UralSib looks to the regions for growth
Pharos sheds light on Russia’s recovery
AS COMEBACKS GO it surely ranks alongside that of Lazarus. In the wake of August 17 1998, when Russia effectively defaulted on tens of billions of public and private sector debt, the country’s economy certainly looked dead and buried as far as both strategic and portfolio investors were concerned.
Yet less than a decade later, Russia is widely seen as a must-go-to destination for a wide range of investors, both big and small. It has been a remarkable reversal of fortune by any stretch of the imagination and one that even avowed Russophiles still struggle at times to comprehend.
Willi Hemetsberger, head of global markets at UniCredit Markets and Investment Banking in Vienna, admits: "At the time it was hard to see how Russia would get itself out of the crisis." Few people can have had such a baptism of fire as Hemetsberger, who joined Bank Austria Creditanstalt, now part of UniCredit Group, the day that the Russian government gave up the fight to defend the rouble and pay back tens of billions of rouble-denominated government bonds. But as Hemetsberger explains, even during the darkest hours of mid-August 1998 there was confidence that Russia would not remain an economic basket case for ever. "It was always clear that Russia was potentially a very rich country, but that it had to sort out its political, legal and regulatory framework to achieve that potential," he says.
Until the dawn of the new millennium it was far from certain that the country would achieve that goal. Peter Halloran, chief executive of fund management company Pharos Financial Group, says: "In 1999-2000 Russia was still pretty much a binary bet, which either would or wouldn’t come off."
One factor that hurt the country most of all in 1998 was the price of oil falling below $10 a barrel. With the oil price having tested the $100 a barrel mark in recent months it’s easy to claim that Russia has simply benefited from the growing global demand for oil. "The recovery in the oil price has clearly helped Russia a lot," says Halloran at Pharos. "But in 1998 nobody knew where oil prices would go." And as Halloran points out, in countries such as Nigeria, Venezuela and Iraq high oil prices have not delivered the widespread economic benefits that they have in Russia. The clear difference is that in recent years Russia has benefited from the type of political stability that has been lacking in many other oil-rich nations. Any discussion about Russia’s economic recovery inevitably revolves around the emergence of one key figure, Vladimir Putin, Russia’s president since 2000 and the man widely credited with restoring the country’s pride in itself. "Patriotism was completely lacking in the 1990s in Russia," says Halloran at Pharos. "Everything that happened was driven by a handful of oligarchs who acted in their own best interests and not in the country’s." Traditionally, pride is regarded as one of the seven deadly sins, but in terms of nation building a sense of pride is essential. Doubts about Putin’s democratic credentials notwithstanding, Halloran says that he has restored a sense of self-belief to Russia that was sadly lacking in the late 1990s. "More than anything else, Putin wants Russia to be a great nation," he says.
Halloran says that when Putin took power in 2000 he stopped the rot by going back to basics and centralizing political and economic power. "He put an end to personal fiefdoms in the regions."
Hans Holzhacker, chief economist for Russia at UniCredit, agrees that Putin’s centralizing policy has paid dividends. "Centralization has been positive from a fiscal point of view in that there is much more economic predictability and that has helped to gain the support of the population." Although the Kremlinization of the Russian economy will not win Putin any plaudits from free marketeers, Holzhacker says it plays well in Russia. "I don’t think that Russian will ever subscribe to a totally liberalized economy," he says. "State control would never be re-established in a Gosplan-type way," referring to Soviet-era style economic planning.
Holzhacker cautions that overcentralization has its dangers as well, however. "If we have overcentralization the cost would be increased cronyism and corruption, and that could endanger the long-term efficiency of the economy," he says. Halloran at Pharos acknowledges that despite the greater democratization of economic participation there is still a danger that the good work of the past few years could be undone. "Russia is still controlled by a relatively small group of people who act without many checks and balances and could make a foolish decision."
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"The big goal is aligning our regional footprint. The Russian banking sector is still underdeveloped compared with the likes of Kazakhstan and Turkey"
Leonid Vakeev, UralSib |
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It’s a danger that Putin himself has acknowledged in recent weeks. Addressing the heads of Russia’s Chamber of Commerce and Industry at a meeting in early December, he said: "We are not planning to have state capitalism. It is not our choice or our way of development." The government would see to it that state corporations do not suppress other businesses, he vowed, by creating a purely market environment for them.
Leonid Vakeev, executive director at UralSib, one of the country’s leading financial services groups, says that the big difference between 1998 and the present day is that there is much more confidence in the country’s economic destination. "Everyone is convinced that Russia is now on the right path," he says. "Both Russian and foreign business people feel comfortable with the situation in the country."
It’s a measure of the turnaround in Russia’s economic fortunes that it is now attracting the attention of the very biggest players from the US, its one time ideological foe. In recent months leading US retailer Wal-Mart announced that it was looking to set up shop in Russia in 2008, and Citi, which has been hammered by losses in the sub-prime mortgage market in the US, recently announced that it would add further bulk to its banking network in Russia.