October 20, 2003 by AK
Alimov vs. Rogers
Dmitry Alimov, a young, overachieving Gazprom Media executive, now a student at Harvard Business School, debates Jim Rogers, an admired international investor (and writer) on the state of the Russian economy and prospects of investing in Russia. Read the whole story and judge for yourself (found at Mos’ka blog).
The bottom line is this:
Alimov: I don’t agree with Mr. Rogers’ conclusions because he’s got facts A, B, C, and D wrong.
Rogers: Idiot. Your facts are crap. I shorted the ruble 1998 and you were long. Shut up.
Alimov: As I’ve said, Mr. Rogers got A, B, C, and D wrong. Here’s why (a long, tedious explanation).
Rogers. Shut up and don’t make an idiot of yourself. I shorted the ruble in 1998 and 1994 and I was right! Your facts are shit.
And so on. So, leaving aside the unbelievably uncivil tone of the “debate” (mostly on Rogers’ part), what can we infer from all this? Firstly, one can be wrong on all the facts and still make the right investment decisions on a gut feeling. That’s why it makes more sense to watch what the Rogerses are doing rather what they are babbling about. Secondly, it’s not the facts alone that matter, it’s which facts — or, rather, factors — one picks as critical. Thirdly, the economist’s view can be different from the hedge fund manager’s view, as they look at things at different angles.
Just a cursory look at the points of contention.
1. People are leaving Russia. Sure enough, people are leaving and coming in, and the balance is probably positive; it’s the mortality-fertility ratio that drives the population decline. What’s more important is what kind of people are leaving and what kind are coming in. Naturally, one suspects there’s both brain drain and an influx of unqualified workers. Still, as long as illegals are flowing in, one can be sure Russia is not the worst of the worlds.
2. Russia’s production of oil is declining, oil companies do not reinvest in production. This is simply wrong. Production has been going up since 1999, and much of the increase is due to reinvestment. 2003 production will be up a third from 1999 unless prices drop precipitously. Production data are the hardest to falsify — no match to financials. Rogers’ question, “if Russian oil production is really up so much, why is the price of oil still so high?” is just a joke. Russia, with all its reliance on oil, exports mostly to Europe and fills only 20% of its needs. It’s OPEC that runs the show, i.e. sits at the valve and adjusts worldwide supply to its liking.
3. Investors are leaving Russia. I realize that capital account data may be unreliable. That is, we’re left with anecdotal evidence. I don’t see direct, long-term investors fleeing. Neither is there a massive increase in foreign direct investment, or FDI, which is regrettable.
4. Overall state of the economy. It’s an oil-driven economy, so as long as oil is above $20/bbl, it’s going to be breathing, at the very worst. It’s also stricken by the Dutch disease: the oil and gas sector is sucking up too much resources, and the rest of the economy gets starved. The ruble is strong indeed — stable, that is, and appreciating in real terms against the dollar. The differences from 1998 are obvious:
— Oil prices were falling in 1998.
— As a result, Russia’s trade balance was going into the red, so the supply of dollars was diminishing. In contrast, it has been stable or growing in the past year or two.
— The Central Bank worried about the ruble’s devaluation and tried to keep it within a pre-specified corridor, pumping its currency reserves into the forex market. Now the CB is more worried about letting the ruble appreciate too much to the detriment of exporters. For two years, it kept buying up dollars and tripled its reserves.
— The government was running a large ruble debt in 1998. The Ministry of Finance kept issuing new debt both to refinance maturing issues and sterilize the excessive rubles. The level of public ruble debt is much, much lower now.
— At some point in 1998, investor confidence in Russia went down the drain. Everyone started selling off ruble bonds and rubles. Russia was facing a prospect of both devaluation and ruble debt default. If it had devalued earlier, it might have staved off the default, but it ended up having both.
I should stop here; Alimov and Rogers are far more entertaining.
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