It is time to leave behind the tired clichés about Russia’s instability and to consider the country as an investment destination in its own right.
Russia enjoys a very robust macroeconomic environment. Government debt is 10% of GDP, mostly in local currency, and we expect that the fiscal deficit will be minimal this year. Household debt is 12% of GDP, a fraction of the level in the OECD, meaning that Russia does not face years of painful deleveraging. Russia also runs a current account surplus of over 2% of GDP, has forex reserves of over US$ 500 billion and has significantly reduced its vulnerability since 2008 by allowing the ruble to float.
The stability of Russia as a producer of hydrocarbons stands out in contrast to the uncertain future of the Middle East. While the Middle East is responsible for half the world’s net oil exports, Russia is the next largest region by far, making up nearly a fifth of global net exports. For those concerned that the environment in the Middle East will only deteriorate, Russia offers a clear way to hedge against this risk.
Russia is a land of opportunity, which for many companies has provided far greater tangible growth and profits than the more obvious markets such as Brazil or China. Since the market opened up some 20 years ago, large companies such as Baltika (brewing), Magnit (retail), Megafon (mobile phone operator) or Yandex (Internet search company), have been built from scratch as Russia has become the largest market in Europe for most consumer goods. For many global providers of consumer goods – from soft drinks and cars, to pharmaceuticals and cosmetics – Russia has been not merely one of their most profitable markets worldwide, but also a key driver of their global growth.
The dependency of the Russian market and economy on oil is a valid area of concern, and it is clear that Russia has some issues in common with acknowledged petrostates. Oil makes up nearly half the revenues of the federal budget, and the fiscal breakeven oil price has risen in recent years to over US$ 100 per barrel. There is little dispute that a transition to low oil prices would damage the investment case for the Russian market for the period of that change.
However, two factors reduce this risk significantly. Domestically, the decision after the 2008 crisis to allow the ruble to float and to take the strain of falling oil prices allows for much greater flexibility, meaning that even at US$ 80 per barrel oil prices the government would run a fiscal deficit of less than 2% of GDP. Externally, lower oil prices seem to require a greater degree of stability in the Middle East. Given recent events, that goal appears ever more distant.
The last few months have seen a plethora of reform and growth initiatives, which we expect to bear fruit in the coming years. The government is acting to reduce capital expenditure and costs in state-run companies and to increase dividends, thereby driving higher efficiency. Meanwhile, a series of roadmaps and KPIs are mapping out improvements in a series of areas across the economy, reflected by Russia’s rising positioning in surveys such as the ease of doing business.
How then to reconcile these competing perspectives?
For domestic entrepreneurs, restructuring at the end of the commodity cycle as well as the rising services and logistics sectors are likely to prove fruitful areas.
For direct investors, the opportunity lies not just in continued growth of existing operations, but also in emerging consumer sectors.
For portfolio investors, there are two key choices – to buy the high dividend yielding oil stocks and enjoy deep value protection against emerging market turmoil or to buy into the high growth sectors such as technology.
Alexander Bazarov is member of the executive board, Senior Vice President, Sberbank of Russia, Deputy Head of Sberbank CIB. He is participating at the World Economic Forum’s Annual Meeting 2014 in Davos.
Image: People enjoy the view from a snowy bank of the Yenisei River in Russia. REUTERS/Ilya Naymushin