Investing in Russia

If you're comfy in China, consider Russia

Speakers at Renaissance Capital's investor conference make a case for investing in Russia.

Renaissance Capital kicked off its 15th annual investor conference in Moscow on Monday by underscoring to the 3,500 people in attendance that Russia’s economic fundamentals make it one of the most attractive Bric nations to invest in.

Bric of course stands for Brazil, Russia, India and China, four promising emerging-market economies singled out by Goldman Sachs a decade ago. The other three continue to attract plenty of interest, but investors have been a bit skittish about Russia lately.

The least sensitive criticism levelled against the country is that during the past three years it has failed to match the economic growth of its Bric counterparts. This might be the case when measured by gross domestic product (GDP), but Russia fares better in terms of GDP-per-capita growth, which is a better indicator of living standards. Russia’s per-capita GDP growth this year is expected to reach 5.9%, second only to China, which will grow by an estimated 8.9%, but ahead of India’s 5.8% and well ahead of Brazil’s 2.6%. And this is off a higher base. At $11,000 per capita, Russia is already wealthier than India and China, and on par with Brazil. China’s GDP per capita is around $4,500 and India’s around $1,500.

But when investors trot these kinds of figures out, they’re often hiding behind them. More likely, they are just concerned about sagas of state control (that they manage to ignore when it comes to China) or oligarch’s behaving in an over-the-top manner.

Stephen Jennings, Renaissance Capital’s chief executive, recognises this and addressed it head-on in his opening remarks, quoting extensively from Daniel Treisman’s The Return, a book that tracks Russia’s journey from Soviet leader Gorbachev to President Medvedev. As Treisman wrote and Jennings quoted:

“Since Russia emerged from the debris of the Soviet Union 20 years ago, most Western commentary has cast it as a dark and dangerous place. Observers have viewed the country from two main standpoints. First, Russia’s political and economic orders are measured against those democracies of the developed capitalist democracies of Western Europe and North America. Compared to Germany or the US, Russia’s politics are undemocratic, its economy unstable, its bureaucracy venal, its judiciary insufficiently independent and its protection of human rights deplorable.

“The second reference point is the country’s past. Russia’s current realities are seen as continuing traditions rooted in its communist and pre-revolutionary history. Thus Moscow is assumed to harbour imperial ambitions that cause it to seek to dominate neighbouring states and expand into Eastern Europe. Russia’s corruption is considered to be endemic and inescapable, as evidenced by the colourful portraits of crooked officials in the novels of 19th-century writers such as Gogol and Saltykov-Schedrin.

“Despite the popularity, these perspectives are not very useful for understanding Russia today or for reasoning about its future. They give a misleading sense of stasis and blind the observer to the complex, multidimensional change that has occurred during the past two decades.”

Both advocate comparing Russia to countries that are at a similar stage of economic development. Russia’s per capita GDP from 2005 to 2009, adjusted for purchasing power, has averaged about $13,400 — that’s closer to Argentina, Latvia, Mexico and Malaysia. And so those should be the comparisons; countries that are economically as turbulent and vulnerable to swings in international prices and investor sentiment as Russia. In other words, if you’re comfortable investing in these countries — you might find Russia attractive, too.

If your concern is that the rouble is unstable — so too are other country’s currencies. Between 1992 and 2007, 48 countries had years in which their currency fell by at least 50% against the dollar, point out Treisman and Jennings.

If you are concerned about oligarchs and crony capitalism, have a look again at comparables. As Treisman points out in his book: “Russia’s richest magnate — Vladimir Lisin, with assets worth $24 billion, according to Forbes — looks poor beside Mexico’s Carlos Slim Helu ($74 billion). He also lags India’s Lakshmi Mittal ($31.1 billion), Brazil’s Eike Batista ($30 billion) and Hong Kong’s Li Ka-shing ($26 billion).”

If you are concerned about a heavy-handed law enforcement system, again remember that this is not unique to Russia. In Argentina, points out Jennings, pressuring investors to sell out to politically connected insiders is known as “Argentinisation”.

Does this make it all ok? Of course not. But the speakers argued that there’s reason to be optimistic Russia will improve in all these areas — and, most important, such optimism is not yet priced in. Most of the speakers argued that a growing middle class will simply demand better, more transparent political and business governance. Historically, that is usually the way it goes.

Predictably, the politicians who spoke said this was already underway.

“In the next three-to-five years the government is going to get out of controlling stakes of government-controlled companies,” said Alexei Kudrin, Russia’s deputy prime minister and minister of finance. He pointed to the financial, oil, telecommunication, shipping and transport sectors as areas where the government will become less involved — regardless of the outcome of the upcoming elections as it is an agreed policy objective.

“This will increase the quality of corporate governance,” he added.

Recognising that there must be sceptics in the audience, he concluded his opening remarks succinctly: “There will be life after the elections. And the economic reform will get more drive and emphasis.”

Arkady Dvorkovich, the president’s chief economic adviser, was similarly upbeat and surprisingly candid. “What we need is more political competition,” he said, which he argued was emerging. “And what we need is more new investors and new kinds of investments.”

That of course is the theme of any such investment forum. And with such a turnout, and many in the audience wearing the earphone that is a dead giveaway they aren’t local, it seems the message is being heard. The question is whether it is being heeded.

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