Ruminations on Russia

Wither Russia?

Or where has it been recently and where is it going?

The Financial Times had an editorial piece on Russia's forthcoming Presidency of the G8. As the author correctly pointed out, an organization that is dedicated to free markets and democracy should not be headed by a country whose support for both of the above is questionable.

The recent past has not been Russia's most glorious since 1992. The Khordokovsky affair was not good, what happened to Yukos was worse and is another example of wealth acquisition by a group who were not clever enough to do so the first time around, at somebody else's expense. In case that is not clear; it was Rapine pillage.

There are rumours that certain 5th Directorate Thugs are being reigned in. I personally don't believe it - but for clarity; the strong Russia natural resource policy is a smokescreen behind which some individuals are enriching themselves. Expect further bizarre behaviour that is clearly not in Russia's long term benefit. It will continue to make good FT/WSJ/NYT headlines to say that democracy is being hindered by media concentration and the direct appointment of Governors. At best the case is unproven that democracy has been harmed at all. Neither the media nor local politicians act in a way that is in anyway democratic. The instinct is anti-democratic; the outcome is open to debate. It's clear that the commanding heights (what a crass phrase. Try telling an entrepreneur that his chain of sandwich shops is not worthy of a commanding height) are being concentrated for the wrong reasons, but Russia is a country of 140mn people and the rising tide is making their Roubles available to all of us.

There will be battles over economic control whoever sits in the Kremlin for some time yet. Short-to-medium term policy is substantially more important. Which leads to my largest worry: Gref vs Fradkov (with Fradkov playing at home) Either Gref feels that he is strong enough to take on Fradkov, or so weak that it no longer matters that there is open warfare. The pessimist in me says the latter.

More important than the personal battle is the actual policy. In spite of Yukos, inward investment is picking up again; concentrated in autos and consumer sectors. Ford (apparently) has a 12 week waiting list to acquire a locally produced Ford Focus. Despite the increase in tariffs on foreign produced cars 2/3rds of all cars bought today were not made in Russia. There is growth evident in every aspect of the consumer sector. Cheese imports, for example, are growing 30% y-o-y (and that's just the reported imports.) Oil is no longer driving growth, it's impact is mostly being neutralized by the reserve fund and a taxation policy that is more favourably skewed to Russia than previously. Still inward investment is not stubstantial enough to kill off inflation driven by an excess of demand over supply. Russia's largest trading partner (the EU) is having a self-induced crisis, as is the $ (one induced by a political elite, the other by credit cards). So it does not matter whether the Rouble is appreciating or the $ and € are depreciating the result is the same. Rouble wages are not inflating as fast as real Rouble inflation. Whilst the Russian Economic Forum week in London is one of the best shopping weeks in London in the year (when did you ever see an underdressed Russian girl (except the strip clubs) Russia's growth is about the Roubles that are being spent by the people who are working for my wife (SWMBO) and thousands of mid-size businesses across Russia. The long awaited middle class. My gut feeling is that they are feeling poorer and less secure. The Ford statistics/rumours and the HUGE number of people going on holiday at Domodeydevo Airport today would not support my gut feeling. My only excuse is that a rising tide is adding to the people who get to go to Anatalyia for the first time, but those who have been through this process before are less secure. An economy that is grown on the seeds of oil, gas, gas, oil, steel and oil and an underserved consumer is storing up substantial problems for the future. In case anyone whose economics education extends beyond mine reads this guff tell could they tell me what happens when you have internal inflation as a result excess demand over supply, a current account surplus and substantial problems in your counterparts currencies.

So on one hand we have an investment climate that is tempered (good choice of word) by Yukos (not Khordokovsky,) Gazprom/Rosneft and directional insecurity and on the other a dynamic consumer sector that is crying out for investment.

Both medium-term (Private Equity) and strategic investors are bullish across a range of sectors. Portfolio investors are wary but then their access to Russia's real story is limited and the market will flit about on UES restructuring and GAZP de-ringfencing - which is not where money is being made today.

I think my money is with the long term investors. There will be good times, there will be better times and there will be worse times but even when the measure is not good my guess is that very little money will be lost.

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