Leaving Russia: How waging its war has undone years of reforms

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0:19Simoney Kyriakou: is brought to you by the show. 2007, when the country experienced rapid GDP growth of 8.1 % and an influx of the world's leading banks and businesses. But nearly 20 years later, this seems like a world away, a fever dream perhaps induced by too much vodka. In any case, I'm Simony Kuriaku, and this is the FT Advisor Margin Notes podcast. Regular listeners will know that Margin Notes has been taking risk as its theme this year, risk in all its various forms. And today we're talking particularly about the risk of having invested in Russia and the risk to Russia itself as a result of Vladimir Putin's war on Ukraine.

1:08Simoney Kyriakou: And who better to have as our guest than Jason Corcoran, a former colleague of mine on Financial Advisor who joined Financial News as head of asset management before being sent to Moscow as a correspondent in 2006. And after that, he worked for Bloomberg and others in the Russian capital until the war in Ukraine forced him and his family to move to Ireland. His new book, Leaving Russia, How Putin Forced a Nation's Future to Flee, is out now. Jason, thank you so much for joining us. Simony, wonderful to re-engage with a starry товarish, an old comrade again from FT Advisor. Thank you very much.

1:47Simoney Kyriakou: I don't think we should say comrade too many times, just in case our listeners get a bit concerned about where my political bents are lying. But I take the sentiment. Thank you very much. Now, let's sort of go to late 2021, early 2022. Cast your mind back. In your book, you've actually said, I reassured my loved ones that all of this invasion and military incursions, it was all a grand bluff to secure a few concessions from the West. When I read that, I was so sort of self-justified because I'd also been telling people, I don't think he'll really do it. I don't think he'll really do it. Should we have expected it?

2:28We really should have expected it. But I suppose my perspective, I don't know about your perspective or some of your listeners, Simone, I had lived and worked in Russia for 14 years. And I had I've been covering Russia and the post-Soviet space for 20 years. And we noticed the buildup of Russian troops on the border with Ukraine and on the border between Belarus and Ukraine. But we'd been there before. We'd seen that picture the previous year, because every year Putin and Belarus, Lukashenko, they would get together and they would have their ZAPID, which is the West exercise, military exercise.

3:08And it was a big game of risk. And we didn't think actually that it would turn into a full scale evasion. And, you know, you always look back and previous patterns of military incursions by Russia under Putin. And we'd seen what had happened in Georgia in 2008. There'd been a five day war. But Putin, excuse me, had backed off when he was at the outskirts of Tbilisi from taking over all of Georgia. And then there had been military incursions in Syria. And he has a military presence in Transnistria, which is in Moldova. So this didn't make sense. So we all assumed all the Russia experts who were in Moscow and I was not alone and you were not alone in assuming that he was playing a grand bluff because he wanted to say to extract concessions from from NATO that they wouldn't expand further or maybe they would retreat to 2008 borders and that he could maybe see some sort of denazification in Ukraine, although that was like a red herring for me.

4:14So until the intelligence was overwhelming, the US intelligence was overwhelming in late 2021, we assumed that he wouldn't invade.

4:25Simoney Kyriakou: Yes. And I think the then president at the time, Biden, in his, I think it was December address, when he sort of read out the conversation he'd had with Vladimir Putin, he said, this is happening and we all should have known it was happening. But even in December 2021 and early January 2022, February 2022, people are still putting money into Russian assets or still not really unwinding their positions. So we had investors, banks, all sorts of people still putting money into Russia, into Russian assets. It seemed to have caught everyone by surprised yeah i mean like well russia is always viewed as a high beta market so there's huge upside when you know commodity markets are booming and when there's a feeling that there's reform in the air but like on this occasion it seemed highly risky and i think ft advisor and you so many have done fantastic work exposing certain funds that were supposed supposedly sri funds that were doubling down on Russia, just as it became very obvious to most people that a full-scale invasion was on the cards.

5:37But yeah, a lot of these frontier funds and regional funds were heavily exposed. I can think of prosperity capital. They probably had about$4 billion completely invested in Russia. They didn't have anything else in the post-Soviet space. East capital, they probably had one or two billion. The Swedish fund as well, but they had diversified. But then there was others as well. There was big household names, Simony. BlackRock has still to this day probably an estimated one billion US stuck in the financial plumbing in Russia and they can't get it out. And also Fidelity had huge exposure.

