Why are investors still piling into Russia?

Whilst relations between Russia and the West may be at the chilliest since the Cold War, economically they are hotter than ever. But Simon Nixon wonders if investors are perhaps a little too complacent.

Sometimes it really does seem as if the financial and political worlds inhabit parallel universes. "Relations between Russia and the West have hit a new post-cold war low," reported the FT this week. That's hardly a controversial statement. President Putin said as much himself in a speech in February. Since then, we've had riots over the removal of a Soviet era war memorial in Estonia, a row over the placing of US missile sites in Poland and the pressing of murder charges against a former KGB official accused of poisoning the Russian dissident Alexander Litvinenko in London. All that's missing is the Red Army parading nuclear warheads through Red Square and it will feel like old times.

But then consider this report on Bloomberg just a few days earlier: "Salaries for top bankers in Moscow are now twice as high as those of their counterparts in New York", it said. "Dealmakers like Edward Kaufman, who left UBS in March for Alfa Bank, and Nicholas Jordan, who will run Lehman Brothers' new office in Moscow, have been offered annual packages of $7m and more, industry recruiters say. Meanwhile, in New York, managing directors typically make $2m to $3m a year, according to headhunters." Politically, relations between Russia and the West may be close to freezing, but economically they are hot, hot, hot.

Investors in Russia are ignoring the risks

What kind of crazy world is it where bankers and investors continue to pour into a market even as the political risks are rising so high? Fans of Russia reel off a list of familiar answers. First, corruption is a fact of life in Russia, just as it is in plenty of countries, but the costs are outweighed by the potential rewards; ask the bankers. Second, the real risks are to firms such as BP, Shell and Italy's ENI, which operate in "strategic" resources sectors. Finally, people say the current climate simply reflects uncertainty ahead of presidential elections next year. Things will calm down once Putin's succession is resolved.

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All these arguments may be true. But I wonder if investor complacency isn't part of Russia's problem. A friend who works in Russia was startled to receive an email the other day from a middle-ranking official in a government ministry telling him not to bother pitching for a consulting role on a new government programme. "We don't need any help from other independent companies," the official explained. "This is serious business for government officials who will slice up the budget themselves with their own business partners." In other words: if you want to win business from us, go into business with us first.

As demands for kickbacks go, this was about as blatant as they come. My friend says he's noticed that the corruption has spread over the last year further and further down the system. Where once only those at the top demanded a bung, now everybody wants a cut. Another contact, a lawyer with long experience of Russia, says: "if you want to understand Russia, think Venezuela". The difference between Russia and Venezuela is that, whereas Venezuela is one of the smaller oil-producing countries, Russia could soon be supplying half Europe's gas.

More worryingly, the common thread running through all Russia's recent arguments with the West is its willingness to use energy as a political weapon. Even during the cold war it didn't do that. That suggests the political risks posed by Russia are genuine and require all of Europe to demand it respect the rule of law. But I don't see any sign of this happening. I wonder why? I suspect the answer has something to do with all that money being made in Moscow.

Simon Nixon is executive editor of Breakingviews.com

Simon Nixon

Simon is the chief leader writer and columnist at The Times and previous to that, he was at The Wall Street Journal for 9 years as the chief European commentator. Simon also wrote for Reuters Breakingviews as the Executive Editor earlier in his career. Simon covers personal finance topics such as property, the economy and other areas for example stockmarkets and funds.