COMMENT: Investors should focus on body language, not words, at G8

By bne IntelliNews June 7, 2007

Chris Weafer of Alfa Bank -

Simply put, we will have to get used to a world in which Russia sees itself as stronger and more often willing to assert its agenda. Investors are largely discounting the sort of rhetoric heard from all parties over the past six months as "politicking". But at the same time, they will be looking for evidence of a better, more pragmatic relationship required to help sustain economic progress in Russia in 2008 and beyond.

Tougher rhetoric from a more confident Russia and a frustrated EU is understandable, but investors will want to be sure that progress on the substantive issues of trade and cross-border investment access is being made. Observing the body language between President Putin and the EU and US leaders is again one of the main preoccupations at this year's G8 meeting.

On the agenda of the G8 summit in Germany are items ranging from global warming to the ongoing campaign to alleviate poverty, as well as promoting economic growth and better health in poorer nations. Meetings on the sidelines will also deal with such issues as currency management and proposals for tighter equity market regulation. No major decisions are expected this week, especially on financial matters, other than general commitments to keep the review process going forward. Amongst the issues that are expected to attract the most interest are those centred on Russia and, in particular, Russia's relations with the EU and the US. For its part, the Kremlin would like to keep energy discussions near the top of the agenda, as that is where the EU is most vulnerable and where Russia has its main competitive advantage.

The backdrop to this year's meeting has been peppered with liberal amounts of Cold War rhetoric from both sides, ranging from the row over the proposed US missile shield to the continuing ban on Polish meat imports. For the leaders of Japan and France it is their first meeting, while for the British PM and President Putin it is their last. Again, this adds to the expectation that very little in terms of important decisions can be expected. But what is very important, especially for investors looking at Russia, is not so much any expectation for specific agreements, but rather to try to get a better sense of whether the recent rhetoric is just politicking or whether it is much more deeply rooted.

The answer to that question has potentially very serious implications for the assumptions investors make for the investment case in 2008 and 2009. That the language of politics between Russia and the US and the EU has become tougher and more belligerent is actually perfectly understandable and of no real consequence for investors. It is simply part of the evolution expected as Russia sees itself both politically and financially stronger and is more willing to assert its own agenda. Nothing of great surprise there.

What is important, however, is that at a pragmatic level there is cooperation between all sides and that progress is made in such issues as trade and cross-border investment access. If there is any evidence that the tougher rhetoric is also paralleled with intransigence on trade issues, then the risk premium for Russian assets will rise and the discount gap with the GEM peer group widen.

A less cooperative relationship between Russia and the "West" might also strengthen the hand of those in government who favour a more domestic bias rather than greater international integration – and that also would negatively affect valuations. This year's G8 Summit, therefore, will be more about gauging "body language" than listening to what the leaders and those in their entourage say.

Chris Weafer is Chief Strategist at of Alfa Bank

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