Business

Confessions of an Irreverent Banker

Eric Kraus arrived in Moscow for a long weekend in 1997 and still has not gotten around to leaving. He’s carved out a dubious niche for himself as the bad boy of Russian finance, having been fired more than once for expressing his opinions “a bit too aggressively” – most recently when he characterized Sibneft’s management as bandits. But two years ago Kraus found a comfortable home as chief strategist for Sovlink, a top bank and broker-dealer. From his desk there, he pens an elaborate monthly e-newsletter called Truth and Beauty (and Russian Finance) that regularly causes a stir among market-watchers around the globe. In this month’s PASSPORT interview, he’s as candid as ever.

PM Should the West be concerned about reform in Russia?

EK Anyone who lived in Russia in the 1990s and now speaks of Russia’s overall “failure to reform” is smoking something! I see changes in good months that more established European countries are unable to accomplish in decades. Russia’s most recent move – the hugely unpopular monetization of the vast range of non-cash benefits received by literally hundreds of segments of the population – from mothers of large families to Chernobyl liquidators – has required some combination of great political courage and an uncommonly passive populace. A new housing code has been fast-tracked in the Duma and agricultural land use is being rationalized. The utterly dire banking system is at last seeing at least the beginnings of restructuring, as are the general standards of corporate governance. A substantial attempt at reforming the bureaucracy is underway. The World Bank raised Russia’s rating for business climate from pretty much the bottom of the list in the 1990s, to number 40 out of 120 countries rated – not great, but quite an improvement! While corruption is still widespread, bribe-taking is no longer a no-risk undertaking: a surprising number of mid-level functionaries are sitting in jail on corruption charges.

PM What about the Yukos affair?

EK There is no arguing that the badly mishandled Yukos affair has caused the Russian market to miss a couple of beats, yet the rally has now resumed with the full force of surging oil prices, excellent macroeconomic fundamentals, gradual reform and enhanced political predictability. Far from boycotting Russia, as Khodorkovsky’s lawyers and tame foundations had warned, Western energy companies are currently falling over each other to get in. The great economic success of Putin’s first years in office was almost entirely predicated upon his successfully taming both the regional barons and their closest allies, the dread oligarchs. Indeed, the real question is what would have happened had Mr. Putin NOT neutered Menatep. Were the oligarchs to have succeeded in "re-privatizing" the Russian government, we could have expected a replay of the 1998 crash; a state simply cannot be run for the personal benefit of a handful of vastly rich, totally unscrupulous operators without courting disaster. While the Menatep boys are now trying to pass themselves off as heroes of Russian liberalism and reform, their behavior has been totally self-serving. Certainly, those of us who have lived in Russia long enough to remember their slash and burn tactics are justifiably skeptical. From the market’s perspective, the vital point is that this is a fight between the Kremlin and one particularly pernicious oligarchic group - not the unraveling of privatization. More than a year after the arrests, we can now feel totally reassured on this point.

PM You are bullish on Russia?

EK If I weren’t I would never have lasted this long here! Russia engenders far stronger emotions than, say, Belgium or Denmark. It has been fascinating living here through this period of accelerated change. On the financial front, of course, it has been great! One could make a great deal of money here by buying when the Westerners sell, then taking profits when they come charging back in. The underlying economic story is excellent: This year’s budget surplus is likely to run about 2.5%, with a current account surplus of about 7.5%; GDP growth is expected to come in above 7% once again this year. In fact, with huge budget and trade surpluses, Russia is the only major European country to essentially meet the Maastricht criteria!

PM You mean the “convergence criteria” such as debt ratios for the EU common currency (Euro) to work?

EK Yes, never shy about setting records, Russia has recently established yet another: to the best of our knowledge, the fastest sovereign dis-indebting in financial history. Shortly after the 1998 crash, we estimate that Russia’s debt-GDP ratio reached a catastrophic 125%. Not only will the public sector debt ratio have fallen to 26.5% by the end of 2004, but Russia is utterly unique among the emerging debt issuers – a net creditor, with almost $100 billion in foreign reserves, she could essentially buy back her entire foreign debt load, with a fair bit left over.

PM What can possibly go wrong?

EK Although, as I have repeatedly had to reassure my Russian friends, a 1998-style crash seems about as likely as snow in Havana, Russia does retain an impressive ability to surprise, and with a little effort, as the recent Yukos follies have illustrated, one can expect the occasional sharp correction in financial markets. Most of the risks are exogenous – for example, we could see a sharp fall in oil and commodity prices were the G7 economies to tank, but Russia is relatively sheltered by her increasing trade with Asia. There are also, of course, some potential Russia-specific issues.

PM Which Russia-specific issues?

EK Regardless of whether or not one admires the Russian president (and I do, hugely) there can be no arguing with the fact that much of the credit for the post-crisis transformation goes to Vladimir Putin. The governance vacuum that characterized the late Yeltsin years has given way to a very firm hand in the Kremlin, a substantial recentralization of power, and an extraordinarily virtuous macroeconomic policy. The downside of this is, of course, that the entire edifice is apparently very much dependant upon one man – with no obvious heir-apparent or mature and predictable party structure. He has just begun his second and final term in office.

PM How has life changed in Russia for a foreigner?

EK On a recent Saturday afternoon, I desperately tried to get a restaurant reservation at one of the top places. Good luck! Vogue, Bisquit, Bed, Boulevard, Market, Antinori – all booked solid. Simply being a foreigner no longer cuts much ice with the management of Moscow’s hip night spots anymore – perhaps I should dye my hair orange. This is not for lack of supply: the number of new restaurant openings is mind-boggling. In the mid-1990s, Moscow had about 6 decent restaurants. Now, they are simply uncountable! And it is not just the $100 plate of spaghetti joints briefly made famous by Victor Huaco’s glorious (if short-lived) Rossini in 1997; there are now an increasing number of places where one can eat well for $30 to $50, certainly better than one can for the equivalent in Paris or London. Services of all sorts are booming. The USSR was surely one of the most under-serviced places on earth, and Russians are fast learners. From lawyers and tax accountants to hairdressers and restaurants, the domestic service sector is growing by leaps and bounds, not just in Moscow but increasingly in the larger provincial cities.

PM What are some highlights of your life in Moscow?

EK The Bolshoi! In March I attended the truly magnificent ballet The Legend of Love. The fruit of the 1950s collaboration of Yuri Grigorovich and Nazima Khikmeta, it combines the rigorously classic forms of great Russian Ballet with influence of the early 20th century innovators – George Balanchine and Martha Graham. With its powerful Orientalism, Nijinsky would have felt right at home! There is not a dull moment, and the music is spectacular. The Legend of Love, alone, is well worth a trip to Moscow!