Business

The London Stock Exchange Comes to Moscow

On the 2nd of February the Moscow International Currency Exchange, or MICEX, held its fourth annual joint conference with the London Stock Exchange. The theme for the day was the general investment climate in Russia, especially as it impacted on the prospect for Initial Public Offerings (IPOs). In the mid-2000s, these became the favoured method by which large Russian companies attracted external finance. London was the most commonly-used exchange. But in 2008 the flow dried up. What signs are there for new life in the market?

Rather as was the case at the RussiaTalk seminar organised last October by the Russo-British Chamber of Commerce, the atmosphere at this gathering was one of caution, reserve and “reality checking”. There was none of the boastful, condescending talk which was common in Russian business circles three years ago, when the rouble and the oil price seemed to be marching in lock-step towards world domination. This year’s atmosphere gave far more hope for Russia’s future because of its realism and the evident willingness of the participants to listen and learn. It was therefore a useful meeting.

Perhaps the most galvanic speaker was Victor Shvets, the emerging markets specialist at Nomura, who gave a forceful presentation, accompanied by a blizzard of statistics, in which he did not shirk from confronting the underlying problem of corruption in the Russian economy.

“All emerging markets are corrupt,” he said. “It is just that some corrupt more efficiently than others. And Russia does corruption badly.”

The result of this was that the economy went from boom to bust in a way which gave no assurance to the markets that if it went back to boom, bust would not once again be round the corner. This was due to the oligarchic structure of control of the economy. The result was, Mr Shvets said, that is was doubtful whether Russia is capable of growing at all without serious economic restructuring, including an “aggressive attack on infrastructure constraints”.

Added to that is the problem of “rusty Russia”, by which he meant that longterm capital neglect has put much of industry beyond hope of recovery from purely internal improvement. But would outside investors flock to assist an economy that seems structured round the interests of the owners of a few very large corporations, to the disbenefit of almost everyone else? Beyond a sixmonth readjustment period which he foresaw due to recent over-discounting, he doubted it. What is there to invest in? There are always possibilities, and he said that high-tech companies were the best bet if you can find them, and Moscow property the worst bet. Beyond this, he would not be specific.

Xavier Rolet, CEO London Stock Exchange

The implication behind Mr Shvets’s comments was that in the medium term Russia will have to rely on its human rather than its physical capital. But this, as Nick Koemtzopolous, the Russia specialist at Credit Suisse, argued is not the sure bet it once was. The Russian educational establishment is under serious threat due to lack of government funding. Today the country produces only 10% of the scientific papers that the United States does. Russia is no longer a scientific super-power.

Nor is native entrepreneurship likely to save the day. Mr Koemtzopolous pointed out that only 10% of Russians work in companies with fewer than 200 employees, compared with an international average of 40%. The small and medium-sized business sector, traditionally the driver of commercial innovation in free economies, is under threat just as much as the scientific sector is.

My personal impression from talking to delegates during the day, and afterwards at the lavish reception in the History Museum, was that everyone present would have been supportive of the reform proposals announced the day after the conference by the Institute of Contemporary Development, whose board of Trustees is chaired by President Medvedev. These would pave the way for an open economy and movement towards the rule of law.

Yet I would also guess that the majority of those delegates would not hold out much hope that any such proposals will actually be implemented. Business as usual.