RD Interview: Bernard Sucher, a member of the board of directors at Aton Group, discusses whether the Kremlin is making the appropriate economic adjustments in response to the current crisis.
From left: Former Russian Finance Minister Alexey Kudrin, Russian Minister of Finance Anton Siluanov, and Minister of Economic Development Alexei Ulyukayev during a CNBC TV debates, held at the 2015 St. Petersburg International Economic Forum. Photo: RIA Novosti
On the second day of the 2015 St. Petersburg International Economic Forum (SPIEF), the CNBC TV network hosted a debate, “Never Let a Good Crisis Go to Waste: Addressing Russia’s Structural Economic Dilemmas,” which brought together Russian economists and officials to discuss Russia’s ability to use the current economic crisis in its favor.
Some of the participants and, particularly, Russia’s Finance Minister Anton Siluanov, seem to be very bullish about the implications of the recession. Siluanov argues that the crisis, driven by the drop in oil prices and sanctions, had a positive impact on Russia’s economy because “we stopped suffering the Dutch disease,” the economic phenomenon which led to the high increase of oil incomes, a sharp inflow of foreign currency and, finally, the decreasing competitiveness of Russia’s exports.
Siluanov admitted that Russia needs new economic growth “based on investment,” not on consumption. He believes that Russia should wait a bit and investment will come to Russia.
However, Bernard Sucher, a member of the board of directors at Aton Group, who attended the SPIEF as well, is very doubtful. As an entrepreneur and a banker, Sucher is very familiar with the Russian business environment. Since 1993, he has worked in the Russian operations of many prominent financial institutions, including Bank of American-Merrill Lynch, Troika Dialog, and Alfa Capital.
During the Forum, Russia Direct sat down with him to discuss the current economic crisis in Russia as well as how Russia should use the crisis to reform its economy.
Russia Direct: Today, some of the participants of the CNBC debate were pretty optimistic about the chances of Russia using the crisis as an opportunity to reform its economy. From your point of view, will the Kremlin be able to avoid 'wasting this crisis'?
Bernard Sucher: Rahm Emanuel, an American politician, said that you should never waste a good crisis, but Russia wasted the 2008 crisis by not punishing the bad managers who led their companies and their ministries into trouble before the Lehman wave hit this country. Normally, what you’d want to see is that managers who have erred are removed and replaced by people who can do better. But that didn’t happen.
The point is that the 2008 crisis was an opportunity for Russia to revisit its economic approach and in particular the notion that large companies — especially, those associated with the state or run by people who are close to the state. Not only did the Kremlin not do this, but rather they reinforced those firms and rewarded their management with liquidity and other forms of support.
RD: And now..?
B.S.: And now Russia is wasting this crisis, too. We see exactly the same behavior, albeit cash is much more constrained. What we do not see is a real discussion about ensuring that we get fresh ideas and new managers to replace the groups that are producing such poor returns for the economy and their biggest stakeholder – Russia’s public.
RD: Russia’s Minister of Economic Development Alexei Ulyukayev claimed today at the debate that Russia is not going to steer away from a market democracy. Do you agree?
B.S.: Of course, I do not. We can see that the major economic and commercial decisions are made by either state-appointed managers or with the approval of the state. Conflicts of interest abound.
And, over the last decade, the role of the state in commerce has increased in almost any way you choose to measure it. Today, the state dominates over 50 percent of the economy [Former ex-Finance Minister Alexei Kudrin also admitted that the problem of dominance of state companies is pervasive in Russia and hamper investment. – Editor’s note].
Statistics revealing government subsidies, dependency ratios, and the scale of benefits programs all demonstrate the paramount importance of Russia’s state today, not just to the economy as the main source of investment, but as growing prop to ordinary citizens.
RD: How can Russia avoid the exacerbation of the current crisis or, at least, minimize its implications in economic terms?
B.S.: By committing itself to a credible program and, then, acting to roll back the state from the Russian economy. Specifically, the state must curtail its own power and the power of monopolies and oligopolies in areas of business where competition and open markets have proven over and over again to be productive of better returns for a nation’s people.
RD: Russia has been more than a year under sanctions. Do they have any influence on you as an entrepreneur to do business in Russia?
B.S.: The principal impact of sanctions first is as a signal to business people that “business as usual” no longer pertains. This is number one. Number two is that sanctions discourage new investment and they make any potential investment a subject of much greater diligence and much greater compliance. And so less likely. Don’t forget, too, that frankly speaking, decision-makers are likely to be concerned about their reputation if they approve investment into a country that has become this controversial.
Since Western – American and European — multinationals have been such important source of scarce private capital for Russia and since European and American banks have been such an important channel of capital to Russia, the financial sanctions have led to a particularly damaging effect: the [higher] cost of capital in Russia.
RD: But some Western companies such as Boeing or Microsoft are still working in Russia. How can you account for their desire to continue their business in Russia regardless of the sanctions?
B.S.: First, Russia has been an incredibly profitable market for companies that had ridden out of volatility of the last 24 years. These companies endured crises in the past, did not panic, and have been rewarded well for staying the course.
One of the reasons for that, by the way, is that such firms have well-diversified global portfolios; they also have experience in crisis management in other countries and very low costs of capital. This combination means that any crisis in any country may actually be a welcome opportunity for growing and strengthening their local businesses...
Another reason is the kinds of businesses that you are describing have very, very big Russian operations. Of course, they have Western origins, but by now multinational firms active here are staffed and led almost one hundred percent by Russians. These people lobby for their jobs, and corporate HQs are generally sympathetic and long-term oriented.
So, when you ask, why these companies are still involved, I would say that they have powerful historical reasons, and may see attractive current opportunities. And don’t discount the sense of responsibility to the hundreds of thousands, and maybe millions of Russian people who collectively work in or otherwise depend upon those firms.