Is Russia Really Such A Solid Investment?

Op-Ed: Right now, Russia is 'in' with investors. But the giant economy is both less dynamic and more risky than many realize.

Bubbles in Moscow...? (senekin)
Bubbles in Moscow...? (senekin)
Frank Stocker

Josef Ackermann, CEO of Deutsche Bank. Citigroup boss Vikram Pandit. Jim O'Neill, 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.

It's not surprising. And it isn't 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 O'Neill put it: Russia isn't just about oil and gas anymore. ‘‘Where else in Europe can you find such innovative Internet companies?"" he asked.

"Russia's 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 won't 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: Russia's economy is not growing.

Let's 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, it's doubtful that that can make up for the loss in the number of consumers. "Russia isn't a domestic economy story,"" Gattiker-Ericsson concluded.

And finally: the economic framework. On this point, even Svedberg had to admit that changes—structural reforms—are 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.

Let's 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 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 don't have what it takes to be an international success story; they couldn't even begin to compete with companies like Google or Facebook.

Russia‘s 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, they've been a little lower than the price of oil. Definitely not a growth story.

Read the original article in German

photo - senekin

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Iran-Saudi Arabia Rivalry May Be Set To Ease, Or Get Much Worse

The Saudis may be awaiting the outcome of Iran's nuclear talks with the West, to see whether Tehran will moderate its regional policies, or lash out like never before.

Military parade in Tehran, Iran, on Oct. 3


LONDON — The Iranian Foreign Ministry spokesman Saeed Khatibzadeh said earlier this month that Iranian and Saudi negotiators had so far had four rounds of "continuous" talks, though both sides had agreed to keep them private. The talks are to ease fraught relations between Iran's radical Shia regime and the Saudi kingdom, a key Western ally in the Middle East.

Iran's Foreign Minister Hossein Amirabdollahian has said that the talks were going in the right direction, while an Iranian trade official was recently hopeful these might even allow trade opportunities for Iranian businessmen in Saudi Arabia. As the broadcaster France 24 observed separately, it will take more than positive signals to heal a five-year-rift and decades of mutual suspicions.

Agence France-Presse news agency, meanwhile, has cited an unnamed French diplomat as saying that Saudi Arabia wants to end its costly discord with Tehran. The sides may already have agreed to reopen consular offices. For Saudi Arabia, the costs include its war on Iran-backed Houthis rebels fighting an UN-recognized government in next-door Yemen.

The role of the nuclear pact

Bilateral relations were severed in January 2016, after regime militiamen stormed the Saudi embassy in Tehran. Amirabdollahian was then the deputy foreign minister for Arab affairs. In 2019, he told the website Iranian Diplomacy that Saudi Arabia had taken measures vis-a-vis Iran's nuclear pact with the world powers.

It's unlikely Ali Khamenei will tolerate the Saudi kingdom's rising power in the region.

He said "the Saudis' insane conduct toward [the pact] led them to conclude that they must prevent [its implementation] in a peaceful environment ... I think the Saudis are quite deluded, and their delusion consists in thinking that Trump is an opportunity for them to place themselves on the path of conflict with the Islamic Republic while relying on Trump." He meant the administration led by the U.S. President Donald J.Trump, which was hostile to Iran's regime. This, he said, "is not how we view Saudi Arabia. I think Yemen should have been a big lesson for the Saudis."

The minister was effectively admitting the Houthis were the Islamic Republic's tool for getting back at Saudi Arabia.

Yet in the past two years, both sides have taken steps to improve relations, without firm results as yet. Nor is the situation likely to change this time.

Photo of Iranian Supreme Leader Ali Khamenei in 2020

Iranian Supreme Leader Ali Khamenei in 2020

Riyadh's warming relations with Israel

Iran's former ambassador in Lebanon, Ahmad Dastmalchian, told the ILNA news agency in Tehran that Saudi Arabia is doing Israel's bidding in the region, and has "entrusted its national security, and life and death to Tel Aviv." Riyadh, he said, had been financing a good many "security and political projects in the region," or acting as a "logistical supplier."

The United States, said Dastmalchian, has "in turn tried to provide intelligence and security backing, while Israel has simply followed its own interests in all this."

Furthermore, it seems unlikely Iran's Supreme Leader Ali Khamenei will tolerate, even in this weak period of his leadership, the kingdom's rising power in the region and beyond, and especially its financial clout. He is usually disparaging when he speaks of Riyadh's princely rulers. In 2017, he compared them to "dairy cows," saying, "the idiots think that by giving money and aid, they can attract the goodwill of Islam's enemies."

Iranian regime officials are hopeful of moving toward better diplomatic ties and a reopening of embassies. Yet the balance of power between the sides began to change in Riyadh's favor years ago. For the kingdom's power has shifted from relying mostly on arms, to economic and political clout. The countries might have had peaceful relations before in considerably quieter, and more equitable, conditions than today's acute clash of interests.

For if nuclear talks break down, Iran's regime may become more aggressive.

Beyond this, the Abraham Accord or reconciliation of Arab states and Israel has been possible thanks to the green light that the Saudis gave their regional partners, and it is a considerable political and ideological defeat for the Islamic Republic.

Assuming all Houthis follow Tehran's instructions — and they may not — improved ties may curb attacks on Saudi interests and aid its economy. Tehran will also benefit from no longer having to support them. Unlike Iran's regime, the Saudis are not pressed for cash or resources and could even offer the Houthis a better deal. Presently, they may consider it more convenient to keep the softer approach toward Tehran.

For if nuclear talks with the West break down, Iran's regime may become more aggressive, and as experience has shown, tensions often prompt a renewal of missile or drone attacks on the Saudis, on tankers and on foreign shipping. Riyadh must have a way of keeping the Tehran regime quiet, in a distinctly unquiet time.

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