Charles Robertson of Renaissance Capital -
Vladimir Putin, who won his third term as Russian president on March 4, has promised a great deal to many constituencies - from a significant rebuild of Russia's military to much-needed investment in Russia's previously excellent education infrastructure. For this piece, "we are basically talking about corruption", to quote Putin from his January 20 speech, which correctly identified this as a key issue for investors.
If President Putin, and (presumably) Prime Minister Dmitry Medvedev, can make progress on this front, it would significantly surprise sceptical investors. Many assume that the host of reforms of 2000-02 (private land ownership, flat tax boosting budget revenues, improvements in the ease of doing business) were an unrepeatable aberration. But the lesson of the global financial crisis was that Russia cannot hope to grow at a high 6-7% if the reform effort coasts along in neutral as it did from 2003-07. If corruption is reduced, the state and key stakeholders in the economy could make billions.
Would a shift towards strong democracy help? Yes, but it is not essential. It is true that countries with the highest democracy ranking from the Polity IV database are also perceived to have the least average corruption, based on Transparency International's Corruption Perceptions Index. Even discounting for per-capita GDP, it is also true that countries that are less corrupt tend to be more democratic, while those with a worse ranking tend to be more autocratic. Yet the strongest correlation seems to be between per-capita GDP in constant 2005 purchasing power parity (PPP) dollars and the corruption perceptions index - as countries get richer, they are seen as suffering less corruption. Corruption in Russia should fall as the middle class grows in size and wealth.
Countries that are seen as less corrupt than they should be for their per-capita GDP wealth level include South Africa and Turkey, which are generally liked by equity investors, as well as Poland, Zambia, Ghana, Georgia, Singapore and Rwanda. Low corruption matters to equity investors and arguably allows stocks to trade at higher premiums. Strong democracy is not essential. Both Singapore and Rwanda - autocracies according to Polity IV Project and the Centre for Systemic Peace (Polity IV) - show that strong political leaders can deliver on low corruption.
Those countries where corruption perceptions are worse than they should be at a given per-capita wealth level tend to be favoured by debt investors, particularly hard-currency debt investors. We assume this is because their legal protection does not depend on local courts. Such countries include Russia, Kazakhstan, Ukraine, Belarus, Argentina, Mexico and Venezuela - amusingly, the US also fits into this group. Greece and Italy are both strong democracies that fare worse than Russia (or the US), compared with their per-capita income levels.
The resource curse is obvious. The countries with the worst corruption ratings relative to per capita-income are oil exporters. None of the countries with the very best ratings are oil exporters. As we have noted previously, energy exporters are the most common exception to the rule that all countries democratise when per-capita GDP rises above $6,000 in constant 2005 PPP dollars. No country producing 150,000 barrels a day (b/d) per million of its population has ever become a democracy. Russia's net exports are just 50,000 b/d per million people, so a shift from its current "weak democracy" rating to a "strong democracy" is possible - we put the chances at a high 29% chance a year. Energy exporters with a weak democracy rating that have shifted to strong democracy since 1965 include Malaysia, Mexico, Peru and Russia itself in 2000 (before slipping back in 2007). Russia's Duma is already considering legislation to make it easier for parties and presidential candidates to participate in elections. So either via stronger democracy or via strong political leadership, Russia may succeed in reducing corruption.
The key conclusion from this report is that a stronger judiciary and less corruption would re-rate Russian equities higher, and benefit an incoming Russian government hoping to advance privatisation and fund high social spending. If Rosneft traded at a similar price/earnings ratio to Statoil of Norway, its market capitalisation would rise from $80bn to $120bn, and the planned privatisation proceeds from this company alone would be $18bn, instead of $12bn, on our estimates. If a similar situation was seen across the board, the government's ability to fund Putin's spending plans would be greatly enhanced.
Jason Corcoran in Moscow - Russian banks are disappearing at the fastest rate ever as the country's deepening recession makes it easier for the central bank to expose money laundering, dodgy lending ... more
bne IntelliNews - The Kremlin supported by national sports authorities has brushed aside "groundless" allegations of a mass doping scam involving Russian athletes after the World Anti-Doping Agency ... more
Jason Corcoran in Moscow - Revelations and mysticism may have been the stock-in-trade of Nikolai Tsvetkov’s management style, but ultimately they didn’t help him to hold on to his ... more