#6 - JRL 7281
Moscow Times
August 8, 2003
letter
Property Rights
In response to "Yukos Affair: After the Scandals," a comment by
Christof Ruhl
on August 7.
Editor,
In his commentary on the Yukos affair and discussion of the pros and cons of
a privatization amnesty, Christof Ruhl is overoptimistic in his reading of
the
financial market's reaction to the outbreak of the scandal in early July.
It is true that Russian bond yields -- that is, the cost of borrowing for
both the Russian government and companies -- had begun to rise in line with
other
emerging market debt after the U.S. Federal Reserve disappointed markets with
its 25 bps interest rate cut on June 25. But in the period from June 25 until
the arrest of Platon Lebedev on July 2, the spreads of Russian eurobonds over
the equivalent U.S. Treasuries actually tightened -- that is, Russian debt
outperformed the correcting U.S. and global bond markets. All this changed
after
the start of the campaign against Yukos. In the following week, the spread on
the longest-dated Russian eurobond widened by 5 percent.
This does not fit Ruhl's conclusion that political risks were already
"priced
in." On the contrary, in early July the market discounted a perceived
increase in Russia country risk. The effect is clearer still in the equity
market,
where the benchmark RTS index -- and not only the share price of Yukos
itself --
is still over 10 percent below its early July peak.
All this underlines the importance for Russia's investment climate of
improving the security of property rights. Any privatization amnesty would
be a
sensitive political question, which must ultimately be a matter for Russian
citizens to resolve through their democratically elected representatives in
the
Federal Assembly. So I agree with the implication of Ruhl's cautious
analysis of
the problem, that foreign observers and participants in Russia's financial
markets should respect those sensitivities.
However, I wonder if Ruhl is not excessively sensitive to the findings of the
ROMIR poll, which you reported in your edition of July 18. To be sure, the
poll shows a large majority responding affirmatively to the question,
'would you
approve any revision of past privatizations?' But other evidence from the
same poll, and from many other polls, shows that the public perception of the
state is no less negative than it is of the 'oligarchs' -- and perhaps more
so.
It follows that any action by the state to expropriate the beneficiaries of
the
1990s privatizations would be unlikely to cause public rejoicing, despite the
perception that the privatization process was unfair and dishonest.
In any case, investors will be looking with interest and concern at the
platforms of the political parties participating in the forthcoming State
Duma
election and of the candidates in the subsequent presidential election to
see what
proposals those platforms contain to protect private property from the risk
of arbitrary and politicized attacks. In the absence of any convincing
proposals -- of which a reduced statute of limitations is an obvious
possibility --
investors will likely draw the logical conclusion from such apparent
indifference.
Christopher Granville
Chief Strategist and Political Analyst United Financial Group
Moscow
Aug. 8, 2003:
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