From: "James Beadle" <jamesdbeadle@yahoo.co.uk>
Subject: The Return of the Reformer?
Date: Wed, 22 Feb 2006
The Return of the Reformer?
Putin's final years could mark a return to pro-active market policies
By James Beadle,
jamesdbeadle@yahoo.co.uk
Optimists worldwide like to think that financial markets are leading indicators of economic trends. The evidence supporting this argument is mixed, but there can be little doubt that the Russian has, for most of the past year, been pricing a huge expectation of forward growth and stability. Recent events give hope that these expectations might be met.
Less than a year ago, the country was in the doghouse, Khodorkovsky was awaiting sentence, and even the most seasoned strategists saw little reason not to send the country into exile with him. But while the former Yukos boss has eight years to pay his dues, Russia served just one year of punishment (2004).
Driven by commodity prices and liquidity, Russian assets returned nearly 100% last year. No surprise then that they are the flavour of the month; everybody wants a piece, and while the odd bear might argue that such impressive returns are unsustainable, the government is beginning to show signs that it might deliver the reforms needed to support them.
Russia has always been a re-emergence play, with a large, well educated and technologically developed society. Now living standards are rebounding and businesses are eager to meet demand, indeed the government needs them to: It has hiked many state salaries this year, creating substantial inflationary pressure. A swift return of business confidence is needed to meet the demand that Fradkov has created.
The brevity of the government's Yukos castigation, then, is a relief and an opportunity. Putin has never ceased to talk pro-business and was even transparent over his plans to shut down the nation's most successful oil company. Yet words and deeds must ultimately move in tandem, so it's great to see his government finally re-engaging in reform and development orientated policies.
Three key government-level trends stand out for 2006: Utilities, state-company IPOs and regulatory reform.
The electricity sector remains a quagmire, totally bogged down in vested interests, regulatory and international trade issues. It is thoroughly unacceptable, but no surprise that the Putin administration buried its head in the sand for so long. Notably, this failure to engage has allowed local players to embed themselves in positions that they will now exploit.
So what has changed? The catalyst was undoubtedly the Moscow power-cut, which plunged parts of the capital into chaos and confusion last summer. Nothing stimulates presidential interest like a good bout of shame. Winter shortages and talk of a demand driven disaster added momentum, and now the utilities sector is rising from the dead.
Promises to make the sector attractive to domestic and foreign investors are easily made and delivery will be exceptionally tough, but for now we can rejoice that the issue is back on the table.
The second government theme is a key driver for the third: For some time the financial market regulators have argued against the shift toward western (ie British) capital markets, but it was not until state-run companies sought to raise capital that the reality of investor-base advantage sank in.
I am personally opposed to majority state ownership, seeing in it the dilution of economic benefit, issues of political abuse (ie turning off the gas to Ukraine) and huge scope for graft. However, restricted private =nvestment is better than none, and both Rosneft and Gazprom are coming from so far behind that the potential for improvement is undeniable. Be ware of skeletons in the closet though: While foreign litigation is unlikely to yield results, the government is simply ignoring pressure from Yukos investors in the hope that it will go away.
Which brings us onto regulation: Vyugin rarely surprises to the upside, but seems to have done so with his recent speech on development of the Russian capital market. Clearing facilities, insider trading rules, corporate governance, pension fund development - its all in there. Let's hope it comes through - if Putin has amassed the level of power he pertained to, and which he is so often criticised for misusing, there is every chance.
The first years of the Putin era were marked with break neck reform; the middle period has seen stagnation. Behind the scenes, and sometimes in full view of the audience, vested interests were marginalised. There are genuine fears that it was more a change of guard than a shift to an open and fair playing field, but either way the future looks warmer and sunnier than the recent past. Russian summers are slow coming, but all the more enjoyable for it.
Asset prices have clearly pre-empted these changes, so recent stellar returns are unlikely to repeat themselves, in fact the smart money is looking for a correction trigger. Fundamentally, Russia has entered a trickier period of emergence where it needs to develop the infrastructure and institutions to facilitate further growth. The good news is that it may have begun to do so.