Friday, June 13, 2008

The Russians are Coming! The Russians are Coming!

A quarter century ago these words would have struck fear into the heart of any westerner. Ten years later, those same westerners would have laughed at the possibility. Today, they're coming for real, but it's not the Red Army that's advancing, it's the financial oligarchs who are coming to buy out western institutions, beating the west at their own game, capitalism. A friend of mine was telling me the other day of his difficulties trying to find someone who spoke English when he first visited my current home of Poland nearly a decade ago. Today, nearly everyone here speaks some English, many nearly fluently, but then it was far more likely that your request for English would be met with "nyet, Ruskij?" Maybe it's time we all took a crash course in Russian if we want to talk to our future boss.

The latest flexing of the new-found Russian financial muscle has come via the person of billionaire Suleiman Kerimov. Financial reports on Wednesday indicated that Kerimov was selling many of his Russian investments, including $15 billion in Gazprom, and looking to increase his holdings in western financial institutions such as UBS, Morgan Stanley and particularly Deutsche Bank. At the end of 2007, he owned 3% of the bank; sources said he was looking to up that to 9%, which would easily make him the biggest investor in the bank, well ahead of such financial heavyweights as French insurer AXA and British bank Barclays. On it's own this may not seem important, however, taken together with Kerimov's call for other Russian tycoons to join him and the emergence of Russia's first Sovereign Wealth Fund, we could be witnessing the start of a large-scale financial invasion. Kerimov is estimated to be only the 8th richest man in Russia, if the others were to join him along with the state fund (the orders of the Kremlin are usually followed by all, unless you want to wind up like Mikhail Khodorkovsky or worse yet, Alexander Litvinenko)they could end up controlling some of the west's crown financial jewels.

On the other hand, this move can be seen as a tiny drop in the bucket when compared to the financial power that is wielded by other Sovereign Wealth Funds. SWF's are state owned investment funds, the first of which was the Kuwait Investment Authority born in 1953 and the largest being the Abu Dhabi Investment Authority, with assets approaching $1 trillion. Many of the funds are the result of commodity wealth, mainly oil, but there are non-commodity based funds such as the Chinese Investment Corporation that are also growing quickly. Rapid economic growth in some developing markets, huge trade surpluses with the US and rising oil prices are the main engines of these funds' growth. A Morgan Stanley report issued last year estimated that the value of these funds will grow from around $3 trillion today to over $12 trillion by 2015. Their influence on markets have become so pronounced that the US held a joint subcommittee hearing into the impact on the US. Ron Paul's comments can be found here.

As is often the case these days, it's the Chinese that people in the west are most afraid of. In all probability they will have the largest SWF by 2009 to go along with the largest corporation in the world (PetroChina), the most people and eventually the largest economy (yes, I know, it still has a long way to go). There was a lot of attention given to the threat of the nuclear option by the Chinese last year in reference to their ability to bring down the dollar through the mass sale of their over $1 trillion in US debt if the US applied trade sanctions on Beijing for not allowing the yuan to appreciate. Funny how every time I start writing about Russia I end up in China. Without doubt the financial centre of the world has shifted dramatically east. Maybe it's Mandarin that we should all be studying?