Five reasons to be positive on Russia – East Capital

Putin’s victory in the presidential election on 4 March was a given, and he remains the most popular politician in the country, although not quite as popular as four years ago, or as popular as some of the official polls suggest, says Marcus Svedberg, chief economist at East Capital.

The big question related to the election is what Putin will make out of his third term as president. Will he be more of a reformist, like his first term in office in the early 2000s, or more a guardian of the status quo, which characterised his second term and most of his chosen successor Medvedev’s presidency?

His rhetoric during the election run-up suggests the former option. What is clear already is that he is taking over the presidency at a time when the economy is doing extraordinarily well.

There are at least five reasons to be positive as Putin begins a new term:

First, the Russian economy has delivered positive surprise after positive surprise lately and it is not only because the oil price has been high and rising. One may even argue that the economy is doing well despite the high oil prices. The greatest accomplishment is arguably that inflation has been brought down to an all-time low, while oil prices are booming.

Almost two-thirds of the Russian economy is made up by consumption. Retail sales have been very strong throughout the fall and winter. Rapid petro dollar inflows normally inflate the Russian economy, but a combination of a more sophisticated monetary policy, capital outflows and falling food prices have pushed inflation below 4%. Although prices may increase slightly in 2H 2012, Russia seems to finally have tamed the inflation beast.

Secondly, the domestic economy is very buoyant. Retail sales have been very strong throughout the autumn and winter. They decelerated from 9.5% in December to 6.8% in January, but nevertheless remain the primary growth driver, as consumption makes up almost two thirds of the economy. And the fact that investment accelerated from 8.5% in December to 15.6% in January confirms that domestic demand is buoyant. Some of this demand is, of course, related to the election, but it does not change the fact that the Russia economy is quite

Thirdly, industrial production and exports have been surprisingly strong lately. Some of this momentum is related to rising oil prices, but the fact that industrial production accelerated to 3.8% in January, despite a high base effect, and that Russia recorded an all-time high trade surplus of over $20bn in December are signs of strengths when much of Europe is moving into recession.

Fourthly, the Rouble appreciated around 10% during the beginning of the year after being more or less flat against the dollar last year. It is currently trading at 29 against the dollar and 39 against the euro after having peaked at almost 33 and 44 respectively during the autumn. The recent appreciation is naturally related to the rising oil price, but probably also to declining capital outflows, which put some downward pressure on the currency during the autumn.

Fifthly, there have also been some notable structural changes. Three of the most commonly mentioned discount factors have decreased or been removed over the past few months. Russia finally signed a deal with the WTO in December and will become a formal member of the world trade body later this year. This should help to boost the economy and improve the investment sentiment.

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