Date: Wed, 14 Oct 2009
Subject: Addicted to the financial crisis.
From: Paul Backer <pauljbacker@gmail.com>
Troubled as to what to do in the current environment? No problem. Follow the news and rely on learned opinion.
Glad tidings! The Russia and CIS financial crisis is over. The stock markets are up. The dollar is down by 10% against the ruble and Moscow commercial rent quotes rose by 20% during the past month. Break out the party hats and noisemakers, invest big.
Woe is us! The crisis is as bad as ever. The Ukrainian and Kazakh banking and finance sectors appear doomed. Russian statistics show no real grounds for optimism, record white collar unemployment, company losses and rapidly growing bad debts. Not a time to take risks.
To make matters worse, U.S. grew record deficits to match record unemployment rates. Who could imagine that throwing hundreds of billions in public funds at companies originating toxic financial products, producing goods that no one wants to buy and THEN giving themselves bonuses for that would prove to be so… stupid? I digress.
But wait, there is more! There is no crisis. Seriously. A situation persisting for over a year is not a crisis; it’s just the way things are. The economy and the world changed, and we are in an enduring economic adjustment.
As an economic participant in the region, you simply must absorb all of the above. Analyze, plan, masticate it a bit. Ponder, dwell, try a couple of concentric circles. Perhaps read a thought piece on the links between the price of oil, DowJones index, Obama, Nazerbayev, Medvedev, Putin, Yushenko and of course (not to be forgotten) what your driver, translator and the security guy think about the regional future? What model truly captures the short to medium term dynamic of emerging markets? Or has it gotten to be far too much thinking without doing?
This isn’t an easy thing to say, but you may be addicted to the crisis. Try an intervention.
It was a miserable year for many in Russia, CIS and Central Asia. Folks lost assets, jobs, life savings, reputations and livelihoods. Careers and lives devastated. Every asset in the region suddenly became a well and truly a troubled asset.
Retirements planned at golf clubs are now being enjoyed as a WalMart greeter.
In some ways the crisis was a priceless gift. We instantly became stars in our own psychodramas and parties to global events. No longer isolated in their own insular worlds of trying to make an entrepreneurial or career dreams come true, but suddenly aswim in the stream of international events and finance, sharing theories, thoughts and predictions. For some, the sharing grew relentless.
Grown, successful executives and entrepreneurs previously reluctant to share innermost fears and parade around demons of insecurity by a sense of… want to say “dignity”, but probably shouldn’t, let’s say… “decorum”, now share, vacillate and think deeply. Very deeply.
To be fair, these are great topics. How did/does/will the global crisis impact: running a law firm, selling Chinese manufactured clothing, running a SME? What will the Fed do? What will the Grivna or the Tenge do? Where are we going? Where will we wind up? What strategy should one pursue? What will the Kremlin do?
It is exciting going from a workaday Joe Lunchbucket of venture capital, SME or law to opining on profound issues. What of the future? Will [pick one, heck pick them all] Putin, Medvedev, Yushenko, Yanukovich, Nazerbayev, Bush, Obama policy initiatives spell the end of a self-storage project in Almaty? Will the collapse of the dollar spell the end of the shopping mall venture in Bishkek? What about Novgorod?
Ah yes… the juxtaposition (transposition?) of Class B commercial office estate development in Tver and how many billions the VEB is dumping into the latest “flavor of the month” company in Russia. Probably none, but it is a pretty problem.
For a number of very good reasons the angst was more pronounced in Russia, CIS and Central Asia than in the U.S. or Western Europe. The seismic financial events here are more dramatic. Regulatory changes are more sudden and sweeping. Watch casinos disappear! Witness a billion dollar market vanish! Observe the dollar fall 8 percent against the Ruble in roughly two weeks for no clear reason. Not only does s…tuff happen, it happens here all the time. In Russia, CIS and Central Asia, the folks doing business in the region lack meaningful control over events.
A good local lawyer can give you a heads up. He can mitigate impacts. Need a stamp, a signature, a regulatory decision, M&A, Eurobond, save a troubled asset, appeal a tax judgment, a veksel… or just have someone wave hi to you at the airport? No problem. All in a day’s work. A good lawyer can certainly get you heard at the gubernatorial level. He can not change national policy.
