Blogginlägg med etiketten Russia

I have been arguing that the elections (parliamentary and presidential) would not change the political situation in Russia in any fundamental way in the short term but that the increasingly assertive middle class represent the best hope for real change in Russia in the medium term.

I was partly right because the formal political set-up has not changed (United Russia won a majority in the Duma and Putin is still expected to become President) and the middle class could now become an engine of change. But it all happened sooner than expected and something did change the week after the parliamentary election on 4 December. The protests and vocal discontent with the ruling elite in general and Prime Minister Putin in particular suddenly became a political force too strong to be easily dismissed or repressed by the Kremlin. 

This force has been described as urban, middle class, young, and frustrated with the ruling elite. All that is probably true but that is also where the easy categorization ends. There is no single organization or leadership but rather a mix of groups with different interests that have united through social networks on the internet based on what they don’t like.

It is therefore difficult to predict how this frustration will play out. But given the fact that the protests so far have been larger than expected and calmer than feared, there is reason to believe this force will not go away anytime soon. Indeed, new demonstrations are scheduled on 24 December.

This should be welcomed as it will put pressure for free and fair elections, more plurality and increased transparency. But given the absence of a single organization, leadership or ideology behind the protesters, it is difficult (although not impossible) to see how this force can challenge the current leadership.

Putin and United Russia are, after all, popular (albeit not as popular as the official election results suggest) among a large share of the Russian population after more than a decade of rapid economic growth and increased stability. Some of the leaders behind the protests have been suggested as potential rivals to Putin for the presidency and an oligarch announced his candidacy this week. More names may appear in the near future but I doubt anyone will have the capacity to unite the protesters and become a serious challenge to Putin in March. 

The political situation in Russia has become more complex and uncertain, but there is also reason to believe things will change for the better even though it is too soon to speculate exactly how things will evolve. In the meantime, I believe one should be careful in comparing this with the color revolutions in Eastern Europe or with the uprisings in the Middle East.

I believe the inevitable change in Russia will follow its own logic, but I dare to say that it has started.     
 
 

We have been predicting (and hoping) that Russia would overcome the remaining obstacles this fall and finally join the world trade organization after 18 long years of negotiations. The last issue on the table was related to customs monitoring between Russia and Georgia, which proved very difficult to agree upon after the conflict back in 2008, but the parties have now reached a compromise agreement after talks in Geneva.

The exact details are unclear and a formal decision will probably be announced in a couple of days, but this should clear the way for an approval of Russian accession in a WTO meeting on 15 December.

This is obviously very positive news for Russia and its trading partners. Analysts, including myself, have grown weary over the years since the accession has been postponed so many times.

WTO accession is one of those win-win deals and the World Bank has estimated that GDP will be 3% higher in the medium term and 11% in the longer term in Russia (or roughly 1% per year) as a result of accession, primarily through gains in the services sector but also through improved market access abroad. The main upside may, however, be on sentiment as one of the Russian “discount factors” is removed.   

One reason the RUB has been so flexible is because the Central Bank of Russia (CBR) has widened the trading corridor and thus tolerates more fluctuation before it intervenes. So, although the RUB dropped from below 33 in late July to almost 36 in early August, before coming back below 35), it stayed within CBR’s 32.25-37.25 range against the USD/EUR basket. The Urals oil price dropped from USD 117/bbl in mid July to 102 early last week before recovering to around 110 before selling off again yesterday.

The market seems to have overreacted though and discounted oil around USD 80/bbl. But assuming an actual oil price at USD 80, which seems bearish but not unrealistic given the deteriorating global economic outlook next year, we expect the Russian economy to be weak but stable with the RUB increasingly working as a shock absorber. This is a rather new and welcome phenomenon in Russia.

Assessing inflows into Russia, Peter highlighted how inflows of money have already increased this year. Contradicting the widespread assertion that investors are turning to the developed markets, Peter forecast a healthy outlook for emerging markets in 2011 and Russia in particular. The number of IPOs forecast will definitely broaden the opportunity for investors looking to move in to Russia. Peter acknowledged that pricing expectations of companies coming to market are looking aggressive at the moment, but he is expecting better pricing moving forward.

Focussing on the impact of a potential slow down of the China economy, Marcus explained that any change in China is bound to have an impact on sentiment concerning all emerging market economies, Russia amongst them. This is due to China now being such an important economy in global terms.

When queried on the inflation outlook for 2011, Marcus acknowledged that rates are currently high, due to the long lasting impact of 2010 summer droughts and wild fires affecting commodity prices. This will likely cause inflation to rise in the first half of the year, but it will drop down to single figures towards the end of 2011. Russia is used to dealing with high inflation, and since we are currently in a low inflationary environment, any rise in the coming months will not be enough to push Russia off track.

Discussion turned to the increasingly active consumer, since Russia has seen a 64% increase in retail and consumer spending in recent months. Peter explained that since few in Russia have a mortgage, the accessibility of affordable mortgages has triggered an increase in consumer spending. Peter identified the primary beneficiaries of this rise as the real estate development along with construction and materials industries.  Russia should continue to benefit from the ever expanding active middle class with their increased spending ability.

Looking ahead to the 2012 elections, Marcus forecast a continuation in the current ruling elite despite ongoing speculation on the outcome. This spells political stability for the country, which is good news for the extensive privatisation program currently being implemented. Heightened privatisation will be a key attraction to investors outside Russia, bringing in more capital flows.

All signals point to a positive outlook for Russia in 2011. Peter believes that people place too much risk on Russia, but already we are starting to see this opinion change. As ever with the country, the journey is complex but Russia is certainly moving in the right direction.

The next Q&A will take place on the 29^th March, and will focus on China. We encourage you to put this date in your diary and look forward to updating you on yet another exciting investment region.