welcome back now here's a recap of the main stories here on our team russia keeps an eye on america's high stakes military ambitions in poland as president obama round soffits european trip in warsaw. belgrade agrees to extradite former driver old rock probiotic to the hague on war crimes charges despite his health problems services accuse of arresting him only so we're controlling the e.u. . georgia protesters appealed to the e.u.

to access harassment of following the government's independence day crackdown that's left hundreds wounded and detained. now russia wants to diversify but a pumped up oil price is making that tricky well it's all for discussion on the money that's coming up next. hello and welcome to on the money with the business of russia is the business i'm hearing about. today we're talking about energy investment in the russian economy and to discuss this i'm joined by ben errors here in the studio with me he's editor in chief of business new europe we also have erich krauss he's an independent fund manager but i'm here also kosky he is the head of strategic planning and development at unicredit securities and lie to me or to commute off he is chief economist at the critter financial corp ok eric i'm going to go to you

first your very well known fund manager here you've been here actually longer than i have and you write this weekly right out of its monthly no truth and beauty and russian finance which is not only very smart it's very funny so my first question goes to you how do you correlate high oil prices and investment in russia and they correlate well or not well i mean there is a persistent myth that the russian economy and market is only about oil and i decided to quit a quick argument with it i mean since oil is a one way bet into the medium term i don't really think it matters very much the point is that what really is been slowing down investment into russia has been a combination of extremely negative coverage in the western press and the russians own god given talent for screwing up their public relations the russians can make themselves look bad giving out christmas candy to orphans and this has different

effects and different parts of the economy i mean the bond market pretty much discounts it but now i mean russian bonds the market rates the risk of most russian bonds a lot less than some of the european countries and in fact only about a half a percentage higher than germany itself on the other hand the equity market it's just fast money flowing in and out right now and. as for direct investment which is what's arguably the most important in the russian economy the funny thing is there's this misperception i mean most of the guys who have invested directly in russia are making a mint money they're doing very very well everybody gets dollar signs in place of eyes when they think of china but who's making money on the direct investment in china not many people in russia most in the doing very well but a lot of people are scared to come in because of what they read in the economist of the financial times ok ben if i go to you in the studio so i'm not sure of arab really and i mean it but there is

a public relations issue here but really when is it a certain point one hundred twenty dollars a barrel hundred thirty dollars or how are investment foreign investment being affected in russia i mean are they coming in bringing in or do you say this is too high can it it's not sustainable i mean what's the calculation that a lot of foreign ministers of mine are making a direct link between the extreme market performance and the price of oil i mean eric story in so much as you should put oil into context. russia's seen as a better economy and of course oil plays a very important role however oil and gas only make up about fourteen percent of g.d.p. where is services retail make up fifty two percent so from that perspective russia is a pretty normal country where oil is important is also makes up something over sixty percent of both export revenues and the government. tax revenue base so what's going on here is is this providing the cash for the government to do its investments and it's providing liquidity for the market yes the economy's being

driven by spending by small medium sized enterprises retail the normal economy and the trouble is this from the outside world is seen to be absolutely important and that if the oil prices tanked in the equity market tanks government revenues tank because they're using the cases such as when i go to what i'm also. also called skewed and it really in a way just given with benches that it really still is an oil story because the oil prices go down so low that much is in a very difficult situation isn't it really respective i mean all of the other elements of how you break down the economy while of course if there will be a substantial correction then of course there will be some negative developments in the russian economy but on the other hand i would say that. since as a result of the crisis actually we are living in a completely different policy set up which is actually kind of under rated from the very perspective but i think it's extremely important that we are living in a condition sort of out of flexible exchange rate and that will really offset

a lot of the negative impact of fear of any correction if if substantial correction oil prices that traffic on in my face so if oil prices were for thirty dollars per barrel that probable fall yes of course but but economy is not necessarily have to contract at that point if i go to our other vladimir here it's very interesting and we keep talking about oil prices at what point is what is the ideal oil price for russia is macro economic development because you know it's people have called all a curse and it can certainly be a curse of it's not managed well what is too high for russia. well it all depends of course because the oil price is not the only indicator good we're looking at to look at the russian or global economy however general perception is and what is good about that is that his general perception is now also perception

