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.
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