welcome back here's a recap of the top stories we're covering on our team russia keeps an eye on america's high stakes military ambitions in poland as president obama round soft as european trip in warsaw. belgrade agrees to extradite former general iraq on luggage to behave on war crimes charges despite his health problems serbia is accused of arresting him only so we can join the e.u. . georgian protesters appeal to the e.u.

to progress access harassment calling the government's an independent state crackdown that's left hundreds wounded and detained. by russia wants to diversify but the pumped up oil price is making that tricky now it's up for discussion and peter viles on the money that's 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 cos 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 letter 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 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've said this could be a quick argument with it i mean cents or oil is a one way bet in the medium term i don't really think it matters very much the point is that what really is the 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 remote russian guns 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 this misperception i mean most of the guys who have invested directly in russia are making a mint the 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 eric really answer the question which i mean 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 not it's not sustainable i mean what's the calculation that a lot of foreign ministers are are making a direct link between the extreme market performance and the price of oil when every 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. whereas services retail what have you make up fifty two percent so from that perspective russia is a pretty normal country where oil is important is also makes up something of a sixty percent of both export revenues and the government. tax revenues so what's going on here is is this providing the cash for the government to do its investments and it's providing liquidity to the market yes the economy is being

driven by spending by small any size and surprise it's reached the normal economy and the trouble is from the outside oil the seem to be absolutely important and if your prices tanked and the equity market tanks government revenues tank because they're using the high ok to subsidize his axis of i'm going to let him out ok. it really in a way just given with benches that it really still is an oil story because it will prices go down so low in russia 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 well of course if there will be a substantial correction then of course there will be some negative developments in the russian economy but on that account i would say that. since as a result of the crisis actually we are living in a completely different ball of policy set up which is actually kind of under a clip from the many perspectives but i think it's extremely important that we are living in the conditions of a modest flexible exchange rate and that will really set

a lot of negative impact of there if any correction if in a substantial correction not oppresses by traffic on in my face so if oil prices will fall to thirty dollars per barrel then probable for us of course but but the 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 price which at one point is what is the ideal oil price for russia is macro economic development because you know it's people have called a curse and it can certainly be a curse of it's not managed well what is too high for russian. well it's all depends of course because the price is not the only indicator that we're looking at to look at russian a 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 russia because the oil price goes the larger our government revenues and. below is the drive towards reform we have seen this right 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 re-appear weird things to see that. the penguins or oil revenues and the redistribution mechanism through state coffers in order to boost economic growth is not necessarily a good thing erick if i can go back to you i mean what you know i'm learning lessons from crisis i think it's 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 there any will any lessons been learned at all but peter the last crisis wasn't about oil 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 cooter 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 sucked totally dry and we had a bit of that we had a bit of a scare so i think the lessons they've learned is don't do that russian companies should be borrowing in rubles on the domestic. market and not getting too heavily exposed to western finance i don't know i think well i don't see much of the curse in oil it's certainly allowing a useful restructuring of the country and i don't think russia would reform 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 high nature of europe so it's going to be a long it's going to be a pain your process twenty year process russian reform i mean we're maybe halfway through it ok then go ahead go ahead 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 again we won't ever again and the reality that came out of it was the stabilization fund and here you have a massively corrupt and inefficient country and yet cruiser in the finance minister was able to ring fence six hundred billion dollars and 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 hands did with their parties coming out of this crisis they had another never again moment because they thought that stabilization fund was enough they could just buy themselves out of a 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 reform 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. after the crisis to talk now is an investment privatized they should and some of those companies that were put off limits are back on limits and they're trying to sell things and transpose shipping what have you and the need then having cash in the bank and 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 commodities like oil the crunch will comment will come regularly if i. go over to 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 things like services and financial services are contributing more than one half of. me is actually a diversified economy it's not that easily double oil dominated russia is a major oil exporter about it's not necessarily the oil doesn't have a lot of it well 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 would really want to comment on that issue i really don't think that the high oil prices or oil resources is a curse russia can reform if well prices is high or low or out of course it's maybe less likely to reform but it can definitely have a possibility of that is not zero so it's not impossible so it's not our salute up to russia to continue to develop

a revolver or something like that and it's not really related. with oil prices for oil just additional resources which russia can use in the process for. one thing what ok or do you want to jump in you're going to remember. the the deal of the year in emerging markets has been the flotation of yen dix 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 of this because it's to misunderstand its ring and it comes to oil is a problem in so much as it becomes with is a very specific country problems in the countries with. appreciation the so-called dutch disease areas we talk about judges these links part of the program but it's not it's not because in some instances you know there's not that many countries

that have missed. but you look at what norway to them and they managed to contain it a state of isolation fund sterilize the money and what have you and it's a problem in so much as you have to have a very specific set of policies that apply generally to most countries in order to what to do with all this money that you generate you can't just dump it in your economy 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 literally turn from that short break we'll continue our discussion on russian energy state with our deep.

that i kill innocent kid i was a calm day of course and that's never answered. the song from the skull still with me i think of it every day. but still the flashbacks from the memories. of so much so a long time this year trying to come. i was