within the garment that high oil price is not necessarily a blessing but is also a curse for sure because the prize goes to the larger our government areas and the glow is the drive towards reform we have seen that quite clearly in the years before the crisis and this last crisis was a very good example and a very good teaching experience for the russian government to revell good things to see that. your dependence on oil revenues and the redistribution mechanism through the state coffers in order to boost economic growth is not necessarily a good thing erick if i go back to you i mean what it you know i'm learning lessons from crisis i think is very interesting has there been any lessons learned here because again with oil so high everyone knows it's easy to be complacent ok money is coming in budgets are expanding have the rating of any lessons been learned at all but peter the last crisis wasn't about all oil fell in the last crisis in two

thousand and eight so the reason that a lot of other assets fell it was a liquidity crisis and the lesson that russia learned from that one is that the couter and system whereby the russian government received huge revenues from oil exports and then bank them abroad and meanwhile russian companies were borrowing very heavily from western banks left the country dangerously exposed so basically when those banks stopped lending and they wanted their money back then the local market was totally dry and we had a bit of that we had a bit of a scare so i think the lesson they've learned is don't do that russian company should be borrowing in rubles on the domestic. market and not getting too heavily exposed to western finance i don't know i think although i don't see much of a curse in oil it's certainly allowing a useful restructuring of the country and i don't think russia would be for very fast under any scenario i mean russia is sort of halfway between europe and china

it does not have the dynamism of china and it does not have the slowness it doesn't have the hidebound nature of europe so it's going to be a lot going to be a pain your process twenty year process russian reform i mean we're maybe halfway through it ok and then go head to head pick up and see points eric's made i mean looking at the ninety eight crisis it was never again they came out of it and we never gave me one of these happen ever again and the reality came out of it was the stabilization fund right and here you have a mess of the corrupt and inefficient country and yet cooter in the finance minister was able to ring fence six hundred billion dollars it makes russia the third richest country in the world in terms of cash in the bank and he managed to keep that out of the has did with a pretty coming out of this crisis they've had another never again moment because they thought that stabilization fund was enough they could just buy themselves out of the crisis and that plainly didn't happen so the result has been in the kremlin

a very strong conviction for the need to real reform and if you want is real referral if you look at what was going on before the crisis we had the for example the strategic investment which was ring fencing some forty sectors so that foreign investors couldn't go into and after the crisis the talk now is on investment privatisation some of those companies that were put off limits are back on limits and they're going to be sold things and transport shipping what have you and the need then having cash in the bank massive amounts of cash is not going to save your bacon you know when that when the when the crunch comes and if you're dependent on commode it seems like the crunch will come in a coming regularly if i. over the of what i'm here over at the unicredit securities i have is the process of diversification away from oil and gas and is that on track because we've been the i've lived in russia for twelve years and i've heard about it for twelve years is it being meaningfully done. well if you know

if you if you look at the structure of russian economy i guess it was mentioned before that. for example of places like services and cross trucks and financial services are contributed more than one half of russian g.d.p. so russian economy is actually a diversified economy it's not that easily dominated and that russia is a major oil exporter but it's not a fairly oil don and i think not only of course is important but. but i would really see it as a function of the fact that we have too much oil on the ground and actually i don't really want to comment on that or curse an issue i really don't think that the high oil prices or oil resources there is a curse russia can reform if well price is high or lord of course it's maybe less likely to reform but it can definitely at the possibility of that is not zero or a thought impossible so it's i'd like to look me up to russia to continue to develop

a revolver or something like that and it's not really related. to oil prices world just bad at bisham our resources which russia can use in the process for. one thing what ok if you want to jump in there go ahead remember. the the deal of the year in american markets is in the location of yenda x. which is a russian technology company one of the only ones in the world which managed to beat google in its own on its own turf and that was made in russia and it's been it's been floated a very high valuation in new york i think because this is to misunderstand that's going on becomes. a problem in so much as it comes with is a very specific country problems with countries with. appreciation the disease areas we talk about judges these links for the program you know it's not because

someone says you know there's not that many countries that have many. but you look at what no way i mean they managed to contain it they used opposition funds sterilize the money what have you and it's a problem in so much as you have to have a very specific set of policies that don't apply generally to most countries in order to what to do with all this money that you generate yukon just dump it in your economy right that doesn't work so you have to do something with it but of course you want to use it to pay for this reform and change ok ben i want to jump in here we're going to go to a short break and then we can be turned on the chair break we'll continue our discussion on russian energy state with our team. elect please please. please.

