Russian small businesses are thriving and agricultural exports are set to overtake imports
Paul Goncharoff is Chairman, Disciplinary Committee, National Association of Corporate Directors, Russia
“That which seems the height of absurdity in one generation often becomes the height of wisdom in another”. Adlai E. Stevenson
Living in today’s excitingly uncertain world of Brexit, Trump, National Interest, Italian, French and German elections we find Russia nicely situated within what are called the emerging markets. Assuming the price of oil holds at current $50+/- levels, Russia’s economic rebound in 2017 should be secure, with growth exceeding most “expert” forecasts.
On the financial front Russia is perhaps more self-sufficient and resilient than many of the BRICS given its current account surplus and the hellish “new normal” challenges Russian companies have learned to overcome in operating, expanding and accessing international funding since 2014.
The country has survived and passed through sanctions, two years of recession, $35 dollar oil, and largely undeserved geopolitical Russia-bashing by globalization-enamored loonies. It is therefore gratifying to see that in spite of the negative noises and demonization Russian securities have seen millions in fresh new dollar and Euro inflows since the New Year, according EPFR Global in the US. There is a sensible saying when looking for the truth in any mystery and it is “follow the money”.
Russia’s stock market (MOEX) has shown solid returns as the economic recovery takes hold. Investors who have made the decision to enter Russia these past two years should not only remain invested, but should probably increase their involvement more than the general emerging markets average. The ruble has support, real wages having turned positive, the central bank is sane, and further rate cuts are likely to come in 2017, which in turn should feed through to a rebound in stronger, more confident consumer demand and consumption.
Emerging markets as a whole rose in 2016. Simply as a comparative example using the Emerging Markets exchange-traded fund (EEM) as a proxy, emerging markets returned 10.87 percent last year, while the VanEck Vectors Russia ETF, the major Russia oriented ETF covering major listings, delivered returns of 47.23 percent in 2016. That showing made Russia one of the top three performers among all the emerging markets.
How far can this grow? Based on data collected through OPKO Russian Market Partners Russian equities are trading at PER 6.4 times forward earnings, about half the 11.4 PER applied to all emerging market equities. Russia has traditionally been low due to the “Russia risk” fiction, but this is a big discount (almost 7 times) its 10-year average. The so-called “Russia discount” persists, mostly due to a predisposition in the US and EU to view Russia through their nationally applicable prisms and not for its value as an objectively viable investment destination based on its own merits and national interests.
What many foreign investors overlook while fixated on the large index issues are the many small-to- medium enterprises that make up a significant slice of the Russian market. If one were looking for energetic price action and more leverage, then it would be worth digging into the small cap Russian index (and the individual component companies) which delivered returns of over 100% in 2016. The Market Vectors small cap Russia exchange traded fund (RSXJ) is up 8.34 percent since January 2017. It is up 140 percent over these past 12 months reflecting the non-commodity and non-financial sector in Russia.
While oil and gas are at the foundation of Russia’s economy, agriculture, R&D, industry and manufacturing are all making increasingly muscular long-term changes by carving out ever-larger pieces of the economic pie as evidenced in the above returns.
Last month, Russian industrial output rose 3.2% year over year in December 2016 after a 2.7% annual increase in November, which beat market expectations twice. For a third consecutive month now, industrial output grew with Russian manufacturing posting a solid 2.6% yearly gain in 2016 at a time when quarterly GDP was just starting to climb over zero.
This year Russia will show not only an increase in grain and vegetable oil exports, but it also will enter global markets with new products such as pork, poultry, potatoes, sugar and so on. In 2Q, 2017 agricultural exports look to overtake imports, making Russia a net exporter for the first time. The Russian government has clearly told farmers that they should not look for any more support than what has been set out in the budget already. Furthermore, they should not expect any quick resolutions of anti-Russia sanctions, and should continue using trade sanction restrictions to their advantage at this current effective sustainable pace.
Among current political and trade relationship shifts China has now become the top user of Russian food products as of the tail end of 2016. Russia has every opportunity now to become one of China’s key food suppliers along with the US, Brazil, Australia, Thailand and others. The ongoing diversification and growth of various products from Russia are a key factor that further ensures this development. China’s interest is strongly oriented towards buying Russian meat products. Russian pork has already arrived on the Chinese market this year, with poultry and beef planned by 2019.
In conclusion, it would be a positive boon if the Trump administration and the Putin administration developed a sane and normal relationship. However, if such is not to be and the current geopolitical impasse drags on, then Russia will nevertheless continue to progress and grow with its own vision and values. Personally, I am of the opinion that this geopolitical theater of the absurd has dragged on long enough, and now that the causative lunatic fringe is hopefully being marginalized or, as in the USA, no longer in power, it is time to do business.
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