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EScroogeJr (< 20)

A few more random words on Putinostan



November 28, 2007 – Comments (7)

The discussion that followed TMFBent's post has prompted me to pen down these few lines.

I think the basic mistake people make is drawing false analogies between Russia and China. This is why they feel so confident green-thumbing Russian stocks. Indeed, if Putin is no different from Deng Xiao Ping, or, to draw a "western" analogy, Pinochet or Franko, then MakeItSeven's reasoning is correct: there will be more decades of rapid growth, investors will get rich, while democracy may be falling behind for a while, but who really cares? Unfortunately, this picture, seen through the rose-colored glasses of Wall Street, which is enraptured by GDP graphs but fails to see the reality behind the numbers, has nothing to do with the actual processes unfolding before our eyes. Here is my own take on the situation, and let us hope that time will prove me wrong.

For starters, it is not so obvious that we need to focus on Putin's personality. To be sure, Putin can always run for the third term or declare himself a president-for-life. That's always a possibility. However, it is my opinion that we'll see instead something closer to the Iranian model. The Iranians, as you may remember, have two leaders at the same time (both are phychos, so this doesn't really make things any easier), and the Iranian polical system is the object of endless fascination to the KGB toadies who are now in charge of Russia. So I wouldn't be surprised to see Putin turning into an ayatollah, while leaving the mundane tasks of running the government to his successor. My crystal ball says it will be Igor Sechin - the only influential figure that has not been mentioned by the press as a possible successor, which, if you know Putin's mode of operation, is highly suggestive, but then, I may be wrong and it could be someone else. The point is, whoever the successor will be, he will almost certainly one of Putin's "bad cops" who will soon make us remember Putin with nostalgia.

Now, to the main issue. The primary motivation of the current regime is simple: rejuvinate the corpse of the Soviet Union and restore Stalinism in its full glory. The reason the China analogy doesn't hold water is that the goal of the Chinese leadership is to improve China's economy. This is a responsible dictatorship whose goals are akin to the goals of any other normal government. On the other hand, the primary goal of Russia's leadership is to bolster its own ego by making territorial acquisitions and by obtaining protestations of respect from its own subjects and especially from foreign powers, while stealing as much as they can steal in the process. This has always been true, for some reason. Why this has always been true, I can't tell, but the fact remains: there was never a government in Russia that viewed economic growth as its primary goal. I know it is hard for Wall Street to imagine how one can sacrifice all those glorious economic prospects, budget surpluses, 8% GDP growth, the promise of future riches and several million people to boot for the prospect of winning back, say, some useless piece of land in the Caucasus, but this is precisely the terms in which the Kremlin inhabitants view the world around them. As soon as the opportunity presents itself, you should expect all economic achievements made thus far to be thrown overboard without any hesitation.

OK, once we mentioned the economy, let us review these achievements that make the Wall Street so exhuberant. Out of 8% GDP growth this year, 2% are due to rising oil prices, by the government's own estimate. But oil is not the only game in town. There are also gas prices, and the prices of other commodities. Subtract these price increases, subtract the growth in industries that cater to the oil and gas industry, subtract the military spending buyoyed by petroleum dollars, subtract the "multiplier effect", subtract the economic activity that already existed under Yeltsin and now showed up in the statistics for the first time as a result of better tax reporting, and this pretty much summarizes Putin's economic miracle. Without the tailwinds, Putin's management of the economy looks every bit as pathetic as Yeltsin's dismal performance. Even the US under Bush would have grown faster than Russia's 1% or 2% a year, commodity-adjusted (compare that with the performance of resource-poor Armenia or Lithuania). Not a single innovative company like China's STP, MR, CTRP or India's SAY and TTM emerging over the 8 years of Putin's presisdency - this really says a lot. Americans taking their hints from Barrons and Wikipedia may feel tempted to attribute the dictator's approval ratings to his sound economic policies, but Putin's genius really lies elsewhere: in his ability to suppress dissent and control the press, and in his readiness to claim credit for every fortunate event from warm weather to the success of the national soccer team.

7 Comments – Post Your Own

#1) On November 28, 2007 at 11:19 AM, MakeItSeven (33.05) wrote:

Some short comments since I can never afford that much time to write.

1) Instead of spending time arguing that US home prices do not go down or flaunt your knowledge of world economy, you should apply some of that domestic/international knowledge to your CAPS stock picks.  If you think Russian stocks are bad investment, just red-thumb RSX, TRF, VIP, MBT, etc.  Try to get a positive CAPS point, BTW.

2)  From wikipedia: The Russian financial crisis (also called "Rouble crisis") hit Russia in August 17 1998. 

That was when Yelsin was in power.

3) Draw a chart of $XOI (oil price index) between 5/1/2001 and 5/1/2003.  It dropped from 600 to 430.  Now, overlay Templeton Russian fund (TRF) on top of it.  It doubled in the same period.

