Despite the political risks, Russia offers attractive investment opportunities. Putin's re-election is not expected to lead to radical reforms.
Over the weekend, to no one’s surprise, Vladimir Putin secured his 4th and final term as President, keeping him in power until 2024. With 99% of the votes counted Putin received 77% of the votes; a significant increase from the 63.6% he amassed in 2012. The voter turned out was 67% according to the official numbers, despite the calls for boycotts from the banned opposition parties. The election did not go without incidents, media reporting numerous cases of irregularities via ballot stuffing, forced voting and enticements.
What can we expect, now that President Putin is in his (most likely) final term as President? Relations with the West are at a low, further exacerbated by the recent diplomatic confrontation between the UK and Russia over the poisoning of a former Russian spy on British soil.
We have long talked about the need for Russia to reform and diversify its economy away from oil. This being his final term, it would in theory be the perfect opportunity for Putin to push through some of these much needed difficult reforms, such as pension reform or spending cuts in security. However, any radical changes are not in our base case scenario, as we believe that Putin will want to implement gradual reforms to ensure social stability. If nevertheless they do materialize, they would be positive for the country’s fiscal health.
As per Putin’s State of the Nation speech, economic goals for the country are to modernize infrastructure, increase non-commodity export by almost 50%, and provide a stable energy network as well as a high- quality internet network. Labor productivity should be increased by 5% a year. From a wellbeing perspective demographics should be improved, life expectancy increased, poverty levels halved. The state is set to increase spending on healthcare and to improve the healthcare system.
Another important question relates to the situation post 2024: who will take over the baton? We do not pretend to have a crystal ball allowing us to predict the future, but what we have seen is that over the last couple of years President Putin has been promoting and surrounding himself with a group of younger technocrats and business men. This is no coincidence. Putin seems to be preparing himself and Russia for the medium to longer term.
More changes from a political angle will materialize in the coming weeks, in the run-up to his inauguration in May. We expect that over this time a cabinet reshuffle should take place which could well give us a better glimpse into the political and economic future of Russia. One of the most interesting posts to look out for is that of the Prime Minister. One caveat is that the constitution could be altered, as we have seen in other countries, which would allow him to be President for life. This currently is not our base case scenario, and in recent interviews President Putin has hinted that this ought not to be the case.
Our fundamental Emerging Markets Equities strategies are overweight Russia. While we recognize the current political risks, we see tailwinds in the medium term as GDP growth recovers, underpinned by an improvement in domestic consumption and prudent fiscal and monetary policies. Russia boasts one of the lowest fiscal deficits in emerging markets, continues to have a current account surplus, and is currently experiencing record low inflation, which gives the Central bank ample room to continue cutting interest rates. Stabilizing oil prices provide additional support. Valuation remains attractive, as Russia is the cheapest emerging market and earnings revisions positive.
The Robeco Capital Growth Funds have not been registered under the United States Investment Company Act of 1940, as amended, nor or the United States Securities Act of 1933, as amended. None of the shares may be offered or sold, directly or indirectly in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act of 1933, as amended (the “Securities Act”)). Furthermore, Robeco Institutional Asset Management B.V. (Robeco) does not provide investment advisory services, or hold itself out as providing investment advisory services, in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act).
This website is intended for use only by non-U.S. Persons outside of the United States (within the meaning of Regulation S promulgated under the Securities Act who are professional investors, or professional fiduciaries representing such non-U.S. Person investors. By clicking “I Agree” on our website disclaimer and accessing the information on this website, including any subdomain thereof, you are certifying and agreeing to the following: (i) you have read, understood and agree to this disclaimer, (ii) you have informed yourself of any applicable legal restrictions and represent that by accessing the information contained on this website, you are not in violation of, and will not be causing Robeco or any of its affiliated entities or issuers to violate, any applicable laws and, as a result, you are legally authorized to access such information on behalf of yourself and any underlying investment advisory client, (iii) you understand and acknowledge that certain information presented herein relates to securities that have not been registered under the Securities Act, and may be offered or sold only outside the United States and only to, or for the account or benefit of, non-U.S. Persons (within the meaning of Regulation S under the Securities Act), (iv) you are, or are a discretionary investment adviser representing, a non-U.S. Person (within the meaning of Regulation S under the Securities Act) located outside of the United States and (v) you are, or are a discretionary investment adviser representing, a professional non-retail investor. Access to this website has been limited so that it shall not constitute directed selling efforts (as defined in Regulation S under the Securities Act) in the United States and so that it shall not be deemed to constitute Robeco holding itself out generally to the public in the U.S. as an investment adviser. Nothing contained herein constitutes an offer to sell securities or solicitation of an offer to purchase any securities in any jurisdiction. We reserve the right to deny access to any visitor, including, but not limited to, those visitors with IP addresses residing in the United States.
This website has been carefully prepared by Robeco. The information contained in this publication is based upon sources of information believed to be reliable. Robeco is not answerable for the accuracy or completeness of the facts, opinions, expectations and results referred to therein. Whilst every care has been taken in the preparation of this website, we do not accept any responsibility for damage of any kind resulting from incorrect or incomplete information. This website is subject to change without notice. The value of the investments may fluctuate. Past performance is no guarantee of future results. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. For investment professional use only. Not for use by the general public.