Investors lose with outdated views about Russia – East Capital

Foreign investors are losing out on extraordinary investment opportunities because they hold prejudiced and outdated views of Russia, according to East Capital asset managers.

Holding their annual investment briefing in Russia’s St. Petersburg , the firm’s experts pointed to vastly improved economic fundamentals, growing political stability following presidential elections, valuations at levels last seen before Russia began its political reforms, and a new determination to tackle corruption and inefficiency across public and private sectors.

East Capital Chairman and founding partner Peter Elam Hakansson said European investors in particular remain mired in their own financial crisis and were finding it difficult to lift their eyes to opportunities on their doorstep.

Aivaras Abromavicius, advisor and member of the portfolio management team, recounted how one US institutional investor admitted they could not move beyond their deep “historical suspicion” of Russia, despite evidence of robust economic fundamentals and outlook.

Says Anders Aslund, a Senior Fellow at the Washington-based Peterson Institute for Economics, and an advisor to the company Board: ” GDP growth at 4% per annum; a budget surplus of 0.8% of GDP, a current account surplus of $10bn, inflation at 4% annualised, and unemployment at 6%. Foreign reserves at $500bn, the third largest in the world. Russia’s economy is in excellent shape. There are no concerns on the macroeconomic front at all.”

Yet international investors persist in marking down Russia and attaching a risk premium they do not demand from other emerging markets. Marcus Svedberg, chief economist for the Stockholm-based group, which has $5.5bn assets under management, says the perception is annoying, unfair, and “difficult to explain from a financial point of view”.

Critics cite two main reasons for caution: Russia’s dependency on a high oil price, and political stability. The latter has certainly been a factor but the March presidential election, which sees Vladimir Putin back in office for another six (previous term was four) years, marked a watershed in Russia’s political evolution.

“The modernisation paradigm won the public debate,” notes Aslund. “What everyone has realised is that Russia is too rich, too pluralized and too educated to be so authoritarian and corrupt. The status quo is not an option. Russia is at a crossroads. It can continue with state capitalism, which will deliver perhaps 3-4% growth a year, with continued oil dependency, or it can start to liberalise for diversified growth of 6-7%. The government itself is discussing change in these terms, and in fact has been doing so for four or five years.”

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