Is Russia still an emerging market?

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By Gary Greenberg, head of Emerging Markets & lead portfolio manager, Hermes Investment Management 

After Vladimir Putin swept back to power in 2012, he had the air of a chess grandmaster: plotting each intricate move from the Kremlin. He swiftly annexed Crimea, suppressed opposition at home, and antagonised a seemingly vulnerable and tactically inept West at every turn.

With oil comfortably around $100 barrel – the government’s treasury was swelling and his opinion rating at home was soaring. How quickly fortunes change! Now the rouble has plummeted, Western sanctions have gripped, allies are in short supply, and a recession more bitter than a Russian winter looks set to take hold. It appears as if Vladmir Putin has spectacularly over played his hand. From an emerging market, Russia may well now be submerging.

Last week’s 17-hour meeting in Minsk brought some initial relief to the markets as the first details of the ceasefire agreement were revealed. These included a broad ceasefire, withdrawal of heavy weapons, an amnesty for prisoners involved in fighting, lifting of restrictions in rebel areas and constitutional reforms that grant more independence to Donetsk and Luhansk by the end of 2015.

We continue to remain cautious as many commentators have already highlighted the similarities between this agreement and the peace plan drawn up in September 2014. It is clear that the ceasefire is very fragile and already the rebels argue that the city of Debaltseve is not covered by it.

The Minsk 2 deal was a great deal for Russia and a terrible one for Ukraine, essentially preventing entry into NATO, but it would not be prudent to assume Russia’s territorial ambitions are sated and sanctions will be withdrawn. We are also concerned about the challenges that Ukraine’s President, Petro Poroshenko, will have pushing this deal through the nation’s parliament.

Then there are the very important logistical questions of just how Russia will withdraw its weapons from territories embroiled in the conflict and which nation will physically man the borders between the two countries.

For Ukraine, the focus in the near-term must be on implementing all aspects of the ceasefire agreement as this is the only way it will secure the IMF support.

On a different trajectory                                                              

While, this development may suggest tentative progress, Russia still faces a myriad of problems. A broad definition of an emerging market is a country which has structured its economy along market–oriented lines, and, in the process, is converging towards developed market standards.

For many, progress for powerhouses like China and Russia seemed inevitable as they moved away from the shackles of collectivism and organised labour. However, EMs are not all on the same trajectory, and some have the capacity to take divergent paths, as appears the case of Russia.

We believe the question must be asked: is Russia still an emerging market? According to the definition outlined above, yes. It has a financial infrastructure resembling those of other emerging markets – such as banks, a stock exchange, a unified currency and some form of regulatory body. Yet there lies a more fundamental question: is it really a market at all? Its government seems to regard many listed companies and their management as playthings.

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