Russian investment breaking into Eastern European business

  • 2011-09-07
  • From wire reports

RIGA - Board chairman Roberts Zile of Latvia’s For Fatherland and Freedom/LNNK (TB/LNNK) political party is concerned about Russian investments into several Latvian economic sectors, as well as the methods they are using to bring these investments into the country, reports LETA.

The evaluation of Latvian-Russian relations depends on how they are viewed: from Russia’s standpoint, the current relations are considered very advantageous. “However, I am concerned about Russia’s investments into the financial and property sectors, and the methods in how these investments are being made, as well as the lobby for the gas sector. Latvia is interested in business development and investments, but we do not want to see investments from Western countries decrease, while investments from Commonwealth of Independent States dominate,” the politician stressed in an interview.

The nationalist alliance All for Latvia-For Fatherland and Freedom/LNNK (VL-TB/LNNK) does not want a comfortable situation to be created for people buying property in Latvia in exchange for Schengen area residence permits. These so-called “investors” only contribute to some, already well-developed, possibly over-developed, sectors of the economy, such as in real estate, and the banking business, but otherwise the money they invest in Latvia is then withdrawn from the economy, except for the one-time tax on a given transaction, believes Zile.

Asked about actual investments in Latvia, for instance, into Jelgava’s AMO Plant where the City of Moscow is the majority shareholder, Zile says that, as far as he knows, Moscow wanted to sell the company after former Moscow Mayor Yuri Luzhkov was ousted.

“This proves that these investments came to Latvia through politics. Another such example is Latvijas Finieris and the aggressive tactics of Russia’s Sveza, which is trying to take over a profitable European company,” says Zile.
When asked what will happen if VL-TB/LNNK becomes part of the government, and whether this could cause problems in the relations with Russia, Zile says he does not know how Russia would react to such a situation. If, for instance, Russia severs economic ties with Latvia in one sector, claiming that nationalist politicians must not be part of the government, that would mean that something is wrong in the very foundations of the Latvia-Russia relations.

Latvia isn’t the only European country facing an onslaught of Russian money.
Russian companies were shut out of eastern European markets after the fall of the Iron Curtain. The debt crisis is now offering them a new opportunity to break back into the region, reports Bloomberg.

Flush with record profits, companies including energy producer TNK-BP, lender OAO Sberbank and Russian Railways are targeting Eastern Europe as mounting debt and widening deficits force governments to sell stakes to raise revenue.
 The debt crisis, compounded with a credit squeeze, is pushing the European Union’s former communist countries to swallow Cold War-era grudges more than 20 years after the end of Soviet domination. The value of Russian acquisitions in the region in the past three years totaled 2.8 billion dollars, compared with 2.4 billion dollars in the previous 17 years, according to the United Nations.

“There’s still obviously a legacy of suspicion,” Chris Weafer, chief strategist at Troika Dialog in Moscow, said in a telephone interview. “The financial crisis partly broke that down because the countries in Eastern Europe don’t have the same access to Western capital that they assumed. There is an opportunity for Russia.”

Sberbank agreed to buy nine Eastern European units of Austria’s Oesterreichishce Volksbanken in July for an undisclosed sum in the Moscow-based lender’s first foray outside the former Soviet Union. Sberbank is offering 590 million euros for the business, according to three people with knowledge of the talks.

OAO Russian Railways, the operator of the world’s longest train network that links Asia and Europe, bid for a controlling stake in the cargo unit of Polskie Koleje Panstwowe, the Polish state railway. PKP received as many as 20 bids for the subsidiary, which may be worth about 2 billion zloty (481 million euros), according to Warsaw-based Rzeczpospolita.
The Russian railroad company is also interested in Slovakia’s Zeleznicna Spolocnost cargo unit, Vice President Salman Babayev said Aug. 23.

