While still generally mistrusted by the international investment community, fund managers are keeping...
Ostensibly hardline and reactionary, Vladimir Putin's government has flashed its capitalist credentials, with a significant section of the cabinet comprising liberal economists. Putin's strict fiscal policy and tax reforms, combined with a broad economic recovery, have ensured that internal investment is booming.
One of the most impressive feats, according to analysts as Brunswick Capital Management, is the fact that the government finalised its budget for 2001 in May and it looks set to record a surplus. For the time being, inflation has remained in control while the currency has strengthened, but there is fear that as foreign reserves grow, the government will have to choose between a strong rouble and moderate inflation.
The increasing supply of money has so far been accommodated easily into the economy, but there are some signs of inflation. Brunswick estimates that the government will be able to pick a path of moderation which will allow the Russian economy to grow by a sustainable 5%-6% per annum.
The tax system is receiving a substantial overhaul, with the headline changes being a switch to a flat 13% income tax and the reduction in payroll taxes from 39.5% to 35.4%. There will also be training and advertising costs will be tax-deductible, while sales-based taxes will be scrapped.
Putin has tried to put the dampners on departmental infighting by dissolving 13 ministries and replacing them with three new departments, including the powerful finance super-ministry.
Recent restructuring of government debt has encouraged world bond investors to increase their exposure to Russia, but a crime epidemic is threatening the stability of many companies.
Putin is in a quandary. Some of the successful companies listed on the exchanges were involved in illegal activities during the confused process of privatisation and their directors were, and sometimes still are, involved in organised crime. If the opportunity arises, Putin has to decide whether to fine these companies, an act which could seriously damage their profitability and their share price.
Andrew Elder, emerging markets fund manager for Aberdeen Asset Management, says: "As a bond investor, you would be a lot more comfortable with the story. As an equity investor, it is a question of corporate governance - you have got to get to know your companies. You cannot simply invest in a broad range."
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