The very clever Mr. Nash of Renaissance Capital opines that in fact the glass is half full. As he is very clever it has to be admitted that he has more than half a well argued point. It is unlikely that the Chinovniki will be any more successful at running car companies than GM for instance, albeit with lower health care costs. So let them keep their heavy machines and extractive industries and let us get on with retail banking and providing services to consumers.
My problem with his argument is that I spend most of my life (the part when I am not I am either asleep or trying to be) interacting with the the owners of the new businesses that drive VVP's economic dream. As the big bosses get their hands around such giants as Kamaz and Avtovaz (and they are welcome to both - as a Brit they equal the quality that was once Leyland, remember it? Exactly) the junior bosses are getting hungrier; the price for delivery of a container through Kotka, Finland before the end of the year increased Monday 1.8x (that's 180% for those of you who prefer stats that way). Of that 180% increase about 30% can be paid white i.e. it can be officially paid and can therefore be deducted from Net Income, in addition a special delivery by New Year price was introduced on the same day of $450 per container. So let's be clear - you could pay the 180% price increase and the risk is that the container would not make it in time for the big buying season unless you pay another $450 per container, or in reality $596 as it cannot be deducted from Net Income.
These rapidly growing businesses are always looking for more cash. In the absence of reasonable bank lending (in particular inventory financing) the private equity guys would appear to be a good port of call. But they demand that the businesses run on the white side of grey-white. Meanwhile their competitors turn to government-sponsored money and run grey-black under the quasi-government roof. Good management will win out at the end of the day, whichever way the business is run - it's just remarkable that they tend to be at the whiter end of the spectrum. But in the meantime unequal competition means that sticking to the clean road is not always easy.
The State also impacts entrepreneurial business through its access to cheap money. An infrastructure company I am a shareholder in, and board member of, was offered a 5 year 9% loan with 2 year capital repayment holiday by such a Government sponsored company. That's LIBOR plus 3 for a business that will generate $6mn in revenue in 2006 and will invest every $ it can gets its grubby hands on. In a WACC calculation that means the debt is cheaper than the equity. Not that WACC calculations are worth the time calculating, but that's another story. That's one hell of a market distortion.
So my glass remains sceptical.
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