No one ever needs any encouragement to take their money out of Russia. Almost a century on from the 1917 Revolution, the country is hardly any more stable now than it was then.
As the country approaches a tense presidential election, with protestors demonstrating against the autocratic regime of Vladimir Putin, most investors may write it off as yet another chaotic, dangerous period, which they will avoid.
Brazil, Russia, India and China – the ‘BRICs’ – might make a nice acronym for headline writers, but it might as well be ‘BIC’, because little global money ever went to the ‘R’ in the line-up of emerging economies.
But that might be a big mistake. The protestors may mark the transition to a more normal, liberal democracy. If so, Russia could be one of the world’s most exciting economies.
Putin enters the vote with his stature badly damaged. In the parliamentary vote last year, his United Russia party did unexpectedly badly, falling short of an outright majority. He’ll probably win, but may need two rounds to secure victory, and his prestige will be dented.
Don’t be surprised if he, like France’s General De Gaulle in 1969 – another autocratic leader with a military background who saved his country from chaos – steps down in 2013 or 2014. For investors, that could present a tremendous buying opportunity.
While Putin may have stabilised Russia, he has modelled himself on Leonid Brezhnev, the 1970s Communist leader who presided over years of moribund stagnation. In recent years, the economy has frozen, along with the political system. The concentration of wealth may be exaggerated – perhaps because Russia’s billionaires tend to be in London spending – but a middle-class, broadly-based consumer and industrial economy has struggled to emerge.
We are aware of big Russian oil and gas companies, but not much else. Most outside investors assumed that under Putin, the country was drifting back towards mild authoritarianism – good for his cronies, but bad for outsiders.
Yet Russia should be one of the world’s most vibrant emerging markets. It has vast mineral wealth, low debts, and a well-educated workforce. It has always been among the world’s most culturally sophisticated and scientifically advanced societies. This was the first country to put a man into space. The Russia of oligarchs and gangsters is relatively new – underneath, it has always been a technical, advanced county. There is no reason why it should just be a resources-based economy – Russia’s engineers, scientists and designers are world class.
Russia’s workforce is far more educated than their Chinese, Indian or Brazilian equivalents. As entrepreneurs create new companies, they could be world-beaters. The economy could develop rapidly. As Morgan Stanley points out, this could happen “over the next ten to 15 years.
Russia’s level of education makes it a credible competitor in a range of sectors, including pharma, composite materials, nanotechnology, chemicals, ICT, aircraft, space and nuclear.” Even its terrible demographics have turned around.
Following the Soviet Union’s collapse, the Russian birth rate dropped dramatically, way below the level needed to keep the population stable. In the last three years, it has improved dramatically. It has not quite got back to replacement level, but it looks to have escaped the demographic death trap, where a declining population, and many old people, make it hard for a nation to sustain itself, let alone grow.
The fertility rate hit a low of 8.7 births per 1,000 people in 2000 but is now at 12.6, almost 50% higher (helped by a $9,000 bonus for the second and third child per family). That’s a lot better than China, where, due to the one-child policy, the population will soon start to age rapidly.
Russia’s growth rates are the envy of most countries. It grew by 4% last year and is forecast to expand by another 2.6% for 2012. It will be hit by the eurozone slow down, but is still growing much faster than most other countries. Debt levels are remarkably low: government debt is just 11% of GDP, and consumer debt just 10% of GDP – a far cry from the mountains of debt elsewhere. With the oil price above $120, debt won’t be rising anytime soon – the government will have a lot of spare money to spend.
Investment bank Renaissance Capital says that Russia’s GDP per capita is about $15,000 on a purchasing power parity basis. At those levels of reasonable affluence, very few countries have ever slipped back into dictatorship. It is far more likely that it will make the transition from being a weak to a strong democracy.
If Putin does step aside, in 2013 or 2014, European-style centre right and centre left parties could emerge, and the country would look a lot more stable. None of that is reflected in the stockmarket. Russian stocks trade on less than six times estimated earnings for 2012. Its fellow BRIC markets trade at double that.
There will be turbulence ahead. As it moves towards a more democratic and open society, there will be bumps in the road. But if it can make that transition – and everything suggests it can – it will be one of the world’s fastest-growing economies. And one of the best to invest in.
• This article was originally published in MoneyWeek magazine issue number 578 on 2 March 2012, and was available exclusively to magazine subscribers. To read all our subscriber-only articles right away, subscribe to MoneyWeek magazine.