“Renaissance Capital has recommended investors to bet on Russia

“The Renaissance the Capital” recommends to the international investors to put to Russia, follows from a new review of the investment Bank for emerging markets (dated 7 June). Analysts of “Renaissance” under the leadership of the chief economist Charlie Robertson explain recommendation overweight (standby high potential) in Russia compared to other emerging markets the recovery of economic growth after the failure of 2014-2015, loan growth in the country and potential reforms.

The overweight rating is also assigned to the Czech Republic and Hungary, whereas the perspectives of Turkey, Greece, Persian Gulf countries, Poland, Egypt and South Africa are estimated worse.

“Renaissance Capital suggested that the allocation of investments among emerging markets, to look for the seven positive factors, including improved economic growth, increase Bank lending, improving sovereign credit ratings, undervalued or at least not too overvalued currency. It turns out that all the factors Russia looks attractive. Russia and Qatar — the only “history of improving growth in 2016 in EMEA, investment Bank analysts write. Chief economist of “Renaissance” in Russia and the CIS Oleg Kuzmin predicts in a baseline scenario (with oil at $45 per barrel) the decline of Russia’s GDP by 0.6% after falling by 3.7% in the previous year; if the oil will cost above $50, the economy will be in growth. Bank lending is growing at 7% in nominal terms, the ruble close to fair.

Robertson believes that Russia deserves to raise the sovereign credit rating noted in the review, although this is unlikely to happen in 2016.

Factor Kudrin

A separate factor, which urge to follow, the analysts of “Renaissance Capital”, is the potential of the reforms. They attribute this potential in Russia with the name of Alexei Kudrin, which is strengthened as an economic adviser to President Vladimir Putin. Parliamentary elections in September “can create a more competitive political struggle, but most campaign reforms are unlikely before the presidential election [in 2018] and will be possible only if we will adopt a new platform Alexei Kudrin,” — noted in the review.

In April Kudrin after several years of speculation about a possible return to power, became Chairman of the Board of the Centre for strategic developments (TSSR) as a result of Putin’s request to connect to the development of the strategy of development of Russia after 2018,” said Mr Kudrin himself. At the same time Kudrin headed the working group of the presidential Economic Council, not going more than two years. In may the economic Council chaired by Putin, decided that the old growth model has exhausted itself and we need new sources of growth. Kudrin said in his report to the Council stated the need for deep institutional and structural reforms, substantial reductions of state participation in business, achieve low inflation under the inflation targeting regime, raising the retirement age. “Implementation of key reforms, such as inflation targeting, the privatization of state-owned companies, as well as raising the retirement age, will allow us even more positive look at Russia”, — noted in the review “the Capital Renaissance”.

“Renaissance” also sees the potential for loosening of Western sanctions against Russia, although not included in their baseline scenario. “We, like everyone else, pledged that the sanctions would remain in force, but talking about it as about a source of positive risk for Russia is that they can be weakened. In our opinion, in view of the difference between the American and European sanctions, it is likely that European sanctions weaken,” — said Oleg Kuzmin. Investment Bank analysts pay attention to Putin’s scheduled meeting with European Commission President Jean-Claude Juncker in June at the St. Petersburg economic forum.

Kuzmin does not agree that “Renaissance Capital offers investors high expectations from Russia. “Last year we had a GDP forecast of minus 4%, and was negative 3.7 percent. For this year — minus 0.6%, slightly more optimistic than the others, but now consensus is starting to move towards us,” he says. With the ruble in “the Renaissance” was “extremely aggressive forecast” in the beginning of the year — 65 rubles, when the dollar was worth 85 RUB — “guess”, said Kuzmin.

Negative scenario “Renaissance Capital” (not itemized in detail) suggests that poor demographics will limit the pace of economic growth in Russia at a low level, and the geopolitical tensions and low growth will suppress investment. In Russia is declining working-age population. As written in the April review of Bank of America Merrill Lynch chief analyst of the Bank of Russia Vladimir Osakovsky, after the peak of 2006, the population of working age in Russia decreased by 5 million people. In the next five years, the Bank forecasts that the number of working age citizens will shrink rapidly — 1 million per year, against limited inflows of population belonging to the age cohorts younger than working age, and increase in the number of those who have reached retirement age. According to calculations of the Institute for economic policy Gaidar, the structural component of GDP growth in Russia is slowing down since 2005, when it exceeded 5%, and in 2015 amounted to only 1.5%, partly due to unfavourable demographic trends. Estimated IEP referred to by the same Kudrin at the presidential economic Council, to achieve growth rates of 4% (sustainable growth rate of the world average), the economy will need additional labor resources to 4.5 million people and an additional 40 trillion of investment in fixed assets in 2016-2018 (for comparison, in 2015, investments in fixed capital amounted to 14.6 trillion).