Is Russia creating a “Gas Cartel”?

The most recent denial of the existence of plans for a "gas OPEC" came during Russian Minister of Industry and Energy Viktor Khristenko's visit to Algiers in January, when Algeria and Russia issued a joint statement saying that they see no point in organizing a gas pricing cartel. However, the idea has received an unexpected boost from Iranian leader Ayatollah Ali Khameni, who called on Russia to create a "gas OPEC" at a recent meeting with Russian Security Council secretary Igor Ivanov.
From economic point view, Russia and Iran are not sharing same markets and, unlikely, would cooperate in “price coordination”. Ayatollah Ali Khameni is trying to create a rather political alliance. Russian Presiden Putin is a pragmatic and very unlikely he will go forward for “Gas OPEC” in a Middle East and North Africa.
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Private Russian Prisons? Not there quite yet.

There are 870 thousand prisoners in Russia, including all, convicted, arrested and detained people. People who are actually incarcerated. Comparing to US, where there are almost 2 million prisoners but population is twice as much, the ratio is similar, 0.6-0.7% is in prisons. The ratio of violence/nonviolence crime is different. Almost 80% of Russians are doing time for a violent crime. In States, 60/40. More than 2 million cons in US are punished without being locked up, for instance: probations, radio-electronic bracelets etc. If you get caught in Russia, there is only 1 out of 10 chances you are going to be bailed out or released within 5 days after arrest.
Whole Russian penitentiary system belongs to State. There are some rumors about privatization of prisons but public would not probably get this idea well due to corrupt practices of Russian authorities. However, I can see some “start ups” in this field within next 5-10 years. If you happened to have bonds issued by a Russian prison, it’s most likely would have a rating close to a Federal.
PS. Japan has only 30 thousand prisoners on 130 million population? Why our society is so criminalized? (Rhetorical question)...

Social Health Care

Public health Care in Russia is in deep trouble. Russian government realized that long time ago but only recently Pr. Putin ordered to improve the situation. Health Care is one of 4 “National Projects” under a close watch of Mr. Medvedev, most likely a Putin’s successor as President of Russian Federation. Every Russian citizen has an insurance policy but quality of medical services is terrible. Hospitals are out of necessities: drugs, tools, equipment and materials. You literally have to come with all your supplies if you want to have surgery. Medical staff (doctors and nurses) coerces patients for bribes. All this used to be for the long time, even in Soviet Union, patients rarely came to doctors empty handed. Now the situation is even worse. You have to pay bribes to get quality service.
I hope Mr. Medvedev will change the situation around. Since he has been appointed as 1st Deputy Prime Minister, Ru government spent billions of oil money on health care. However, there is no indication of systematic change. The simple money “injections” in Ru health care would most likely be wasted and if oil prices went down, everything would be the “same all” again. Russia needs to move from public health care to a private one, probably not to the extend as it is in US.
Watch for Senator Clinton and her future policy regarding health care. It raises a lot of concern – would we want to have a “Russian style health care” in US? Good advise for any traveler to Russia: forget about you ins policy, get some cash in the event something happens to you, US dollars are very welcome.

Walking the Walk

Russian Prime Minister Mikhail Fradkov made a major announcement concerning future budget deficits. He stated the government will made an amendment to the budget guidelines dictating any future budget deficits cannot be any larger than two percent of the nation’s GDP. We will be watching, along with many other people to see the policy is implemented but it is encouraging in a general sense the government recognizes it cannot run up debts without concern for the economy. As we indicated in our newsletter, President Putin is turning on the charm offensive to woo investors and taking the first baby steps of reform in the process. Too much to hope that my own country could one day follow?

Russian “Real Estate Bubble”