please. please please. know that i kill you and i simply have a wiser. face of course and that's never am said. i am a song from the skull skull i'm a guy i think you are but every day. a flashback from the memories. i have so much so a long time. ago. i was afraid. i was ashamed that i didn't. i was ashamed that i hadn't a clue. why i got my arm i got my.

wow ok i know of course. what i'll go i don't want to i think. that i was the book so. well you know my soldier on the other side and i think i'm just a good. welcome back on the money i'm peter lavelle we're discussing russia's energy sector. but first let's see whether russia is too dependent on its energy resources. sooting crude prices of late two thousand and ten and early two thousand and eleven have an upside of the budget deficit at one point tipped to pass seven percent

increasingly approaching balance with energy revenues pushing consumption and g.d.p. growth but the downsides include aggravation of russia's chronic inflation concerns rubin strengthening stoking consumer imports some warn the dutch disease but others note the russian symptoms are unique there classical example of the duchess's is that your dependence on oil and gas or other natural resources pushes up the real exchange rate and distortion manufacturing industry well russia hasn't got a manufacturing base to destroy the first place where you have a dependency away suff could supply suffering is that you might have a hurdle for developing a manufacturing industry and russian government has long been concerned about over dependence on commodity revenues and has pushed the besom occasion with limited success and skepticism about the prospect of i personally don't see how it's going to change. in the near term and in the long term. because you know even

though the russian oil production against the decline or the global oil production begin to decline what will happen at that time would also mean high oil prices so you war production will be getting lower the oil price will be getting higher because of that saw as a result the russian intake from exports would more or less the the same it will be a big amount of money coming into the country that leaves investors with the choice of liberal energy revenue or trying to pick those economic sectors which can create and sustain burl you into the future the russian government increasingly pushing for the latter but international investors usually riding the form the theme of how to play russian energy and position for a future russian economy will continue to be seen from russian investment james blake on the money to. ok vladimir over at unicredit

securities that i to go back to you so is the dutch disease a myth when it comes to russia or just as russia have its own russia disease. well yes and i guess russia does have problems with. russian tradeable goods sectors do have problems well prices do rise and the ruble appreciates of course there we see substantial problems in a key benefactor of producers they do have losses and there is a huge n.p.a. import competition can potentially increase and if this situation prevails but at the other hand i would say that the russian market as a whole is not as developed then is not really it is really big enough to sustain the last big you know substantial big domestic industries actually so for example if you are talking about countries which usually are talked about that you talk about there is this for example at norway australia or something like that then.

the cooperation of russia is actually the bigger the population of those countries combined so it's potentially it's much bigger market which can accommodate. most of the best most of foreign players but also big domestic industries as well and on top of that the actual industries benteke industries are not big to you know to suffer let's see if we go over to other glad to be rid of critter i mentioned russia disease i mean maybe there are certain elements of dutch is easier that russia has just because of the things we just heard the other variables involved russia does has its own downswing and when it comes to high oil prices. well my view is that there are two points of view one you can form of the look. at the structure of russia's g.d.p. and say hey russia receives more than fifty percent from from services so it's not

come out of the driven economy however if you dig a bit deeper and look at how much of consumer demand. and the demand for local services and financial services for that matter is driven by all the money which is reduced to a butyl through bite it through the garments then you would realize how strongly the car country country's economy is still reliant on. revenues raised from oil i say that yes russia is perhaps less dependent on oil than it was ten years ago but it is certainly still very much duchesses case. much of industries outside of the commodity sector as my colleague another londoner just said are not that competitive both on a global markets and domestic market so that means that there is a huge need for investment in order to modernize this industries in order to make them competitive however when you look at the sources of this investment you end up with it will become oddity revenues in that all the way again ok ben what about you