6:17Simoney Kyriakou: Yeah, absolutely. And this is kind of understandable because after the economic emerging market crisis, in the 1990s, Russia emerged to become this huge key player in the BRICS. We were all talking in the early noughties to late noughties of the BRICS and how it's so important to invest in Brazil, Russia, India and China. And it was a key player. You had big companies moving in there and you covered FDI into Russia, you know, both before you moved there and during your time with Dow Jones and Bloomberg. Can you talk a little bit about just the sort of flow of money and the flow of businesses and the sort of businesses that were, you know, making headwind into the country?

6:56Yeah, in the noughties, like when I was considering going to Russia, it was one of the hottest places for capital foreign investment. It was, I recall, in 2006, the year I moved, two of the biggest IPOs in the world. There was VTB Bank, second largest lender, raised probably, I don't know, several billion. And there was also Rosneft, which is Russia's oil giant, also had a dual listing IPO in Moscow and London. And so the weekly data numbers, fund data numbers were off the charts. It was hundreds of millions every week and people were piling in. And you had, you know, retail money going in as well.

7:41Retail money from Scandinavia, I mentioned, prosperity capital, lease capital, taxi drivers were putting their money in. And so it was institutional money and retail money that was pushing in and investing in these Russian IPOs.

7:54Simoney Kyriakou: A very exciting time to be there, then. Did we think that this economic boom could end? Because, I mean, looking at the example of China, you know, we were talking about how China's economic boom could last for 20, 30, 40 years. And, you know, it's obviously unwound a lot since then. So we all know that predictions are usually wrong. But there's been this idea that these are the countries that are going to grow. These are the countries that are going to end up in the main world indices. They're going to move out of emerging market status. And yet, and yet, dot, dot, dot, right? Now people have got positions that are unwound, positions that are frozen.

8:36Simoney Kyriakou: Can Russia ever come back from this? I think the invasion in 2022, Simony, it really marked a structural break, not just for Russia, but for emerging markets in general and the way global investors are pricing risk. So I think we're seeing now a real shift underway, away from treating emerging markets as a single asset class. And it's become much more fragmented and it's shaped by war, geopolitics, sanctions. You know, Russia has been, you know, I think it has had 80 ,000 sanctions against individuals and state owned entities and all the supply chain insecurity. So we've seen Russia removed from all of the global indices and capital markets now.

9:27You know, they're much more unstable and there's a really massive rise in risk premium and a much more selective approach to capital allocation right across the emerging and frontier worlds.

9:40Simoney Kyriakou: and has this has the war has government has has putin's government completely reversed all the positive economic changes that seemed to have been put in place and and and is this the end for russia as an emerging market is it going to drop into frontier status or never regain its positions at all um i think well russia is in pariah status at the moment and it's by the day is inching towards the grouping them, the axis of evil, North Korea and Iran, or maybe you might even price Iran even better than you'd price Russia. So in the book, I talk about that the invasion of Ukraine was like 10x Brexit.

10:24So overnight, Russia was kicked out of political, social and cultural order. They were severed from capital markets. there has not been one international IPO, one euro bond since the invasion out of Russia. And there's not likely to be for a generation because there will have to be regime change. And even if there's regime change, will they be allowed back into good society? I sincerely doubt so. I mean, and the sad thing is, Simone, there was so much positivity that happened just in the financial capital markets, for instance. There was so many reforms. When I was there in the mid-noughts, they unified the two stock exchanges.

11:05There was two competing stock exchanges, MySex and RTS. They combined and made a central depository, and there was a lot more liquidity. There wasn't enough domestic liquidity because it was mainly foreign liquidity, which as a result, it was a high beta market. But there was changes. There was a lot of corporate governance initiatives. There was an initiative by Dmitry Medvedev, who came in in 2008 with a clean broom, or we thought it was a clean broom. And he talked about stamping out legal nihilism. And he wanted to transform Moscow into an international financial center to compete. It was very, very ambitious to compete with London, Frankfurt and New York.

11:46and he brought in all these guys and I wouldn't have never had the opportunity to interview the head of Goldman Sachs, Blankfein, the head of Citigroup Vikram Pandit, Schwartzman from Blackstone but for the fact they were coming into Moscow and they were being appointed to all these committees to improve Moscow as a financial center and I would inevitably be able to interview them for 10-15 minutes and one of the big issues for say Blankfein was the traffic. never mind about the liquidity and the corporate government, but it was the grind, the grind, the three hour traffic jam from, yeah, from Moscow, Sherry Motivo to the center.