Prices on Russian Real Estate market almost tripled in 2006. If you want to buy a condo or apartment in Moscow, you would have to pay $400-500 per sq. f. for “an average” property and up to $2000-3000 per foot for an “elite” one. I see 3 major reasons why it happened:
1) During 2000s, Russian ruble was constantly getting stronger against Dollar (5-9 % every year), even Euro/RUR ratio got up a little, nobody considers European currency as a full replacement to $ yet. So, Russians chose a real estate as their new investment. A number of people who own 2-3 and more apartments increased significantly. It was similar to the “2000 correction on US stock market” when low interest rates and too much money from stocks were chasing limited amount of real estate. Low taxes on Russian RE also make it an attractive investment, for instance, you would have to pay only $200-300 per year for a condo worth of half mil dollars. There is no school tax in Russia.
2) Land development in Russia is a very tricky process. Most of the population live or desire to live in cities. Ordinances put additional pressure on zoning, permit processing and licensing. Luck of infrastructure and corrupt practices increase a burden on developers. “If you can get a permit in Moscow – you can get it anywhere” (Frank Sinatra). The price increase of residential properties in big cities stands for 90% of increase in all sectors of RE.
3) Unavailability of RE for most of Russian population. There were only 20,000 mortgages taken in 2006 in the country of 140 mil people. Most of the RE transactions are cash transactions and it means “in cash”. Most of working class can’t afford it or don’t have a chance for a number of reasons (undeveloped banking sector, luck of liquidity in some areas, high interest rates (20-50%). So, is Russian RE is a highly speculative market of Russian Neauvoux Riches? Not quite right. It’s market for 10-15% of people.

Observation: Unlike in US RE market that tanked in 2006, Russian RE market probably would not go down in 2007. If oil and commodity prices remain on the same level, it would support higher demand for a tangible asset and there is no indication of fast increasing in supply. We can predict another 20-25 increase in Russian RE market in 2007. Russian Fixed Income Portal and GR Investments offer Russian Real Estate Mutual Funds where NAV is linked to a price of SQ.F. In addition, some funds pay dividends in a semi-annual or annual basis.

A Bond Meant Just for You

So you say you’re a big believer in Russia and want to go long-term. Perhaps you believe, but are only sure of a year or two in the future. Then again, you one of the people who see the attractive rates from our bond portfolios and would like to dip your toe into something short-term. We have good news for all of you. Use our search engine to do a basic search for various bonds, with different ratings from different industries, and you’ll discover securities from less than six months, one to three years, and even longer. If you wanted to buy your own securities and have them monitored for risks or perhaps to sell it for a profit, we can accommodate you. Compare the rates our bonds from our time separated portfolios to the industry top performers and we think you’ll be wanting to find out more information. The different thing about Russian bonds, is the fact that they range from 6 months to 10 years or more, more options for you to make money while managing risk.

Reading the Tea Leaves

According to Interfax:
“Russia's foreign trade surplus widened to $151.6 billion in January-November from $129.3 billion in the same period of last year, the Federal Customs Service said. Foreign trade turnover grew a tentative 29% year-on-year to $392.9 billion in the eleven-month period, including growth of 29.8% to $334.7 billion in trade with non-CIS countries and growth of 24.6% to $58.2 billion in trade with the CIS.”

We won’t give our secrets of analysis away but lets try and read into the numbers here. Let’s assume the price of oil has fallen by 15% and profits from exporting energy have decreased by 15-25%. Looking at the previous stated numbers I see a smaller profit, but certainly nothing that alarms me. I’ll take another look when prices get into the 40’s per barrel, but it’s still looks good folks.

Let the Uninformed Flee

Over the past week as oil prices have slid, several Russian companies have lost a some of their value in terms of equity and their bonds have gotten hit as well. If this should happen a little more we would be thrilled as we view this as a rare buying opportunity to selectively purchase quality issues at relatively cheap prices. Unless you believe China and India will disappear in the next few weeks, or clean hydrogen will no longer be just a pipe dream, let’s throw world peace in there as well, then you must believe the world will keep using more energy and this is just a short term price correction. Politically, the situation is as stable as it ever has been with the current government being immensely popular. What many foreign observers don’t get is that even if elections were held under foreign rules, Putin’s candidate would still win. Fundamentally and internally the situation is fine in Russia, we’re just seeing a momentary external variable that can be played for a profit with the proper selections.

No Immediate Impact from WTO Membership

We can deduce WTO membership should not have an immediate impact upon Russian exporters. Most Russian manufacturers, with certain exceptions, don’t compete with the Japanese, Europeans, and Americans on the high end and don’t compete in terms of cost structure with China and India on the lower. The major cash cow of Russia is of course commodities and these should not be influenced by WTO membership, one way or the other. We will discuss other aspects in our newsletter and in later blogs but look for WTO membership and the easing of financial regulations to make it easier for international banks to take on new roles in Russia. If nothing else, this alone should be a catalyst that spurs growth for other industries, forces Russian financial companies to be innovative and meet demands of their own customers, and to have carry over effects into other industries.

