Ben Aris in Moscow -

Just spent two days at Troika Dialog's Russia Forum 2011 on February 2-3, which is always fascinating, as along with Renaissance Capital's conference in the summer, this annual investment conference provides a benchmark for international sentiment towards Russia.

The first thing to note is that based on the conference's attendance, Russia's stock market is going to have a very good year. Much of investing in Russia is driven by sentiment and not fundamentals (the fundamentals have been excellent for more than two years, but Russia almost entirely missed out on last year's rally in global emerging markets, or GEMs). Hermitage Capital's Bill Browder used to say that you could tell how the Russian market would do by counting the number of empty seats at conferences; there were virtually no empty seats at this year's Troika do, which had a record number of well over 2,000 delegates - nearly twice as many as last year.

Clearly, the Russian equity market has already caught the attention of international investors and began its catch-up rally in December: the RTS was up by 23% in 2010, but it was up 18% in December alone. Likewise, mergers and foreign direct investment both suddenly took off in the final months of last year.

Given that historically the least the Russian equity market returns in a non-crisis year is 20% (and 2010 was plagued by problems such as the fires), provided this year is a lot quieter the equity market should return at the high end of the 15-45% that the investment banks have been predicting.

Lack of consensus

The content of the talks was less inspiring. Last year, there were interesting sessions on the rise of China and dramatic talk of double dips and the other "Big Dangers" the global economy faced. Also the presentations were most about long-term trends and eventual convergence in 2050, etc. This year, the sessions were more detailed and (for Russia geeks like us) more interesting, but much less dramatic.

While everyone agreed that the dangers highlighted last year - double dip and second wave - have largely receded, there was no consensus on what will come next. Some people like Marc Faber, editor of the Boom, Gloom & Doom report, says the US economy will crash on the back of debt and deficits, others like Russell Napier of CLSA said rich Americans are bound to spend their savings and so the US economy will boom.

One of the things that struck me was that compared to the sessions that dealt with global issues, like where the flows of capital were going or what asset classes would make the best 10-year investment, the Russia sector-specific sessions were much more detailed and talking about incremental change - and these sessions were almost entirely missing from last year's conference.

Furthermore, the global sessions were marked by total confusion. The presentation by Hugh Hendry, CEO and CIO of Eclectica Asset Management, on global assets summed up the mood. A highly entertaining speaker and someone who always talks sense, he sat in his chair with his head hanging down and admitted that he didn't know what to say about the outlook for the near term.

Indeed, when Faber asked everyone to pick one asset that would make the best returns over the next 10 years, the panel of worthies could only agree that buying US Treasuries was a really bad idea, but the number of profitable asset suggestions were almost as numerous as the number of speakers on the panel (and included real estate in Lebanon, anything you can eat, oil - which was more popular than most of the others - GEM blue chips, and gold).

Finally, the Russian government's participation was a lot more muted than last year. Deputy Prime Minister and Finance Minister Alexei Kudrin gave the keynote speech and, of course, presidential economic advisor Alexey Dvorkovich was there to report on the progress of reforms. But last year Igor Shuvalov, the number three in the Kremlin hierarchy, used the keynote speech to call on investors to come to Russia.

Kudrin announced a set of good economic results, but his high point was that growth in 2010 came in at 4% not 3.8% as initially thought. Wow. (Not). Delegates appeared pleased, as even this mild result looks great if put into the context of international results for 2010 - a point that is lost on no-one. But they also complained that you could put most of this progress down to the recovery of oil; as usual, there is a lot of talk about "what we are going to do," while the list of "what we just did" is pretty short.

The announcement of the merger between Micex and the RTS was obviously timed to come ahead of the conference, but did little to imbue delegates with a sense of action or optimism. The state is good at these big set pieces, but ultimately all that happened was another big state-controlled entity (Micex is controlled by the Central Bank of Russia) tying up with something else (in this case the privately owned RTS) to create a new big organisation that will do something to make things better - at some point.

The nitty-gritty reforms are still missing. Russia's economy continues to advance by oil prices being pushed up by external forces and corporate investment strategies by big companies on the inside (like the supermarket chains that provided the grist for a good session on retail). But the point here is that the government has contributed little to the success of sectors like this. What is driving Russia forward (and particularly the stock market) is the steady rise in corporate earnings. And to be fair, just this is enough to allow Russian stocks to easily outperform all their GEM peers.

But there is no sense of excitement over Russia's progress. There are no dramatic changes on the ground or in legislation, etc. - the economy is grinding away under its own momentum, fuelled by oil money.

When all is said and done, this is actually enough to bring Russia's standard of living up to that enjoyed in the West. While everyone is mesmerized by China's 12% GDP growth, they forget that China is a low-income country. Russia's 4% growth is a lot less impressive, but it is already a middle-income country - and as Kudrin noted, the catch-up opportunities that enable double-digit growth have already been exhausted.

To be fair, this year offers more chance of the kind of dramatic change that we journalists love in the form of the launch of a big privatisation programme. First up will be the sale of 10% of VTB Bank (Kudrin actually said 20% - was that a mistake?). But typically, this stake was originally slated to be sold in December, but now they are talking about March. And again it is a big set piece change organised by the state.

I was more encouraged by PM Vladimir Putin's promise at the end of last year on how the state will pump billions of dollars into the domestic pharmaceutical industry and erect some trade barriers to force international companies to invest in Russia and so create a vibrant new domestic sector. This has worked spectacularly well with the car sector (which as an investment/reform story has gone almost entirely unreported), so I expect some real action on at least this front this year. But typically, the Kremlin has not done a good job on selling itself; there wasn't even a pharmaceutical session at the conference.

The last thing to note is that the session on agriculture came at the very end of the second day (and so loads of people skipped it). However, as we move out of 2010 and its associated problems of debt, deficits and double dips, it is already clear that as we emerge from the frying pan of the 2008 financial crisis we are jumping straight back into the inflation/food crisis of the summer of 2008.

The riots in Algeria were spiked by the sharp rise in sugar prices. The Egyptian crisis was partly caused by the soaring bread prices and even in Russia the cost of the basic basket of goods was up 25% in 2010 against the 7% headline inflation. Inflation and food will be the big issue for this year, but it was relegated to an afterthought at the conference.