The hunger for investment is changing attitudes in Poland, the European Union’s largest eastern economy that has resisted Russian investments since breaking from communist rule in 1989. In the Baltic port of Gdansk, the birthplace of Poland’s anti-Soviet Solidarity movement, the Grupa Lotos refinery’s majority stake has been put on sale by the government.
TNK-BP, the Russian oil venture half owned by BP Plc, is among the bidders and is one of four to have been short-listed, Polish news service PAP reported June 30, citing Deputy Chief Executive Officer Maxim Barskiy. The Lotos sale is part of Poland’s plan to raise 15 billion zloty from state asset sales in 2011 to finance the deficit and curb debt.

“There are no jobs without investment,” Jerzy Borowczak, who fought alongside former President Lech Walesa in Solidarity, said in an interview. “The most important thing for us is for Polish refineries to be more competitive. Historical grudges mean nothing to me.”

Russian mergers and acquisitions from 1990 to 2010 totaled 15 million dollars in Poland, less than 1 percentage point of the 48 billion dollars in cross-border mergers and acquisitions involving Polish companies in the period, according to UNCTAD, a United Nations body that tracks trade and investments. The data reflect direct purchases of Polish company stakes exceeding 10 percent where the price was disclosed.

The share of Russian acquisitions in Poland may rise in part due to the changing attitude of politicians including Prime Minister Donald Tusk. There should be “no ideological reasons” to reject Russian investments even as a “certain amount of caution and restraint” is warranted because of the dependence on Russian energy supplies, Tusk said at the Lotos refinery on March 28.
The danger with Russian investment moving west is that it generally brings in only money. It isn’t high technology investment and doesn’t bring in world-class products – Russia simply doesn’t make any on the consumer level. It as well lacks attractive management, organizational and marketing skills for the acquired companies.

Tusk’s opening toward Russia is facing resistance in Poland. Dawid Jackiewicz, a member of Law & Justice, the largest opposition party, said he would make Treasury Minister Aleksander Grad stand trial if Lotos is sold to a Russian company, Dziennik Gazeta Prawna reported on April 28.

“It’s hard to treat Russian investors as one would treat, say, Dutch companies when political opposition describes any talks with Russians in terms of betrayal of national interests,” Bartlomiej Sienkiewicz, an analyst at the Polish Institute of International Affairs in Warsaw, said in a telephone interview.
Russia has been prepared to wield its economic muscle in Eastern Europe using other means. Gazprom, the Russian natural-gas export monopoly, has twice switched off supplies since 2006 because of pricing disputes with Ukraine, disrupting deliveries to the European Union in mid-winter.

Hungary, with the highest debt level of any eastern EU member, said it spent part of its IMF bailout loan to buy a 21.2 percent stake in Mol Nyrt., the country’s largest refiner, from Surgutneftegas, Russia’s fourth-largest oil producer. “A country can’t be strong if it’s completely dependent for its energy needs,” Prime Minister Viktor Orban, an anti- communist student leader in the 1980s, said in a live TV address when he announced the purchase of Surgut’s stake for 1.9 billion euros in May.

Even so, the biggest corporate profits in history and an expanding economy are buoying Russia’s pursuit of assets in the region. VTB joined Sberbank in reporting record net income last quarter as lending expanded and the share of overdue loans shrank. TNK-BP said in July the oil company is poised for record annual profit after second-quarter earnings rose 82 percent.
The nation’s combined corporate profits, excluding financial companies and small businesses, surged 43 percent in the first half from a year earlier to 4.1 trillion rubles (100 billion euros), the Federal Statistics Service said Aug. 26.

The recent bids and acquisitions by Russian companies reflect an “improved political environment” that may further cement ties in the region, said Simon Quijano-Evans, chief economist for Europe, Middle East and Africa region at ING Groep NV in London.

“The more cross-border activity, whether trade or investment, you have in the region, the lower the political noise is going to be,” he said in an interview. “Obviously, every country has its own interests, but the more interaction you get, the more you remove the barriers that there are.”