Josef Ackermann, CEO of Deutsche Bank. Citigroup boss Vikram Pandit. Jim ONeill, head of asset management at Goldman Sachs. These three global heavy hitters and six other top representatives of the finance world took part in a discussion at the St. Petersburg International Economic Forum (SPIEF) a few weeks back. It was one of the many symposia at the Forum focusing on the future of the BRIC countries. At the end, the moderator asked participants which of those countries - Brazil, Russia, India or China currently holds the best investment potential. The favorite? Russia.
Its not surprising. And it isnt only finance world titans who harbor sympathies for Russia right now. So do hundreds of managers of emerging market funds. In the monthly Bank of America/Merrill Lynch survey, Russia also emerged a favorite.
As ONeill put it: Russia isnt just about oil and gas anymore. Where else in Europe can you find such innovative Internet companies? he asked.
"Russias economy is in considerably better shape than it was before the financial crisis, said Marcus Svedberg, head economist at East Capital, a fund specializing in eastern Europe.
Its growth rate over the next few years is expected to be higher than it was before the crisis and wont only be commodities driven, but increasingly driven by consumption. Many Russians are now able to get consumer credit, which is why consumption can be expected to pick up soon after rising inflation rates caused a slow-down.
All of this sounds wonderful, a classic emerging-nation growth story. Investors love those. But a number of factors would seem to indicate that many investors, apparently blind to a whole series of negatives, are getting overly carried away. Because the negatives are pretty conclusive. Bottom line: Russias economy is not growing.
Lets start with the consumption boom. It may actually play out in the coming months. But it will mainly be driven by extremely low interest rates. The current rate of inflation is 9.6%, but the base rate of the Russian National Bank is 8.25%: no surprise then that credit is easy to come by.
Russian demographics are disastrous
The second big problem is that there are fewer and fewer Russians. Christian Gattiker-Ericsson, head investment strategist at Julius Bär, the Swiss private bank, called Russian demographics disastrous. The population has been shrinking for 15 years; there are 6 million fewer Russians today than there were in 1995.
Low life expectancy, low birthrate, and emigration are thinning the population. Even if some Russians start to consume more, its doubtful that that can make up for the loss in the number of consumers. "Russia isnt a domestic economy story, Gattiker-Ericsson concluded.
And finally: the economic framework. On this point, even Svedberg had to admit that changesstructural reformsare necessary. Asked what that meant concretely, he mentioned privatization, investing in infrastructure, reforming the pension system, land, taxes, joining the World Trade Organization (WTO) In other words, Russia needs a complete overhaul.
Lets remember that, oil and gas aside, Russia has no significant production sectors. Eighty percent of its exports are oil and gas. And exports account for around 25% of their gross domestic product.
Even if a few innovative Internet companies have cropped up, like the Mail.ru e-mail service or the Yandex search engine, both of which are listed on the stock market, they are mostly active only in Russia and therefore remain small players. They dont have what it takes to be an international success story; they couldnt even begin to compete with companies like Google or Facebook.
Russias stock market will for the foreseeable future remain geared to oil and gas prices. That much is clear from the share prices on the Moscow exchange -- in dollars they follow oil prices almost slavishly. Let me rephrase: make that followed. Over the past few months, theyve been a little lower than the price of oil. Definitely not a growth story.
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