IN THE Russian business community Sergei Galitsky served as a rare example of a self-made billionaire who rose with relatively little state help and outside the natural-resources trade. He built his retail company, Magnit, from scratch into Russia’s largest network; it has more than 16,000 stores. Rather than moving to Moscow, he kept his headquarters in his hometown of Krasnodar, where he also founded a football club. On February 16th he made a telling exit, announcing he would sell nearly all of his shares in Magnit—29.1%—to VTB, a state bank.
That Mr Galitsky (pictured, above) decided to sell is the result of a tough business cycle and some strategic mistakes. More remarkable is that he found a buyer not on the domestic private markets, or from among foreign investors. Selling to a public-sector bank reflects the growing role of the state in the Russian economy. Russia’s federal anti-monopoly service puts its share at 70%. Yet the retail sector had largely been insulated from the trend. Now the Magnit deal could become “a landmark for Putinomics”, wrote Tatiana Stanovaya of Moscow’s Center of Political Technologies this week, marking the expansion of the state into a sphere where private competitors had reigned. Businessmen make mistakes, she noted, “but in market conditions this doesn’t automatically lead to the sale of assets to state structures”.
Mr Galitsky got his start selling household chemicals and cosmetics in the mid-1990s before expanding into groceries and retail. Magnit kept prices low, focusing on working-class customers, and ventured into far-flung towns and small cities that large retailers typically avoided because of the complex logistics involved. The strategy paid off. Magnit is Russia’s largest retail network in terms of stores. The Boston Consulting Group said that between 2009 and 2013 it created the most value of any retail network globally.
Yet recent years have been rough for Magnit. Russia’s recession in 2014-16 hit consumers hard. Though the economy returned to modest growth in 2017, Magnit’s profits fell by over one-third. X5 Retail Group, its main competitor, has overtaken it in terms of revenue. Magnit’s share price had been plunging, and the company will not pay dividends this year. Mr Galitsky says his vision began clashing with investors’ wishes. “If investors want changes, they should get them,” he said.
Pending anti-monopoly approval, VTB will pay 138bn roubles ($2.4bn), a 4% discount at the time of purchase. Investors took the news glumly; on the day of the announcement Magnit’s shares fell by 10% in London, and nearly 8% in Moscow. Many worry that VTB lacks the expertise and attention to manage Magnit’s complex retail business effectively. Western sanctions on VTB add another set of risks. In addition, by buying a stake of less than 30%, VTB avoided a legal obligation to offer buyouts to minority shareholders. “It’s a slap in the face to all investors,” Aleksei Krivoshapko of Prosperity Capital Management, a minority stakeholder, told Vedomosti, a Russian business daily.
For VTB, Magnit offers an attractive equity-investment opportunity. It aims to spend several years rebuilding Magnit before reselling its stake. “We’re not going to stay in the asset forever,” said Andrei Kostin, the bank’s chief executive. VTB also announced a partnership to merge Magnit’s transport and logistics operations with the Russian postal service.
The sale means the end of an era for Mr Galitsky, though it may be for the good. “When you’re under constant stress, sometimes you think a nightmare ending would be better than a nightmare without end,” he told a business school in 2016. He will exit as chief executive and resign his board seat, keeping only 3% of the firm. He will give his new free time to youth football.
Japan still has great influence on global financial markets
IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.
“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.
This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.
One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).
But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.
Tokyo storm warning
These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.
Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.
What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.
Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.
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