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27 June 2011, 10:00
Opening Address – Stephen Jennings


There are many familiar faces in the audience today, and since we saw each other in this hall one year ago the global economic outlook is unfolding largely according to our predictions and, not inconsequentially, according to the business model we at Renaissance have built.

I am referring to the transformation taking place, which is global in scale and scope, whereby the traditional financial centres and Western economic model are losing their preeminence, and there is a gravitational shift of business, capital and ideas towards emerging market economies, including Russia.

Economics, politics and geopolitics are being transformed by accelerating global change. Fast-growing economies, including Russia, are becoming the leaders of the new economic order. Russia is also one of the bridges linking these new super-economies.

Look no further than the IMF’s recent economic outlook, which predicts that the world economy will grow at about 4.5% a year in both 2011 and 2012, but with advanced economies growing at only 2.5%, while emerging and developing economies grow at a much higher 6.5%.

Why is this? Because in emerging marketing economies, unlike in advanced economies, the crisis left few lasting wounds. Their initial fiscal and financial positions were typically stronger, and the adverse effects of the crisis were more muted. High underlying growth and sound macroeconomic policies are making fiscal adjustment much easier. Exports have largely recovered, and whatever shortfall in external demand they experienced has typically been made up through increases in domestic demand. Capital outflows have turned into inflows, due to both better growth prospects and higher interest rates than in the advanced economies.

More fundamentally, the emerging markets continue to achieve profoundly superior productivity growth and, in most cases, benefit from vastly superior demographics.

What we at Renaissance Capital now see on a daily basis is the integration of the emerging markets, and its corollary – the partial disintermediation of the West. Russian, CIS, African and Latin American companies listing in Asia. Chinese, Kazakh, Indian, Brazilian and Russian companies undertaking numerous billion-dollar projects in Africa, and bringing large-scale holistic solutions to previously intractable infrastructure constraints. Indian and Chinese companies negotiating global scale upstream, processing and offtake agreements with Russian partners. Russian companies looking to invest in large downstream projects in Asia. Massive increases in inter-emerging-market trade flows – China’s trade with Africa, for example, has increased tenfold to $129bn over the past decade, considerably outstripping China’s overall trade growth.

This convergence and integration of emerging markets is a long-term structural process and the growth differential with developed markets will, if anything, increase. We should expect continued relatively high, and in some cases accelerating, GDP growth in these fast-growing regions, particularly in Africa and other so-called frontier markets.

We also expect significant periodic shocks to the global markets because of the deep structural problems in the West and Japan. In addition, the historic global reallocation of capital towards emerging markets will lead to new imbalances – asset bubbles, for example, in emerging markets – which may lead to even bigger dislocations in the global markets in the future. In other words, the corollary of accelerating change in the global economy is likely to be more frequent, and probably larger, global imbalances and adjustment shocks.


In our emerging market world, Russia – to bring us back to where we are today – may be no less volatile than the others. At the same time, Russia also has the potential to be the investment success story of the next 10 years, especially within its much-touted BRIC peer group.

Russia has transformed beyond all recognition over the past 20 years. Real sustainable growth started after the 1998 crisis and since then nearly any economic indicator you care to name has improved massively.

  • Russians are now the wealthiest of the BRIC countries.
  • Government debt has fallen to one of the lowest levels in the world.
  • Reserves went from $600bn to a low of $340bn during the 2008 crisis, but within 18 months, they recovered almost fully.
  • In the decade to 1 January 2010, all the major Western stock market indices lost money – the UK and the US were both down more than 20%. In the same decade almost all the EM markets were up…and by triple digits. Russia was the best-performing in the world of all the significant markets, up 727%, perhaps the most objective measure of the extent to which Russia exceeds expectations.
  • Among country-specific funds, Russia did even better: Specialist Russian funds ended the decade as the 1st, 2nd, 3rd, 4th and 6th best performing funds in the world, with the very best returning over 3,000%, according to Morningstar. So much for Russia’s dismal investment returns.
  • Russia’s per-capita growth is high relative to the other BRICS – up $8,000 since 2000, vs $7,000 in Brazil, $3,500 in China and $1,000 in India.

So why is it that since Russia emerged from the debris of the Soviet Union 20 years ago, most Western commentary has cast it as a dark and dangerous place?

Professor Daniel Treisman from the University of California, who is with us here today, answers this question with remarkable clarity in his new book, The Return.

Observers have viewed Russia from two main standpoints. First, Russia’s political and economic orders are measured against those of the developed capitalist democracies of Western Europe and North America. Compared to Germany or the US, Russia’s politics look undemocratic, its economy unstable, its bureaucracy venal, its judiciary insufficiently independent, and its protection of human rights deplorable.