If you find yourself in a room with a major law, audit, consulting firm partner pratting (of it you prefer prating and/or prattling) on about his “good” lunch with Medvedev’s best friend or a good meeting (don’t these people EVER have bad meetings?) with a Duma committee chairman at AmCham or (sigh) the Embassy and… having been told in confidence that [it doesn’t really matter, but let’s imagine that] by the end of the year oil will be 60 or 80, or that the ruble will be 25 or 36 or whatever. This person is one of three things 1. Unable to remember how a living is learned, 2. Dangerously delusional or 3. Both of the above. Follow these simple tips. Do not make eye contact. Do not confront. And for the love of god, don’t give them your spare change, you are just enabling their lunch addiction.
The truth is that in “permission based” property systems like Russia/CIS only God and a very few key individuals make the weather. Neither you nor your lawyer are one of them. Key impacts can be moderated, but not prevented. For example, if you invested into a bank competing with Sberbank and the RF Government bought a billion dollars’ worth of Sberbank shares, not much you can do about it. Dramatic, unpredictable, uncontrollable, OK… but, is that new? Isn’t this what we signed up for when we came out here? Big guy, are you in or out?
At some point the angst became… dare one say it… a bit much. Certainly, if one’s revenue model encounters seismic events, one should stop, listen, take stock and adjust. But, if you have spent a year or more stopping, listening and taking stock, you may be a crisis addict. Unless your name is Hamlet and you have an inside track to the throne of Denmark, snap out of it.
What does that mean?
It means that if you invest now, you can make a killing or lose everything. The one sure way of losing your assets and perhaps most importantly, your time is to keep standing around, flying in and out of the region to “take a look”, “test the waters”, etc. What should one do?
1. Every asset owned or invested into in the region is a troubled asset. Due diligence it to heck. Run all of the public and non public financials. Run personal financials and tax data for key executives. Check “wants and warrants”, tax debts, judgments, open investigations, etc. If your lawyer can’t get you that info, change lawyers. If you have a spare $75,000 go to a major firm and get a book report on the RF Constitution and/or (and this one is my favorite) the legal, regulatory and economic “climate”.
2. Know where your Exit is and use it. The world is the way it is not the way that we want it to be. If your asset is hemorrhaging money, exit. It won’t get any better. Talk to your lawyer, have him explain how the asset can be monetized and perform the necessary tasks. Remember, you entered the region to make money, not to be in the region.
3. Get lean and mean. The vanity driver, bodyguard, “personal assistant”, etc., etc. The stuff that is seen as an indulgence in good times makes you look sad, weak and ridiculous in the current climate.
4. Know who you are. Unless you have personally spoken to Nazerbayev, Karimov, Medvedev, Yushenko, Putin, etc. in the past 24 months or at least someone who works within two floors of the same building as them, whatever you are being told about the above persons’ interest/role in your project is nonsense. During a crisis, buy/invest into hard assets not into the childish BS as to whether Putin, Luzhkov, Medvedev, Karimov, etc. view favorably your plan to sell mid-range clothing or whatever.
5. Control your risks. Have you thought about how you can lose your assets in the region? Has your lawyer done a risk/exposure analysis for you? No? Well, when push comes to shove you can always deduct the $6 to 12,000 you saved from the price of your lost assets. If nothing changed in your operations and asset protection in response to the crisis, you have a distinct likelihood of failing.
6. Understand the climate. Everyone is hurting. A lot more zero sum games being played out here. It’s rougher and tougher than ever, or at least for the last ten years. Not man enough for this place? No shame in that, but be honest with yourself if you don’t have the will, the budget and the team to fight for your stuff, see item 2. above. Cash out, and on your way out, buy lunch for someone who is staying behind.
We don’t know any better and enjoy a free lunch. Whether you stay or go, local currency will likely continue to fluctuate wildly. Governments, courts and regulators will make smart, somewhat smart, stupid and exceptionally stupid decisions impacting your business. Adapt and overcome or just leave. Just don’t keep standing around, it’s kind of blocking traffic and we worry about you.
Oh incidentally, for my part… no more dwelling on the crisis, let’s focus on making and protecting your money. Just had some $72,000,000 of intellectual property violators’ stuff confiscated in our neck of the woods, so there is stuff to talk about. Or maybe effective government relations or saving troubled assets in the region? At any rate, less “crisis talk” and more about making and keeping the good stuff.
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