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Bashneft Grab: Russia Scores Own-Goal, Undermines Trust in Russian Stocks


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There is great rejoicing in the Russophobe camp following what appears to be the use of the prosecutors office to acquire Bashneft assets in a clan war. 

The claim that this is a re-run of the Yukos massacre is obvious nonsense.

Yukos was clearly political. Khodorkovsky was a murderous thug turned born-again businessman who threatened the foundations of the Russian state. Had they not stopped him in his tracks, Russia was heading back to the good old days of Boris Yetlsin and economic collapse.

The Sistema story - on the other hand - is totally apolitical.  It is asset stripping - pure and simple. Clan warfare, a la 1990s. Not good. Not remotely good. 

The deal when President Putin came to power was as follows:  Since perpetual revolution is untenable - and provided that the oligarchs accepted the new rules going forward, the past would be forgiven.

<figcaption>Trust takes a long time to build</figcaption>
Trust takes a long time to build

Whilst the privatisation of Bashneft came after, it was clearly supported from "the highest levels" since they needed someone to do their dirty work, and trying to take Rakhimov's cash cow was a physiclally very dangerous undertaking. Others had tried and failed. Not all lived to tell the tale.

Frankly, I do not much care about the morality of all of this. My sympathies lie with none of the parties - I see very few shinning examples of clean, forward-looking probity amongst the prinicipal participants. (the reader is welcome to send me a list of the white knights here)  Neither the main target nor his attackers is worthy of much sympathy. 

No - what I care about very much is the effect that this will have on Russian financial markets - this at a time when domestic confidence is of crucial importance as Russia must go it alone without Western financial inflows.

Russia currently has a functional debt market, a very good Central Bank, a decent banking sector, but a vestigial equity market which is collapsing upon itself. This last is a crippling disadvantage for Russian companies who need to finance their business. It is for precisely this reason that there are no domestic pools of long term capital. If title to assets can be challenged at any time by a more powerful player, then the rational response become diversion of cash flows and moving money to safe havens - exactly what we see.

The Western press never tires of pointing out that Russia has the world's cheapest (major) equity market. Alas, regardless of their motives, that happens to be a statement of fact - and there is a reason - and the reason is now staring us on the face.

When you buy a Russian equity, you are expressing the hope that what the company appears to own it actually does own - and that a somewhat bigger and nastier dog is not about to come up and snatch away its bone. This may to some extent be true anywhere, but we have seen it here a little too frequently - and there is now zero confidence.

Thus the capital flight - thus the short-termism. This constitutes a major own-goal for any country wishing to assert its financial independence and to build deep domestic capital markets.

Caveat Emptor.

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