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Friday, March 11, 2022
What the Kremlin’s Myopic Nationalization Gambit Might Mean for Investors
“Venezuela, but with worse weather.”
Destined to make the above quip a reality, Russia’s ruling party United Russia reported earlier this week that the government had begun to take steps to nationalize, or take over, the assets of foreign companies that withdraw from or suspend operations there in protest of Russia’s invasion into Ukraine.
Should Russia go through with these nationalization plans, history indicates that they will almost certainly lead to failure, including further economic pain for its citizens and greater isolation for its government. Investors and companies, which strategically look to balance risk and reward, would have to be offered significant upfront economic inducements to invest in Russia. These inducements would create extreme relationship imbalances, which in turn–quite ironically–create the conditions, similar to Iran in the 1950s, that led to the perceived necessity of nationalization of private assets initially.
The Kremlin is more likely to avoid the Iranian example, and instead might point out how its western neighbor Finland nationalized assets in 1993 and again in 2015. However, this is not an appropriate comparison. In 1993, the Finnish government founded a banking sector company to help its banks out of a significant financial crisis. More than two decades later in 2015 the Finnish government purchased a failed mine from bankruptcy in order to prevent poisoning of its water and further contamination to the environment.
A more appropriate comparison for how this might play out in Russia is the case of how nationalization of resources has played out in Venezuela. Venezuela and Russia, which are both petrostates, feature governments run by autocrats where widespread corruption is a hallmark feature. Secondly, both states’ widespread level of corruption has led to incredible, yet fairly predictable levels of mismanagement.
Venezuela’s vast material wealth was a significant reason for the country once being the world’s largest producer of oil. Despite the subsequent riches from its oil, its kleptocracy has led to unfathomable rates of poverty (nearly 80% of its populace in 2021). In the face of material prosperity, corrupt persons are primarily looking to enhance their position and not those of society at large.
The trickle down effect from widespread corruption is typically widespread misery for a majority of citizens. Greater interest and investment in improving the lives of large swaths of society is eschewed in favor of advancing the narrow interests of the few. Worse still is that this corruption begets more corruption.
Because investors are loath to invest significantly in places where assets are more likely to be nationalized, these countries are essentially depriving their emerging economies of the technical skills and monies necessary to build infrastructure and diversify and modernize their economy in order to better serve its citizens. Once seemingly endless resources either dwindle or the infrastructure necessary to maximize their profits crumbles. In either case, the pie continues to grow smaller, even if the number of hands reaching for that pie continues to grow.
Countries like Venezuela have doubled down on corruption, and another generation of Venezuelan citizens will be forced to endure greater misery as a result of that corruption. Part of what has previously allowed Russia to mostly escape the fate of Venezuela is that despite their noted corruption they were still able to attract significant investment dollars.
Russia, the R in BRIC, was once a much desirable destination for investment resources and investors looking to profit from emerging countries. Going forward with their nationalization plans will likely put a permanent end to this status, as well as subject us all to inevitable advertisements touting investment in BIC economies as “the best an investor can get”.
Russia also figures to share a similar future as its military brother Belarus as poor European countries with few freedoms. However, unlike after the fall of the Soviet Union, there doesn’t appear to be a foreseeable path to prosperity out of this self-induced quagmire.
Although the prognosis for any sort of Russian economic revival appears grim, Russia’s continuing downfall provides significant opportunities for frontier markets or other emerging markets to embrace a “next country up” mentality to take Russia’s place on the world stage.
Even though no single country can replicate Russia’s current resources or influence, evidence of piecemeal attempts to do so are already appearing. Qatar is mediating the surprising nuclear talks between the United States and Iran. Turkey recently reached out to Israel to renew their relationship. South Korea’s president elect Yoon Suk-yeol appears to favor a pro western stance and is keen to attract more investment dollars to his country.
Even if Russia fades from the global stage in the near future, investors will still have plenty of opportunities to get returns worthy of the tagline, “the best an investor can get.”
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