Moscow and Money

Moscow, December 2007

Dear Family and Friends,

This evening I was lying on the leather backseat of my driver’s new Accord, typing my memos, as we drove to the airport when I started thinking about Putin’s Russia and what I could tell you of my week in Moscow. This is my last trip of the year before I head out to California for Christmas.

My driver was a handsome 30-something Muscovite who is honest and works hard. Roman’s father, Slava, is also a driver for our staff. Slava had picked me up at Moscow’s Sheremetyevo Airport on Saturday afternoon the week before. “I am very glad to see you,” Slava said as I handed him my luggage cart just outside of the arrivals area. “Roman sends you hello,” Slava said with his hand on his heart. “Please give him my regards,” I responded a little formally after 14 hours of flying. Then I asked, “Is Roman married now?” “No,” was Slava’s response. “Girls only want to marry oligarchs.” That was how I felt about Moscow. It is all about money.

In the three years since last I was in Russia, Moscow has become prohibitively expensive. “What happened to the Moscow Hotel?” I had asked Slava as we drove into town. “It is gone,” he responded, “There are no more three-star hotels in Moscow.” Then we passed the new Ritz Carlton. “The minimum room there is Euros 800 per night,” Slava explained and shook his head. For those in their 50s who had never joined the Communist Party and who were too young to benefit from the transition to a market economy--for people like Slava--Moscow provides few opportunities. For his son Roman, who is determinately honest, it is little better.

I had gone to Moscow to help put together a new project on Financial Literacy, which was quickly becoming a project on Financial Literacy and Consumer Protection (the latter being my expertise.) With three years away from Russia, I felt that I needed time to figure out the new lay of the land. I convinced the project task manager to let me do a technical mission, where I could talk with middle-level officials and get a feel for what economic reform is possible in today’s Russia.

Three years ago, Putin was moving quickly to consolidate power. He changed the appointment of the Regional Governors from direct popular election by the local electorate to appointment by Putin and his administration. Then he took on Mikhail Khodorkovsky, the oligarch who had gained control of the oil giant, Yukos. After many suspect transactions that were thought to have benefited him personally by billions of dollars, Khodorkovsky had started to become transparent—or at least as transparent as any of the world’s new rich are. It was to no avail. Khodorkovsky had also started a political campaign for the Russian Presidency and was a serious threat to Vladimir Vladimirovich Putin.

Putin’s administration conducted a trial on trumped-up charges of tax evasion where Yukos was not permitted to even use its cash in the bank to pay the taxes that had been suddenly levied. Khodorkovsky was placed in a harsh prison despite his white-collar crime. The people who know him say that he will eventually finish his prison term and emerge as powerful an enemy of Putin as he was before entering prison. It was the Khodorkovsky trial that made me decide to give up on Russia. No work on corporate governance could make any difference in that environment.

But then last June, one of my colleagues heard about my work on financial consumer protection in Slovakia. At a happenstance meeting at the coffee bar on G Street in Washington, he asked me to help him on his Financial Literacy Project. I have almost no free time between now and next July but I still agreed. “It is Russia,” is the common refrain of those of us who seem not to be able to stay away. No other country in the world is quite so fascinating for those of us interested in economic change. The parliamentary elections this week spoke volumes. Putin’s party (United Russia) was elected with more than 60 percent of the vote. As one of my colleagues explained, “We knew United Russia would win. We just didn’t know if it would be by 64.3 percent or 63.7 percent. The margin could only be within one percent.” Putin ensured that the state-controlled media put out only one message (favoring him) and then he encouraged his local administration to make sure that 70 to 80 percent of the electorate voted (presumably for United Russia.)

The party now has sufficient control to revise the constitution—including the restrictions on two consecutive terms that now threaten Putin from remaining as President-for-Life.

Not just the intellectuals are upset about Putin’s total control over the Russian Government and its administration. The hotel’s restaurant staff told me that they voted for the Communist Party, which gained only 11 percent of the vote. “I wanted to vote for the opposition,” explained the maitre d’ in the restaurant. The administrative staff voted in the same way. In Putin’s Russia, only the former ruling Communists have a chance to provide any sort of opposition to his total control.

The problem is that the control is being used to benefit the small group of people around Putin—and ingrain, even more deeply than before, a culture of corruption as the only way to get things done.

At the Hyatt, the receptionist asked if I had my police registration on my person. “You must always carry it,” the beautiful young blonde instructed with some concern in her voice. “What happens if I don’t?” I asked to see what response would be forthcoming. “Then you must pay,” she replied calmly. “How much should I pay?” I asked to press the point. “I don’t know,” she responded trying to get out of the conversation. “Would 1,000 rubles be enough?” I asked, thinking that I always had the equivalent of $25 in my purse.” “I think so,” she said, “but you should always carry the paper in your passport.” I had the impression that it was not always so easy to bribe your way out of police violations. Maybe more money would be needed. It is the same answer for all violations of the law. “Then you must pay.” I began to be grateful that my driver’s car had red license plates, indicating diplomatic status and avoiding the question of whether I had kept my hotel registration with me at all times.

“All projects in Russia involve watches,” explained another colleague who supervises a capital markets project in Russia. “You need to be aware of the watches,” she noted again touching her own watch on her wrist.

The Moscow local staff tell me that such corruption has never been so rampant as it is now. We agreed that, in general, corruption tends not to correct itself. It just becomes more and more engrained in the culture.

This is Putin’s Russia. In the meantime, Roman and Slava live in the city that has become the most expensive in the world.

As for my work, on Wednesday I gave a 30 minute presentation to a group of senior officials where I talked about the findings of our reviews of consumer protection in financial services. Not just in Russia but throughout central and eastern Europe, rising house prices have caused a doubling of loans to households for mortgages. At the same time, banks have started lending for luxury appliances such as flat-screen TVs. In Russia, the banks most active in consumer lending are also those that hide their fee and commission structures. A loan at 29% soon becomes one at 90% per annum as borrowers realize the true cost of their borrowings. Last year, legislation to require lenders to disclose the true “effective” interest rate was killed in parliament by the banks, presumably those benefiting most from the high lending rates.

An issue of commercial fairness and transparency has become a hot political issue. A year ago, Putin instructed his government cabinet to review ways of improving financial literacy and banking practices—and the Finance Minister asked for help. My colleague has been focusing on teaching budget management to high school students but I suggested that we needed to look at the laws protecting consumers and see if they are working properly. We agreed that I should start my work by conducting a seminar on the findings from the work in Slovakia.

So for 30 minutes late on Wednesday afternoon this week, I talked to a group of senior government officials, two rival banking associations, and a foreign business association and two foreign financial institutions. Then for an hour, each proceeded to tell the audience what their organization was doing to promote financial literacy. Indeed it was hard to close the seminar even 30 minutes after the scheduled closing time. In the follow-on meetings, government and private sector officials were similarly enthusiast.

Over and over again, the key seminar participants and especially the finance ministry officials said how much they appreciated our involvement in this area. I am not accustomed to being so appreciated and wondered just what I was walking into. But it means that I will probably be back in Moscow before the snow melts, squeezing time from other assignments—because it is Russia.

One of my colleagues tried to get me encouraged. She pointed out how successful projects in Russia have launched many an international career. “And how will this help me on the beach in California?” I asked, thinking about my future retirement but knowing that I would find the energy to come back to beautiful Moscow, with its overpriced hotels, corrupt police, and women on the prowl for the money of oligarchs.

Sue