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Bullish about the bear: Putin sets out stall to lure international investors to Russia

Russian economy | Bullish about the bear: Putin sets out stall to lure international investors to Russia Ian Fraser

The economy of the Russian Federation is on the cusp of major structural change, with the government aiming to limit dependence on raw material exports – particularly oil and gas – and to normalize the economy, luring in more foreign investment.

The privatization of the government's stakes in Russia's largest companies, including oil giant Rosneft and Sberbank, the country's biggest bank, is central to the government's plans. Speaking at an investment conference on September 15, finance minister Alexei Kudrin said:

"We will have a privatization programme for five years worth around $10 billion a year. The work continues, [the list of companies] to be privatized will be extended somewhat, with several [other] enterprises.

However if Russia's ambitious $50bn privatization program is to win the support of international investors, the country must first persuade them that it has reformed: that standards of corporate governance and market oversight have been improved and that tribalism has been eradicated from Russian politics.

Memories of the Yukos scandal, described by Bruce Misamore in his QFINANCE viewpoint and other sagas like BP’s spat with Russian partner TNK, are fresh in the minds of many international investors. Many would rather give Mother Russia a wide berth and focus  instead on emerging markets where the risk associated with a strong-arm state are perceived to be lower.

So it will come as little surprise that Vladimir Putin is making a determined push to persuade non-Russian investors that Russia has changed its spots. Speaking at an investor conference hosted by Russian bank VTB on October 5, he claimed that Yukos was a "unique case". According to a transcript of his speech Putin said:

Our immediate goal is to complete the legal framework for a modern securities market ... which will then ensure that its rules and technologies meet the very highest international standards. A law has been adopted to prevent the abuse of insider information and price manipulation. We will soon complete our work on regulatory acts governing the financial market's infrastructure, including rules of securities issue, exchange trading, clearing, and the central securities depository (CSD). All the above are necessary and important steps towards establishing Moscow as an international financial centre.

Arkady Dvorkovich, an aide to the Russian president Dmitry Medvedev, told the same conference that the government no longer wants to see investment in Russia based on high commodities prices and expectations the ruble will rise. Instead, he hopes the privatizations will build the foundations for more sustainable growth.

But what about the outlook for the Russian economy? Here the picture seems somewhat mixed. The Russian government estimates the economy will grow by 4% in 2010-12, a sharp rebound from 2009’s contraction of 7.9%.

Finance minister Kudrin says he is confident Russia can rein in inflation and eradicate the budget deficit by 2015. If he pulls that one off, investment-starved Russia could be transformed into an "island of stability" for foreign capital, Kudrin said. He predicted inflation would not exceed 8% by year-end, the lowest in years, and would be down to 5.5% by 2013.

However in a monthly strategy note Troika Dialog was more bearish, predicting that inflation will creep up to 9%, which would “reduce the attractiveness of the market overall, as rates will likely follow and GDP growth and the ruble will be slightly weaker.”

Sergey Aleksashenko, director of macroeconomic research at the Higher School of Economics in Russia and former deputy minister of finance of the Russian Federation, is even more bearish about the bear. Speaking at a Fund Strategy Investment Summit in St Petersburg, he warned of coming stagnation.

At the same event Olga Trofimenko, associate professor of the St Petersburg University, itemized several issues that need to be addressed before Russia can achieve sustainable growth. She said birth rates are falling in Russia, which indicates how uncertain Russians are about their future. She was also critical of a “dangerous lack of commonly accepted clear strategy” as power is transferred from Putin to Medvedev.

Further reading on the economies of the Russian Federation and Commonwealth of Independent States:

Tags: BRICs , corporate governance , demographics , emerging markets , privatizations , Russia , Russian Federation , transparency
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