Some 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 and Russia 

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. 

We have 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. 

Foreign 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 would bring. 

Also, the 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. 

The 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. 

The currency 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 sound infrastructure. 

Being 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. 

The reason 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. 

Ultimately, 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 me.” 

Of course, 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 skin. 

It’s 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. 

We don’t 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. 

People have 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.