Expect a Holding Pattern

With Presidential and Duma elections set to take place in the coming year. Expect calm, certainty, confusion, and nervousness. A little confused yourself, let me explain. Firstly, Putin will definitely be leaving office on time and handpick his successor. He has the power over the media, money, legal establishment, and political power to get a jar of caviar elected if he wanted to. There will be some moderate inflation growth to be expected from growth in income, government spending, extra costs to consumers and businesses for the lessening of government subsidies for energy. All the things you would come to expect from a growing economy with some extra things added in that make Russia, well, Russia. All which brings us to the phrase “perception is reality” and in the case of financial markets this is usually the case in the short term. You will start to hear things from the mainstream media such as “will Putin really leave on time” (yes), “will a surprise candidate appear that nobody expects” (probably not), and “will the new policies be radically different” (no). There is a very good chance the markets will punish Russia in the short term for the perceived uncertainty, both in the fixed income and equity markets. We view these as buying opportunities. A chance to selectively buy quality issues unfairly beaten down. Of course, with all elections there will be winners and losers and we invite you to check here and our main web page for the latest, including are odds on favorite to win the race!

Bet on the Retail Sector in ‘07

All the stars seem to be lining up for yet another banner year for Russian consumer goods companies as well as the real estate sector that specializes in consumer goods. Consumer income was up approximately 11.5% last year with similar growth projected for the coming year. Western retailers are not ignoring this marketplace anymore, for example American women’s apparel retailer Nine West has plans for a new location in Moscow. There is less than a 1% vacancy rate for first class retail space in the Moscow region. Little by little, many middle class shoppers are making the switch from open air markets to traditional western style malls. The Russian Ruble promises to keep and appreciate in value, thereby making most imported consumer goods even more affordable to consumers and profitable to the companies that sell them. The construction industry looks promising as well. Low borrowing rates coupled with low vacancy rates and an exploding market have the industry going full bore.

Please click on www.grinvest.org for more

Sakhalin-2-Reading Between the Lines

After much wrangling and consternation the legal claim of Shell and partners have been formalized with the Russian government. What does this mean when you read between the lines? The original deals were signed at a tumultuous time in Russian history by government officials that negotiated unfair deals to the detriment to their own nation. If the same were to occur in America, with foreign companies benefiting from an unstable Presidency or Congress, selling to the benefit of foreign interests, we would feel the same. Ultimately, an agreement was reached, all parties stand to reap benefits.

We feel the mass media has missed some important points. The Russian government asked Western companies to re-negotiate only deals negotiated during a legally and politically gray time in Russian history, not in recent years. Secondly, Western companies in this situation were put in a position to negotiate a mutually agreeable ending to the conflict, not told to pack up and go home. There are other developing countries, Algeria comes to mind, that are forcing oil companies to re-negotiate contracts due to the increase in the price of oil, not because of a fundamentally flawed process of negotiating process. Politically speaking, Russia is a rock of stability for the next two years of the Putin administration. It will be as well for the foreseeable future after that as well. Next time you read headlines about Russia, pay attention to what you see. The Russian government living up to its end of making a reasonable business environment, now contrast that with what you see in many other developing markets. Domestically, at this juncture most well run Russian companies know how to navigate the economic and political landscape of Russian society, but that will be discussed in a later entry…..

Russian Ruble Rumors-Don’t Pay Attention

We are all aware of the meteoric rise of the Russian Ruble vs. the U.S. Dollar the past several years. To current holders of Russian bonds this has been an added bonus on top of money they have already made. Many of us are also aware of the stirrings caused by the Russian government including the Finance minister indicating their alarm at an appreciating Ruble and willingness to eventually do something about it. We have been advising our customers not to pay attention to this, we are seeing politicians, much like they do in the U.S., play to special interest groups. We believe the decision makers in the Kremlin know better than to do anything that would interrupt almost a half-decade of unprecedented growth.

Don’t get us wrong, there have been industries that have had their competitiveness hurt. This includes industries that pay their costs in Rubles but get paid in dollars. For example, the steel industry and textiles. But even the steel industry has been diversifying by merging or acquiring assets overseas. Far more industries benefit from a strong currency such as financials, telecommunications, and consumer goods. Contradictory to some in the Russian administration’s viewpoint, virtually any economist in the world will tell you a strong currency will keep down inflation by making imported goods cheaper, and despite booming commodity exports Russia certainly is a big importer of goods. We believe recent comments have just been an attempt to keep the markets from getting too frothy. At the end of the day, rationality will prevail; it is in the interest of both the Russian government and investors alike.