people in motion

people in motion

dimanche 20 octobre 2013



VTB Capital Investment Forum 2013

The “Russia Calling!” Investment Forum provides a platform for developing dialogue between Russian business and the international investment community. Prominent political and business community figures from around the world are taking part in the event. The forum is examining development trends in the Russian and global economies and the state’s role in an investment model for growth. 
This year  winter came early over the Russian Capital with light snow showers in this begining October. Sitting here in the 12th floor in a tower in Moscow looking down on a cold, wet and white city.. It's definitely sad. 
The first flakes are unmistakable. They don't fall like the fluffy white powder of December, so much as slap you in the face with the full force of October's wet promise of the six months of gloom that lie ahead. So it was at 11.30am on Tuesday. The immediate response is confusion – why is my coat turning white? Then comes denial – is it just oddly coloured rain? And finally, acceptance – here we go again.
Winter is, of course, Moscow's natural state. The slightest hint of frost brings Russians fumbling for their furs, checking skating rink schedules, ensuring soup ingredients are in full stock. And yet there are constant attempts to challenge its inevitable path.
And it is the same for the general state of the economy and the Russian situation the later months. We can only hope that Christmas is getting closer.

Opening the forum, Economic Development Minister Alexey Ulyukaev said that being there reminded him of an old joke that says: We don't have culture, but we do have a Culture Minister, and he feels really well! 
"Practically, there is no economic development [in Russia]," Ulyukaev said, paraphrasing the joke, "but the Economic Development Minister is here, in front of you!" But unlike the minister in the joke, he is feeling poorly, Ulyukaev added. 

Ulyukaev is one of those Russians that match perfectly the American idea of the Russian archetype. The man’s a bear with short, gray-spiked hair. In the three years I’ve been coming to Russia Calling!, I’ve never once seen him smile.

The morning sessions were full, and every door was guarded by a stone faced bouncer. 
It seemed the size of his arms reflected the degree of importance of the attendees.

A take it away economy 

Perhaps he has a reason. Foreign direct investment into Russia, the measure of foreign capital coming from corporates and portfolio flow, has gone from $74.7 billion in 2008 to $51.4 billion in 2012. That’s down from $55 billion in 2011, according to the International Monetary Fund.

“There is a very low participation of private Russian capital in our economy,” said Alexei Moiseev, the Deputy Finance Minister. “It resembles an old Soviet left over. I know a lot of people in the government would disagree with me. The truth is, we are aware of this problem and are doing something about it.”
Creating investing rules that are in accordance with that of the Organization of Economic Cooperation and Development is a starting point.

Let’s not forget, Russian capitalism is only 21 years old. If you start with the dissolution of the Soviet Union in January 1992 (officially was Dec. 26, 1991) as the start of Western-style economic practices being incorporated in the Russian economy, then you’ve got a capitalist system that turns 22 the day after Christmas 2013.

To use a drinking metaphor, by U.S. standards Russia is one year in to being legally able to handle its liquor. Bottom’s up.

Top Down

The macro view of Russia is a mixed bag. The investment view is a bag full of holes .

“We’re now trapped in an intermediate level of development,” said Moiseev. “This is not a cyclical slowdown in Russia. This is a structural one and it concerns us all.”

Last year, the Russian government spent around $1 billion on the world’s longest suspension bridge in Vladivostok, the peninsula that juts into the Sea of Japan. The Russky Island Bridge was built to help Russia tend to a number of big events happening in the east, like the Asia-Pacific Community Summit.
Russia has the Sochi Olympics to tend to this coming winter.

The Sochi airport terminal, which is expected to cater to 3,800 passengers an hour during the Olympics, is undergoing renovations to the tune of around $200 million. Basel Aero is doing the work, a company owned by metals tycoon.

Russia launched a new investment strategy for civil aviation this year. The investment volume is estimated at $9 billion, with over 100 sites currently undergoing reconstruction and modernization with help from both the private and public sector.

Ulyukaev is hopeful. “We expect and forecast a serious increase in investment and hope it reaches 4% in 2014, 5.5% in 2015 and over 6% in 2016,” he said. Wait…did he just smile?

If Russia can sell itself better — never an easy task for an amateur at 22 years of age — then more institutional money will flow. New policies will liberate big investors like pension funds to invest long term. It’s not going to happen over night, but neither did China’s move from $2 a day laborers pouring cement in Shanghai, to $50,000 a year Shanghai one-percenters shopping at Huang Shu Chi in Xintiandi.

The United Arab Emirates is taking note. The Abu Dhabi Department of Finance, the capital city’s long term investment vehicle, said last month it will invest $5 billion in Russian infrastructure projects over the next seven years.

Why Russia Is 'China In Reverse'

One of the Conference theme was that the actual situation of the Russian economy is the reverse of what the Chine has been implementing.

