Ben Aris in Moscow
April 25, 2013
"There is no competition in Russia. The revenues are fake. You have to control the whole sector to make money."
This comment was made by Oleg Tinkoff on one of the panels at Sberbank’s recent investment conference, "The Russia Forum", yet this highly successful Russian serial entrepreneur's entire career is testament to the opposite.
Tinkoff began his career in the 1990s setting up an enormously successful bar-cum-microbrewery in St Petersburg, which is still packed to the gills today. From that he launched his own eponymous beer brand – a light larger and Russia’s answer to the Mexican brand Corona – which he eventually sold to one of the big beer companies for sqillions of dollars. Then he went into banking and more recently set up Russia’s first entirely virtual bank. Next up will be his own budget airline, which is coming, though no one is quite sure when.
Thus Tinkoff has created competition in several sectors himself. He controls none of them. And he has clearly made a lot of money. So what is he talking about?
There was a lot of irony in him making this comment from the stage of the Sberbank event. Until last year, this conference was known as the "Troika Dialog Russia Forum" – named after one of two vibrant and active local investment banks that did a brilliant job of selling Russia to the international investment community. It was one of my favourite events on the calendar. The halls were packed with fund managers and top-level businessmen from all over the world, who had to come to check up on how Russia was faring. There were entertaining sessions chaired by the likes of Marc Faber, the celebrity editor of the "Gloom Boom & Doom Report", together with fund managers such as "Black Swan" author and fund manger Nassim Nicholas Taleb or junk bond king Michael Milkin.
And this year? "Welcome back to the Sberbank snoozefest," tweeted one well-known correspondent as the next session started. The first panel contained the former UK premier Tony Blair, secretary of defence Colin Powell and Czech President Vaclav Klaus. Perhaps with the exception of former Russian finance minister Alexei Kudrin, all on the panel were very famous, very eloquent, very expensive to book - but none know that much about Russia when it comes to the nitty-gritty of investing.
Sberbank is the epitome of Tinkoff’s complaint. The state is engineering a concentration of power in the economy that is crushing the life out of competition and innovation. Following Sberbank's acquisition of Troika Dialog and the rescue of the failing Renaissance Capital last summer (it is still functioning but in a reduced form), Russia’s entire investment banking system is now controlled by two state-owned giants – Sberbank CIB and VTB Capital.
This is not a good time for investment banking anyway, but the upshot is everyone else has been caught in the "killing fields," as outgoing Renaissance Capital CEO Stephen Jennings put it in his swan song, between the very large state-owned banks and the tiny specialist boutiques. In investment banking at least, there is no real competition, the revenues are fake as the origin of the majority of fees is actually the federal budget, and these banks do indeed control the sector so are the only ones making money.
This is not a return to the command economy, but the result of bad policy. You can see what the Kremlin is trying to do. It wants to keep control over key strategic sectors, but it also sees the need for competition. So it has set up a hybrid system where it has two big state-owned organizations that compete against one another. And it does work – to an extent. Sberbank is now a much, much better bank than it was a decade ago.
The Kremlin is about to do the same thing with the gas sector. As the budget surplus dwindles, there will be more onus on the state-owned gas monopoly Gazprom to make money; in the boom years it was little more than a tool of foreign policy. So state-owned oil giant Rosneft has set up a gas subsidiary and will start competing head-to-heard with Gazprom on the domestic market from about 2016.
But the trouble is that his hybrid-market model is not enough to coax investors into Russia. It doesn’t matter if the state-owned companies are more efficient and profitable, as all foreign investors see is the dominance of "state-owned companies" that they don’t trust.
The upshot is that "The Russia Forum 2013" was a disaster because there were no foreign investors there. The event used to be awash with them, but the crushing boot of state arrogance has killed off its mojo. The only people that bothered to turn up were the old guard of local funds (and even some of these people who live in Moscow skipped it), companies that are reliant on the state for their business (the biggest group), and Sberbank’s own employees.
Russia is making itself an irrelevance. It has been the fastest growing major economy in Europe and has none of the huge macroeconomic problems almost all the other countries on the Continent face, yet the stock market is down by nearly 10% this year already and was trading at the levels last seen at the end of 2009 at the time of writing. The price/earning ratios of stocks are similarly depressed to crisis levels. Russian stocks have always been cheaper than their emerging market peers, but now they are ridiculously cheap even by Russia’s own modest standards.
The same is true in foreign direct investment (FDI): Usually Russia can manage to attract a couple of tens of billions of dollars a year, but last year the net FDI was a pathetic $358m according to central bank data – enough to buy, say, one moderately sized retail chain. Yet like the first panel at Sberbank, there is a big disconnect between what is actually happening and what the government would like to happen: Prime Minister Dmitry Medvedev said in April that FDI will rise to about $70bn by 2018.
At the moment, Russia is about as popular with international investors as a skunk in a banya. Things are so bad that President Vladimir Putin felt forced to urge Russian companies to switch their privatisation plans from listing on international markets to floating on the local exchanges instead. VTB bank dutifully announced it would offer a secondary public offering of 10-15% of its shares, worth about $3bn on the Moscow Exchange, some time very soon. And the state followed up increasing the value of state assets to be sold to investors this year from RUB300bn ($10bn) to RUB1.2 trillion.
But Russia can put as many companies on the list as it likes – no one came to its investment conference. Like Tinkoff is suggesting to the powers that be: if you really want to attract investors, you have to learn to share your toys with the other children and not just hire a bunch of expensive clowns to entertain your classmates.