Medvedev's Russia investment pitch under pressure

Guy Faulconbridge | Published: July 26, 2008 00:00:00 | Updated: February 01, 2018 00:00:00

Dmitry Medvedev's case for investing in Russia is under pressure less than three months into his presidency after a top foreign executive left the country and state criticism wiped $5 billion from the value of a coal miner.

Medvedev, a 42-year-old former corporate lawyer, took over as Kremlin chief from Vladimir Putin in May and swiftly vowed to reinforce the rule of law in the world's number two oil exporter.

But Russian stocks tumbled on Friday after two unrelated events at separate natural resources firms shook confidence in the investment case for Russia's booming $1.3 trillion economy.

The chief executive of BP's TNK-BP joint venture, one of the biggest foreign investments in Russia, said on Thursday he had left the country due to "sustained harassment", bringing to a head a long-running conflict over the oil venture.

Hours earlier, public criticism by Prime Minister Putin of Russia's biggest coking coal miner, Mechel, slashed over a third from the company's market value as investors dumped its New York-listed shares.

"The last train carrying the optimists out of Russian equities has just left the station," said Chris Weafer, a strategist at Moscow investment bank Uralsib. "Let's hope it's just for a vacation rather than emigration."

Investors said Thursday's events underlined the risk borne by Russia that, until now, had largely been masked by record-high prices for the commodities and oil that Russia produces in abundance.

"The place looks rotten to the core. It always did, but it was masked by high commodity prices," said one fund manager who asked for his name not to be used.

"It is a kind of unmasking of Russia's problems," the investor said, adding: "If the commodity prices come back up it will mask everything again."

Russia's benchmark MICEX index fell as much as 6 percent to 1,480.43, the sharpest intra-day fall since January and the lowest point since Medvedev took office. The yield on Russia's 2030 Eurobond was little changed.

"Sentiment cannot turn around any time soon. Investors will just sell into any bounce," said Matthias Siller, investment manager at Barings Asset Management in London.

BP PACKING ITS BAGS?

Kremlin officials say Russia is open for investment and wants to attract foreign investors to a booming economy.

But as credit fears spook global markets and douse appetite for risky stocks, investors are focusing on the Russian investment story, which they say has serious problems.

"There is no longer an investment case for Russia now. There is a speculative case but not an investment case," said another fund manager who also asked for his name not to be used. "Russia has reached the tipping point."

BP's fight with shareholders of TNK-BP is one major problem for Medvedev, who many investors believe was picked by Putin to improve Russia's investment image abroad. Medvedev says the government wants to stay out of the dispute.

The dispute between BP and its four Russia-connected partners has raised concerns about the safety of major foreign investments and could even clip Russia's oil production.

Failure to rein in the campaign against TNK-BP has convinced many observers the Kremlin is comfortable with the dispute, probably because a state company could later buy up some assets.

Putin's attack on Mechel for selling its coking coal in Russia at double the price of its exports also drew comparisons with the ex-president's sharp criticism of oil firm YUKOS.

Unicredit suspended its coverage of Mechel after its biggest ever one-day decline on the New York Stock Exchange, saying the fall was "reminiscent of the wild swings of the YUKOS affair".

But some traders say investors will still be lured back to Russia's economy, which is booming for a tenth straight year on soaring consumer spending and high prices for oil and gas.

"The Russian government doesn't care about foreign investors. It cares about its national security and, if foreign investment gets stomped on, then so be it," said one sales trader at a major Western bank who asked not to be named.

"But with strong growth and a huge population, investors will close their eyes and jump in regardless, and the Russian government knows it," the sales trader said.

On Friday, Daimler AG, the world's biggest maker of commercial vehicles, said it may spend billions of dollars on taking a stake in Russian truckmaker Kamaz.