Considering its massive potential, investors should be getting behind the most forgotten of the Brics (Brazil, Russia, India, China and South Africa) – Russia. To some degree they have been. Over 2019, Russia’s was the best-performing major stockmarket in the world, rising by 39%, just slightly ahead of Greece. The recovery in oil prices, a gradual thawing of tensions with the West, and some cuts in interest rates, all combined to push equity prices higher.
The wrong kind of reforms
In normal circumstances, you might expect political reform to accelerate that – and for investors to pile back in. In the last week, President Vladimir Putin unveiled sweeping changes to the constitution. If they had been about making the system more democratic, strengthening the rule of law and encouraging a more diverse range of parties to flourish, it would have been widely welcomed. Instead, it seemed more like part of a plan to keep Putin in power after his latest term as president expires. And that is the real issue. The autocratic president, with his icy grip on power, is the biggest barrier to growth in Russia.
It is now 20 years since Putin emerged as the dominant force in Russian politics. Over that time, former communist states such as Poland, the Czech Republic and Hungary have grown rapidly. Still nominally communist countries such as China and Vietnam have boomed. By contrast, Russia has stagnated. Its growth has been pitiful, its population has started to shrink, and it remains dominated by oil and mining, with its leading companies controlled by a handful of oligarchs. If there are any Russian manufacturing, design, technology or media companies of any significance they are keeping themselves well hidden. Russia could have been the next China. Instead, it is turning into the new Argentina.
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Putin's three big errors
There are three ways Putin has crippled the Russian economy. First, geopolitical meddling. The Russian leader’s aggression towards the West and his territorial ambitions have created tensions with the countries that should be Russia’s biggest trade partners. Sanctions were first imposed in 2014 during the crisis in Ukraine and have only been partially lifted since. Russian companies and banks have faced restrictions on their ability to operate abroad and investment into the country has been limited. It is hard to see that Russia has gained anything from this, nor was it defending itself from any potential threats. The economy has paid a heavy price.
Second, cronyism prevents entrepreneurs seizing opportunities and building new companies. Putin operates by dividing up the country’s oil and mineral wealth among a few favoured companies and oligarchs, all of whom owe their loyalty to the regime rather than to their customers and shareholders. Other businesses operate only with the toleration of local officials. There have been attempts to stimulate entrepreneurship and create science parks, but they have amounted to nothing. A country that was a leader in technology – the Soviet Union was the first to put a man into space – has failed to produce a single internet or biotech business of any note. Nor are there any Russian brands any of us have ever heard of. Putin’s suffocating system of kickbacks and cronies has stifled the economy.
Finally, the president’s nationalist conservatism prevents reforms being made. The oil and gas industry could be broken up to make it more competitive. Markets could be made more competitive. The banks could be opened up to more competition and encouraged to lend more to small businesses. Government contracts could be put out to wider tender to create new firms, and restricted professions forced to allow new players to come into the market. All of that should kick-start growth and expansion, as it has in other countries. But Putin is only interested in stability, military strength and shoring up his own power.
Russia remains an economy with huge potential. But it won’t really flourish until Putin has finally left the stage. Don’t hold your breath.
Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.
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