The second reference point is the country’s past. Russia’s current realities are seen as continuing traditions rooted in its communist and pre-revolutionary history. Thus, Moscow is assumed to harbor imperial ambitions that cause it to seek to dominate neighboring states and expand into Eastern Europe. Russia’s corruption is considered to be endemic and inescapable.

Despite their popularity, these perspectives are not very useful for understanding Russia today or for reasoning about its future. They give a misleading sense of stasis and blind the observer to the complex, multi-dimensional change that has occurred during the past two decades.

The real story, as Professor Treisman points out, is revealed when you compare Russia with other countries with similar levels of economic development.

Let’s take the chief perceptions, or misperceptions, about Russia among international investors and commentators today:

  • The economy:In recent years, Russia’s GDP per capita, adjusted for purchasing power has averaged about $13,400. This is close to that of Argentina, Latvia, Mexico, and Malaysia – countries that tend to be turbulent, vulnerable to swings in international prices and investor sentiment. Their currencies come under pressure and sometimes crash. Income inequality is often high. Officials intervene, and it is not uncommon for the state to expropriate foreign or domestic private investors. Clearly, Russia fits right in. In late 1998, the rouble’s value plunged by more than 60 percent, causing many to despair of the country’s prospects. In fact, the drop was severe but not unusual. Between 1992 and 2007, 48 countries had years in which their currency fell by at least 50% against the dollar.
  • Oligarchs:Russia is infamous for its oligarchs and crony capitalism. But concentrated ownership and flamboyant, politically connected tycoons are found in just about all middle-income states. It is not a Russian who regularly tops the world’s rich lists, but Mexico’s Carlos Slim.
  • The use of law enforcement to “raid” companies has become notorious. But such activities are not unique to Russia. In Argentina under Presidents Nestor and then Cristina Kirchner, pressuring investors to sell out to politically connected insiders goes by the name of “Argentinisation.” In Turkey, huge tax-related fines have been imposed on media groups that happen to be opposed to the governing AKP. Similar activity was seen in South Korea just ten years ago when owners of the three largest newspapers were arrested and held in solitary confinement while their media groups were forced to pay multi-million-dollar fines.
  • Corruption:Corruption in Russia is a problem. Among middle-income countries, that makes it the rule, not the exception. The most credible cross-national indicator comes from surveys that ask respondents whether during the previous year they or a family member has been expected to pay a bribe to a public official. Transparency International’s Global Corruption Barometer Survey in 2010 found that, among Russians who had come in contact with public service providers, 26% had been expected to pay a bribe. That was slightly more than in Hungary and Chile, but less than in Romania, Mexico, and Turkey.
  • Politics:Politically, middle-income countries span a broad spectrum from dictatorships to the consolidated democracies of Chile and Poland. Most – like Russia – lie somewhere in between.

In all these respects, Russia today has converged with countries around its level of economic development. It has returned to the world, and to the norm. In this sense, Russia is quite normal.

So what happens next? After the stellar performance since 1998, there is a real concern today that the economy is on course for Brezhnevite stagnation. Excessive state intervention in the economy and crowding out of the private sector is holding Russia back. In banking, the lack of choice and the dominance of a small number of state banks means less diversity in funding sources. Money flows most easily to larger companies – which at least have the option of borrowing abroad – rather than the small and medium-sized enterprises that could diversify this economy. The lack of choice for borrowers makes it easy for lenders to allow non-profit motives to determine the allocation of lending.

Excessive state interference is not just a banking story. The 2010 corruption perception index published by Transparency International saw Russia’s rating fall from 2.2 to 2.1 on a scale of 0.0 (highly corrupt) to 10.0 (very clean), which was enough to rank Russia 154th out of 178 countries, between Papua New Guinea and Tajikistan. This low ranking was in part due to hostile practices, including stifling business regulation and insufficient protection of minority rights. The poor quality of the Russian judiciary and lack of independence and integrity of government institutions undermine confidence in property rights and the business environment. It leads to an unending supply of headline stories about government corporate abuse that have contributed to the overall view of Russia losing against other emerging market economies in the global competition to attract foreign investment.

Russia's fundamental weakness is that it finds it virtually impossible to build high-quality transparent institutions. This is arguably a direct consequence of the type of political regime Russia has today.

These problems would be challenging for any country but in Russia they coincide with a deterioration in the fiscal deficit, which, while still remarkably strong by developed market standards, is worrying. The budget might only balance at an oil price of $115 a barrel. In a world where the developed economies are themselves stagnant and the IEA attempts to devalue the oil price like the Fed aims to devalue the dollar, Russia is at risk of running not just a fiscal deficit but also a current account deficit within a few years.

