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Feature Story June 28, 2002
 
Once Bitten, Twice Felched
By Genghis Goldberg Browse author
 
 

It's no joke: Russia is every emerging market financier's wet dream. Its stock market performed at or near the top of the world in 1999, 2000 and 2001. What does it mean that Russia just clinched a three-peat? An even worse crisis looming than in 1998, which followed a two-peat emerging markets victory?

Who knows. And really, who cares. This time around The Russia Story is not about the stock market or the treasuries. Volume on the Russian stock market is still a fraction of what it was in 1997 (a fraction of the daily sales of a Fresno Sam's Club), and the treasury market is practically non-existent.

Yet foreign capital, which had sworn off Russia for good just four years ago, is piling back in just in the past six months. One investment banker told the eXile that he knows of "at least 15 new funds being assembled or solicited" on top of those announced earlier this year, most of them being sector funds or region-oriented funds focused on oil, gas and mineral-rich areas.

Why, you ask?

We're the eXile for chrissakes, what the hell do we know? We're too busy boozing with 50 dollar village whores and shaking our fists at our flaccid units to pay attention to the emerging Russian financial bubble, right?

Wrong, and wrong. In the first place, the eXile was the only English-language newspaper to predict the financial crash in 1998, and in the second place... wait, was the first place again? We forgot. Damn, gotta lay off the anthrax poppers! Oh yeah: Russia isn't a financial bubble a-bubblin' anymore. It's more like a financial fun house. Lots of mirrors, lots of slides, and a place called Night Flight that makes the whole damn thing worth it.

Separated in Algebra Class?

Grand Unification physicist with shaking hands Stephen Hawkings...

...and Grand Putinification banker with steady hand Sergei Ignatiev?

So, why is the foreign money coming in?

Let's get the obvious out of the way first: better corporate governance, increased transparency, lower taxes, more investor-friendly...

More importantly to investors, Putin has eliminated much of the "risk" factor associated with a potentially unstable emerging market economy by doing what every Western investor had hoped would be done here years ago: stomping on the uppity free press (which was far too free for comfort under Yeltsin) and the political opposition, most importantly by turning the upper and lower houses of parliament into rubber stamp committees which differ from the Supreme Soviet more in style than substance. That means stability. Predictability. Putin and the Chekists are not going to allow even a hint of free and fair elections for the Duma or the presidency if they sense any threat, but rather just enough of a veneer of democracy to allow organizations like the OSCE and the State Department's human rights observers to save face when they issue their whitewash reports. Foreign investors know this, and they like this, in spite of the warm fuzzy hymns that the McFauls of the world sing to Great Union of Democracy and Markets. Argentina, Brazil, Turkey and others, with their constantly simmering political problems and attendent uncertainties, have disappointed the foreigners too much. Putin has proven himself to be an impressive authoritarian-democrat since coming to power -- a man, as Clinton said, "whom we can do business with." Given his track record (shutting down NTV and TV-6, scaring the print media into submission) one gets the sense that few mistakes will be made from here on out. From an investor's point of view, the next six years, and perhaps beyond, will yield few surprises in Russia. That means risk rewards without the risk downsides.

But even this is too high-brow an explanation of a sudden surge of financial flows. The fact is, foreign money is coming back to Russia for the simple reason that over the last three years, it has been one of the world's top emerging market performers. It's money chasing money. Why has it been performing so well? Who the fuck knows: partly because it started from zero, partly because the market is so easily manipulated, and partly because there have been some remarkable about-faces in the corporate culture (YUKOS, Wimm-Bill-Dann). Money is the ultimate herd animal, as paranoid as a gazelle, yet as greedy as Daffy Duck. Money gravitates towards a good story -- and today, without a critical press or opposition, Russia is nothing but a good story. Remember what Anatoly Chubais and his bitch Michael McFaul said in the weeks and months leading up to the August 1998 crisis: "The perception of reality is more important than reality itself." Today, that perception has been vertically integrated. And that, despite all the bleeding-heart talk about transparency, is good for investors, at least in the short term.

Most of the West's Big Shot financiers missed out on the boom of the past three years. They got fried in 1998 (after missing the '96-97 boom), but even so, once again, the geniuses waited until all the money was made before jumping back in now. Hey, whoever says that Russians don't have a lot to learn from us Westerners is a big fat dummy. So, now the money men are ready to ride in just in time to help the first wave cash out, on the theory that in another year, the really-really Big Boys like U.S. pension funds or GE Capital will arrive in all their Brain Bug splendor, looking for assets to snap up. Who will be holding onto those wonderful assets when the Big Boys come? That's what this is all about, far as we can tell. Economics not much more complicated than a scalper's.