12:25And he was like sitting there in his, you know, his limo, whatever, like, oh, have I ever got to make it to the Kremlin?

12:31Simoney Kyriakou: Well, I mean, it's really interesting that you say that. And I remember you talking a lot about sort of getting into elevators with some very, very senior, very, very senior people when you're working there. And it just seemed that there's this huge inflow, not just then of businesses setting up and businesses listing, but we had banks coming in, bringing their talent in, talented individuals from across the world were flowing into the capital, flowing into the business district. And now, you know, in sort of chapter one of your book, which you called The Great Escape, you're now talking about thousands upon thousands of talented individuals just pulling out.

13:12Simoney Kyriakou: So all the foreign investment, foreign talent that was working and helping to sort of boost Russia, gone. Foreign banks, foreign businesses, foreign companies, gone. Then you've got all the thousands of people that had been employed, Russians that had been employed by these companies and talented people in the tech space, in the banking space. Again, no jobs for them. I mean, this is not just an economic drain, This is a huge brain drain, isn't it? Yeah, I think it's unprecedented in modern history. But if you go back 100 years ago, when Lenin spearheaded the revolution in 1917, and it led to at least 2 million people over the period of a decade leaving Russia.

13:58And these were the troublemakers as they would have been regarded by the communists, the philosophers the teachers the poets the entrepreneurs and the musicians and the artists and I was researching this book and they're called the white Russians because they're seen as noblemen and they fought against the reds and I was writing this book and I was writing a feature for the Sunday Times in the UK and I can't even recall who it was I interviewed all these people who were fleeing Russia in 2022, and they were going to the four corners of the world and to Mexico, to Argentina, to Germany, some of the same routes that the white Russians had followed 100 years prior.

14:40And one of them said to me, we're the new wave of white Russians. And I went, okay. So, you know, history doesn't necessarily repeat, but it rhymes, one person I think once said. And so I just saw the patterns again being repeated. And then Putin, lo and behold, in March 2022 came out and he repeated the same rhetoric that it was, you know, a hollowing out of the intellectuals and the troublemakers and they were welcome to leave.

15:12Simoney Kyriakou: Yeah, exactly. And it was a really interesting parallel. I don't want to give too many spoilers away because your book is out now. But, you know, in your book, you focus on individuals, some of the chapters very much upon individuals like entrepreneurs. And I really enjoyed your sort of interview and your profile of Tinkoff because it was a real story of how capitalism or a form of capitalism could drive such entrepreneurship and help someone sort of move from being the children of a poor sort of working class family to becoming billionaires plus with loads of sort of fingers and different pies and this huge global sort of business empire.

16:00Simoney Kyriakou: Are those days gone? I mean, we used to call that the American dream, obviously not the American dream, but can Russia ever sort of foster entrepreneurs again if it's still going to crack down on capitalism as being a Western thing? I think, well, it's really difficult because even in, you know, so Russia had this so-called managed or sovereign democracy, as, you know, this guy called Vladislav Surkov came up with these terms. So it was making the right, you know, moves. We hoped it would become a partner, you know, in Western democracies. And it was going on the right path. But there was always things that made me think, oh, my God, we're never really going to make it there.

16:42and the invasion of Georgia, the poisoning of Litvinenko in London. And there was lots of things, arresting Khodorkovsky, the oligarch, in the early noughts a few years into Putin's administration. But real entrepreneurs like Oleg Tinkoff, and he's often compared to Richard Branson in the UK for his bold and maverick approach to marketing and the fact that he's built four or five businesses and he's actually gone again. It's remarkable. I'm in the book. So Oleg, he lost about$9 billion because he was one of the very few entrepreneurs and public figures who spoke up against the war. And he called it barbaric and he said very dismissive things about Putin's army.

17:34And he was forced to sell his stake in his bank, Tinkoff Bank, and he made a loss of$9 billion. So he lost his billionaire status and he was he was never has never been back in Russia since. But since then, he has funded FinTech startup in Mexico and 30 of his former employees from Tinkoff fled to Mexico and helped set up this Banco Plata. And they just had their second funding round. And it's three billion valuation, which is remarkable. So Oleg is fine, he's making money. But to the wider point about entrepreneurship, so Oleg was the exception. There was others as well, but it was so difficult to navigate the bureaucracy and the corruption and to pay bribes and to have accretia, to have protection from those within the Kremlin and within the military industrial complex.

