CONFERENCE CALL: Russia seen muddling through, with no reform on horizon

By bne IntelliNews June 29, 2015

Henry Kirby in London -


Russia’s wobbling economy will likely “muddle through the next couple of years,” according to panelists at a bne IntelliNews debate on June 25.

The event, entitled “Russia: Which Way Now”, held at Cass Business School in London, aimed to form a broad prognosis for Russia in light of the Western-led sanctions and external forces such as oil prices that have blighted its economic development over the last 12 months.

Panelist Renee Friedman, an emerging markets specialist, said that the obvious factors that will dictate a lot of Russia’s near future are oil prices and continued sanctions, which, she said, “aren’t going anywhere soon.” Any serious and sustainable progress hinges on regional and national structural reforms. However, the political will for that kind of change just does not exist right now, she added.

bne IntelliNews Editor-in-Chief Ben Aris described a “we’ve been here before” mood at this years St Petersburg International Economic Forum (SPIEF). There were no big announcements, he said, and Putin was instead preoccupied with his geopolitical posturing with the West.

Former Kremlin advisor Valery Morozov pointed to the “tremendous difference in the pictures that Russians and the West see,” when a discussion of Putin occurs. Putin is not the engineer of tension that many in the West paint him to be: “he invents nothing – he only reacts,” Morozov explained.

A major oversight of the US and EU has been the failure to foresee the galvanizing effect that sanctions would have on Putin’s relationship with Russians. Aris noted that a recent study into brand awareness in Russia revealed Vladimir Putin to be the second most-admired brand in the country, after Google.

The debate came only a day after Putin recorded his highest-ever popularity rating, at 89%. The irony of this was not lost on Aris, who reminded the audience that Putin’s popularity has always been predicated on the notion that he brings prosperity. In this sense, Aris added, sanctions have been a “massive policy failure, strengthening Putin’s hand.”

The last couple of months have seen Russians adopt a “firm party line that sanctions are making [them] stronger,” panelist Tom Blackwell of EM Advisors said, citing a slow pivot to the East and the benefits of import substitutions. He was, though, quick to add that any benefits of sanctions are “long-term opportunities,” adding that the short term is still a “tricky game.”

The development of the Russia-China relationship is indeed well underway, according to Aris, who pointed out that 25% of bilateral trade with China is now settled in yuan, up from zero five years ago.

Russia will have more than enough time to cultivate its trade and finance links with China if Blackwell’s forecast for another year of sanctions proves correct. When asked by bne IntelliNews Editor-at-Large Liam Halligan – who also chaired the debate – if another 12 months of sanctions are likely, Blackwell said it would be “politically unacceptable” for the EU to withdraw them at this point.

State of the economy

When quizzed about Russia’s monetary policy in the coming months, Friedman predicted that there would be little to no movement in interest rates, which will directly affect small and medium-sized enterprises (SMEs) and the retail sector. This result would be contrary to the plans laid out by Putin at SPIEF, in which he pledged to make life easier for SMEs through tax breaks and an easing of the bureaucratic hurdles that they often face.

A key component of any recovery for Russia in 2015 and 2016 will be the protection of the ruble, Friedman said. While its depreciation over the last year – from roughly 32 this time last year to a high of 80 to the dollar in December – has been pronounced, the key now is stability, she added. Aris agreed – its recent rally has actually been damaging, he said, citing April and May’s year-on-year industrial production figures of -4.5 %and -5.5%, respectively as evidence of this.

Friedman came back to the theme of the need for reforms in her closing remarks, admitting that while she would love to be positive about prospects in Russia, she does not see the necessary reforms materializing any time soon.

Thomas Blackwell of EM Communications emphasized the need to have open discussions, free of emotion, in order to cool the current Russia-West tensions. Too often, he said, the geopolitical conversation regarding Russia is viewed in “black and white” terms.

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