In the fun-house mirror of the global economy, Russia is the mirror opposite of China.
China consumers are the driving force behind the market. Russian consumers are hobbling along and maybe stuck in a middle income trap. China needs less investment. Russia needs more.
China used to be all about infrastructure investment: new roads, new bridges and airports. Now it's Russia's turn.
The kind of investment Russia needs doesn’t lend itself to a lot of sex appeal. We’re not talking about oil and gas giant Rosneft investing billions in Arctic drilling.  This is about roads and very big bridges.
“Russia is a reverse-China,” Alexei Yakovitsky, global CEO of VTB Capital said. ”China is a consumer theme for investors today,” he said, noting that not too long ago, investment was China’s theme. Now, investment is Russia’s theme. Years ago, it was the consumer. “Russian consumers still have room for growth, but that is no longer the story here. The story in Russia today is investment,” he said last Tuesday on the sidelines of VTB’s Russia Calling!, an annual investor’s forum in Moscow.
Consumers were the main growth driver in Russia for more than a decade. That was mostly because Russian consumption was bouncing off such a low base from the 1998 financial crisis, known as the “Russian flu”.  An overvalued currency, a war in Chechnya, and a bloated government led Boris Yeltsin to default on a $5.5 billion loan.  Russia was nothing but one big junk bond. Yields on its debt was stratospheric. Cosmonaut Yuri Gagarin could have seen them from space at 47%.
Consumers were the story again when Russia used its oil wealth to pump around $60 billion into banks and the stock market. Financial transfers in the form of higher wages and big pension fund gains thanks to government stimulus kept Russia’s economy whistling while everybody worked.
The whistling has stopped. There’s barely a  hum. The economy has grown just 1.5% so far this year, where a normal growth rate is closer to 3%.  The consumer story is stable, but waning.  While China shops and spends less on infrastructure, Russia retail sales are benign to flat. For the last three years, retail sales growth month over month averages about 0.6%, according to the country’s Federal Statistics Service. It reached a record low of -26.3% in January of this year.  China retail sales averaged about 1.18% month over month from 2010 to 2013, according to China’s National Bureau of Statistics. Its worst month in that period was a gain of 0.19%, recorded in January 2012.
If VTB’s China comparison is correct, then investors should expect Russia to remain slow and steady. They’ve already come to expect the government to be extra cautious.
Despite a weak investment climate, the ruble remains strong. Their current account has a surplus. The federal budget deficit is almost zero, and will be minimum for the next three years, promised Finance Minister Anton Siluanov.  The country’s debt to GDP ratio is under 11%, around seven times less that of the United States. “We’ve based our budget on just 1% GDP growth. We’re not exaggerating our opportunities here,” said Siluanov.
Private capital outflows re-accelerated in the third quarter to $12.9 billion from $7.9 billion in the same period last  year. That lifted the 12 month rolling total to $56.5 billion from $51.5 billion in the second quarter.
The reverse China theme better settle in quick if Russia is to ever shake off its last place status among the big four emerging markets.
Russia's Growing Pains Not All Europe's Fault
Russia Minister of Economic Development Alexei Ulyukaev: government could do better.
In 2013, Russia is getting worse. For some, it’s all Europe’s fault. Others prefer to lay the blame on the Kremlin, including top government officials.
A normal growth rate in Russia would be around 3%, but now it’s growing by half that, at 1.5% this year so far and expected to end the year under 2%.
“We do not expect any serious improvement in the overall market situation in Russia,” said Economic Development Minister Alexey Ulyukaev during VTB Capital’s annual Russia Calling! investment conference in Moscow on Tuesday.
Investment is shrinking this year. Industrial production has been a disaster, negative in January, February, May, June and July. August IP grew 0.1% on an annual basis. The only thing growing is consumer spending and that’s mainly because of rising government wages, which is actually a problem for the government budget because a large portion of Russia’s economy are state employees. The growth of fiscal volume of goods and services is primarily coming from inflation. Inflation here is around 6.5% currently.
Labor costs are up for three years in a row. Russia has had an increasing share of labor in GDP while the share of savings and investments are in decline. That combination of demand constraints and increasing costs — be it worker salaries or higher electricity bills — has created a situation where the performance of Russian companies are in decline.
Take natural gas behemoth Rosnef.They’ve been spending on acquisitions and signing joint ventures deals from Vietnam to Venezuela, but their net income is falling. In 2011, their net income was $12.4 billion. In 2012, it was $10.9 billion. Forecasts for this year are better, at $11.4 billion, but falling to $11 billion next year and $9.7 billion in 2015.
Falling net income constrains the capacity for Russian companies to fund investment projects which is one of the factors hurting demand for investments in Russia in the first place. Bad sentiment on Europe doesn’t help.
A week before, Prime Minister Dmintry Medvedev blamed much of Russia’s lackluster growth on the E.U., their chief trading partner.
“The European economy is teetering on the edge of recession, and has slowed growth in all BRICS countries. The U.S. economy cannot fully recover with high unemployment, and many individual Americans are just beginning to crawl out of debt,” Medvedev wrote in the official address on the state of the economy available on the Kremlin’s website if you can read Russian.
During the G-20 meeting in St. Petersburg this month, Vladimir Putin even said the “R” word: recession is back on the table.
Maybe not in Russia, but if Europe does worse than expected next year, it will surely hurt Russia’s plans.
Not that they have gangbuster plans here either.  This is a very conservative economic administration. Public debt to GDP is around 11%, lower than any of the big four emerging markets and light years lower than that of the budget-busting United States, which recently closed down Washington because they don’t now how to count. While ridiculous expectations are an American forte, lowered expectations are Russia’s thing.
The reduction in the investment scene is problematic, but not leading to Russia’s demise, said Anton Siluanov, Russia’s Finance Minister and one of the brains behind Russia’s recent budget cuts.
“Despite a weak investment flow, our currency is strong, the budget is strong, the budget deficit is almost zero, and will be minimum for three years to come,” he told investors at Russia Calling! this morning on a chilly October morning.  ”Plus, we’ve based this budget on just 1% GDP growth. We’re not exaggerating our opportunities.”
Investors may be growing tired of the usual Russian juggernauts. The Rosnefts and Gazproms are government entities, distributing profits throughout the budget and not using it to invest in growth as much as investors would like.  Things are changing, but at a tortoise pace and investors can be impatient. 
Privately held search engine, Yandex, has seen its net income double in two years from around $125 million in December 2010 to $265 million in December 2012. It gets better: first quarter net income was $295.2 million rising to $325 million in the second quarter.  The stock is up 31.72% in the last three months.
See part 2 President Putin Address

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