In other words, a good part of the foreign investor rush is to get second in line, since first has riden the ride and there's sure to be a third and fourth soon. It's the Greater Sucker Than Myself Theory that has driven the world of investing, if not capitalism itself, from day one. After all, investors who buy Russian don't really buy for the intrinsic value of the asset, which few still believe in; rather, they buy anticipating that the value of the representation of that asset can be resold to someone less sophisticated or less lucky than they. Given that, the asset itself -- stock in an oil company, a blocking stake in a packaging plant, a Eurobond issued by a mineral-rich region -- is irrelevant. They may as well just trade strips of paper, for all they care.

The first tier are cashing in their mind-boggling returns from the past three years, and the second tier are lining up for the pickins, eager not to get left behind and stuck with the third tier. At some point, as always happens with emerging markets, someone -- the fourth, fifth, maybe even the second tier? -- will be stuck holding the grenade when the next crisis goes off... The point now, the lesson from the mid-90s, is to get in, flip your assets for a profit quickly, and get out.

This has led to a kind of expat-fund manager social situation oddly reminiscent of the last boom-and-bust cycle. Namely, many of the funds, and their managers, are said by sources speaking off the record to be "totally clueless." Few emerging markets in the world can prepare a fund manager or investor for the merciless and lawless nature of doing business here.

One example cited of this cluelessness is the Lehman Brothers $150 million Telecom Fund, a new fund devoted to investing in Russian telecoms. In the first place, the savagely competitive telecoms market has already been carved up; in the second place, foreigners face all kinds of obstacles and restrictions in telecoms that go beyond the normal problems foreigners here face.

Then there's the other type of foreign fund, the type whose manager understands how much he can make on the side, who invests in shite companies which offer him a juicy kickback, and whose bosses in the corporate headquarters have no clue how to effect any oversight in a country as impossible to navigate as Russia.

Many of the new Putin-era fund manager types are described as "old guys" who feel most comfortable in hotel lobbies. None of this will matter until the shit starts to hit the fan. Thing is, will they notice it? As we saw in 1998, clueless foreigners who had made a bundle previously yet didn't understand a lick about Russia likewise couldn't see, smell or taste the shit hitting the financial fan, even though the signs were obvious for months leading up to the crash.

So what in jimmity-jimmins is the eXile doing sticking its bleeding-booger-caked nose into business that should be left to well-groomed business-type people?

Welp, we're gonna tell ya. Fact is, we wanna make some coin. Need to make some coin. Gots ta make some serious Pyotor Velikis (that's 1000 ruble notes in serf-talk) if we ever want to buy our dream house in a gated golf course retirement community out in Scottsdale someday. Sure, up till now we haven't exactly come across as the kinds of guys who are eager to speed through the awful years from 25-65, that purgatory before the bliss, bliss meaning retirement, caddying across the green with a defibrillator standing sentry over your heart, the comforting crackling of your plastic Depends underwear as you lurch over the compost bumps, and a 15-year-old Afghan refugee whom you've affectionately nicknamed "Hershey" bent almost to the ground from the weight of your clubs, desperately trying to keep up with your cart as he power-limps in your wake. Evenings playing bridge with the other retirees, after which we have our weekly Investment Club meeting to talk about our stocks... Yes, bliss, dear readers! This is what life is all about! Two years, before the hips crack! That's all we ask!

Where was we? Oh yeah. Money. We want it, folks. Reeeal bad-like. And like U, we smell an opportunity. See, we're among the few and the proud who have stuck it out here in Moscow through thick and through thin. We've got know-how like you wouldn't believe, trust us. You send one of your 31-year-old MBAs straight from the States, the poor bastard has no idea where to spend his money. So he'll go farting around, reading The Moscow Times hoping to find an asset that doesn't require travel to the provinces or a deal that doesn't require speaking to too many Russians during the acquisition phase.

That's where we come in. Fund Managers. We like the sound of it. So today, in this issue, we announce the opening for subscriptions to three new eXile funds (See page 4). The Bottom-Feeding Fund, which will close at $69 million and will focus on cheap undervalued assets like village whores, The Moscow Tribune and the city of Izhevsk; The eXile Elite Fund, which will also close at $69 million and will focus almost exclusively on pharmaceuticals and trade with Afghanistan and the countries of the Golden Triangle; and the eX-Inet Fund, a revolutionary eXile fund focusing on the Internet, which we believe will revolutionize people's lives. That fund seeks to subscribe up to $911 million, cuz it's a doozie!

So there it is, folks. Your useless primer to investing in Russia, and now, finally, your opportunity to get in on the Russia Miracle today, with people whom you can trust. Us.

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