Chris Weafer:
Russia Macro-Politics: One Step at a Time
“Although it is said that faith can move mountains, experience shows that dynamite works better”
Anon
Moving up the rankings. The main news last week was the gain in Russia’s ranking in the World Bank’s 2014 Ease of Doing Business survey. Russia is now ranked 92nd (out of 189 countries) having moved up from 111th last year (details below). This does not have any immediate impact on the perception of equity risk, on valuations, on earnings growth, nor on the medium-term macroeconomic indicators. It is important because it shows that the government’s commitment to business reforms is starting to yield some results.
Russia now ranks 10th best in the world for contract enforcement. That disposes of a popular mis-conception about the risk of doing business in the country.
Reform progress since the last elections. Over the past eighteen months we have seen more progress in advancing reforms that ever before. The list includes WTO entry, capital market reforms, anti-corruption legislation and better budget discipline. It can be argued that these changes are still not much more than a drop in the ocean relative to the size of the problem still to be addressed. But at least we now have reform momentum and that’s not something we could have said before the summer of 2012.
Big month for equity issuance. The other news of significance over the past couple of weeks concerned the two IPOS and one SPO which, in aggregate, raised almost $3 bln. Selling shareholders appear to have finally got the message about valuations. The fact that QIWI is up 138% and Luxoft up 72% since their listings earlier this year is partly due to the confirmation of rapid earnings growth. It is also because the issue valuations were attractive and created a positive listing legacy. Apart from the government’s on-off privatization programme, the list of private issuance waiting in the queue is thought to be worth over $20 bln. Next up is shoe manufacturer, Obuv Rossii, which is expected to raise Rub1.5 bln-Rub2.0 bln ($$47-$62 mln) via a MICEX listing before year-end.
Watch the macro indicators mid-month. Investors are mostly focused on external trends and newsflow, especially from the US Fed, but a couple of events in Russia will have an impact on how markets trade between now and year-end. The Economy Ministry is convinced that the macro reports due this quarter will show a meaningful recovery, albeit the Ministry is still looking for only 1.8% GDP growth for the year. Given that many investors are fearful of a continued decline in the data, any recovery will be treated as a positive.
Amnesty should bring some surprises. The second issue to watch is the amnesty to be published to coincide with the 20th anniversary of the Russian Constitution (December 12th). We should get some positive surprises in that list as the Kremlin boosts the PR campaign ahead of the Sochi Olympics. President Putin’s state of the nation address and marathon press conference, both set for the second half of December, may also yield some positives.
All change in the spring. My view remains unchanged; the rate cuts and stimulus measures expected earlier this summer (delayed because of Fed caused global uncertainty) will be back on the table directly after the Olympics are concluded. Cabinet changes and economic policy changes are still more likely in the spring.
Boring politics. The monthly polling data from Levada center shows that President Putin’s approval and trust ratings remain steady and almost unchanged all year. Defense Minister Shoigu is again the 2nd most trusted politician (as he has been for the past six months) as speculation continues over a possible cabinet re-shuffle in the spring. Moscow’s Mayor, Sergei Sobyanin, has seen a further boost to his popular rating.
Markets
Positive global momentum. Global markets maintained a positive momentum through October, although it was more a case of edging gingerly forward than a confident step. Investors have concerns about the unresolved debt and budget issues in the US, the potential for problems in the eurozone banking sector and the question mark over the collateral damage to emerging markets when the Fed starts to ease its QE programme. The likelihood is that we will see a repeat performance of a modestly positive move in most asset classes through November. The oil price (Urals) looks safe above $100 p/bbl due to the continuing outages in Libya, Iraq, etc. Yesterday’s Tehran demonstrations should kill off the recent optimism that Iranian oil sanctions may be soon relaxed.
MICEX is now marginally positive in 2013. Russian equities and debt moved almost in line with the MSCI EM Index and the S&P 500. The RTS and RDX$ Indices added 4.1% and 4.3% respectively while the MSCI EM gained 4.7% and the S&P 500 closed the month with a rise of 4.5%. The US Index is up 23% year to date and on course for its best annual performance in sixteen years. Russia’s MICEX was a little more sluggish, adding 3.2% for the month but that was enough to pull the index just above the break even line for the year so far. (see table of performance statistics below).
$3 bln new issuance. October was a busy month for new issuance as two IPOS (Alrosa and TCS Bank) and one SPO (NOMOS) raised almost $3 bln. There is time, and a generally favourable market backdrop, for one or two more issues before year end.
The IT/Media sector completely dominates the top of the stock performance table this year with QIWI and EPAM both up over 100%. The metals sector stocks dominate at the bottom end of the performance table (see full details in tables ate end of this note).
Central Bank has regained ruble control. The Fed’s delayed tapering comments in September and the expectation that US macro data will remain unreliable for several months as a result of the shutdown, has sustained a positive backdrop for emerging market currencies. The Central Bank added to that with a clear statement that rate cuts will be delayed. That, plus $200 million per day of intervention, allowed the Bank to pull the ruble back towards Rub/$31.5 mid-month. The rate closed the month just above the Rub/$ 32.0 level, a gain of 1.2% of the month. The year on year inflation rate stayed just above the 6% level at the end of September which confirms the view that rate cuts will start only next year.
Kudrin’s new role
The Kremlin’s economic A-Team. Another positive sign that the Kremlin is taking the issue of economic slowdown seriously is the appointment of former Finance Minister Alexsey Kudrin to the presidium of the presidential Economic Council. Kudrin tweeted “We will be discussing the most pressing problems”. The presidium includes the country's top economics and finance officials, such as First Deputy Prime Minister Igor Shuvalov, Central Bank chair Elvira Nabiullina, Finance Minister Anton Siluanov and head of Audit Chamber Tatyana Golikova.
