Renaissance sees incentives for reform in Russia

Renaissance Capital says that developments in Russia’s budget since the financial crisis mean that the country is finally becoming incentivised to carry out the political reforms required to improve the investment climate and attract foreign investment into the economy.

Ivan Tchakarov, Renaissance chief economist for Russia and the CIS, said: “The current account surplus will disappear in the next couple of years, even if oil price stays at $110 per barrel, and this deficit will need to be financed. But this is a great development if it encourages reform.”

The only way to tackle the problem, in his view, is to increase the investment to GDP ratio, which at 20% is “appallingly low.” An increase of 5-6% is needed to drive growth and avoid a current account deficit, he said.

Tchakarov outlined a list of reforms taking place in Russia, which he believes will attract foreign investment into the economy.

One of the most important reforms taking place is Russia’s joining the World Trade Organisation (WTO) last week. Tchakarov said: “Russia is not going to find new export markets just because it joined the WTO, since the market is 80% commodity driven and there were no import restrictions on them before. The most important change is that the membership imposes common rules and regulations, which Russia must now comply with, so it improves Russia’s competitive strength.”

On 1 July, Russian government bonds started trading through Euroclear, the world’s largest provider of settlement services. In two months’ time, Russian corporate bonds will also trade through Euroclear, promised finance minister Anton Siluanov. The development is a good example of a reform driven by the need to finance the impeding deficit.

Other reforms include privatisation, which aims to reduce the government’s stake in Russian enterprises, especially in the banking sector; the creation of a Central Depository in Russia; and the Central Bank of Russia’s focus on inflation targeting.

Additionally, Russia plans to introduce new fiscal rules which will change the calculations of the federal budget. Due to the steady increase in the breakeven oil price over the last four years, which in turn has been driving up federal expenditure, the Ministry of Finance is proposing to calculate the budget based on an average oil price over the last 10 years, instead of the current price.

“In 2008 the breakeven oil price was $50 per barrel, now it is $117. With the new rules, this figure would fall to $105, which is already an improvement, although we would feel more comfortable with $90-95.” Tchakarov said.

The proposal will be reviewed by the government on 20 September and approval is expected, despite opposition from some ministers, who would prefer the government to continue spending money.


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