Russian Roulette | Page 7

This, perhaps, is what the Kremlin
wants. After all, he who controls the purse strings - rules Russia.
II. The Stock Exchange
The theory of financial markets calls for robust capital markets where
banks are lacking and dysfunctional. Equity financing and corporate
debt outstrip bank lending as sources of corporate finance even in the
West.
But Russia's stock market - the worst performer among emerging
markets in 1998, the best one in 2001 - is often cornered and
manipulated, prey to insider trading and worse. It is less liquid that the
Tel-Aviv Stock Exchange, though the market capitalization of RTS,

Russia's main marketplace, is up 430% since 1998 (80% last year
alone). Bonds climbed 500% in the same period and a flourishing
corporate bonds markets has erupted on the scene. Many regard this
surge as a speculative bubble inflated by the high level of oil prices.
Others (mostly Western brokerage houses) swear that the market is
undervalued, having fallen by more than 90% in 1998. Russia is
different - they say - it is better managed, sports budget and trade
surpluses, is less indebted (and re-pays its debts on time, for a change),
and the economy is expanding. The same pundits talked the RTS up
180% in 1997 only to see it shrivel in an egregious case of Asian
contagion. The connection between Russia's macro and micro is less
than straightforward.
Whatever the truth, investors are clearly more discriminating. Both the
New York Times and The Economist cite the example of Yukos Oil
(up 190%) versus Lukoil (up a mere 30%). The former is investor
friendly and publishes internationally audited accounts. The latter has
no investor relations to speak of and is disclosure-averse. Still, both
firms - as do a few pioneering others - seek to access Western capital
markets.
The intrepid investor can partake by purchasing mutual funds dedicated,
wholly or partially, to Russia - or by trading ADR's of Russian firms on
NYSE (10-20 times the US dollar volume of the RTS). ADR's of
smaller firms are traded OTC and, according to the New York Times,
one can short sell Russian securities through offshore vehicles. The
latter are also used to speculate in the shares of defunct Russian firms
("shells") traded in the West.
III. Debt Markets
Perhaps the best judges of Russia's officially minuscule economy
(smaller than the Netherlands' and less than three times Israel's) - are
the Russians. When the author of this article suggested that Russia's
1998 chaos was serendipitous (in "Argumenti i Fakti" dated October 28,
1998), he was derided by Western analysts but supported by Russian
ones. In hindsight, the Russians were right. They may be right today as
well when they claim that Russia has never been better.
The ruble devaluation (which made Russian goods competitive) and
rising oil prices yielded a trade surplus of more than $50 billion last
year. For the first time in its modern and turbulent history, Russia was

able to prepay both foreign (IMF) and domestic debts (it redeemed state
bonds ahead of maturity). It is no longer the IMF's largest debtor. Its
Central Bank boasts $40 billion in foreign exchange reserves. Exactly a
year ago, Russia tried to extort a partial debt write-off from its creditors
(as it has done numerous times in its post-Communist decade). But
Russia's oft-abused creditors and investors seem to have surprisingly
short memories and an unsurpassed capacity for masochistic
self-delusion.
Stratfor.com reports ("Russia Buys Financial Maneuverability" dated
January 31, 2002) that "Deutsche Bank Jan. 30 granted
Vneshekonombank a $100 million loan, the largest private loan to a
Russian bank since the 1998 ruble crisis. As Russia works to
reintegrate into the global financial network, the cost of domestic
borrowing should drop.
That should spur a fresh wave of domestically financed development,
which is essential considering Russia's dearth of foreign investment."
The strategic forecasting firm also predicts the emergence of a thriving
mortgage finance market (there is almost none now). One of the
reasons is a belated November 2001 pension reform which allows the
investment of retirement funds in debt instruments - such as mortgages.
A similar virtuous cycle transpired in Kazakhstan. Last year the Central
Bank allowed individuals to invest up to $75,000 outside Russia.
IV. The Bandits
In August 1999, a year and four days after Moscow's $40 billion
default, the New York Times reported a $15 billion money laundering
operation which involved, inter alia, the Bank of New York and
Russia's first Representative to the IMF.
The Russian Central Bank invested billions of dollars (through an
offshore entity) in the infamous Russian GKO (dollar-denominated
bonds) market, thus helping to drive yields to a vertiginous 290%.
Staff members and collaborators of the now dismantled brainchild of
Prof. Jeffrey Sachs, HIID (Harvard Institute of International
Development) - the architect of Russian "privatization" -