Shares of the Russian tech giant Yandex dropped by over 18 percent on October 11 after it was reported that the Kremlin had backed new legislation aimed at limiting foreign ownership of the tech firms to 20 percent. This development came only two weeks after the annual Moscow Exchange Forum in New York at which top managers of the largest Russian companies, most of whom were from the West, praised the low-risk, high-value opportunities of the Russian market, naming tech as one of its key attractions.
Oleg Vyugin (left), chairman of Moscow Exchange Forum and former First Deputy Governor of the Bank of Russia opened up the New York session on October 3, 2019. Photo: Olga Khvostunova, IMR.
This ambiguity surrounding Russia’s place in the current geopolitical climate has been part of the political discourse for years. On the one hand, Western countries impose sanctions on Russia and criticize Vladimir Putin, while, on the other, Western investment funds continue to be the largest holders of Russian equities. This naturally means oppositely directed vectors when it comes to Western interests in Vladimir Putin’s Russia. Political incentives to keep the Kremlin’s aggressive policies in check are countered by the tempting opportunities that continue to attract investors, despite the perceived risks.
The more upbeat view of the Russian economy was in full display at the Moscow Exchange Forum in New York on October 3-4. At the panel on Russia’s position in the global economy moderated by Daniel Russell, president and CEO of the U.S.-Russia Business Council, the consensus was that, despite the slowdown of the U.S., European, and Chinese economies, Russia is doing pretty well. According to Russell, Russia is considered a strategic market for many foreign investors, with the energy, consumer goods, IT, and retail markets being the most attractive.
All of the speakers at the panel, including Willem Buiter, special economic adviser at Citigroup, Charles Robertson, global chief economist at Renaissance Capital, Eric Jayaweera, senior portfolio manager at Emso AM, and Jyrki Talvitie, management board member at Magnit (Russia’s major food chain), praised the Russian Central Bank and the Finance Ministry for their conservative fiscal policies and overall macroeconomic stability.
Robertson showed the greatest optimism, pointing out that Russia’s debt/revenue ratio is the best among the emerging markets as is its per capita growth. He acknowledged that Russia wouldn’t be able to escape global recession, but underscored that “every recession for Russia was better than the previous one.” Jayaweera assured the audience that Russia is a “great place to be”—a low-risk investment environment with “extra room for performance on the local markets.” Buiter was more cautious in his assessment, but still concluded that Russia is well-positioned to cope with vulnerabilities related to global recession. And Talvitie expressed hope for a recovery of the retail segment following the Western sanctions and Russia’s counter-sanctions.
The sanctions issue remained, as one speaker put it, the “elephant in the room” and was brought up multiple times in panelists’ remarks and questions from the audience. The expert consensus was that sanctions will stay in place for years to come, but recently investors’ fear of sanctions has disappeared, while most political risks have already been priced into the Russian financial markets, making them cheap.
It is noteworthy that recent reports from the World Economic Forum and the World Bank tell a slightly different story. According to the former, Russia retained its 43rd place in the global competitiveness index, but its positions noticeably dropped in indicators concerning the investment climate, such as organized crime, corruption, property rights protection, etc. The latter adjusted its 2019 forecast of Russia’s economic growth to just one percent, down from its earlier projection of 1.5 percent.
It was only at the very end of the hour that the speakers at the Moscow Exchange Forum in New York were asked what, in their opinion, Russia should do to improve its investment climate. They named demonopolization (since 70-80 percent of companies are run by the state), a more competitive economy (Canada can serve as an example), consistency in the rule of law, prevention of geopolitical escalation, and minority investment protection. In other words, they barely covered the basics and offered no detail, no context, and no probability for these issues to actually be resolved.
It is understandable why these issues were evaded by the speakers—it was not the goal of the forum. But what happened to Russia’s tech giant Yandex, which lost $1 billion of its valuation on October 11, should serve as a red-flag for all foreign investors, reminding them of the way the rules of the game can change on a whim if it suits the Kremlin’s party line.
It was Russia’s political volatility that caused this crash. Following the passage of the “sovereign Runet law” early this year, the State Duma decided to move forward and restrict foreign ownership in tech companies to 20 percent. This initiative is likely propelled by the summer protests in Moscow, according to some experts: the pro-Kremlin lawmakers called for international tech giants, like Google and Facebook, to be penalized for interference in the Russian elections, since many protest organizers relied heavily on social media.
A KPMG Russia practice lead told Kommersant that, in its current version, the proposed legislation is unlikely to affect a large number of tech firms, but even those that will be affected will find a way around these restrictions as happened with similar legislation on restricting foreign ownership in the media sector—the ownership structure changed in favor of Russian stakeholders, but foreign owners managed to preserve their economic interests, albeit indirectly.
Some experts believe that the real goal of this initiative is the Kremlin’s planned takeover of Yandex. According to Novaya Gazeta’s sources, the Presidential Administration is interested in the opportunities offered by political ad targeting, similar to those provided by Cambridge Analytica. “The administration does not care what will happen to the investment climate and to Russian hi-tech,” said one source.
As the president of the Moscow Partners investment group, Eugene Kogan, told Novaya, “once again [what happened to Yandex] has high, extreme risks. Which is why any investor will think twice before buying Russian assets. We are slapping on the wrist not only foreign investors, but ourselves.”
One can only wonder what stories will be told at the Moscow Exchange Forum that takes place in London on October 15-17.
