PERSPECTIVE: Russia has to look East rather than West

By bne IntelliNews June 25, 2013

David Thomas, BRIC Expert -

As a keen observer of the BRICs, and spending most of my time working with investors and businesses in the Asia-Pacific region, I don't spend enough time in Russia. I constantly scour the western media looking for unbiased and objective perspectives, and regularly devour the reports from Russia-based bloggers, investment analysts and local commentators, but nothing beats being on the ground to refine your own views and perspectives!

So it was with some delight and anticipation that I gleefully accepted the invitation from my friends at East Capital to attend their annual summit with a small group of investors from around the world, mainly from Europe and Scandinavia, who all gathered in Moscow in May. Over four busy and packed days, we met, mixed and listened to local analysts, economists, fund managers and the senior directors and executives of some of Russia's most iconic and well-known companies, including Aeroflot, Lukoil, Sollers, Sberbank, M.Video and Yandex.

As usual, I left Russia with the challenge of trying to make sense of all the views, data, charts, forecasts and opinions expressed to form my own coherent view of Russia's current and future direction. It is indeed a puzzle, but here's a summary:

Russia is on the move

On the bus sitting next to my friend, Karine Hirn, she gave me fascinating insights into her time in Moscow in 1991 when she lived and worked there as a young student. In those days, Moscow was a very grim, grey, dark and gloomy city, with drab and nondescript buildings, no cars, and only three places to go out to eat and have fun. Everyone travelled by bus or tram, nobody had any money and Russia was only just emerging from the ravages of the Cold War.

Contrast this with today, over 20 years later. Now everyone has a new car of the latest model, brand and description; the buildings are clean, colourful and shiny; the night sky lights up with neon lights displaying well-known western brands; and there are new restaurants and night clubs everywhere. 67% of Russians are defined as "middle class", household consumption has grown by over 10% a year for the last 10 years, and unemployment is at its lowest level ever (5.3%).

Yet, despite the above, the Russian consumption story still has a long way to go. By western standards, Russia seriously lags in key sectors like air travel, retail banking, logistics, pharmaceuticals, cars, media and online advertising, which is 50% or less than the European average penetration. Long-term investors, entrepreneurs and business leaders have the opportunity to participate in this long-term growth story at a historically low entry price. They will be handsomely rewarded over the next decade or two if they get in now.

Russia has many problems to overcome

There are many short-term challenges, and we constantly hear about them. The need to deregulate certain industries, accelerate privatisation, improve corporate governance, boost competition, smash corruption and increase investment in infrastructure were recurring themes over the four days in Moscow.

Economic growth has slowed to 1.1% a year, inflation is too high (over 7%) mainly due to an increase in food prices caused by a poor harvest in 2012 (food represents one-third of consumer spending) and, while the consensus view was for GDP growth in 2013 to improve to 2% to 3%, there is even talk of a possible recession. Russia's GDP per capita of $16,000 is reaching the point at which fast growing emerging countries typically hit the "middle-income trap", a sure sign that economic growth will slow to lower levels in a band of between 2% to 4% max.

In my view, the fact that these problems are so widely acknowledged, discussed and aired is a sure sign that they can and will be addressed. Over 800 corrupt government officials are languishing in Russian jails (a fact which was highlighted by President Vladimir Putin in his recent National Address) and there are early signs of improving corporate governance, increasing dividend payments and the protection of the interests of minority shareholders. There is of course more to do, but the trend is in the right direction and, as we were told, Russia usually "surprises on the upside".

Putin is popular

Boosting growth rates is a hot topic within government circles. Despite reports to the contrary in the western media, Putin is genuinely popular amongst most Russians due to his commitment to economic reform and the widely held view that he is the first Russian politician to actually deliver on the dream of a real consumer boom.

The average Russian is more affluent, secure and content than at any time in living memory. Much of this is credited to the political stability, increased affluence and greater certainty delivered by Putin over 18 years (in two six-year terms as president and one as prime minister). The search for a successor is now on, as many locals predict that his current term as president (expiring in 2018) will be his last. The recent return of former Finance Minister Alexei Kudrin, the architect of many of Russia's recent economic reforms, was highlighted as a particularly good sign.

Russia has to look East rather than West

From my perspective, many of the more gloomy forecasts were over pessimistic. Russia's growth to date has been largely due to its relationship with the Western European consumer (representing 60% of current exports), which is clearly unsustainable. Europe's economic and fiscal problems are well known and are unlikely to be resolved in the near term. The future depends, to a large extent, on Russia's ability to engage with its Asian neighbours for trade, investment and the opening up of new markets, pipelines and channels for its vast supplies of oil and gas. Yet these opportunities were barely mentioned during our visit.

In my part of the world (Asia), it is impossible to talk about the economy or the future without mentioning the significant impact that China will have over the next decade or two. China's positive influence is everywhere, in investment, infrastructure, consumption and manufacturing. When China "sneezes" (eg. new data comes out which is lower or weaker than expected) the whole of the region starts speculating on the likely impact on each local economy, and everyone starts speculating on whether this is a short-term blip or a longer-term trend. Whether we like it or not, China is the new global growth engine and we all need to start getting used to this. It represents enormous opportunities and also a few threats. Old and dated views, a lack of trust and negative perceptions need to be cast aside by governments, companies and entrepreneurs who have no choice but to engage in the "Asian Century."

I was amazed by the lack of attention being given to China during my visit to Russia. Russia needs to seriously engage with China (and India) to overcome its short-term growth problems. The decision by new Chinese President Xi Jinping to choose Russia as the destination for his first official overseas visit is a move in the right direction and I expect to see more bilateral engagement in the next few years. Russia is a member of the BRICS for a reason (an abundance of land, people and capital, to name three!) and its future lies to its East rather than its West. A more proactive and committed engagement with China would be a good first step.

BRIC Expert, Speaker, Entrepreneur and Thought Leader, David Thomas is well known in the Asia-Pacific region for his experience, credibility and passion for identifying, building and facilitating business and investment relationships between developed and emerging countries. For more information:

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