Amid the recent emerging-market turmoil, Russia’s economy is under scrutiny once again.
The ruble is down 5.5% year-to-date against the greenback. Experts warn the economy is too reliant on its natural-resource exports (i.e. oil and natural gas) and that it is showing symptoms of the Dutch disease.
Dutch disease is the phenomenon in which economies driven by commodities exports see their currencies get overvalued. That in turn hurts local businesses as imports get cheaper.
Meanwhile, the corporate sector is dominated by state-run companies, and the lack of privatization is a secular concern for Russia.
However, this isn’t the whole story.
It’s a PR problem
Matthias Kuhlmey, partner at HighTower Advisers, which has over $US20 billion in assets under management (AUM) thinks Russia suffers from a “PR issue,” and that “maybe the story is misunderstood.”
“Russia, even though it’s underperforming broadly in currency and stock markets, actually looks far more robust than any other emerging market,” Kuhlmey said.
“You look at the current account surplus, which is oil driven, but nevertheless [in surplus], external debt to GDP, and the federal budget is in good standing. I think when you compare this to other very heavily commodity dependent emerging markets, this is something that just needs to be portrayed to the world.”
In looking at Russia’s economy, Kuhlmey prefers to compare it to China as opposed to the other BRICs or emerging markets.
“When you go back in history to Russia, it is a massive consumer market. And this was basically oil money that was spent, and the Russian consumer was on top of the world,” Kuhlmey said. “And when you look at China it was the opposite story, everyone was waiting for the consumer, and growth was driven by government spending and infrastructure.”
New drilling techniques, which has triggered the shale energy boom in the U.S., is a big risk for Russia.
However, Kuhlmey believes Russia now has the ability and opportunity to shift its economy from being consumption-driven to one that’s more investment-driven. This means more infrastructure investment, which creates more opportunities for foreign direct investment (FDI).
One thing everyone forgets about Russia
Kuhlmey also pointed out that one of the biggest mistakes that people make in talking about Russia, is that they think of it as a capitalist economy that has always been around. The media doesn’t emphasise that the economy is still in its infancy.
“The best comparison I can draw in the last two years is Spain. We were very nervous about Spain, but in the 80s Spain was still emerging market, and the world needs to be reminded where these countries are coming from. And that being said Russia actually looks very good from an economic framework.
“I make reference again 14% external debt to GDP that’s an outstanding number that you hardly see in any of the developed economies. And even though the growth is driven by oil exports and oil revenues, it nevertheless creates a current account surplus that hardly any country operates on today. We need to be reminded that they are in the infancy stage and that they have managed to create not only a fiscal and financial framework, but Putin, as controversial as he may be, has brought Russia back on the map of world consideration.”
HighTower Advisors has about $US100,000 in Russia ETFs. HighTower itself doesn’t have a position on Russia, but Kuhlmey is neutral.
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