When we considered the outlook for Russia at the beginning on 2009, it appeared we were staring into the abyss.
It seemed it was going to be even more bleak than the dark days after the 1998 Russian Default. The global financial crisis did indeed seem to be global and the long talks of decoupling of emerging markets was not the reality. It was only six months later we could truly say emerging markets would survive intact.
The reasons why Russia recovered so well during 2009 are simple. Less debt, commodities becoming the potage de jour once again, helped immensely by the strength of precious metals and the US dollar’s demise.
The domestic economy in Russia is not as encouraging as one might initially assume. Commodity exports are down and the domestic credit market is at best sparse. This has caused consumption and corporate investment to be sluggish, muting the ability for the economy to recover quicker. In the long term, this may be a source of strength to the Russian economy as the foundation for reform is already there and will be strengthened by gradual growth rather than a casino approach.
The last 10 years has been a rollercoaster but predominantly a success story for Russia, based on prudent management of macroeconomic levers, eg, the efficient management of commodity profits, expansion of domestic credit and improvements in governance at a Central bank and debt management level. It could be argued the easy work has been done. As we consider the next wave of reform, it will need to be focused on more micro factors that cause a drag on growth such as the reorganisation of industry, outlawing of barter and offsets. Mid- and small-cap companies are not able to participate in the credit markets as easily as the larger, mainly commodity-based firms. This will mitigate the growth of a diversified economy with depth to sustain future economic shocks heading from the West.
It is tempting to suggest a period of consolidation and profit-taking is required. As we look forward, it is clear Russia is increasingly looking East rather than West. Geopolitical manoeuvring like the expansion of Nato and economic sanctions in countries that fall with Russia’s sphere of influence have pushed her into an ever closer alliance with China, which will be viewed with suspicion by Western governments. This may cause markets to become jittery and Western investors may withdraw some support, but it is safe to suggest a core of large-cap Russian investment should remain a cornerstone of any well-diversified, globally focused portfolio.
Dawn Kendall is head of product development and investment strategy at Architas
