welcome back you with our team live from moscow recapping our top stories and russia should have a stake in the missile shield program in europe barack obama spells out his idea while visiting warsaw poland is said to house a part of the system that used to be an apple of discord between moscow and washington. serbia as it divided over the rest stand a looming extradition on war crimes charges with many saying it's a sacrifice to speed up joining the e.u. former general was ruled out fit to be handed over to the hague despite health

problems. and the us are sick of harm and calls on the georgian authorities to investigate the armed crackdown on protests that led to several deaths that's as crowds take to tbilisi streets again to rally against the government's excessive use of force. and egypt opens a border crossing with gaza partially ending a four year blockade of the palestinian territory human rights groups say it's a breakthrough in the humanitarian crisis for one and a half a million palestinians who have to face constant food shortages and a lack of medical treatment. time those are the headlines on it this saturday here on r.t. up next it's a much. hello and welcome to on the money where the business of russia is business and i'm peter . 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 glad i'm here also called ski he is head of strategic planning and development at unicredit securities and glad i'm here to commute off he is chief economist of the critter financial corp ok eric i'm going to go to you first you're very well known fund manager here you've been here actually longer than i have and you write this weekly right off 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 in market is only about oil and i decided to quit and quit arguing with it i mean since 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 then slowing 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 corson's and this has different sects and different parts of the economy i mean the bond market pretty much discounts it by you know 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 for 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 mental money they're doing very very well everybody gets dollar signs in place of

the 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 in the financial times ok ben if i go to you in the studio so i'm not sure of eric really and i mean there is a public relations issue here but really when is it it a certain point one hundred twenty dollars a barrel hundred thirty dollars about how our investment for investment is 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 for investors and mine are making link between the extreme market performance and the price of oil i mean eric's right so much as you should put oil into context. russia seen as petro column e. 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 what is important is it will make something of a 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 the actual economies being driven by spending by small mini size and surprises retail the normal economy. but some of this is from the outside world is seen to be absolutely important and if the oil prices tanked and the equity market tanks government revenues tank because they use an old ok to such you know they have access on every negative lattimer also. also cost you then really in a way just given what benj is that it really still is an oil story because the oil prices go down so low in russia is in a very difficult situation isn't it 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 and there are and i mean but on the other hand i would say that. since as a result of the crisis actually we are living in a completely different while a process set out which is actually kind of underrated from the many perspectives but i think it's extremely important to be are living in the conditions of a lot of flexible exchange rate and that will really offset a lot of negative impact of air if any correction if substantial could actually in oil prices that russia is going to my face so if oil prices will fall to thirty dollars per barrel that robot will 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 when 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 called oil 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 oil price is not the only indicator that we're looking at to look at this russian a global economy however general perception is and what is good about that is that the general perception is now also perception within the garment that high oil price is not necessarily a blessing but it is also a curse for sure because the oil price goes and the larger our government revenues and the lower it 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 reveal the things to see that. your dependence on oil revenues and the redistribution mechanism through state coffers in order to boost economic growth is not necessarily

a good thing erick if i go back to you i mean what is that 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 there any will any lessons been learned at all but peter the last crisis wasn't about oil. or 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 couldn't 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 lesson that they've learned is don't do that. company should

be borrowing in rubles at the domestic. market and not getting too heavily exposed to western finance i don't know i think oil 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 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 ten year 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 let this happen ever again and the reality came out of it was the stabilization fund right and here you have a mess at least corrupt and inefficient country and yet cooter 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 hasn't admitted that he's coming out of this crisis and they've had another never again moment because they thought that stabilization from 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 do real reform and if you what 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 the foreign investors couldn't go incident after the crisis the top now is an investment privatization some of those companies that were put off limits 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 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 the crunch will come and it'll come regularly for. go over to of lattimer over at de 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 meaning being meaningfully done. well if you know if you take a look at the structure of russian economy i guess it was mentioned before that. for example it's pretty basic services and contracts and financial services are contribute more than half of russian g.d.p. so russian government is actually a diversified economy it's not actually the oil dominated that russia is a major oil exporter but it's not a fairly well dominant economy where of course is important but that 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 back well kirstie sure i really don't think badly high oil prices or poor resources is a curse russia can reform if well prices. or floor of course it's maybe less likely to reform but it can definitely a possibility of that is not zero or not impossible so it's not absolutely up to russia to continue to develop sort of war or something like that and it's not really related. with oil prices oil just bad additional resources which russia could use in the process for. one thing what ok or do you want to jump in there go ahead remember. the the big deal of the year in american markets is in the flotation of the end which is a russian technology company one of the only ones in the world which managed to beat google in its own under 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 if you do this because it's to

misunderstand it's going on becomes oil is a problem in so much as it comes with this very specific country problems in the countries with you have appreciation the sort of disease areas we talk about that says he's looking for the program given that it's not because someone says you know there's not that many countries that have less. if you look at what norway to them and they managed to contain it they used isolation front 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 don't 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 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 probably turn from that short break we'll continue our discussion on russian energy state and our deep.

