It’s a funny thing, but if you read the Western media you could be forgiven for believing Russia is to return to its bad old ways. Vladimir Putin is seen as little more than a former KGB man stuck in the rhetoric of the cold war era, and his decision to appoint Dmitry Medvedev as his successor, while Putin himself stays on as Prime Minister, is seen by many as an example of just how poor the Russian President’s democratic pretensions are.
But those views are apparently not shared by business and the markets.
In fact, The Russian stock market did something of a wobble in the weeks before Putin announced his big idea. Once Dmitry Medvedev had been confirmed as his choice for President, and once Putin announced his intention to stay on as PM, markets soared.
The truth is, that while Putin may be seen as something of an impaler to democracy, when it comes to being pro free markets, he is seen as the quite opposite of Vlad the Impaler – more like Vlad the Hailer of markets.
As for Medvedev, well, he is seen as even more of a market man.
Recently, the IMF revealed its latest set of projections for global growth – and while it was predicting growth of just 1.5 per cent for the US next year, it was projecting growth in the Commonwealth of Independent States (CIS – that’s the former Soviet Union) of 7 per cent.
As for Russia, recently the World Bank predicted growth of 6.5 per cent this year and 6 per cent growth in 2009.
Turning to the markets, the Russian State is seen as keen to develop them. It is now mandatory for Russian companies launching an international IPO to list at least a third of the shares on a domestic exchange. At the same time, it’s become a lot easier for a firm to IPO in Russia, with the levels of bureaucracy cut right back. It is also thought that the Russian Government wants to see Russia itself become the financial centre of the CIS region – and it is introducing measures to make it easier for firms based in neighbouring countries to list in Russia.
But then, last week, Dmitry Medvedev, opened a can of worms when he called for Russian firms to copy Chinese business, and buy up western businesses.
“This will allow us to re-tool Russian enterprises with technology, boost their production culture and grant them the opportunity to diversify investments and win new markets,” said the Russian President-in-waiting.
As for growing suspicions aimed at Russia, he said, “This is not a reason for hysteria. We should quietly and measuredly forward our interests and convince people that investments from Russia are effective, transparent and necessary for the countries involved.”
In fact, Russia is currently sitting on a $157bn Oil Stabilisation Fund. It seems a lot, but actually, look a little deeper and the amount of money involved is not so great.
Under new rules set by the State, 10 per cent of Russia’s GDP must be invested into AAA-rated sovereign bonds and, as things currently stand, that leaves just $32 billion available for more-risky corporate investments.
The question, though, is will this grow? Well, most estimates out there seem to suggest investment by sovereign funds is set to balloon But, much depends on the future movements of the price of oil. If oil stays up there in the $90-plus region, then sovereign fund investment will indeed expand. But if oil falls back, then it will be a different story.
Capital Economics, for example, looked at this and said, “Growth of sovereign wealth funds is likely to taper off sharply over coming years as commodity prices moderate, and the global imbalances which have driven up Asian surpluses unwind. While that will still leave many of them as major players, they will not change the rules of the game. As the events of the last few weeks have shown, Sovereign Wealth Funds should be welcomed as a source of capital for ailing Western banks rather than feared as a source of nationalist investment.”
But, for Russia, its ability to invest abroad may only be a short-term phenomenon.
Russia knows there is no guarantee that oil will stay high in price. So by investing now, diversifying its interests, it knows that if things take a turn for the worse, it has at least built up these valuable overseas assets.
That’s what you are supposed to do of course. Save when times are good, Alas, it’s where the US and UK have been going horribly wrong. We have experienced years of remarkable growth, and yet debt levels are at an all-time high.
Maybe the real lesson from Russia, is to learn prudence.
Sovereign Wealth Funds might be providing essential funding to western business, but in the long term, it means dividends will be flooding out of the UK and US. That’s what happens when you spend, spend and spend.
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