseas manufacturers.

The early signs of this may already have begun, if the Institute for the Economy in Transition is to be believed (noting, of course, that the IET is a vehicle for Yegor Gaidar, whose views are hardly neutral). At the same time, Russian wage inflation continues to soar; way out of kilter to GDP growth.

This is good, at this stage of the election cycle, for the ruling elite to shoe-in Dmitry Medvedev as President, on a landslide victory. In the long term, however, the combination of soaring wages and manufacturing capacity growth seriously lagging behind, leads to structural mess in supply side economics, and doesn’t bode well for President Putin’s laudable, long-term economic ambition: diversification of Russia’s economic base (away from oil, gas and metals).

An increasingly wealthy, free-spending Russian consumer is good electoral politics – and makes the retail sector and retail/warehousing real estate a strong buy – but it may lead to economic gains being lost to ramping inflation.

Now don’t get me wrong. Russia in 2008 will still bring in one of the world’s best GDP growth performances in 2008. But it won’t be entirely unaffected by the recession in the USA and Europe. For the reasons mentioned elsewhere, I would guess GDP growth in 2008 will come in under the Russian government’s forecast of 6.4%: I would say closer to 5%. Inter alia, this does suggest a tighter leash on P/E-led valuations for stocks on the Russian stock exchanges.

Off topic?

Ah yes. The humiliation and fall of UK Conservative MP, Derek Conway (who decided the public purse was a good way of ‘keeping it in the family’ and whose political career began its death tonight).

Some years ago – when he was between seats in Parliament having lost his seat in the 1997 UK General Election, he was casting about for a job in political lobbying. Not getting one he decided to go it alone. At the time he said: “I have met these New Labour Consultants and basically all they know how to do is pour gin & tonic for Peter Mandelson” (approximate quote as I can’t find the original).

He was talking about me.

The prat had come to me for a job and – not thinking much then of his brain or his understanding of what people like me do for clients – I politely sent him on his way. His sneering comments came a week later and, Tory mates at Westminster (I had, and have, a few bizarrely) pointedly said he had me in mind...

Well now, mate, you can pour me a G&T.