Focus on Russia – Must avoid bad headlines, says East Capital’s Svedberg

East Capital’s chief economist Marcus Svedberg (pictured) is convinced that Russia joining the World Trade Organisation will positively impact its image in the eyes of foreign investors, but in order to improve its long-term perception the country needs to avoid bad news, not just make positive headlines.

Unfortunately, Russia has a tendency to make a bad name for itself. Svedberg points to the two stages of Russia’s accession to WTO, both overshadowed by socio-political drama. In December, when the deal was signed in Geneva, the street protests by Vladimir Putin’s opposition dominated the headlines. Now, as Russia officially becomes a member, all eyes are on the Pussy Riot case.

Last Friday, as members of the punk group that publically insulted the president outside Moscow’s largest church were sentenced to two years’ imprisonment, the Russian rouble nosedived against the US dollar, causing some speculators to make a connection between the two events.

Svedberg says: “The Pussy Riot case is important to investors, because it is generally perceived that the verdict is too harsh and poses a question mark over the Russian legal system. These events always really affect investor sentiment on Russia. Just look at the Khodorkovsky case – it’s still being mentioned.”

Mikhail Khodorkovsky was imprisoned for fraud by the Russian government in 2003, after accumulating wealth as head of Yukos, one of the largest Russian companies to emerge from the privatisation of state assets in the 1990s.

Debate continues on whether the imprisonment was politically motivated and opinions among market participants are divided. In this month’s poll of 1,601 Russian citizens conducted by the country’s independent research institute Levada Centre, 31% of participants voted for the liberation of Khodorkovsky. To date, he has served nine years of his 13-year term.

Svedberg suggests that attitudes towards Russia might improve if Moscow were to release Khodorkovsky – a topic under continuous discussion – and “sort out the current mess with Pussy Riots.” The latter in particular may be “one of the more damaging cases”, he thinks, because it affects a social strata not necessarily involved in politics and finance, making social unrest all the more likely.

But even if these events have distracted the markets from the news of Russia’s accession to the WTO, the membership will still improve sentiment toward the country. In the short term, Svedberg believes this to be the greatest advantage of Russia joining. He said: “There has always been a discount on Russian equities, and the fact that Russia was not in the WTO was often quoted as one of the main factor.”

But he cautions that the other factors that stand in the way of improving investor confidence in Russia must not be overlooked. In particular, Moscow must press on with privatisation initiatives and improve rule of law if it is to transform into the global financial centre it plans to become.

WTO is just one step on the way to a reformed Russia, but an important one, because it signals Moscow’s readiness to follow through with other reforms. After a 20-year wait, the government must have a good reason to make the push to join, so it can be expected to follow through with the other necessary reforms. One of the factors putting time pressure on Moscow to increase foreign direct investment are the impending Winter Olympics in Sochi in 2014 and the football world cup in 2018, both requiring an improvement to the country’s image and its infrastructure.

Svedberg echoes other experts, saying that WTO accession goes hand in hand with other reforms and will only be effective in improving Russia’s investment climate in conjunction with one another. But he is convinced improvement will be seen, even if the transition period for some industries may be five to nine years.

In the medium term, Russia’s gross domestic product can be expected to see an annual additional growth of around 1%, according to World Bank estimates.

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