Taking the Measure of Business in Russia
The Association of European Businesses presented a first class review of the Russian economy, at the Marriott Tverskaya, last month. Mr Chris Weafer is the Chief Strategist for UralSib Capital, having been in Russia 17 years, previously with Alfa Bank, Troika Dialog and other blue chip names. His illustrated talk was crammed with insight, detail and understanding, and thoroughly appreciated by the 70 strong audience, who contributed to a lively Q&A session afterwards.
Is Russia a good investment destination? If the answer was simple, we would not need analysts of Mr Weafer’s quality. We do. Cautiously optimistic (with caveats) for a steady boom, he outlined the evolution of the Russian economy over the last decade. The high oil price helped the first phase of reconstruction since the millennium: clearing up the inherited chaos, re-establishing the most basic infrastructure and laying the ground work for a higher and more balanced expansion. The global shock in 2008 was a spur to a more realistic and pragmatic tilt to policy and the dam collapse in 2009 abruptly cured complacency and hubris.
The oil price is again very favourable, and if it remains above about US$ 85, the government should be able to balance their books, palliate ever increasing expectations of citizens, and possibly make further improvements in social spending. However, and in line with the long term design, the next phase requires huge inward investment, as the oil bonus is now fully committed. Russian industry is thought to need at least US$ 50bn to allow needed restructuring and modernisation. This money is available, and managers already here are taking a more expansive view than cautious external potential investors. The search for good projects is key. Already delayed, a much larger diversification away from production of basic materials is sought. Moving up the value chain, enjoying more of the benefits of higher level processing and capital-intensive production are vital. Industries identified as being critical and early priorities include car manufacturing, food production and processing, and pharmaceuticals, then finance and tourism. Russia is again importing over 40% of its food needs, and farm gate prices are one of the drivers of worryingly high inflation. The recent spate of vehicle investors are being encouraged to move towards 60% local content.
All of this is possible, but not without problems. Poor perceptions of corruption and bureaucracy are well known. Coming into focus is the worsening demographic position, with a huge decline in the workforce, and in modern skills. Inward investment needs to bring new skills in, and to help the shrinking labour force be much more productive. A yet higher ruble, about the only tool to hand for easing inflation, won’t help this. Success in improving the business environment is essential—although ironic on the very day that foreign labour registration laws were dramatically worsened.
The potential for a decade of better performance is there. A reverse of the recent net capital outflows is both required and offers good returns, for both investors and for Russia. It is a delicate and subtle puzzle, and one that deserved Mr Weafer’s matching analysis.