Maturing Russia Part 3 – Russia’s Future
This is the 3rd and final article of a three-part series about Maturing Russia. In the first article, in the November issue of Passport, we considered the social, economic and legal changes in recent years. In December’s issue we focused on the tangible changes to Russia’s infrastructure such as in retail and office space. This article considers the opinions of three prominent business leaders and their view of the future.
Text James Logan
Stephen Jennings, who heads Renaissance Capital, comments:
Russia: cold and hot at the same time. A balance between isolation from, and integration with, the rest of the world. A G8 member and host of the 2014 Winter Olympics. Nevertheless, Russia is still the only major economy in the world which is not a member of the World Trade Organization. It is an energy powerhouse, but on its own terms. Russia has chosen its own brand of transitional democracy irrespective of international approval. But increasingly, Russia is becoming a major force in the global economic system, whether formally or informally. The fact is that global economic growth is being driven by the world’s emerging and re-emerging economies…
We are entering a new global paradigm where these new economies, with Russia dominating the list, are the driving force for growth and value creation globally. The rules and laws of economics are, if not being completely rewritten, evolving in ways that will benefi t those investing in Russia now and in the future. The G7 countries have seen their 60% share of global GDP rather quickly inverted to 40%. Sixty percent of the world’s GDP is now outside the Group of 7. And these traditional powers are struggling to understand, let alone respond to, this new pecking order…
Russia’s own business infl uence can be seen all over the world. Russia’s outward investment in other countries has now reached $140 billion. Many Russian businesses are now of global scale, throwing off extraordinary free cash fl ow and laying the foundation for becoming major investors abroad. Witness Basic Element’s investment in Canada’s auto parts manufacturer Magna or in Austria’s construction giant STRABAG, and LDV in the UK. Or Evraz’s acquisition of Oregon Steel and Severstal’s purchase of Rouge Steel in the U.S. Or Norilsk Nickel’s acquisition of international nickel producer LionOre. Or our own expansion across Sub-Saharan Africa, with what I have called the second “once-in-a-lifetime opportunity” in my professional career. This new class of business owners and executives forged their skills in one of the toughest and most dynamic markets in the world. They have skills and organizational models that are ideally suited to other rapidly developing emerging markets and in many instances they will prove more than a match for their international counterparts.
Eric Kraus, one of Russia’s leading fund managers from Nikitsky Capital, opines that:
Much though it may displease those in the West who have persistently predicted doom and gloom, the Russian economy is now enjoying its 7th year of rapid growth, currently running at an annualized 7.5%. Although soaring energy prices have helped, Russia’s extraordinary rebound from the 1998 default, itself capping the catastrophic first post-Soviet decade, was due to economic orthodoxy, political stability, and a mixed economic model, more reminiscent of the Asian Tigers during their initial growth spurt than the neo-liberal model.
That Russia is now the largest European consumer market is well known. Perhaps less so is the fact that it is also the third-largest Asian consumer market. With average real incomes growing at an extraordinary 14% annualized rate, Russia has become a magnet for international retail and consumer goods companies.
While Russia remains exposed to the commodities cycle, the secular growth in the Asian Newly Industrialized Countries continues to drive higher prices of oil, minerals and agricultural commodities. Like Australia, Russia is uniquely well-positioned to benefit from this growth, supplying virtually the entire range of commodities required.
The challenge has become one of managing wealth – infl ation threatens and high commodity prices have decreased the perceived urgency of enhancing the effi ciency of Russian business. As Russia develops into a middle-class, middle-income country, wage costs are increasing rapidly, and the ”Dutch disease” threatens.
Investment and fixed capital formation essentially ground to a halt in 1989; leaving Russia with a decaying infrastructure and industrial plant. Fortunately, a wave of new investment began in 2004, and is now accelerating towards the levels needed. Having gone from bankruptcy to having the world’s third largest Forex reserves, the challenge will now be to spend efficiently.
Finally, Nuri Katz, the Director of Century 21 Russian Franchise, gives his view:
In the last 17 years, since 1990, there have been a few economic cycles in Russia. The first was the total implosion of the Soviet economic system, as well as that of the Soviet Union itself. During that time, although terribly painful for most people, the destruction of the system happened with surprisingly little bloodshed. In the early 90s a new economic cycle was created, during which the privatization of the government command system occurred in what had then become Russia. Huge fortunes were made by a very small group who ended up usurping all political and economic power from the government. The next cycle happened in one day in 1998, and that was what was called the “economic crisis”. This was characterized by one day of hyperinflation that led to the bankruptcy of the economy again.
Almost immediately afterwards, the economy started up again in what has become a relatively short road to recovery, leading to the point today where Russia and its government is an international economic and political powerhouse.
Today, looking to the future, we see that Russia has all the tools to become a stable economy able in the future to provide a standard of living to its people that will rival any European country. As incomes continue to rise, as infrastructure is built, and with the rise of consumerism, the economy will be forced to wean itself off of its dependence on commodities. Manufacturing will be developed at a greater pace, providing better and more secure jobs for the population. The service industries, a sign of a mature market, will continue to develop as well. As this cycle of economic growth continues, we should also see greater co-operation between business and government, with the government correctly managing the economy. As long as the government stays the course and allows business to continue to develop, there can be nothing but optimism when looking at the Russian economy and its long-term prospects.