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Investors are more concerned about the price of oil, rather than the protests

March 2012

On March 23rd, 2012 at the conference “Euro-Atlantic Security Community: Myth or Reality?” (organized by the Russian International Affairs Council), President Dmitri Medvedev stated that “one has to admit that Western businesses are starting to feel a lot more comfortable in Russia or at least, the rules of the game are becoming more clear for them.
petrodollars

Actually, the presidential election (which took place on March 4th of this year) should have calmed investors down. Naturally, investors are weighing the risks of doing business in Russia and the recent wave of protests after the December parliamentary elections did not exactly make investors feel at ease. Russia is undergoing some turbulent times. Last autumn, hardly anyone doubted the fact that the “rock of stability”, Vladimir Putin, would return to the Kremlin for the next six years, but by December this did not seem so obvious.

Investors were quick to act. According to the Bank of Russia, in 2011 capital outflow from Russia exceeded 84 billion dollars. Nikolai Podlevskikh, head of the analytic department of “Zerich Capital Management” in Russia, claims that “this capital outflow can be attributed mostly to the great degree of uncertainty during the presidential campaign”.

Investors are not concerned about protests

Nevertheless, the majority of Russians voted for the party in power “United Russia” and Vladimir Putin for president, i.e. for stability.

Theoretically, this choice will make investors more confident that their current contacts and contracts will not be tampered with. Yaroslav Lisovolik, the head economist at Deutsche Bank in Russia, believes that “the factor of political uncertainty is now on the back burner”. Yulia Tseplyaeva, head economist for BNP in Russia and the CSI countries, solidifies this opinion by stating that “foreign businessmen are not bothered by the surge of protests, but rather are expecting a continuation of the policies they have seen in the past”.

Theoretically, Vladimir Putin’s victory should reaffirm the status-quo for investors; their contracts and other contacts will in no shape or form be violated

Foreigners are more accustomed to protests of the opposition. Tseplyaeva clarifies that “the demonstrations of the opposition after the elections is nothing compared to what regularly occurs in democratic countries. This is something unique and new for Russia, but these types of things happen all the time abroad. Russia’s “political activeness” seems a bit weak and lethargic for foreign investors. According to them, we are not up to par in this sense”.

National Risks

Experts pay careful attention to two Russian internal risks: high level of corruption and ever-changing tax regulations.

Yaroslav Lisovolik from Deutsche Bank asserts that “one of the biggest fears for those who invest in Russia is tax regulations, in particular, the debates about possible amendments to tax code in the oil and gas sectors

The government has decided to significantly increase the mineral production tax for gas (this will come into effect in 2013). The cabinet of ministers is now discussing how much this tax rate will rise. “This fact has made investors feel a great deal of uncertainty. Although there was hope that the tax code in this sphere would stabilize, it is evident that these talks damper the overall outlook for the future”, noted Lisovolik.

Besides that, ministers cannot seem to agree on the amount of insurance premiums and possibly getting rid of these premiums. The government may have to resort to the old practice of collecting a uniform social tax to cover the costs of the retirement and insurance (social and medical) systems.

Experts pay careful attention to two Russian internal risks: high level of corruption and ever-changing tax regulations

Many are now discussing the possibility of doing away with returning the value-added tax for exporters.

Every Tom, Dick and Harry is talking about corruption in Russia. Yulia Tseplyaeva from BNP Paribas adds that “big business is counting on the government to really start dealing with corruption in response to the recent protests. People are banking on this more and more. The main issue is that when corruption becomes a fixture of the system (like in Russia) then foreign businesses have a lot of difficulties because they do not really know what is going on”

The makeup of the new government, which is to be formed in May, also is making investors a bit anxious.

Nikolai Podlevskikh from “Zerich Capital Management” suggests that “many are in limbo because they are not clear about who is going to be in the new government and how its economic policy will change, but the next few months should set the record straight. Foreign markets will have a significant impact on the Russian domestic market. The state of the economy is up in the air and the fear that the world (and Russian) economy may slip into a new wave of the crisis is still pertinent”.

Podlevskikh’s predictions for the future are optimistic, he states that, “despite all of this, in May we probably will find that there will a new capital inflow”.

External factor

The main external factor that foreign investors take into consideration is the risk of a drop in the price of oil. Yaroslav Lisovolik affirms that “geopolitical uncertainty and other negative factors elevated the price of oil, but now there is a risk that the price of raw materials will decrease due to slowed growth in China and the burden these high prices have on the world economy”.

In conclusion, Nikolai Podlevskikh adds that “confidence in one’s financial situation may dramatically change with the price of oil”.

Mariya Selivanova
Economic observer RIA Novosti
Specially for Russian-survey.com RS