Russia has one of the best performing stock markets in the emerging markets sector. Over the last fi...
Russia has one of the best performing stock markets in the emerging markets sector. Over the last five years the RTX (blue chip) index tripled and until the substantial volatility which started halfway through 2004, Russian funds were finding it relatively easy to make great returns.
A large degree of this success has been the overwhelming influence of the oil sector on the stock markets and the government's finances. But as Putin discovered, this reliance is a double-edged sword: while the buoyant oil prices have fed economic growth, the Yukos affair threw the international community into a spin.
The government has responded to this threat to stability by slowly diversifying its interests away from oil and encouraging investment in areas such as telecommunications. However, a complete transformation is out of the question with many fundamental parts of the economy underproductive, especially the banking sector.
Marina Akopian, investment manager of the New Russia Fund at Barings, says: "The economy remains strong in Russia. We expect to see strong growth not below 5.5% this year. The oil price has been strong which has benefited the country.
"There has also been strong domestic demand in the country. Consumer sectors such as food and beverages have been showing strong growth signs on the back of an increase in peoples' incomes."
Kim Catechis, global emerging markets fund manager at the Scottish Widows Investment Partnership, says: "Russia has very strong macro fundamentals. The country has been upgraded by S&P to investment grade and has turned around magnificently since the 1998 default."
For example, Russia at the end of 2003 was in debt to the tune of 17% of its current account balance. 12 months later at the end of 2004 the country was in net credit of 11% of its current account.
According to Henry Stipp, strategist of emerging markets at Threadneedle, the government is presently in negotiations with the Paris Club to pay out the remainder of their debt at a 10% discount. It is likely in four to five years Russia will have no debt.
The Russian government is also beginning to diversify away just from investing in the commodities sector. According to Akopian, the government is starting to invest in other industries to make them become more competitive on a global footing. It plans to invest around $650m in the software sector.
Catechis thinks the mobile phone industry in the consumer sector has been growing. Inflation has come down and the rouble has strengthened against the dollar. Russian citizens have a low proportion of mortgages as people were given ownership of their flats so they are growing in wealth. This will be a key element going forward.
Peter Elam Hakansson, fund manager at East Capital, says: "There is much more to Russia than oil and natural resources. The domestic consumer area is a strong growth area for Russia. One important factor is that Russia has a flat tax rate of 13% rather than a progressive rate. Most people have a low cost lifestyle and disposable income is high."
Hakannsson feels the perceived risk is higher than the real risk. There is a lot of money in this economy which will see Russia continue to boom.
However, Akopian warns not everything has been going smoothly in Putin's reform processes. When Putin came to power, Russia was still in a difficult state, with a lot of things needing to be done. The reforms are not happening quickly as the country is so vast it is difficult process.
Akopian thinks the problem has been bureaucracy and political division. As Russia was once a communist state a balance still has not been found between state control versus a more liberal approach.
However, Catechis believes the sluggishness in the Russian government is because of lack of experience rather than another agenda. The constitution in Russia is only around 12 years old.
One area of the Russia economy Catechis feels needs improving is the banking sector. This is still in need of reform and in still need of regulation.
View from the front row
Project Libra unveiled
Including SJP and investment trusts
Spent two years at Sanlam
Will also assess FCA's actions