Russia's financial community readies itself for change
Russia’s financial community is calling out for the introduction of badly-needed reforms, but will Vladimir Putin’s government listen?
As Muscovites brave temperatures of -20 to express discontent with Vladimir Putin’s autocractic government in Russia’s capital ahead of March elections, members of the country’s vibrant but restricted financial community are preparing for change.
The fact people are beginning to express opinions publicly means a significant shift is taking place in a country where freedom of expression has never been accepted historically, says Anton Rakhmanov, CEO of Troika Dialog’s asset management operation. “Until now we have had an oligopoly, with the ruling party controlling 75 per cent of parliament,” he says. “But the elite decoupled from reality and the government moved further than before from everyday life.”
The prime minister’s reform-focused public pronouncements have yet to bear any fruit in reality, says Mr Rakhmanov. “He says he is against corruption and wants to end dependence on commodity prices. But, hey mate, this has all happened during the last 12 years when you were running the country! The situation has deteriorated under your management.”
Bankers believe Mr Putin, if surrounded by reform-minded advisers, would be capable of making improvements in corporate governance and diversify Russia’s economy away from reliance on resource-driven stocks. This would attract serious international investment.
Such a strategy would require the recall of financial experts such as sacked former finance minister Alexei Kudrin and former economics minister, German Gref, back into senior Kremlin posts. Mr Gref was sacked from the Cabinet in 2007 but is now the president of Sberbank, Russia’s largest financial institution.
“For such people as Gref, logically, running real businesses like Sberbank is more interesting than running politics,” says Mr Rakhmanov. “But if the situation goes out of control, these people have to come back to politics, as you cannot run a business in an atmosphere of complete chaos.”
Even with the changes which Mr Rakhmanov predicts, it will still take five years for the economy to gain some independence from the stop-start commodity engine to which it has become a long-term hostage. “Political risk is currently over-priced in our equity market,” he says. “If Putin – or his successor – starts to move the situation in a more constructive way, we will see massive inflows into the country from institutional investors.”
Troika expects the RTS equities index, currently at 1632 and already up 18 per cent since the beginning of 2012, to surge another 35 per cent this year.
Currently Russia’s wealthy have turned their backs on their own market, demonstrated by vast capital outflows during 2011. “People will start moving their assets back as soon as they seem a little more confident,” believes Mr Rakhmanov. “But first we need real reform of the legal system and an anti-corruption drive against high profile officials.”
Roland Nash, chief investment strategist at Verno Capital and one of Moscow’s best-known investment commentators, also expects Mr Putin to show some reformist credentials. “The protestors want a better business environment, better oversight of government, a more responsible bureaucracy and more public investment into education, healthcare and public sector infrastructure,” says Mr Nash. “I expect that is what we will see after the elections.”
Politics, he believes, will become a major medium-term driver of Russian equities. “The political protests are likely to have a positive impact on valuations.”
But more conservative elements in the industry are not expecting such comprehensive change. “It is difficult to argue that the fundamentals of the Russian economy and its stockmarket will somehow be changed by perceived real or superficial climate of reform,” believes Alexander Kotchoubey, executive vice-president at Lombard Odier in Moscow.
The key drivers of the economy, he says, will remain global demand for natural resources and investor appetite for risk.
Lawyers moving assets of wealthy Russians into secure foreign structures are doing brisk business. Safety of holdings, particularly from ownership disputes, or from appropriation by the authorities is the main concern. “Confidentiality of ownership of assets remains a key issue,” says Andrew Terry, a partner with Withers LLP in London. “Information is not as confidential as you might expect.”
