President Vladimir Putin is battling investor skepticism to woo foreign executives descending on his hometown today as Russia’s economy faces a risk of recession and a crackdown on critics scares off top intellectuals.
This year’s St. Petersburg International Economic Forum, which will host the likes of German Chancellor Angela Merkel and Rex Tillerson, the head of Exxon Mobil Corp. (XOM:US), kicks off amid Russia’s slowest growth in more than a decade, excluding a 2009 recession. Economist Sergei Guriev, who was due to host a panel, fled to Paris in April fearing prosecution over ties to opposition leader Alexey Navalny, himself on trial in a fraud case he says is politically motivated.
“Guriev’s escape from the country is bad for the market,” Dmitry Malykhin, who oversees $30 million in Russian assets as chief investment adviser at Moscow-based DV Advisers LLC, said by e-mail. “It reinforces investors’ perception of Russian political institutions as weak and the rule of law as shaky.”
Sluggish investment is hampering Russia’s growth, the International Monetary Fund said this week, while Economy Minister Andrei Belousov warned in April of a new recession without stimulus measures. Stocks, which are underperforming peers this year and entered a bear market on June 6, endured their biggest outflows since 2011 last week.
The dollar-denominated RTS index is down 17.7 percent in 2013, compared with a 13.2 percent decline for the MSCI Emerging Markets Index. It fell 20 percent from its January peak on June 5, entering a bear market on concern that falling oil prices may curb growth in the world’s biggest energy exporter. The ruble-denominated Micex has lost 11.6 percent this year.
The declines have been exacerbated by the U.S. Federal Reserve, whose chairman, Ben S. Bernanke, roiled markets yesterday by saying that monetary stimulus may be scaled back should risks to the American economy abate. Russian assets took in less foreign cash than other emerging markets and shouldn’t suffer as much during the current market volatility, Finance Minister Anton Siluanov said today in St. Petersburg.
Outflows from Russian equity funds in the week to June 12 were $524 million, the most since October 2011 and the biggest exodus among emerging markets alongside Brazil, according to a June 14 note from OAO Sberbank (SBER), citing EPFR Global data. Stocks are the cheapest among 21 emerging markets tracked by Bloomberg, with the Micex (INDEXCF) trading at 4.8 times estimated earnings, about half the ratio for the MSCI Emerging Markets Index.
“The problem for Russia from an investor’s angle is that it is very rarely regarded as a long-term investment destination,” Sergey Dergachev, who helps oversee about $9 billion at Union Investment Privatfonds in Frankfurt, said by e-mail. “Bureaucracy, corruption and investor rights -- Russia is still very poor here.”
To be sure, Russia continues to attract foreign capital, particularly in the energy sphere. As well as Exxon, the heads of oil companies BP Plc (BP/), ConocoPhillips (COP:US), Statoil ASA (STL), Royal Dutch Shell Plc (RDSA), Eni SpA (ENI) and Chevron Corp. (CVX:US) are all attending the annual forum, along with the CEOs of ABB Ltd. (ABBN), General Electric Co. (GE:US), Alstom Group, Metro AG (MEO), Siemens AG (SIE) and Unilever NV. (UNA)
Merkel, whose country is Russia’s largest European trading partner, is a guest of honor along with Dutch Prime Minister Mark Rutte.
Putin, 60, has sought to rein in dissent since his 2012 return to the presidency sparked the biggest demonstrations of his political career. Some protesters have been imprisoned after a rally last May turned violent, while non-government organizations that get funding from abroad are being threatened with fines or possible closing unless they declare themselves foreign agents.
Guriev, who’s also advised the government on economic policy, left for Paris after prosecutors questioned him over the defunct oil company Yukos, whose former billionaire owner Mikhail Khodorkovsky remains in prison. Garry Kasparov, the former chess world champion turned Putin critic, said this month that he’s left Russia and won’t return for fear of being detained.
“Relying on the rule of law in Russia is risky,” Guriev, 41, said June 14 by e-mail from the French capital. The business climate is “not great judging by market valuations and capital outflow.”
Russia was the lowest-ranked Group of Eight nation in Berlin-based Transparency International 2012 Corruption Perceptions Index. Capital flight exceeded $54 billion last year and reached almost $26 billion in the first three months of 2013, central bank data show. Outflows in 2012 were “abnormally high,” outgoing central bank Chairman Sergey Ignatiev said yesterday.
“Very few” international investors will attend this year’s event in St. Petersburg, according to Clemens Grafe, chief economist for Russia at Goldman Sachs (GS:US) Group Inc. Goldman Sachs’s Chief Executive Officer, Lloyd Blankfein, and Morgan Stanley (MS:US) CEO James P. Gorman, who came last year, aren’t among the participants this time.
“There are two camps in the government,” Grafe said June 11 by phone. “One camp believes in the market and the other believes firmly there should be closer control of the country’s resources. At the moment, it seems the latter is in ascendancy.”
State-owned companies accounted for almost half of Russia’s economic output in 2012, up from about 42 percent in 2008 and 38 percent in 2006, according to BNP Paribas SA (BNP)’s Moscow unit. Continuing that trend, state-run OAO Rosneft (ROSN), led by Putin ally Igor Sechin, bought BP’s Russian venture for $55 billion this year to become the world’s largest publicly traded oil producer by volume.
Russia is becoming increasingly dependent on commodities, failing to prepare for falling oil output in 20 years, according to the European Bank for Reconstruction and Development. Oil and natural gas account for about two-thirds of exports and about half of budget revenue.
Oil prices, which have rallied after dipping below $100 a barrel in April, may decline by about 5 percent a year in the medium term, according to Kingsmill Bond, chief strategist at state-run OAO Sberbank, Russia’s largest lender.
“While it’s not dramatic, it’s enough to be a concern for petro-states,” he said in an interview. Even though this should encourage the government to open up the economy, among top officials “there is the hope that oil prices will get better again.”
Gross domestic product rose 3.4 percent last year, the least since Putin, 60, came to power in 1999 except for 2009, when it plunged 7.8 percent in the wake of Lehman Brothers Holding Inc.’s demise. The economy expanded 1.6 percent from a year earlier in the first three months of 2013, decelerating for a fifth quarter as the euro-area recession curbs exports and prompts companies to cut investment.
GDP will rise 2.4 percent this year, about half the government’s medium-term target of 5 percent, the Economy Ministry predicts. Against this backdrop, Guriev’s departure is “particularly damaging,” according to Tim Ash, head of emerging-market research at Standard Bank Group Ltd. in London.
“Bright people like Guriev leaving is not very encouraging,” he said by phone. “First Putin needs to persuade his own people to stay, forget about the foreigners.”
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