This content is from: Portfolio

Putin and Investors Engage in a Dialogue of the Deaf

Kremlin leader slams Western policy over Ukraine while urging Western investors to remain engaged in Russia’s economy.

Can Russia be at war with the West politically while coexisting with it and prospering economically? It’s a tough line to walk, but President Vladimir Putin sought to do so on Friday in an address that combined belligerence toward President Barack Obama and other Western leaders with entreaties to international investors.

In a feisty speech at the St. Petersburg International Economic Forum, Putin hit back at Western countries that have imposed sanctions on Russia over its interventions in Ukraine, condemning “those who would seek to maintain their monopoly on dictating global affairs.” At the same time, he beseeched investors not to “give in to blackmail but think about the profits and dividends you could earn in Russia.”

Speaking for 45 minutes, the Russian president insisted that “the level and quality of our people’s lives are improving,” and that the fallout from his standoff with the West over Ukraine “does not have a systemic effect on our economy.” He bragged about the 30-year gas supply deal he concluded with China earlier this week, saying it would entail $55 billion of investment in Russia and create “the world’s largest construction site.”

But business executives at the forum ­— foreigners and Russians alike — painted a very different picture. They described the economy as stagnant and complained about a bloated state unable to make broad structural changes, which they believe offer the only hope of reviving sustainable growth.

“Something has to be changed in economic policy for the country to succeed, but we can’t seem to figure out what it is,” German Gref, CEO of the country’s largest bank, state-controlled Sberbank, told a separate forum panel.

“The situation is sad and even boring,” echoed Irackly Mtibelishvily, Citigroup’s head of corporate and investment banking in Russia and the Commonwealth of Independent States. “All the questions and all the answers are clear, but still nothing is done.” Mtibelishvily’s boss, Citi CEO Michael Corbat, figured prominently on the long list of world business leaders who skipped this year’s forum altogether. Organizers had to face last-minute cancellations from a number of heavyweights whose names had already been printed in the event program, including CEO Robert Dudley of the British oil and gas giant BP and Leon Black, chief of the private equity outfit Apollo Global Management.

Still, Putin managed to take the stage flanked by a polyglot roster of corporate executives and investors that reflected his message of “a new multipolar order.” His panel included CEOs from French engineering power Alstom, Norwegian telecom Telenor Group and the Indian family conglomerate Sun Group, as well as the head of Mubadala Development Co., an Abu Dhabi sovereign wealth fund.

The forum also produced some hopeful signs that the worst could be over for Russia, both in its aggression toward Ukraine and in the economic consequences of that crisis, such as near-record capital flight and the disappearance of economic growth.

Pressed by Geoff Cutmore, a CNBC anchor who moderated his session, Putin offered a detailed explanation of his Ukraine policy, which included plenty of recriminations toward the West. He slammed the European Union for allegedly refusing to engage Russia over EU policy toward Ukraine, saying, “I have never seen such snobbism.” An eleventh-hour decision by former president Viktor Yanukovych, a Putin ally, to abandon an association agreement with the EU last November triggered protests in Ukraine that led to his ouster and a sharp rise in tensions between Kiev and Moscow.

Putin declared that the association agreement was unacceptable because “the next step would be Ukraine in NATO; and the step after that, U.S. rockets in Ukraine, all while refusing to talk to us about it.” Russia’s annexation of Crimea, formerly a Ukrainian territory, was necessary to defend the ethnic Russian population there from violence, he insisted. “If we hadn’t acted as we did in Crimea, it would have been worse than Odessa,” he said, referring to the deaths of more than 40 pro-Russian activists in a fire in that Ukrainian city in early May after sectarian street fighting.

But Putin also held out a grudging olive branch to the new Ukrainian president — most likely billionaire businessman Petro Poroshenko — whom voters will go to the polls on Sunday to select. “We respect the choice of the Ukrainian people,” the Russian president said. “We are sure that people in Ukraine are looking for a way out of the violence, and we also want that.” Asked whether he would talk with Poroshenko, who polls suggest will garner the most votes on Sunday but not enough to avoid a second-round run-off, Putin injected a rare dash of humor. “Let him pay the $3.5 billion they owe first to make for a sweeter conversation,” he said, referring to Ukrainian bonds that Russia bought at below-market rates in an attempt to prop up former president Yanukovych last winter.

Elvira Nabiullina, the governor of the Central Bank of the Russian Federation, who headed her own panel at the forum, offered a hint of good news on capital flight. She said it slowed dramatically in April, to $4.6 billion, from $63 billion in the first quarter. She added that two thirds of that $63 billion stemmed from “internal conversions,” accounts that Russian companies and individuals switched from rubles to dollars or euros as the Russian currency dropped in reaction to rising tensions in Ukraine. The ruble has rallied over the past month, slowing the pace of conversions and giving the public new confidence in the banking system. Deposits have begun to rise again after shrinking during the dire first quarter, the central banker said.

Still, Nabiullina cautioned investors that she has no monetary tools that could revive economic growth. The central bank has hiked interest rates from 5.5 percent to 7.5 percent to support the ruble and fight inflation, which is running at a rate of more than 7 percent, well above the bank’s target of 4 percent. “In our current situation of little excess capacity and low unemployment, adding liquidity to the banking system could only result in more inflation,” she said. “Whatever changes are made in policy should not under any circumstances sacrifice macroeconomic stability.”

Another view on the depth of Russia’s structural difficulties was offered by Andrey Nazarov, co-chairman of the business support organization Delovaya Rossiya. He said a survey by the group indicated that 57 percent of all Russian entrepreneurs would like to sell their businesses, compared with 17 percent in the West. The main reason is the risk of being thrown in jail for economic crimes. The share of small- and medium-size businesses in Russia’s economy has languished at about 20 percent for a decade, compared with 60 percent in a healthy developed economy like Germany’s. Without sweeping legal reform, Nazarov said, that number will not improve.

Related Content