Many assume the economy of the former Soviet Un ion is heav i l y dependent on the oil and gas industry but the country has been undergoing massive change and expansion in recent years. Speaking at Global Partnership’s summer investment club, Russian investors Prosperity Capital Management made the case that there are plenty of other reasons for investors to look to the region.
The former Soviet Union has enormous wealth and diversity of natural resources beyond oil and gas, they said, including metals, minerals and agriculture. At a time when commodities are becoming scarcer, harder and more costly to extract, Russia has what countries like China need and as such will be a prime beneficiary of their expan-sion and resource demands. Sino-Russian trade has already gone from $20bn per annum in 2005 to an esti-mated $80bn for 2012 and Pros-perity managers believe that by 2015 this could even double again.
Outside of natural resources there have been other significant changes to the make-up of Russia’s economy. The country’s service sector, at around a third of national income, outstrips hydrocarbons in terms of scale and profitability. Meanwhile, the oil and gas sector in Russia in 2005 accounted for more than 40% of the country’s GDP whereas today it is closer to 17%, according to Prosperity’s statistics.
Growing wealth in the area has also led to increased discretionary domestic spend. According to Pros-perity in US dollar terms average wages in Russia are up 13 fold over the past 10 years. At the same time the country has high savings rates, at 18%, but a low basic rate of tax of 13%, bringing disposable incomes close to Western European levels. Consumers are also far less leveraged in Russia, around $800 per capita, while there is near 100% home ownership, in huge contrast to the west. “Low taxes and minimal debt interest mean Rus-sian consumers spend 65% of their incomes on retail.”
Highlighting the differences and scope for growth among Rus-sian companies exposed to retail consumption, Prosperity pointed out Russia is already a major retail market and is set to become the largest in Europe. “The top 10 food retailers have just 22% of the food market so there can be big consoli-dation gains.”
Russia today is a far different place to what it was in 1999, the group said. Yet market valuations remain on similar levels post the 2008 financial crisis. The Russian economy is in far better shape and although Prosperity admits corpo-rate governance remains an issue to watch, it too is much improved. “We would struggle to come up with another country in history that has undergone such a turnaround but it doesn’t get recognised.”
Accord i ng to Prosper it y ’s founding partner Mattias Westman: “Russia has been and continues to be one of the very best investment opportunities of my lifetime. The combination of rapidly growing company earnings on the one hand and the ongoing determination of so many to view Russia as a ‘basket case’ on the other means valuations remain extremely attractive.”
