Russian corruption holding back its markets ? investors

February 3, 2011



Russia is narrowing its discount to other BRIC stock markets thanks to strong oil and metals prices but needs to beat corruption to erase the gap, investors and analysts said on Thursday.
Debate at a major Moscow investment forum on the relative merits of the BRICs ? the large economies of Brazil, Russia, India and China ? turned controversial as a sceptical audience challenged the bullish view from the stage.

“If you invest in an asset where there is no guarantee that it won’t be taken away, then you need a risk premium. Asset values will therefore be depressed,” said Paul Bate, chief investment officer at emerging markets fund manager Matterhorn.

Perceptions that Russia is a risky place to invest and too dependent on oil and gas exports have long kept its stock market priced at a discount to the other BRICs, but that gap has narrowed as crude prices have powered through $100 per barrel.

The RTS index is up more than 20 percent since the beginning of December, with Russia seen by investors as a net winner from the inflation pressures that have destabilised import-dependent nations such as Egypt.

“Around $93 billion was invested in emerging markets in 2010, but Russia only got a small part of it,” said Aivaras Abromavicius of fund manager East Capital, which has $4.8 billion invested in Russia.

“But it had a good end to 2010 and we expect that trend to continue as commodity prices remain high,” he told Reuters Insider Television on the sidelines of the conference.

Feeding the Dragon

The bullish case depends on Russia capitalising on China’s resource-intensive boom, which is sucking in crude oil via a new pipeline, and aluminium and steel from Siberia’s smelters.

“It is the greatest economic synergy on Earth: China the consumer of resources and Russia on its doorstep,” said Christopher Granville, whose Trusted Sources consultancy covers the BRICs, an acronym minted by Goldman’s Jim O’Neill in 2003.
Aluminium major UC RUSAL, which raised $2.25 billion in a Hong Kong IPO last year, pitched its float as a China play, and first deputy CEO Vladislav Soloviev said bilateral trade ties defined Russia’s worth to investors.

“China’s GDP growth could be 13-14 percent in 2011 … the country needs rail, bridges, high-speed trains, but it lacks the right type of resources ? especially energy,” he said.
“Russia has the opportunity to ‘feed the dragon’.”

Beast in the Room

Granville, chairing the BRICs debate at the Troika Dialog conference, conceded when challenged that Russia’s corruption problem was “the beast in the room that needed to be unmasked”.

Russia ranked 154th out of 178 countries in a corruption perceptions index released by Transparency International last year ? by far the worst among the BRICs ? and President Dmitry Medvedev has put the issue at the heart of his reform agenda.

Kingsmill Bond, chief strategist at Troika, gave a robust defence of Russia as an investment location while highlighting risks associated with the other BRICs.

“Brazil has an over-priced currency, China ? there is far too much capital there leading to very low returns, and India has a tiny middle class and a huge bulge ? that could lead to the problems seen in Egypt,” he said.

Yet he, too, said Russia needed to “sort out corruption or get poor; grasp the nettle or fall behind”.

Russia, which suffered huge capital outflows and was forced to devalue the rouble at the height of the crisis of 2008-09, has refrained from imposing capital controls even as high oil prices force up its currency, threatening competitiveness.

“It does not mean that Russia is a paradise for foreign investors, but it is a more open country for foreign investments than most of the other emerging markets,” said Michael Calvey of Moscow-based private equity fund Baring Vostok Capital Partners.