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dot com. welcome back to 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. surging crude prices of late two thousand and ten and early two thousand and eleven have an upside of a budget deficit at one point keep the past seven percent increasingly approaching balance with energy revenues pushing consumption and g.d.p. growth of the downsides include aggravation of russia's chronic inflation concerns with brutal strengthening stoking consumer imports some warn dutch disease but others note the russian symptoms you can make a classical example of the dutch disease is that your dependence on oil and gas or

other natural resources pushes up to really change shape and distortion by the fashion industry well russia hasn't got a manufacturing base to destroy the first place. well you have a dependency with soft goods and suffering is that you might have a hurdle for developing a manufacturing industry the russian government has long been consumed about over dependence on from moderately revenues and has pushed the business because we've limited success and skepticism about the prospect of i personally involved see how it can change in in the near term and in the long term because you know even though the russian oil production begins to decline or the global oil production begins to decline what will happen at that time would also mean high oil prices so if war production will be getting a lot more the oil price will be getting higher because of that saw as a result of the russian intake from the 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 leveraging energy revenues or trying to pick those economic sectors which can create and sustain bill you heading into the future with the russian government increasingly pushing for the latter but international investors usually in writing the film the theme of how to play russian energy and position for a future russian economy will continue to be central to russian in business 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 i know i guess russia does have problems with it when oil is high but rather russian tradeable goods sectors do have problems about oil prices do rise

and the ruble appreciates of course there we see substantial problems in the key manufacturing producers they do have losses and there is a huge and very important petition potentially increase and if this issue asian prevails but at the other hand i would say that the russian market as a whole is not as developed and there's not really it is really big enough to sustain domestic you know substantial big domestic industries actually so for example if you're talking about countries which usually are talked about any talk about best disease for example at norway australia or something like that band. the cooperation of russia is actually bigger than population of those countries combined so it's potentially it's much bigger market which cannot come a day. most of the best most both foreign players but also big the best they can histories as well and on top of that the actual industry the better game histories are not big to you know to suffer too much of it legal or do other glad to be over

it or critter i mentioned russia disease to be maybe there are certain elements of dutch is easier but russia has reduced because of the things we just heard the other variables involved russia decides its own balancing act we have when it comes to high oil prices. well my view is that there are two points of q one you can form a 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 under to driven economy however if you dig a bit deeper and look at how much of consumer demand and the demand for local services or financial services for that matter is driven by oil money which is the register buter through budget through the government then you would realize how strongly the car can country's economy still reliant on on the revenues it raised from oil i say that year so russia is perhaps less dependent on oil

than it was ten years ago but it is certainly still very much duchesses case and much of industries outside could become what is the sector as my colleague another vladimir 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 auditee revenues in that all the way again ok then what about you you're the first person in the program that mentioned dutch disease i mean i'm pushing the russia disease ok there's a big is it because there's no industrial base to really degrade ok i mean it's really come back so that's the point isn't it i mean what is russia exports nothing except raw materials and you could argue that's 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 that still produces and so you produce still why don't they make containers why don't they make finished goods and tell you reason why we don't do it is because it's so expensive to do it here we can never ever compete against someone like the chinese you can get this. pennies and so from that sense the economy's already been afflicted with us this is however the point you're making that has been mitigated by the size of the population i mean. fifty percent bigger than next biggest country in europe germany and the mystic markets you know to some extent is insulated because just as he stops you exporting everything's to expensive however you have a massive massive domestic market and so that will missing it to some extent and that's what's going on at the moment i mean they're pushing to diversify manufacturing a service company. but then in pharmaceuticals in the car industry we have a massive investment in two so it's not as bad as it could be it's not as bad as as

it is for countries with small populations like norway like australia eric i'm going 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 the ruble. i'm sorry going back going to inflation the inflation was under control for a short amount of time and now it we go again high oil prices and the are you happy with management of the ruble. the ruble is basically bouncing along we haven't i mean everybody is talking the dutch disease the only problem is dutch disease requires a constantly strengthening ruble currency and the ruble is not constantly strengthening the the debate is slightly think titian's 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 is being made since the dinosaurs were. all prices are going to continue

to strengthen and russia has if you compared the bent just russia is never going to be a major exporter of nobel telephones russia cannot compete with the chinese neither can anybody else so russia needs to develop those sectors of the economy where there is a comparable. then there are few of them in the resource sector and ben 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 that they're doing very well in in high tech resources and that is where russia is good as well as in some hype and some technology. only one example maybe there are spaces where there is but it's never going to it's never going to export stereos to korea it's just not going to happen and i think a better example of we keep looking at norway in place i think is australia which

is doing very very well on supplying the demand of china in all sorts of resources ok if i go over to vladimir over it i mean when we looking at management of the ruble have they found the right balance in making russia a more attractive investment. destination because we an 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 that trouble is is not a free float in currency it is a managed currency so basically we can get ruble rate whenever provided that the global situation remains stable where we can get any ruble rate where the central bank of russia wants it to be currently we've seen some stability in the markets we have seen quite significant growth in commodity prices but we also see in still

a fairly high levels of risk aversion global markets and the recent correction of the markets disease is quite a good example of that from their 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 which is. you are more of russian exporters not repeat trading or for the export revenues into russia partially due to political domestic factors but partial it is also due to the fact that ruble was going nowhere as eric greitens said however the fact the trouble goes nowhere is that because the central bank with russia does not see any need for ruble appreciation the current set up with liquidity to levels being quite high any but stable any any ruble appreciation of what can create additional speculator from flow of cash into the country as was the case before the crisis which eventual

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 many over the last one to two years came in and we'll ask question only a few seconds election cycle is coming up is it going to affect how investors look at russia certainly i mean we have in capital out of the life of russia for the first time in nearly ten years there's a lot of us because no one knows quite what's going to happen and if there is a change of the tough then you know we launch into a totally new direction and who's to say we're actually in this let's see what happens ok gentlemen we've run out of time i want to paint my guests today and thanks to our viewers for watching us here on on the money see you next time and stay with our team.

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