you're the first person on the program that mentioned dutch disease i mean i'm pushing the russia disease ok is it is it because there's no industrial base to really degrade ok meaning there isn't really come back so that's the point is that i mean what does russia exports nothing except raw materials and you could get us diseases here and it's affected russia already a long time ago the ruble keeps appreciating and appreciating strongly and you go and talk to say the still pictures and you say you but you still why don't they make containers why don't they make finished goods and thirty reason why we don't it is because it's so expensive to do it here we can never ever compete against something like the chinese economy it's. for pennies and so from that sense the economy's already been afflicted persons is however the point you're making that it's been mitigated by the size of the population i mean we have. fifty percent bigger than expected country in europe germany and that domestic markets are going

to some extent is insulates him because that's disease stops you exporting everything's to expensive but however you have a massive massive domestic market and so that will mitigate it to some extent and that's what's going on at the moment i mean they're pushing hard to diversify manufacturing you know yandex a service company. but then in pharmaceuticals in the car industry we're having massive investment into that too so it's not as bad as it could be it's not as bad as it is for countries with small populations like norway like australia erica i go to you i think it's very interesting i've lived here for over twelve years and it was only during the great recession that the. ruble. i'm sorry going back going to inflation the inflation was under control for us for a short amount of time and now we go again high oil prices and the are you happy with management of the ruble peter the ruble is basically bouncing along we haven't i mean everybody's talking disease the only problem is that these

requires a constantly strengthening ruble currency and the ruble is not constantly strengthening the the they did slightly think patients to the extent that all prices are pretty much a one way bet given the continued growth in consumption in asia and the fact that no moral has been made since the dinosaurs left paw prices are going to continue to strengthen and russia has a few compared with advantages russia is never going to be a major exporter of mobile telephones russia cannot compete with the chinese neither can anybody else so russia needs to develop those sectors of the economy where there isn't compelled. then and there are few of them and the resource sector and then was talking about the steel producers and he's right in terms of finished goods but on the other hand if you look at the metals producers they have become so much more technologically advanced in the last ten years i mean they're now

exporting specialty steels and they're doing very well in in the high tech. resources and that is where russia is good as well as in some high tech in some technology. and it's being only one example maybe aerospace if he were there is but it's never going to it's never going to export stereo's to korea it's just not going to happen and i think a better example if we keep looking at norway in place i think is australia which is doing very very well on supply the demand of china in all sorts of resources if i go over to vladimir over it a critter i mean when we looking at management of the ruble have they found the right balance in making russia more attractive investment. destination because we ate a economy that doesn't have a good handle on it its currency is not attractive well i want to stress one part of your question when you said management of the ruble and i want to stress the

trouble is is not a free floating currency it is a managed currency so basically we can get ruble rate whenever. provided global security remains stable what we can get in a ruble rate where the central bank of russia wants it to be currently we've seen some stability of the markets we have seen quite significant growth in commodity prices but we also see in fairly high levels of risk aversion global markets and the recent correction of the markets is this is quite a good example of that from that perspective there has not been a lot of investment into the ruble coming from abroad and the one one example is that russia still suffers from continuing capital of those which in. you are more of russian exporters not europe a trading off of the export revenues into russia partially due to political domestic factors but partial it is also due to the fact that trouble was going nowhere and sarah correctly said however the fact the trouble goes nowhere is that

because the said central bank of russia does not see any need for a ruble appreciation the current set up with that liquidity levels being quite high in any but stable any any ruble appreciation of what can create additional speculate if inflow of cash into the country as was the case before the crisis which to ensure would boost the money supply levels and boost inflation central banker fresh is very much aware of this fact that's why the ruble is managed in fairly narrow corridor has been managed over the last one to two years came in with the real last question only a few seconds be election cycle is coming up is it going to affect how investors look at russia certainly i mean having capital out of capital flight for russia for the first in nearly ten years there's a lot of nerves because no one knows quite what's going to happen and if there is a change at the top then i think you know we launch into

a totally new direction and who's to say what that actually is let's see what happens ok gentlemen we've run out of time i want to thank my guests today and thanks to our viewers for watching us here on the money see you next time and stay with our king.

wealthy british style. sometimes. market finance scandals find out what's really happening to the global economy with mikes concert for a no holds barred look at the global financial headlines tune into cars reports on r.g.p. . the for. morning.