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Inside the BRIC's Enigmatic 'R'

Steve Sedgwick|CNBC Anchor
Thursday, 4 Feb 2010 | 3:20 AM ET

If the truth be known, few things in life shut me up. I know, that's not much of a revelation for SquawkBox Europe viewers.

AP

However, one thing that does quieten me for an hour or so every day is The Daily Telegraph's cryptic crossword. On the flight to Moscow I tackled Wednesday's puzzle.

The clue for 10 across was 'mysterious magnetic flows around island', (nine letters). The answer was an easy anagram of the word 'magnetic' combined with the 'I' from island - 'enigmatic'. For those of you who prefer your crosswords a little more straightforward, the clue could just have been 'overused adjective to describe Russia'.

For Russia is still one of the most enigmatic, complex and confusing countries on this planet. It is a country that ever since the break down of the Soviet Union in 1991 has been promising modernization, promising to invest in new technologies and promising to reduce its economic dependence on its vast natural resources.

By and large, it is still promising a lot and struggling to deliver. Jim O' Neill of Goldman Sachs still maintains he was right to place the country in the BRIC acronym - symbolizing high growth emerging economies - eight years ago, but the recent global economic crisis has shown that the country is still as dependent as ever on commodities.

Last year saw the Russian gross domestic product contract around 8 percent, the worst figure since 1994. In comparison China grew over 9 percent, India still had a growing economy and Brazil just about avoided any meaningful contraction.

The Russian economy, which had been worth $1.7 trillion in 2008, slipped to $1.2 trillion as a result of the crisis.

The President, Dmitry Medvedev has promised modernization, stating that without it, the economy has no future, despite its natural riches. High technology sectors are just one of the areas he is keen to promote.

Between Perestroika and Modernization

But critics say there is little real action in this direction. The Economist analyzed Medvedev's 'Building Project' in its November 26th, 2009 edition, drawing parallels with the perestroika era of the 1980s:

"At times, Mr Medvedev's speeches sound uncannily like postmodern renditions of Mr Gorbachev's. His diagnosis is relentless: a primitive, commodity-based economy cannot create prosperity….And his vision of the future is charged with excitement: a Russia bursting with nanotechnology and nuclear-powered spaceships. Yet ultimately his recipe for change is implausible," the Economist wrote.

Despite criticisms of the lack of diversity in the economy, early economic statistics for 2010 look encouraging, with GDP seen bouncing back with 3 percent-plus growth this year.

Rail freight, seen as a key measure of economic health, rose 17 percent in January, the third month in a row of year-on-year gains, and manufacturing also showed a monthly expansion.

Liquidity crises which preyed upon Russian companies in 2008 and 2009 may also be consigned to memory, with deputy central bank chairman Alexei Ulyukayev forecasting loan portfolios growing 20 percent in 2010.

And the oil and gas sector is powering ahead, with the country producing more than 10 million barrels a day of oil in January, significantly more than the next biggest producer Saudi Arabia.

The Russian conundrum though goes right to the top, and the relationship between Vladimir Putin and Dmitry Medvedev typifies this. Is the former just playing 'good cop' to the latter's 'bad cop'? Are they bitter rivals? And just what are their intentions towards the oligarchs who still control so much of Russian industrial capacity?

No-one has to date offered conclusive answers to any of these questions.

The Wall Street Journal delved into this issue last month, pointing out that if the Russian government still wanted to get rid of the power wielded by billionaires such as Oleg Deripaska, then why was the owner of great swathes of assets, including aluminum giant RUSAL, given such official support to help him avoid falling victim to the global financial crisis?

The Journal attempts to answer its own question stating: "Before the crisis, the most dynamic players, like Mr Deripaska, became ambassadors for Russia's economic expansion, gobbling up assets overseas. Since then, the tycoons have provided the capitalist engine driving Mr Putin's Kremlin-dominated system."

History and Mystery

Even central bank decisions are shrouded in mystery. There are no set public dates for rate-setting meetings. In fact, it's only been six months has the central bank has even bothered to explain to the markets why it has changed rates.

This from a body that cut rates ten times and by 425 basis points in the current cycle, down to the present refinancing rate of 8.75 percent.

For outside investors the challenges are many but not insurmountable.

A case in point as to the complexity of doing business in Russia is the experience of BP. The UK oil major has had more than its fair share of ups and downs in the country and only now, after years of tensions surrounding the management of its massive TNK-BP joint venture, has peace broken out between the BP and its Russian billionaire partners.

BP Misses Forecasts, Shares Fall
BP missed profit forecasts for the fourth quarter, dragging shares in the company and energy sector lower Tuesday. "The market probably hadn't really understood how tough the downstream was," Tony Hayward, CEO of BP, told CNBC.

Earlier this week I asked Tony Hayward of BP why doing business in Russia was so very different from elsewhere?

"I think it's probably the history. The history of Russia over the past twenty years has been very challenging. It went from a Communist state to completely uncontrolled free-market capitalism, which was actually a mistake. The pace of transition was too fast. It then went back to a quasi-state run economy," Hayward said.

And yet international oil companies such as BP are compelled to do business against this ever-evolving political backdrop. Quite simply they are desperate for the reserves. Hayward believes unequivocally that the TNK-BP experience has been a positive one for BP, despite the roller-coaster ride.

"Russia's been a great place to do business. We've done very well out of TNK-BP and so have our partners. By and large everyone is pretty satisfied," he said.

I pushed a little further and asked him if the Russians had used undue pressure to get what they wanted from the joint venture. Hayward's reply was as cryptic as you would expect when talking Russia: "I think they fought the Russian way."

Perhaps Winston Churchill summed up the questions over what drives Russia better than most 70 years ago, in a remark that remains true even today:

"I cannot forecast to you the action of Russia. It is a riddle, wrapped in a mystery, inside an enigma."

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