With all eyes on Europe, we're missing the Russian parade

Investors, preoccupied with problems in the eurozone, are under-appreciating Russia’s new investment landscape where things are hotting up, writes BlackRock’s David Reid.

Russian prime minister Putin’s announcement that he was seeking a return to the Presidency left many political observers with a sense of deja vu. They would be forgiven for thinking that it was business as usual in a country where reform is popularly perceived to have gradually frozen over in recent years.

But those observers who follow the economy have started to recognise that business in Russia is steadily becoming less ‘usual’ and in fact an emerging driver of the reform that is so important to galvanising the economy.

The signs of this openness to foreign investment are not hard to spot. This year PepsiCo has been permitted to become the largest food and beverage manufacturer in the country through an acquisition, and Exxon has been invited into the strategic oil reserves of the Kara Sea. The US and the EU were finally persuaded to back Russia’s potential accession to the WTO, after 17 years of delays.

The Russian government has established a co-investment fund to promote FDI and has given large foreign companies access to ‘troubleshooters’ at the Ministry of Economic Development to help overcome local bureaucratic hurdles. Russia has even leapfrogged Brazil in the World Bank’s ‘Doing Business’ survey thanks to a series of reforms cutting red tape on foreign trade.

Join the dots and the picture you end up with is that Russia’s investment climate is slowly thawing into a new spring.

Driving forward

So why are we seeing this ‘economic perestroika’? The fact is that the 2008 credit crunch changed the country in ways that are only just beginning to be felt. Russia, like any developing country, needs capital to be invested in order to develop. Prior to the crisis the growing source of that capital was the income gained from natural resources, much of which entered the economy through government spending or government corporations. This did not incentivise a strong investment climate for foreign capital – it was largely surplus to requirements and oil revenues are a less demanding option to turn to.

But the crisis demonstrated to the political elite that this economic model, whilst vastly successful in the preceding decade, was no longer sustainable. Russia’s growth and funding suffered with the volatility of the oil price. Russia was saved by the fact that it had run its economy very prudently and amassed the third largest reserves of any country globally, but reserves cannot provide a long-term growth model.

Foreign investment

The government is starting to embrace foreign investment because it can supply two vital things – financial fuel to help drive the economy forward and also the management and technological skills to help modernise the country’s industry.

Putin is well aware that his critics are conjuring up images of Brezhnev-era stagnation, and that is why in his recent speech to investors at a flagship conference he stated that ‘…changes are needed… …the mission of the state is to lend support to entrepreneurs when needed and remove barriers that stand in their way…’. He then went on to outline many pro-business ideas that would form policy in his next government.