Russia & China: Blight of crony capitalism

The problem with the Russian economy is that it is designed to favour its crony capitalists. Similarly, the assets of the Chinese elite are derived from government connections

The West is attempting to force Russia into giving up the Crimea and invading eastern Ukrainian. Their weapons of choice are sanctions. The US and European Union (EU) have imposed sanctions on some of the leading political and business leaders close to Russian President Vladimir Putin. Russia has retaliated with its own set of sanctions. Although it is doubtful that either set of sanctions will have any real effect on Russia’s foreign policy, what is interesting to us are the effects they will have.


So far the Russians have restricted travel for several US legislators, the leader of the House and Senate as well as a few others. I doubt if they even noticed. It is possible that they have never even been to Russia. They certainly do not go there on a regular basis. Most likely all of their assets are in the US. If they do have foreign assets they are definitely not anywhere near Russia.


In contrast, the US has placed sanctions on 20 Russians and one Russian lender, Bank Rossiya. Bank Rossiya was referred to as “the personal bank for senior officials of the Russian Federation”. Putin’s stance hasn’t changed, but both the equity and the currency, the rouble, have been punished. The equity markets are off 21% this year and the Russian rouble has declined over 13%. Meanwhile, the US equity markets are flirting with new highs.


The wealthy Russian oligarchs were the worst hit. In March alone, Russia’s top 10 billionaires, led by Alisher Usmanov, had lost a combined $6.6 billion of their net worth. This is perhaps fitting. The problem with the Russian economy is that it is designed to favour these crony capitalists. But apparently Russia isn’t even safe enough for them.


Crony capitalism allows certain individuals to profit from special connections to the state. Often their gains are allowed by contravening weak laws. The paradox is that at some point these people need laws to protect their property regardless of its origin. So they leave and invest elsewhere. The money leaving Russia is estimated to be $65 billion last year alone.


One favourite destination is London. One important guage of crony capitalism is the price of London real estate and the origin of the buyers. Property prices in London rose 12% last year. Much of this was from Russia and the rest of the former Soviet Union. When surveyed by London real estate agents about change of domicile, 37% of this group said they were considering a move. The global average is around 15%.


Russians and Ukrainians are hardly the largest nationality vying for London property. This distinction belongs to the Chinese, although usually the money comes through Hong Kong or Singapore. They prefer new buildings where up to 90% of the buyers are from “Hong Kong”.


The number of Chinese, who want to leave, is also similar to their Russian counterparts. As of 2013, Chinese emigrants to overseas had reached 9.34 million, an increase of 128.6 % in 23 years. Those that stay in China, still want to invest outside of one of the fastest growing economies in the world. One third of wealthy Chinese have overseas assets and 30% of those who don’t intend to in the next three years.


Of course like the Russians, the assets of the Chinese elite are derived from government connections. These wealthy individuals exploit these connections to become what is known in economics as rent seekers. They get exclusive access to public goods like licenses, building contracts, and low interest loans. This type of crony capitalism is a disaster for the economy because it results in misallocation of capital and poor infrastructure.


The Economist recently even came up with a chart. The problem with their chart and many others is that they used the wrong metrics. They arbitrarily used billionaires and limited their financial interests to certain sectors. This led to a ranking that put China below Britain and just above France.


Perhaps, a better way to rank crony capitalist countries would be to compare countries the rich want to leave with places where they want to live and invest once they attain their illicit booty. The mistake that The Economist makes is to limit the sectors. The real problem is not the sectors or necessarily the institutions although these are certainly part of the problem. The real problem is government itself.


All government policies distort markets whether they intend to or not. The distortions lead to misallocations and inefficiencies that slow growth. In the US, the massive program of quantitative easing was intended to help the unemployed. Instead it just made the rich richer.


This is not to say that all of these policies should be eliminated. Simply that they should be limited. Limiting the scope policies to the least number of areas is the best way to eliminate the advantages of the elite and avoid unintended consequences. Regulations necessary to protect the general public should be designed to be self-executing when ever possible. In other words, harness the power of self interest to help make a decent place to live rather than allowing government enabled greed to create a place people want to leave.


(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first-hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)




3 years ago

My! My! Has the Indian National Khangress been conducting training programs and offering Consultancy to Russia and China?

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Sensex, Nifty may struggle to rally further: Weekly Market Report

Indian indices are still possibly gathering energy for a short upmove but the market is highly overbought

The BSE 30-share Sensex closed the week that ended on 21st March, at 21,753.75 (down 56 points or 0.26%), while the NSE’s 50-share Nifty closed at 6,493.20 (down 11 points or 0.17%) for the week.


On Monday, Indian financial markets were closed on account of Holi. On Tuesday both the Sensex and the Nifty hit their all time highs but could not sustain at that level and gave up all the intra day gains. Nifty closed at 6,517 (up 12 points or 0.19%).


Goldman Sachs upgraded Indian shares to "overweight" from "marketweight" and raised its target on Nifty to 7,600. It also recommended investors to focus on potential election beneficiaries. On the other hand, factory production in the US rose in February by the most in six months. The 0.8% gain at manufacturers followed a revised 0.9% slump in the prior month that was the biggest since May 2009, figures from the Federal Reserve showed.


On Wednesday lower forward guidance by Tata Consultancy Services affected the market which ignored the positive data coming from the US. On Wednesday, Nifty closed at 6,524 (up 7 points or 0.11%).


Credit rating agency Standard & Poor's (S&P) Ratings Services on Wednesday said that Indian companies are improving their credit profile by selling equity and assets, or using free operating cash flows to reduce debt. U.S. housing starts fell for a third straight month in February, but a rebound in building permits offered some hope for the housing market. The Commerce Department said on Tuesday groundbreaking slipped 0.2% to a seasonally adjusted annual rate of 907,000 units.


The gains of previous three consecutive sessions (ending Wednesday) were wiped off by the negative move on Thursday. The weakness was after the recent US Federal Reserve's policy statement hinted towards the prospect of interest rates rising sooner than anticipated. Nifty closed at 6,483 (down 41 points or 0.63%).


With the positive data from the US and Fitch Ratings affirming its credit ratings at "AAA" helped the global indices get some relief. Nifty closed at 6,493 (up 10 points or 0.16%).


For the week, among the other indices on the NSE, the top two performers were Media (4%) and Metal (3%) while the worst two performers were C P S E (3%) and PSE (2%).


Among the Nifty stocks, the top five stocks for the week were Maruti Suzuki  (7%); Hindalco Industries (7%); Tata Steel (6%); Wipro (4%) and Jindal Steel & Power (3%) while the top five losers were Mahindra & Mahindra (6%); G A I L (5%); O N G C (5%); I D F C (4%) and B P C L (4%).


Of the 1,420 companies on the NSE, 795 companies closed in the green, 575 companies closed in the red while 50 companies closed flat.


Out of the 27 main sectors tracked by Moneylife, top five and the bottom five sectors for this week were:


Top ML sectors   Worst ML sectors  
Shipping 7% Oil & Gas -4%
Non-Ferrous Metals 5% Refineries -2%
Consumer Durables 4% Con_EPC_Infra -2%
Media 4% Real Estate -2%
Lifestyle & Leisure 4% Financial Services -1%



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