City talk: Why investors in Russia get into hot water

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The Independent Online
AFTER a week in Moscow and St Petersburg, this column will stray from its usual stamping ground to look at the prospects for investment in Russia.

Last week's failure to auction off a 75 per cent stake in Rosneft, Russia's largest oil company, could not have come at a worse time for the government of that beleaguered country.

A lack of bids from consortia including Royal Dutch/Shell and British Petroleum should indicate to Premier Sergei Kiriyenko that the price asked was too high. Of course, in the murky decision-making forums that pass for democratic bodies in Russia, it is impossible to know precisely why the price was set at $2.1bn (pounds 1.28bn) in the first place - adviser Dresdner Kleinwort Benson suggested a starting price of $1.6bn - and why interested parties refused to submit bids at the asking price. The Russian ambassador to the UK last week said the sale had been postponed until some time in June, but an official statement is still awaited.

Rosneft, with 5 per cent of Russia's crude oil output, would be a huge prize. It is an expression of the huge contradictions that plague the country that no- one would submit a bid. On the one hand, the last big oil concern still in state hands: on the other, a buyers' strike instigated, it would seem, by the likes of Oneximbank and Gazprom, respectively the allies of BP and Shell in this foray.

Such dilemmas are commonplace for investors in Russia - huge prizes, offset by quite exceptional risks.

Turn from this drama for a moment to the domestic arena, and the hot water that flows from taps in apartment blocks across Russia. A visitor may be surprised to learn that the flat has no boiler - water is piped in from a local power station. For apartments from Moscow to Kiev in the Ukraine the same holds good. At first sight it's a marvellous idea - unlimited hot water, and the state provides it for free. But consider the downside. The power plants shut down for a month every summer for maintenance. No hot water, when you most need a wash. Never mind, at least the weather's hot.

Often, however, the plants break down in mid-winter when temperatures of -30C are common. Bang goes the central heating, and what is a nuisance in summer becomes more serious. It is a perfect illustration of the command economy at its best and worst. Centralised control leaves the individual powerless.

Locally distributed power - your own hot-water boiler - is not on the cards. And at some stage the power stations will be sold off too, but what foreign utilities will want to invest in a system where the consumer pays nothing?

By contrast, British retail chains have been leaping into the country, hoping their superior retailing skills can compensate for poor domestic distribution. That may be true. Next hopes to introduce its mail-order catalogue, BHS has opened in Moscow. But unless they can identify a real niche, there is ferocious competition in a country where hospital doctors, for example, earn no more than $200 to $300 a month. The formation of a comfortable middle class that can support a broad-based consumer retail base is many years away.

Russia is a paradox. Western wisdom counts for little, but its technical inventiveness and natural resources ensure that it will develop its own brand of capitalism. Not very soon, though.