Should investors bet on Russia amid the economic crisis?

November 21, 2015 08:01
Moscow's deputy mayor Marat Khusnullin (left) believes “every market is cyclical” but Andrei Sharonov, dean of the Skolkovo Moscow School of Management, said Russia did not learn its lesson from the previous crises. Photo: Brian Yeung

Contrary to industry forecasts that Russian recession will continue, President Vladimir Putin was quoted by Reuters last month saying that "Russia may have reached the peak of an economic crisis".

Last year Russia’s net capital outflow hit a record US$151.5 billion, more than double US$61 billion recorded in 2013.

According to central bank data, Russia’s net foreign direct investment in the first half of this year was only US$2.6 billion, the lowest since 2006.

Finance Minister Anton Siluanov cautioned that the country could run out of reserve funds by 2017.

Moscow, which receives over 50 percent of the country’s foreign direct investment, is aggressively seeking to attract foreign investment, especially from China.

Should investors take their chance and invest in Russia during recession?

Speaking at this year's Moscow Urban Forum, an international forum on urbanization issues, Marat Khusnullin, deputy mayor for urban development and construction, said the Russian capital offers “a rare buying opportunity” for investors, particularly in the real estate sector.

He cited the price of Moscow's premium office building as an example: the price per square meter was US$5,000 but now it costs only US$2,500 at the current exchange rate.

Despite the crashing ruble, falling oil prices and the ongoing recession, Khusnullin remains upbeat about the future of Russia based on the country’s past.

He recalls what happened during the past two crises, in 1998 and 2008. Russia's GDP increased almost 10 times from US$158 billion in 1999 to US$1.61 trillion in 2008, and property prices soared.

“Similar to many other markets, the price of real estate can be volatile. But you have to understand that every market is cyclical,” Khusnullin said.

While Khusnullin described the current recession as part of an economic cycle, Andrei Sharonov, dean of the Skolkovo Moscow School of Management and former deputy mayor for economic policy, noted that Russia did not learn its lesson from the two previous crises.

“When crisis came once again, we have recognized that the structure of our economy has been heavily relying on oil and gas as well as natural resources. But we never learned our lesson,” Sharonov said.

In 2013, for example, crude oil accounted for 68 percent of Russia’s total export revenue and 16.4 percent of the country’s GDP.

“In the past, we swore to diversify our economy and reinvest in other sectors during the crisis but the political will almost disappeared when the situation improved. This is where we are,” he said.

"If we look at the fundamental drivers of domestic demand, exports and investments, they may continue to fall along with oil prices,” he added.

Other analysts also share the view that the Russian economy has yet to reach the bottom.

OECD expects Russia’s GDP will shrink by 4 percent this year and will only start growing by 1.6 percent in 2017.

The European Commission also predicts Russia’s GDP will drop by 3.7 percent in 2015 and start picking up by 1 percent in 2017.

Still, some investors are placing their bets on Russia against the backdrop of economic recession.

Hong Kong-listed REX Global Entertainment, for instance, announced in October it would acquire a 64.9 percent stake in Russian smartphone company Yota Devices from Telconet Capital for US$100 million.

Vladislav Martynov, chief executive of Yota Devices, said now is a good time for China and Russia to work together as they “can complement each other”.

He said: “Russia has idea and technology. China has the capability to produce mass market products, the financial resources to help companies to go global and the market to make businesses viable.”

In addition to Chinese investment, Yota Devices announced a partnership with ZTE which will see the Chinese telecommunications company manufacturing the third generation of YotaPhone.

Martynov said China and Hong Kong as the top markets for Yota products, followed by Russia and Germany.

In last year’s APEC Summit in Beijing, Putin gave Chinese leader Xi Jinping a dual-screen YotaPhone 2 as a gift. Since then, YotaPhone is referred as "a symbol of Sino-Russian cooperation".

However, Yota Devices’ experience appears an exception instead of the rule. In the first half of this year, China’s foreign direct investment in Russia fell by 20 percent.

If the Russian economy has yet to reach the bottom, and most investors remain cool on the Russian market, should investors still bet on Russia?

Skolkovo’s Sharonov believes that Russia is still of “huge fundamental interest for global investors”.

“The country’s vast territory, abundant natural resources, and more importantly, geographical position in between the East and the West will make a difference in investors’ long-term view on Russia,” he said.

As a country that covers one-eighth of the Earth’s surface, Russia is the world’s largest producer of crude oil and the second-largest producer of dry natural gas.

Sharonov also said that rising temperatures as a result of global warming continue to melt the sea-ice and the Arctic Ocean gradually opens, making the notion of Northern Sea Route possible.

Russia, the largest Arctic country with the longest Arctic coastline, will have evident geographical advantages as a result, he said.

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Vladislav Martynov (left), chief executive of Yota Devices, attends this year’s Chinese-Russian Expo in Harbin, where he presented YotaPhone 2 to Chinese Vice Premier Wang Yang and Russian Deputy Prime Minister Dmitry Rogozin. Photo: Brian Yeung
The Russian government plans to expand Moscow's territory 2.5 times. Skolkovo (right) is located in the New Moscow area. Photo: Brian Yeung

an independent contributor and consultant