Some welcome reforms, which are highly likely after next year’s presidential election, will help address this. Russia is already enacting an ambitious privatisation agenda (and perhaps when it has finished, it could head to Athens and help Greece do the same). Minority stakes are being sold in state champions, and President Medvedev hinted earlier this month that even majority stakes in these companies might be on offer. It may surprise you, but as Professor Treisman notes in his book, President Putin suggested the very same in April 2008. Of course, Mr. Putin’s sense of market timing was not ideal. But the goal has been constant and when implemented will foster competition and productivity as well as greater respect for minority investors.

Second, WTO entry has now seemingly been endorsed by all the major actors, President Medvedev, the US, the EU and Prime Minister Putin. More consistent regulation, better protection for investors and a more open economy should be the result.

Third, Moscow’s determination to become a leading international financial centre is likely to pave the way for improvements in the capital market. Burdensome local requirements have prevented non-residents from investing in the OFZ market, but the need to finance the fiscal deficit is leading to many improvements. MICEX is planning to curb the requirement to trade bonds via local brokers, to merge the two settlement houses, to use only one account for trading on different markets from the end of 2011, and – most ambitiously – to make the OFZ market Euroclearable.

So, as India actively protects even its retail sector and prohibits foreigners from investing in its local debt market, while China’s currency remains only partially convertible, and Brazil is doing as much as possible to impede foreign portfolio flows, Russia is opening up strategic sectors to foreign investors, allowing the rouble to float ever more freely and making it easier to invest in the local debt markets.

Furthermore, we expect the Winter Olympics in 2014 and World Cup in 2018 to boost infrastructure spending and help encourage a further opening up of Russia to the outside world. Improved visa regimes between Europe and Russia are planned and a welcome sign of Russia’s normalisation.

These reforms are probably achievable without a major change in the overall style of government, let alone a complete regime change. Moreover, given the considerable disquiet within Russia’s political elite, and increasingling across the broader electorate, regarding Russia’s current economic performance, I believe that the package of measures I have just outlined represents a highly plausible post-presidential election scenario for Russia.

These measures should be enough in themselves to ensure Russia grows at a 4-5% pace, perhaps without the extreme volatility seen in recent years. This might be classed a successful outcome given the obstacles I noted earlier. After all, Brazil is widely considered a success after growing at an average 3.9% over 2002-2010.

Yet we believe Russia can, and eventually will achieve far better than this. More fundamental reforms are plausible, and are very far from priced in.

Our research team released a report last week that has set Moscow and a few other global capitals buzzing. The report examined the political development of 150 countries over 60 years and showed that rising wealth levels are very strongly correlated with eventual shifts to democracy. To their surprise, they found there is a nearly 30% chance each year that Russia now becomes a strong democracy. Russia already has a sound constitution, elections that politicians take so seriously that the fiscal position worsens every four years, as well as opposition newspapers and radio stations (even those owned by Gazprom). It is not hard to imagine a scenario in which a more demanding middle class gets the political change that is normal at this wealth level. In fact, it is harder to find the counter-examples where this does not happen. Russia is not a city-state like Singapore, nor a hereditary monarchy with barely 100 years of history like the Gulf states. And even these countries have faced tests this year – with Singapore’s opposition capturing more seats than ever, and unrest in the Gulf.  

Political change and greater political competition will unleash Russia’s full potential. A confident middle class will demand a stronger, more independent judiciary. That in itself will allow improvements in the business climate and the relationship between government and the private sector. A government that served the people will be more interested in fostering greater competition in the economy, and bringing down prices, rather than crowding out the private sector and allowing inefficiencies in the system to fester.

Full political competition will also clear the way for transparent, high-quality institutions and dramatically reducing the scope for corruption. Accordingly, the next stage of Russia’s political development has the potential to unleash massive gains across all areas of the economy as well as in the quality of the health, education and welfare systems. The diversity and stability of the economy will also benefit enormously. Needless to say, none of this potential is priced into the Russian market today.

No doubt many in this audience regard these predications as self-serving or naïve, optimistic crystal-ball gazing. In fact, they are entirely consistent with the scale and pace of change we have witnessed in Russia and across emerging markets generally over recent decades.

After 20 years of participating in this extraordinary change, I am still astounded at how many commentators analyse long-term opportunities through the prism of short-term events and circumstances.

Whether we are talking about political evolution in Russia or economic development in Africa, there continues to be a huge overemphasis of current difficulties and constraints together with vast under appreciation of the pace and magnitude of modernisation and structural change.

  Russia has considerably and consistently exceeded consensus expectations over the past 20 years; I predict that it will continue to do so over the next decade and beyond. In particular, among the BRIC countries, Russia has the greatest potential and likelihood of outperformance over the next decade.

We look forward to exploring these and other themes with you over the next two days, and discussing concrete opportunities that will no doubt play a role in the continued development of Russia and its capital market.

Thank you.