The cautious optimist

Date: 29 April 2010

Source: The Telegraph – Russia Now

At this year’s Russian Business Week in London, Troika Dialog chairman Ruben Vardanyan talked about problems in the economy, modernization and attracting the best people.

I’m optimistic in the short term. One year from now, we expect to see inflation and unemployment down, currency stable and growth of 5pc. In five years’ time, however, we will face increasing challenges. There will be a shortage of people; with more people reaching pension age, the pension system will be under strain; gas prices will fall if Shell continues to develop its current oil fields; and natural resources will become less crucial.

My major concern regarding Russia is that we are losing time to change, to become more ambitious, more open-minded, more creative, willing to take risk and be competitive on a worldwide scale. In the coming years, the main competitive advantage will not be natural resources but people. The country that provides people with the best living conditions, education system and benefits will win. In the 21st century, medicine, education, the creative and technological sectors will be the most important. If we want to keep our people and attract the best talent to compete on a global level, we are all responsible for creating such conditions and it is pointless to lay this responsibility solely on the government. The modernization program has been initiated by the government, but its success will largely depend on whether it can be managed efficiently.

I think it is a natural evolution process that has been experienced by several countries. As Troika Dialog points out in its monthly forecast, since 2004 the economic diversification has been primarily state-driven, with the state supporting a number of “national champions” which didn’t deliver impressive results. I do not doubt that in the next three years we will see parts of state companies privatized.

Russian capital markets are continuing to develop and have been subject to significant volatility. If you compare the market in Russia and China in 2000, 10 years on the return on securities in Russia is around 700pc and in China 170pc. Unfortunately, while the Chinese market grew steadily without any stress factors, in Russia it has been going up and down. Midsized investors really have to be patient and need to adopt a long-term investment horizon.

Hedge funds are responsible for creating turnover and volatility and the current community is clearly dominated by short-term investors. The main driver of market growth should come from local investments which are still quite small.

Judging from our experience in helping different companies invest in Russia, margins are higher here compared to China. More than 80pc of our beer industry is controlled by foreigners. The banking industry does not face any restrictions either. These industries are smaller than our natural resources industries and that is why people talk less about them, but there are plenty of success stories here that highlight the contribution of foreign investment.

This is the difference. The problem in Russia is that you have so many different interest groups and the rules of the game are less clear. So it is not really a question of a corrupted vs non-corrupted state, but rather making the rules clear.