Then try to find the tailwind correlation between the two, 

4)  The approval rating of Putin among Russians is indisputable.  Their contempt for the corrupted drunkard Yelsin is also well-known.

5) As for dealing with demonstrator, Russian tanks refused to fire, caused the collapse of the Communist government and brought Yelsin to power.  Chinese tanks ran over demonstrators at Tienamen square.  Not that I care to compare politics or countries but since you mentioned it.

6) In investment, it's not one or the other, or even good companies vs so-so companies.  It's about diversification and valuation.   Great companies at high prices are still bad investment.  What did Buffett say when getting out of PTR since his investment doubled after 6 months or so ?

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#2) On November 28, 2007 at 12:00 PM, EScroogeJr (< 20) wrote:

Let's hope you're right. This is the bet that I'm perfectly willing to lose.

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#3) On November 28, 2007 at 1:11 PM, MakeItSeven (33.05) wrote:

Thanks.   BTW, my company sent me to Russia in 1/1999.  At that time, teachers had not been paid for half a year, even with the near worthless roubles.  Soldiers' monthly salaries were only enough to buy a tube of toothpaste, give or take half a tube depending on the price of the day  There were many examples of how much suffering Russians went through, right in the shiny tourist brochure written in English.

Putin took power in 1999 and brought inflation from 120+% to the more manageable 9% today.    He also introduced flat tax rate since he realized the old labyrinth tax system just could not work. That's why Russians loved him.  So does the investment community which started to upgrade Russian stocks after getting news that Putin would still be in control and keep the stability and economic progress longer.

BTW, China started making economic progress since 1987 or so.  Russia just started in 2001, after recovering from the rouble crisis so you should really compare the current Russia to Chinese investment opportunites/companies 15 years ago, not now. 

Food for thought: China is like a family with many children and little resources.  Russia and Australia (and to a somewhat lesser extent, US and Canada) are like families with few children and a lot of resources.

As long as the poor children can find work to do the poor family might do well but the large number of children can either be a bonus or burden depending on the circumstances.  However, a smaller family, rich with resources, can almost always do well.

And as far as countries growth is concerned, GDP growth can always be imported with immigration, as long as the domestic economic resources support it.

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#4) On November 28, 2007 at 1:25 PM, Imperial1964 (97.93) wrote:

Russia is a very interesting--especially some of their great philosophical literature.  I have no desire to actually go there, though.

As far as investing, I have absolutely no interest in investing in a country whose government illegally seizes the assets of publicly traded corporations and places them under control of the state, jails CEOs for political revenge, etc.

You're right that in Russia it is all about power.  Why do you think the government has forcibly taken control of many oil & gas assets?  Oil = Power.  Money is a secondary motive.  

At least when you invest in the US, our corrupt and power-hungry leaders are usually favorable to corporations.

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#5) On November 28, 2007 at 2:15 PM, EScroogeJr (< 20) wrote:

Look, let us be careful here, because the ground can get slippery when you begin to extrapolate what I said, painting me as Yeltsin's admirer or a brainless idealist. What you said about Yeltsin is 120% true. I can also agree with you about potential and resources, and about the flat-rate tax. Where we part ways is in the estimate of the current situation. The fact that Putin pushed through a flat tax rate in 2001 does not mean that he is not going to turn Russia into a rogue state in 2008. I happen to read the Russian press, and I can definitely tell you that something is brewing there at this very moment. We can very easily get a Stalinist regime or something that will be even worse.

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#6) On November 28, 2007 at 2:37 PM, EScroogeJr (< 20) wrote:

"a country whose government illegally seizes the assets of publicly traded corporations and places them under control of the state, jails CEOs for political revenge, etc"

Imperial1964, I have something even better for you. How about arresting a deputy finance minister to send a message to his boss who wouln't allow you to embezzle the foreign currency reserve fund?

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#7) On November 28, 2007 at 2:45 PM, MakeItSeven (33.05) wrote:


We were visiting our Russian contractors then, on company business.  BTW, that same contracting company dropped us later since Intel offered to make everybody Intel employees and guaranteed no layoffs two years.

If you read about VIP, it is significantly owned by western companies.  Its Chairman of the Board and two VPs are non-Russians.  Do Intel and all these business people not know about what you said and risk their lives as well as tens of billions of dollars ?

I know the incident you're talking about.   Yes, oil is power and it's really up to Russians. not Americans, to prefer where the power of the Russian government is, isn't it ?  The most recent poll, in November, showed Putin with 85% approval rating.  That would be some indication what they like.

The other side of the freedom coin is chaos (e.g. Iraq).   In poorly developed countries, stability is much more needed than freedom since nobody wants to listen to another.  China made that decision in 1989 at TIenamen square and they are still heavily suppressing some religious sects.   But everybody praises them for making good economic progress, right ?

The American press can make people believe in a lot of things, like WMDs in Iraq.  Not all of them are necessary true.  A lot of times, it's 5% fire and 95% smoke.

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