Country risk: Russia takes centre stage


Jeremy Weltman
Published on:

When the World Cup fanfare is over, investors must gauge whether the country represents a better bet than other emerging markets – and there are still some nagging doubts.

Much like this pylon depicting the World Cup mascot, Russia could be a powerhouse amongst EMs – or plain shocking

The countdown is over, it’s under way, another month of the most eagerly awaited football tournament held every four years, and one that will likely lend support to the rouble thanks to the substantial foreign-exchange inflows.

The Russian hosts hope to put aside the sanctions, the security issues and the underwhelming performances of its home team, in the hope the feelgood factor returns to help restore investor confidence already buoyed by oil prices climbing higher than expected this year.

President Vladimir Putin, now re-elected, wants higher productivity growth, greater involvement of small and medium-sized enterprises, and to lift more people out of poverty, a key indicator determining his popularity.

With oil prices recovering to $76 per barrel, Russian oil producers are now more satisfied with their operating margins, and are seeking to expand production regardless of Opec-inspired targets, transforming the budget along with increased grain-export earnings to generate a small fiscal surplus this year, enabling the authorities to ramp up infrastructure projects.

The country’s decline in Euromoney’s risk survey has consequently stopped, with all five economic risk indicators improving, supported by the return to GDP growth in 2017 led by recovering domestic demand.

A stabilizing economy, higher oil prices and stronger domestic demand will keep GDP growing by around 1.5% in 2018, predicts the European Bank for Reconstruction and Development in its latest Regional Economic Prospects report.

IMF’s forecasts also show the current-account surplus rising to 4.5% of GDP, with central-bank data showing FX reserves replenished to more than $450 billion.

Fresh uncertainties

However, despite fiscal prudence – enforced through a new budget rule – cautious monetary policy relaxation and a gradually improving economy, hopes for a safer investor environment are dampened by fresh uncertainties.

One is inflation.

It rose sharply after the rouble devaluation accompanying the oil crisis, and has since fallen to low levels, steadying in April at 2.4% year-on-year, below the central bank’s 4% target rate, with leading oil producers presently willing to forgo higher petrol-pump prices in return for lower excise duties.

However, the rouble has recently fallen and the central bank has stopped cutting its key policy interest rate, the one-week repurchase rate, which now stands at 7.25% after five successive reductions.

“This will be unwelcome news for Russian consumers, who are only just seeing their real disposable incomes rising, after two year-long falls,” says Lilit Gevorgyan, an ECR survey contributor and principal economist for Europe and CIS economics and country risk at IHS Markit.

“Private consumption will probably not be robust in the next 18 months. Inflation is set to inch upwards in 2019 as well, dampening consumer spending.”

Other risks include a cooling of oil prices in 2019, affecting the economy, and the sanctions.

As Gevorgyan states: “The April sanctions were severe enough to weaken the rouble, shake the Russian stock market and create new uncertainties for the targeted large Russian businesses, which would require at least a few years to adjust to the new realities.

“EU sanctions are unlikely to change at least in the next 18 months.”

Consequently, Russia’s risk rating has merely stabilized, rather than regained its previous heights. As of early June, the country was 70th in Euromoney’s global risk rankings, still languishing behind South Africa – despite the latter sliding – and comparing unfavourably with other, more enticing opportunities, such as Morocco, Euromoney’s scoring system suggests:


Political risk indicators have improved slightly with the elections out of the way, but Russia’s structural factors are low scorers in the survey, with one or two worsening on a year-on-year basis, and capital access failing to improve with the sanctions enforced.

These problems are not insignificant, as the multilateral lenders routinely hammer home in their regular reviews.

Russia is still far from advanced country status, there are bank stability concerns highlighted by the failure of some private lenders, and longstanding issues of governance, institutional weaknesses, population ageing and insufficient economic diversification and other structural reforms, the IMF and others note.

“Missing structural reforms, the high cost of funding, a weak demographic situation along with Western sanctions have impeded a fixed investment boom, limiting Russia’s potential output at around 2.0% year-on-year until 2020,” say Danske Bank economists, who incidentally use econometric forecasting to predict Brazil taking home the cup.

As for IHS Markit’s Gevorgyan, she says: “Investors will be looking at the Russian government’s policy decisions for incentives to open or expand their businesses.

“Credible fiscal policy, tangible steps to improving governance and economic diversification will certainly be good indicators for any further credit-rating upgrade.”

Diplomatically, she is keeping her options open and predicts one of the Brics will claim the prize.