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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. sooting crude prices of late two thousand and ten in early two thousand and eleven have an upside of a budget deficit at one point tipped to 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 just disease but others know the russian symptoms are unique the classical example of the dutch disease its edge of dependence on oil and gas or other natural resources pushes up

to really change it and distortion manufacturing industry well russia hasn't got a manufacturing base to destroy the first place where you have a dependency away with soft goods suffering is that you might have a hurdle for developing a manufacturing industry the russian government has long been consumed about over dependence on commodity revenues and has pushed versification with limited success and skepticism about the prospect of i personally don't see how one can change in in in the near term and even 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 higher oil prices so you wore production will be getting lower the oil price will be getting higher because of that so as a result they'd be russian in tape. exports would more or less they the same it will be a big amount of money coming into the country that leaves investors the choice

a blip. energy revenues or trying to pick those economic sectors which can create and sustain value heading into the future with the russian government increasingly pushing for the latter but international investors usually riding the former the theme of how to play russian energy and position for a future russian economy will continue to be central to russian investment james blake on the money. ok vladimir over at unicredit securities i'd like 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 or no i guess russia does have problems with when oil is high right what's a russian tradeable goods sector as do have problems well prices do rise and the ruble appreciates of course there we see substantial problems in a key benefactor and producers they do have losses and there is a huge and b.

import capitation can potentially increase and if this issue asian prevails but neither had i would say that the russian market as a whole is not as developed and there's not really a really big enough to sustain domestic you know substantial big domestic industry is actually so for example if we are talking about countries which usually are talked about when you talk about this disease for example of norway australia or something like that then. the cooperation of russia is actually a bigger than population of those countries combined so it's potentially it's much bigger market which can i come a day. most of the best most of foreign players but also big the best they can histories as well and on top of that the actual industry the best again this rays are not big to you know to suffer too much let's see if we go over to other glad to be over the critter i mentioned russia disease i mean maybe there are certain

elements of dutch is easier but russia has just because of the things we just heard the other variables involved russia dissonances own bouncing 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 for 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 all the money which is the register buter through budget through the government then you would realize how strongly the country's economy is still reliant on on revenues raised from oil i say that yes russia is perhaps less dependent on oil that it was ten years ago

but it is certainly still very much duchesses case. much of industries outside become what it is sector as my colleague another vladimir just said are not that competitive goals 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 then what about you you're the first person on the program that mentioned disease i mean i'm pushing the russia disease ok because it is it's because there's no industrial base to really be green ok i mean it 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 so they're still purchases and so you do still why don't they make containers why don't they make finished goods and you reason why is because it's so expensive to do it here we can never ever compete against someone like the chinese who can look at this. for pennies and so from that sense the economy's already been afflicted with us this is however the point you're making that it's been mitigated by the size of the population i mean we have a fifty percent bigger than expected country in europe germany and the west it's you know to some extent is insulated because first disease stops you exporting everything so expensive but however you have a massive massive domestic market that's a level missing to some extent and that's what's going on at the moment i mean they're pushing hard to diversify manufacturing or service company. but then in pharmaceuticals in the car industry we're having massive investments. 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 erica if 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 a short amount of time and now we go again high oil prices and the are you happy with management of the ruble at. the ruble is basically bouncing along we haven't i mean everybody's talking about dutch disease the only problem is that these requires a constantly strengthening currency and the ruble is not constantly strengthening the the debate is slightly thick dishes 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 oil prices are going to continue to strengthen and russia has if you compared to the advantages russia is never going

to be a major exporter of mobile telephones russia cannot compete with the chinese and neither can anybody else so russia needs to develop those sectors of the economy where there is a compelled. advantage and there are few of them in the resource sector and ben was talking about the steel producers and he's right in terms of it is good 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 and some technology. only one example maybe aerospace if you 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 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 them russia a more attractive investment. destination because we any economy that doesn't have a good handle on its currency is not attractive. well i want to stress one part of your question when you said management of the rouble and i want to stress the trouble this is not a free floating currency it is a managed currency so basically we can get ruble rate whenever. provided that the global situation remains stable what 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 have seen still 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 outflows which in my view are more of russian exporters not europe it's rating all for the export revenues into russia partial it is due to political domestic factors not 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 central bank of russia does not see any need for a ruble appreciation because and set up with that liquidity levels being quite high in any but stable any any of ruble appreciation of what can create additional different flow of cash into the country as was the case before the crisis which eventually most money cyclo there was and boost inflation central banker fresh is very much aware of this fact that's why the ruble is managed in the fairly narrow

corridor there has been many over the last one to two years came in with the real hours question only a few seconds the lection cycle is coming up is it going to affect how investors look at russia certainly i mean we having capital out capital flight for russia for the first in the ten years there's a lot of us. because no one knows quite what's going to happen and if there is a change at the top then you know we launch into a totally new direction and who's to say what that actually 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 on the money see you next time and stay with our team.

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