Prime Minister Vladimir Putin was just one of several top officials putting a positive spin on investing in Russia this week, but investors remain cautious despite a sharp sell-off.
Russia’s war in Georgia, its rising tension with the West and falling commodities prices have prompted foreign investors to dump Russian assets. Its stock market is off 40% since May and the cost of insuring its debt is up 60%. Yet Russian policymakers this week largely shrugged off the falls or even put a positive spin on them.
On Thursday, Putin forecast that foreign investment would fall more than 40% this year to $45-50 billion, yet called this positive as it might help dampen inflation. “I think a lot still has to be done,” said Ralph Sueppel, chief economist and strategist at Bluecrest Capital, which has $2 billion invested in emerging markets. “Markets are still very fearful of random political interference in companies and there are worries over the political situation.”
Asked about the impact of the Georgia conflict, Finance Minister Alexei Kudrin told Reuters on Tuesday: “From my point of view, the situation has now been resolved and political risks have disappeared. Investors can now relax and start acting ...If you want to make money in Russia, please, go ahead,” he said.
Investors took $7 billion out of Russia immediately after the conflict broke out, sending Russian stocks and the ruble tumbling. Russian stocks bounced up from two-year lows on Friday thanks to firmer global markets, a recovery in the oil price and a technical correction, but nerves remained. Investors want clarity on what will follow the recent more conciliatory comments towards foreign investors after Russian billionaires squared off with oil giant BP over control of their Russian joint-venture, TNK-BP.
Analysts said investors also want to see if Russia will use its vast wealth to intervene in markets, as Kudrin suggested it could on Thursday. A pricing row between Putin and New York listed mining firm Mechel -- now seen as largely resolved -- brought back memories of the collapse of Russian oil giant Yukos and any further clashes between firms and the state could prompt further sell-offs.
But Goldman Sachs said in a research note they believed such risks were falling, citing the speed with which both local and outside investors had pulled capital from what was seen as one of the more appealing emerging markets. “The dramatic turnaround in investor attitudes is likely to temper the government’s willingness to undertake policies that could do further damage,” Goldman analysts said.
President Dmitry Medvedev said on Thursday that Russia’s government and central bank should take “all necessary measures” to lure additional funds into Russian markets, while Kudrin said Russia was considering using its sovereign wealth fund to support markets.
The latter suggestion prompted almost immediate criticism from ratings agency Standard & Poor’s, which said it could threaten Russia’s credit rating. It also drew a mixed response from investors and analysts. “It might provide some short-term support to prices but it would address the underlying issues,” said Bluecrest’s Sueppel.
Commerzbank’s head of emerging market research, Michael Ganske, said it might help and could be a reasonable use of Russia’s vast oil wealth. While analysts estimated more than $20 billion of foreign money left Russia after its troops invaded Georgia, high oil prices have allowed Russia to add over $100 billion to its reserves this year. “Russia has become very rich and if they want to use some of their money to push up the market, why not?” Commerzbank’s Ganske said. Central bank deputy chairman Alexei Ulyukayev told Reuters this week that there was “no limit” on how much of the country’s $582 billion reserves it could spend to defend the ruble.
After the recent slump in Russian stocks, some see valuations becoming appealing again, particularly as even with the decline in oil prices few analysts or brokerages have predicted a significant impact on the economy in general. “By most metrics, the market is now heroically cheap,” said Troika Dialog chief strategist Kingsmill Bond in a note. “As in 1998, (time, reform and stability) will eventually lead the market back to an even path. Unlike 1998, we won’t have a macroeconomic collapse to get to this point.”
Unless oil prices fall much further than most analysts expect, they say the only real impact will be to slow the rate at which Russia’s sovereign wealth fund grows rather than inflicting serious budgetary constraints. But some Russian corporate borrowers may face a tough time. Troika Dialog estimates a backlog of $40 billion from companies which would like to raise debt but are unable to do so in the current market -- although it believed the government would stop any failures in the banking sector. “While the lack of capital will have an impact on some smaller businesses, we believe that real GDP growth can still be maintained at above 6%,” it said.
But in a volatile environment, any heightened rhetoric between Russia and the United States would be seen as negative for Russian assets -- and that makes the upcoming US presidential election on November 4 another potential wildcard for investors. “It is certainly one things people should be looking at,” said Commerzbank’s Ganske, saying Democratic presidential candidate Barack Obama was seen likely more conciliatory while rhetoric and tension might rise more under Republican John McCain. President Medvedev said on Friday that even if Georgia were on a firm path to NATO membership, he would not hesitate to attack it under circumstances similar to last month’s conflict. (Reuters)