countries have form, and when it comes to economic crises there are two
countries in particular that you know we haven’t heard the last of: Argentina
Here at Mind
Your Own Business we have firsthand experience of Russian economic crises and
here is our response to a few questions from behind the former iron curtain
about what to do now amidst the current global turmoil and the recent stock
market and banking woes in Russia.
three golden rules for doing business in Russia:
1 Never trust the Russian banking system
2 Never trust the Russian currency
3 Never trust the Russian government
On the face
of it, these might sound rather extreme and particularly anti-Russian. We do
not mean them to be, so perhaps we can explain where they come from.
banks are still not able to operate in Russia in a truly competitive
environment, banks with foreign sounding names are basically locally owned
franchises. The result is a cartel, or quasi-cartel, where the banks are
protected from the rigour and discipline that their international competitors
system is not regulated as well as one would like. There are too many vested
interests influencing regulatory decisions. Decisions are not always taken with
the most proper of motives in mind.
combination of these two factors means that systemic weaknesses remain. Sooner
or later these weaknesses will be tested and the system will be found wanting.
We are then likely to see some sort of banking failure – either individual
banks or the system as a whole. This might be limited to short term controls on
how depositors move their money, or to the sort of wipe outs we saw 10 years ago.
is just short hand for the economy as a whole. If and when there’s an economic
crisis the currency will take a pounding and you don’t want to be left with a
bunch or rapidly depreciating roubles in your hand. Though Russia has seen an
unprecedented economic boom in recent years there are still fundamental
weaknesses in the economic foundations of the country. The country is too dependent
on high commodity prices, and isn’t putting in place well enough a sound
economic foundation for the long term. Russia needs a diverse economy with
successful in business in Russia is not as well correlated with being a good
businessman as one would hope. Again, other factors come into play with regard
to who succeeds and who fails. We would like to see the economic environment be
based much more on merit, where anyone can compete on genuinely fair terms. As
for Russia’s notorious bureaucracy, the anti-business costs burdens this
imposes will only exacerbate economic woes – businesses on the margin that
might otherwise survive will be killed off by the bureaucratic burden.
As to the
government, we are really unconvinced that anything much has changed that would
mean individuals are treated differently in crises. Russian governments have a
track record. Rather than just being a possibility, we would argue that it is a
probability that draconian measures might suddenly be decreed (such as all US $
deposits converted to roubles at a government stipulated rate) at no notice at
all. These might help bail the government out of an immediate crisis but they
will hurt the individuals affected and cause a long term fall in confidence.
We do not
believe the leopard has changed its spots. Look at the way Yukos and
Khordokovsky were dealt with, and more recently TNK-BP. No doubt Khordokovsky
got what he deserved, but the way the Russian government chose to resolve the
matter did not leave one feeling confident that the rule of law was going to be
respected any time soon.
why we say ‘never’ is that we cannot see the economic and business culture of
Russia changing by such significance that we would feel confident trusting any of
these three while we are alive.
banking systems depend on confidence. If people lose confidence and start
withdrawing cash from banks then the system implodes, regardless of the
underlying fundamentals. Last week we received a call from a Russian friend
seeking help in protecting his cash assets – he had lost very heavily in the
previous crisis and wasn’t going to go down again. And, over the weekend a
former contemporary from St. Petersburg wrote on the same subject “I have been
waving the flag for a year that symptoms do resemble 1998. No one listens to
the key with all these things is to be prepared and have your money safe before
the crisis hits. This was the strategy we adopted in 1998 – had we been wrong
we would have been better off losing a little in transaction costs and deposit
interest as we moved our funds to a safe haven than the losses we would have
suffered had we been right but failed to act. In the end our strategy saved our
important to look not just at the risk probability but also the impact. It is
worth having contingency measures for a low chance risk but one with a high
impact if the worst happens.
believe Russia has seen its last economic crisis. Now might not turn out to be
the next (at least the government is in a better financial position this time
round) but experience suggests one adopts an extremely cautious approach. One
could have made a fortune ignoring our three golden rules over the last 8 years
or so. But what good would that fortune be if at all turned to dust now? If one
has a great sense of timing one can perhaps finesse these things – exploiting
the system in the good times and getting out before the bad times return.
However, we don’t feel confident that we wouldn’t get caught out. Indeed, with
a great sense of timing our three golden rules could be used to help facilitate
exploiting the system in the good times knowing the bad will return and getting
out in advance.
short memories and are quick to forget how they, their families and their
friends suffered 10 years ago. Our advice would be, as far as is possible, to
switch to the Dollar, Euro or possibly the Pound and to get funds safely out of
banks within Russia. Ideally, park money offshore. If that is not there are
worse places than in a tin buried at the dacha (though we would use a number of
different tins in a number of different locations).
We think it
pays to be cautious, and now is not the time to economise on transaction costs
and currency conversion costs.