18:30So they were the exception, Simony, not the rule.

18:33Simoney Kyriakou: But these entrepreneurs and all the talent and Russian talent that has left the country. In your book, you also talk about people who felt the long hand of the government, the Russian government's force, reach them in their own countries, in the countries that they've fled to. Is there not a fear that even where they go, their success will always be watched? You're never really outside of Russia, are you? Yeah, I mean, there's two individuals. It was early the first year of the war. I mean, two individuals who fled because the exodus didn't start in 2022. I'd noticed this phenomenon in 2015. So there was the annexation of Crimea in 2014, and Russia was backing these so-called separatists in Donbass.

19:28And people, you know, my contacts suddenly started leaving in 2015. And they were going and taking their capital and taking their ideas and innovations overseas because, you know, they were afraid that they were going to be stolen. You know, intellectual property was going to be stolen. And there was two individuals. There was one hedge fund manager, Slava Rabinovich, who worked for Bill Browder at Hermitage Capital. He went to Israel. He was obviously Jewish. And he was managing money there. And he became a dissident and he was outspoken. He had a very popular blog. And it was like six or seven months into the war.

20:06We heard horrible news. He'd been mowed down by a car. A car had mounted on a pavement in Tel Aviv and was killed. The only conversation right now is they're so busy with their high Russia, that is, with their hybrid attacks and trying to keep Ukraine at bay. And I think Ukraine now perhaps has the upper hand in terms of the war and that, you know, Russia can't put out fires everywhere. And, you know, they've taken their eye off their own near abroad because they're losing influence right across. They're losing influence in Belarus, Armenia. Armenia is pivoting towards the West and Azerbaijan is pivoting towards Iran and Turkey.

20:46And so their only real friend is China, it would seem, at the moment.

20:51Simoney Kyriakou: Yeah, but even China seems to be wanting to forge its own economic path and to maintain diplomatic ties with the West. You know, China's got its own agendas. And I think, you know, you have to be very careful, whoever your friends are. right I mean this is this is what we've learned from globalization globalization works really well for investors for people who've got pension funds wrapped up in all of these different countries you're like yes I can get the best of the best from around the world but suddenly nations fall out with other nations or they invade or they attack someone's sovereignty or you know human rights abuses are unveiled and it just becomes really difficult because globalization has kind of almost given us the sensation that we're all one folk, one family on Earth.

21:38Simoney Kyriakou: And really, it's incredibly dysfunctional. And then, as we've seen, it can be incredibly damaging. Yeah, well, absolutely. The relationship between Beijing and Moscow is not one of equals. I mean, China has vast scale and they have diversified trading relationships and they have leverage over Russia, while Russia has been narrowed into being this resource exporting economy, and China uses Russia completely for cheap oil and gas. And I think China and India are their main markets for cheap oil. And Russia is now pretty much dependent on China for their discounted sale of energy, raw materials and commodities.

22:24And I mean, on the other side, Beijing is now providing Russia with much needed dual use technology, which they're, you know, sort of repurposing for drones and for conductor chips, which they desperately need. So it is not a relationship of equals.

22:42Simoney Kyriakou: Let's sort of coming back then to home, to the domestic economy, to investors, ordinary investors like you and I, who've got money wrapped up in our pensions, perhaps with some sort of exposure to Russia that hasn't quite been unwound or exposure to emerging markets or even just generally to countries where there is this threat. They might be tyrannical countries. They may be countries that would be classed as autocratic. How much danger, how much more risk could this pose to people's pension? You know, it's horrible to put monetary terms on something that's affecting people's lives. But, you know, this is, you know, our readers, you know, our listeners, they've got clients who've got money all over the world and they are feeling the effects of this.

23:33Yeah, I mean, it really has accelerated a shift away from EM. And we're seeing since COVID, actually, Simony, it was COVID was happening. And then we were just thinking, OK, we're emerging from COVID and, you know, from vaccines and from travel bans. And then lo and behold, I mean, it was pretty much came down the track pretty, pretty quick. And the invasion happened and, you know, supply chains were affected and, you know, shipping routes were affected. and it led to massive inflation spikes. And then we've seen then, since then, energy shocks have become commonplace in the market. And we look at our electricity bills here in Ireland, and I'm saying the same in the UK, they've tripled since the full-scale invasion of Ukraine.