Kudrin remains very bearish. Last week Kudrin again warned that Russia is a hair's breadth away from recession and added that he believes the country's budget income is likely to be short of three trillion rubles ($93 billion) in the next three years due to the slowdown in the economy's growth. A media report cited him as saying, first, the budget figures mismatch the officially stated principles of the fiscal policy. Secondly, they do not correspond to the current economic realities - that is, the continuing stagnation the ways to overcome which have not yet been found.
Central Bank is not far behind. The newspaper also quoted head of the Russian Central Bank Elvira Nabiullina, who called the three-percent economic growth forecast for 2014 too optimistic.
One reason why IT-Media stocks are so high
Still rapid growth in internet usage. According to the head of the FOM-RUNET project of the Public Opinion Foundation, the monthly Internet audience in Russia reached 66.1 million people aged 18 or older, or, 57% of the country's population in recent months. Based on their analysis, the optimistic scenario the number of Internet users will reach 80% by 2018. The conservative estimate till places the usage at 78% in big cities, in small towns 72%, and in rural areas 64%.
Slowly getting tougher on corruption
Tightening rules for state officials. The Anti-Corruption Committee of the Duma has submitted a comprehensive update to existing anti-corruption legislation. The amendments focus strongly on corruption as committed by state officials and employees and will tighten regulations relating to state tenders. The plan is to reduce the scope for bid rigging.
Definitions are being clarified. It is reported that the proposed amendments also contain specific definitions for the first time of what constitutes ‘a crime of corruption'. It will also be illegal to pay off witnesses in criminal court cases, as well as making judges criminally responsible for knowingly allowing miscarriages of justice. The head of the presidential administration reported that 200 officials, including eight unidentified senior officials, have been fired for "loss of confidence" over information in their income declarations for 2012.
Other points
Khodorkovsky arrest anniversary. The Financial Times carried an extensive interview with former Yukos CEO Mikhail Khodorkovsky one week ago to mar the 10th anniversary of his arrest. The piece, titled “One day in the life of Mikhail Khodorkovsky” is in the form of a series of questions posed to Khodorkovsky by the FT. if you have not seen the piece I can send it to you.
BBC interview with Pavel Khodorkovsky. Also marking the 10th anniversary the BBC held a 30 minute Hard Talk interview with Khodorkovsky’s son, Pavel. Pavel Khodorkovsky is president of the think tank, The Institute of Modern Russia. In his interview Pavel was very clear about the fact that his father would not be active in politics after his release and has no intention of seeking compensation for the loss of his oil wealth.
The full interview can be viewed at http://www.youtube.com/watch?v=Ddkeoff8C6w&feature=c4-overview&list=UULA1hmG9tc0RNnqnoDn8bOg
Book Choice
Title: Environmental Crime and Corruption in Russia
Authors: Sally Stoecker and Ramziya Shakirova
I have to say up front that I have not read this book as it has only just been published and is very “academic/technical”. It also costs £82 ($130 approx.) from Amazon. The book looks at the legacy of pollution from Soviet-era industrialization and concludes that very little is being done to deal with the problem. All familiar stuff, unfortunately. The book should be of interest to anybody looking at Russia’s forestry industry. It focuses on the widespread corruption in this industry.
Looking for a book to get you into the mood for Russian winter? Julian Rimmer reminded me of “Smashed in the USSR: Fear, Loathing and Vodka on the Steppes”. Published last year it chronicles the real life story of Ivan Petrov who spent over forty years wandering, drinking and, sometimes, working, throughout the Soviet Union until he emigrated to London in the early 1990’s. Depressing is something of a Russian literary speciality.
Moscow Times Op-Ed. See later in this note my most recent Op-Ed carried in the Moscow Times “Losing No 1 Oil Spot is the Least Problem”. This piece reflects on the rising shale production in the US, and elsewhere, and the recent spate of commentaries suggesting that Russia is on the road to ruin because it will no longer be the world’s biggest energy producer. The fact is that Russia should not seek to remain the world’s largest producer. It already produces enough. It certainly does not need to spend money on shale. Instead the priority needs to remain fixed on reforms and programmes to boost investment and economic diversification. It already has enough oil and gas revenue. The Kremlin should not be goaded into spending money on boosting oil and gas output further at the expense of the rest of the economy.
Moving up the Ease of Doing Business Rankings
Best of the BRICs. The World Bank has just released its 2014 Ease of Doing Business survey for 2014. This year Russia is placed in 92nd position, up from a revised 111th last year (the original 2013 report had Russia in 112th). The World Bank survey covers 189 countries. For what it’s worth, Russia ranks just better than China (96th) and ahead of Brazil (116th) and India (134th). Turkey (69th) and South Africa (41st) are better placed.
Following the president’s timeline. The table below shows the main categories of “doing business” which are reviewed by the World Bank for this survey. Unlike the Transparency international Corruption Index, which is perception based, this survey is technical and formula based. Russia has embarked on a programme to reduce time, paperwork and costs across the main categories. If it sticks to the published timetable then there is no reason why the country may not achieve the target ranking of 20th set by President Putin. Unlikely by the set date of 2018 but, maybe, by the end of the decade.
Russia climbed the rankings this year with improvements in the scores for;
· Getting Electricity – up 71 spots to 117th
· Registering Property – up 29 spots to 17th
· Starting a New Business – up 12 spots to 88th
Russia’s best placed category is that of Enforcing Contracts, in which it ranks 10th best in the world.