The last few years have been propitious for emerging
economies. As the U.S. and Europe struggled to recover from the
deep, self-inflicted wounds of the financial crisis, emerging
economies around the world boomed and took on bigger and more
important roles in the global economy. During the first
quarter, for example, China attracted $95.9 billion in foreign
investment, despite the imposition of capital controls that
were designed to slow the flood of money.
And then, theres Russia.
Even as the price of commodities soared during the first
quarter, oil and resource-rich Russia was hit by a wave of
capital flight. An estimated $25 billion in capital left Russia
during the first quarter, according to Alexander
Perjéssy, senior economist with asset manager
AllianceBernstein. Capital flight is still a problem in
Russia, even though the country has benefited from higher
commodities prices. The rates of return are just too low,
[See the complete listing of the 2011
All-Russia Research Team.]
As other emerging economies have pulled ahead, Russia
remains stuck with relatively slow growth and overexposure to
the volatile commodities sector. Perjéssy expects the
Russian economy to grow 5.2 percent this year. That is up from
a disappointing 4 percent in 2010, thanks to the boom in the
price of oil and other resources. But it is well below the pace
of growth in China, which is forecasted by Chinas CICC
investment bank to grow 9 percent this year.
Meanwhile, inflation in Russia is 9.7 percent, according to
Perjéssy. That is much higher than inflation in China,
which CICC estimates at 5.4 percent.
As global growth slows and the boom in commodity prices ebbs
with it, there is little reason to expect Russian growth to
pick up. Having failed to take full advantage of the growth of
the last two years, it is now vulnerable to a deceleration of
the global economy.
One reason that China continues to attract capital: a high
rate of return in the fixed income area. The countrys
central bank is aggressively raising rates. The opposite is
true in Russia, where the overnight borrowing rate is 3.5
percent. Considering the nations high rate of inflation,
real interest rates in Russia are negative. The spread on a
basket of Russian debt is 215 basis points above the JP Morgan
Emerging Market Bond Index-Global. The spread on Brazils
debt is 179 and Chinas is just 166.
Russian debt appears to be fairly priced at that level,
according to Perjéssy. Returns in the equities markets
lag other markets, too. Companies tied to the infrastructure
market might do okay, given that Russia has set investment
targets and is preparing to host the Olympics. But there
is no emerging Russian version of Silicon Valley or of the
biotech industry, despite talk about creating one. That is a
long-term goal, Perjéssy says.
Russias manufacturing center lacks the
competitive punch of other emerging economies such as that of
China. Due to upward pressure on the nominal exchange rate (and
inflation) from the commodities-centered export sector,
Russias real effective exchange rate has virtually
doubled since 2000 whereas that of the Chinese Yuan appreciated
by only about 15 percent, according to Perjéssy.
This clearly says something about the relative
competitiveness of the manufacturing sectors in these
countries, he says.
Even as China and Brazil evolve, Russia remains narrowly
focused on its resources. From where I am looking at
Russia, I dont think the Russian economy is very
diversified at all. It has missed opportunities during the
global credit crunch to sprint into action to do more to wean
itself from a heavy reliance on hydrocarbons. That will contain
the economy and asset prices going forward,
What is holding back Russias growth? Corporate
governance has been the key issue, Perjéssy says.
The government has talked about selling off stakes in
state-owned enterprises and in removing government officials
from the boards of those corporations. And while that
discussion is a move in the right direction, those goals have
yet to be sufficiently realized.
The fate of market reform is tied to the countrys
political future. President Dmitry Medvedev has appealed to the
relatively well-to-do by promoting plans to develop the
economy. But he is expected to be succeeded in March 2012 by
Vladimir Putin, the former president and current prime
minister. Perjéssy says Putin has appealed to the
broader lower-income population, which prefers stability to
change. Putin is not expected to be a champion of market
Medvedev was picked by Putin, who needed to time-out before
he could qualify for another two terms as president. While
Medvedev has shown signs of independence, it is unlikely that
he would be allowed to face Putin in an election campaign,
which would be the mark of true independence,
Given the likely outcome of the March 2012 presidential
election and of the elections for Duma representatives, it is
unlikely that market reforms will move forward fast enough to
reverse the flow of capital. In particular, investors are put
off by high taxes on the extraction of coal, oil, gas and other
resources. Those taxes might hinder the development of the
private market, but they provide a steady stream of cash for
the government. For now, that is the Russian investor that
might be satisfied before all others.