24:26So, you know, globalization has not reversed because of the war, but we're just seeing so much fragmentation. And geopolitics is embedded into the pricing of capital. and I think it affects all of our decisions where we put our money, for instance, where I put my money in Revolut or a Challenger bank and away from the pillar banks and do I put my money now in a market that's more stable? Is Mexico more stable? Is Southeast Asia, if I want a bit of alpha? Where are sanctions not affecting these markets and supply chains and where will there be less effect of the energy shocks? Virtually nowhere.

25:04Simoney Kyriakou: Absolutely, and it's going to affect us affect us everywhere. These are always obviously big risks that advisors will need to speak about with their clients. And it's something that's never going to go away. Hopefully, we will see an end to this war. I don't know how it will end. I hope that a ceasefire and then a truce and then peace can ensue. But it's been four years now. And I don't know how long it's going to take Russia to recover. I don't know how long it'll take Ukraine, importantly, to recover. Can you ever see yourself going back to Russia? I mean, obviously, your wife is Russian, isn't she?

25:46Simoney Kyriakou: I mean, do you, can you ever see yourself going back there? Well, I personally don't see myself going back until there is regime change. As I outlined in the book, I received an anonymous warning on Telegram. Somebody, it could have been a crank, or it could have just been somebody who was hired to clip the wings of foreign journalists and they were saying that we are monitoring your reporting and it was an anonymous user on telegram the encrypted messaging app and we are following your reporting and you are having um security issues and i was just knocked you know for 10 and i thought about it for a second and then i replied and said by by we do you mean the royal we, Nicholas II, the last czar, and they never answered.

26:32But because of that warning, my wife cancelled plans to go back in, it was early 2023, and she hasn't been back since. And at the same time, there was a foreign journalist, you probably know, called Evan Gerskovich from the Wall Street Journal. And he was captured and accused of espionage in Russia. And he was effectively held hostage for a year and a half. So there is untold risks for, you know, journalists who try to, you know, report what's happening inside of Russia. So until there's regime change, I will not go back. But I like to think if there is a new czar or a new dictator, perhaps, because I don't see there being any democratic alternative at the moment, that maybe the new leader will want to see sanctions be eased maybe they want to go on holidays in Saint-Tropez maybe their mistress will want to go shopping in London and Paris and visit those chateaus um on the south of France and they've been there have been empty ever since yeah absolutely absolutely I think you know what's

27:36Simoney Kyriakou: very clear is that the risks are almost too great to enumerate and I think back to um I think it was the Atlantic Council a couple of years ago put out a sort of what happens, what will happen to Russia, what's going to happen. And they said there are five possible scenarios that they thought of and they could envisage. And that's, you know, one of five is almost an impossible sort of choice, you know, which path is it going to take, what's going to happen. So I think, you know, we need to just continue to, like you said, just hope that there's some regime change, that there's some positivity that we see an unwinding of everything because you know the forces that are shaping Russia's wartime reality and its longer term future it always then comes back down to this is the world's largest country by land size it is one of the nuclear powers it's got a rich history a wonderful history it's got so much that it could potentially be offering to the world and you know so much that the world could offer it so my hope is that there's a positive scenario um and i and i i do i personally want to be walking around the streets ofst petersburg and looking at the whole rich history but again like you said i wouldn't would not be going for a long while i think uh you're absolutely right i mean i i miss the the culture um that i was exposed to in moscow before i went to moscow i lived up in london and worked with you closely for a number of years um but i never was never exposed to classical music or to ballet or even to chess and then in moscow you know all these things were so accessible and so relatively cheap and um the people themselves are you know the greatest resource and bill browder the former investor who became this human rights advocate.

29:34He wrote in my book an endorsement, and it's very apt, actually, a powerful window into how Putin has devastated Russia's greatest resource, its people. And they're the people that this book is an homage to the best and brightest. And they feature the film directors, the musicians, the rappers, the poets, the teachers, and my friends who have fled. And I hope that one day they'll return and it won't be 100 years later, like the descendants of the original white Russians.

30:06Simoney Kyriakou: Indeed. Well, that's a really good hope for the future. So let's, in our own little corners, in our own little way, let's see what we can do to make that happen. Jason, thank you so much for talking to FT Advisor readers and coming in to talk to us on the Margin Notes podcast. Thank you so many. And for more FT Advisor podcasts, you can find it on all the usual channels. Until next time, take care.

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