Conference Presentation, Panel
Russia: A Riddle Wrapped in a Mystery Inside an Enigma?
Milken InstituteAlexander Kovaler, Erik Berglöf, Mark Garber, Steven Hellman, Maxim Oreshkin, Ernest Rudyak, Alex Kohl
- The Russian government expects sanctions to persist long-term, potentially viewing them as a protective measure to spur domestic investment and allow sectors like agriculture to develop without WTO constraints, with a "base case" of limited, half-step reforms continuing through the 2018 presidential elections.
- Economic growth projections of 3% to 5% are considered unlikely absent meaningful structural reforms, while inflation has slowed to 7% from 16% a year ago and GDP is on an upward trajectory, though growth may struggle without breaking capacity constraints.
- Businesses in the tradable sector are experiencing significant margin expansion, with agriculture operating margins rising from 7-8% to 20%, alongside a 30% increase in investment activity in the chemical industry last year.
- The economy is transitioning from a debt-reduction cycle to a new investment wave in tradable goods, supported by a real effective exchange rate aligned with fundamentals, a labor force cheaper than in Southeast Asia, and abundant domestic liquidity with near-zero deposit rates.
- Risks include the inability to achieve full economic potential without massive investment, the absence of excess capacity due to near-full employment and stagnant population growth, and institutional barriers such as the lack of an independent judiciary and free press.
- Political stability concerns, specifically the fear of regime change and a return to 1990s-style transitions, may deter systematic reforms, leading to a continuation of the current crisis phase which participants believe has reached its worst point.
- Export-oriented industries like titanium and potash are benefiting from sanctions, alongside opportunities for imported goods replacement in agriculture, while a new generation of educated Russians with different mentalities may shift from government roles to private business sectors.
- Future integration is expected to favor Europe over Asia due to market size and energy complementarities, even as the Kremlin seeks alternative capital from China and Japan and businesses anticipate the last major reshuffling of potential wealth.
- While the stock market has reached a new bottom, the economic outlook for 2 to 3 years is described as uncertain and potentially surprising, with specific challenges noted for attracting Western professionals due to ruble devaluation against the dollar.