Russia’s conservative economic approach offers opportunities for the attentive investor.
Since the end of the Cold War and the dissolution of the Soviet Union, Western perceptions of Russia have been perennially gloomy. However, these pessimistic views overlook several underappreciated and unheralded strengths—and realms of opportunity that may surprise investors who have let Russia slip off their radar.
There’s no doubt that Russia has painted itself into a corner on many fronts. But in an environment of constant crisis—or so investors might believe based on headlines—there are many green shoots of promise for the country and its economy. And some of what critics view as weaknesses are, say supporters, strengths in disguise.
For starters, in a world of escalating debt and money printing—in the past year, the US printed three-quarters of all dollars ever printed—Russia is a “fiscal fortress,” according to longtime Russia watcher Ben Aris, founder and editor-in-chief at business media company bne, formerly known as Business News Europe, publisher of bne IntelliNews. The country’s federal debt-to-GDP ratio of 19% is one of the world’s lowest, compared to 89% for Brazil and 129% for the US. The Bank of Russia also holds the fifth-largest amount of foreign currency reserves of any economy, at nearly $600 billion, according to the central bank.
Russian Federation President Vladimir Putin has long leaned toward managing his nation’s economy conservatively, and the country has been running what Aris calls an “austerity budget” since 2012. There may be an eventual shift toward greater investment via the government’s five-year, 25.6 trillion ruble ($340 billion) National Projects program—which entails reforms and investments in infrastructure, health care and technology—to bolster the economy, slated to be completed in late 2024.
“Russia’s fiscal cushion means that the economy is better positioned to be able to withstand any additional sanctions imposed by the US and Europe,” says Thomas Adshead, Moscow-based director of research at Eurasia strategic consultancy Macro-Advisory.
Concurrently, the economy has scope to accelerate. It’s encouraging to note that even without large Covid-19 stimulus plans like those implemented in many other economies, the Russian economy contracted by a relatively modest 3.1% in 2020.
Natalia Orlova, the chief economist at Alfa-Bank, forecasts growth of 2.5% in 2021 but warns that inflationary pressures may force the central bank to hike rates—thus putting a temporary brake on growth.
The impact of allegations of Kremlin corruption by Putin critic Alexei Navalny have had virtually no impact on the public’s trust of Putin, according to independent polls. Navalny is a darling of the Western media, but just 4% of Russians trust him (20% of younger, more educated urban voters), says Macro-Advisory’s Adshead. “Unless the authorities do something particularly brutal against [Navalny], he’s unlikely to generate mass protests like those in 2012 and 2013.”
Internationally, Covid-19 provided Russia’s presence on the world stage an unexpected boost with its Sputnik V vaccine. It has built bridges across the globe by delivering dosages to more than 50 countries, from India to Lebanon, that have struggled to source other vaccines.
Meanwhile, Russia’s digital domain is thriving. According to World Bank December 2020 figures, nearly 96 million Russians are online. By blocking some of the biggest foreign tech companies from operating domestically, Russia forced the development of domestic alternatives. Google is a distant second in internet search to homegrown Yandex (a global top-five web-search platform), while Facebook and LinkedIn are can only be reliably accessed through a virtual private network (VPN). VKontakte, Russia’s answer to Facebook, is similarly one of the most prominent social media platforms globally. Russian e-commerce giant Wildberries is looking to expand in the US, challenging Amazon on its home turf.
And the innovation continues. A handful of technology companies, such as former state savings bank Sber and Yandex, are developing superapps that would be a one-stop shop for everything from taxis and food delivery to e-commerce and online banking. Meanwhile, messaging platform Telegram, which has upward of half a billion users worldwide and a rumored implied valuation of around $40 billion, leads a small number of startup tech innovators.
In the bigger picture, demographics—long viewed as Russia’s sword of Damocles—are a less daunting challenge than they appeared to be a decade ago. Forecasters at the United Nations expect Russia’s population to contract by nearly 7%, to about 136 million people, by 2050. They also expect that much of Europe and China will see their populations drop in the coming decades, which will pressure growth and restrain productive capacity.
Russia, on the other hand, is bucking expectations of two decades ago: Average life expectancy has increased a remarkable eight years since 2003, to an average of 73 years—though it remains below the 79-year average of the US. Alcohol consumption, long an underlying cause of subpar male life expectancy, declined by 33% since 2006. Infant mortality has been cut in half since Soviet times, reflecting a dramatic improvement in Russians’ overall health.
To be sure, the bearish case for Russia is familiar to even the most casual observer: The semi-authoritarian reign of President Putin, now in his fifth presidential term, stifles democracy, dissent, reform and new thinking. There’s little hope for change, following constitutional and regulatory changes that mean Putin can remain in the Kremlin until 2036, when he’ll be 83 years old. The imprisonment of dogged Putin critic Navalny (ostensibly for embezzlement, though most understand the Kremlin wants him out of the spotlight) has yet again thrust Russia’s troubled relationship with democracy to the fore.
The economy remains dependent—perhaps too dependent—on hydrocarbons. Russia is the world’s third-biggest oil producer and the second-largest natural gas producer, and these products account for over 60% of its total exports and more than a quarter of GDP. The state is by far the biggest player in many sectors of the economy. For example, state banks account for more than half of the banking sector’s assets, crowding out private initiative and investment.
As a result, growth has stagnated. Economic output did not rise above 2.5% for the past five years, according to the World Bank’s DataBank. Foreign direct investment (FDI) collapsed by 95% in 2020, to levels last seen in 1994—but even before Covid-19, in 2019, FDI as a percentage of GDP floated at 1.9%, well below other emerging markets. The ruble has lost nearly a third of its value relative to the dollar since early 2018.
Russia’s prickly relations with the West heighten the perception of geopolitical risk. The massing of Russian troops along Russia’s shared border with Ukraine earlier this year highlighted the continued scope for military mischief, with its 2014 annexation of Crimea still looming large.
Investor interest in Russia is also dampened by concern over possible increased sanctions on the Russian economy. The US-Russia relationship is “the worst it’s been since the early ’80s,” said Ian Bremmer, founder and president of political risk consultancy Eurasia Group, in an online GZERO talk.
Finally, continued poor corporate governance—as highlighted by the politicized February 2019 arrest of high-profile American investor Michael Calvey—is a continued deterrent to investment. The enduring perception that at best the rule of law is shaky, and at worst it is weaponized against investors who fall afoul of Russians with friends in high places, accounts for the continued sharp valuation discount of Russian assets relative to those of other emerging markets.
The news isn’t all bad for Russia. Some savvy international investors have found a way to navigate the shoals of corporate governance. “The issue in Russia is not the laws, it’s the law enforcement system,” Adshead says. “The courts in Russia are not there to protect the weak against the strong. So minority investors are dependent on being able to align their interests with other big shareholders—or else find companies that are motivated to do the right thing,” he advises.
And some longtime foreign investors in Russia are happy for the drumbeat of negative news to continue to emanate from the country, because it keeps out the competition. “It’s fantastic that everyone is so scared of coming here,” says one prominent British entrepreneur who’s been active in retail, fintech and real estate. “It makes my life a lot easier.”