russia under putin – emerging market or stagnating...
TRANSCRIPT
Russia Under Putin – Emerging Market or Stagnating Regime?A presentation for ESADE Globalisation Lab
January 2012
Roland [email protected]+7 495 980 7373
2
• Russia today – the economics of the politics.
• Russia tomorrow – can Putin solve the failures of Putinism?
• The market – what are the implications?
Source: State Statistics Committee
3
The Fall and Rise of RussiaReal GDP, 1991 = 100
50
60
70
80
90
100
110
120
130
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E
–
One of two superpowers
Nigeria with snow... GDP per head USD1,352 (Egypt = USD1,450)
–Dynamic BRIC... GDP per head USD11,709 (Poland, 2007 = USD11,200)
50
60
70
80
90
100
110
120
130
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E
Source: State Statistics Committee
4
The Fall and Rise of RussiaReal GDP, 1991 = 100
Life expectancy at birth – 68.9 yearsMarriages – 8.6 per 1000 heads annuallySuicides – 26.5 per 100ths heads annuallyBirth rate – 1.7 children per woman
Life expectancy at birth – 67.1 yearsMarriages – 5.8 per 1000 heads annuallySuicides – 35.3 per 100ths heads annuallyBirth rate – 1.2 children per woman
Life expectancy at birth - 67.9 yearsMarriages – 8.3 per 1000 heads annuallySuicides – 27.1 per 1000 heads annuallyBirth rate – 1.5 children per woman
0
5 000
10 000
15 000
20 000
25 000
30 000
35 000
Spain EU27 Greece CEE Hungary Chile Poland Russia Brazil LatinAmerica
South Africa Bulgaria China India
28
31
4751 52
53 55
7277
91
134
Source: IMF, UN
5
GDP per head comparedGDP per head USD, and Rank out of 183, 2011
0
10
20
30
40
50
60
70
80
91
85
57 5037
51
Source: World Bank* Latest data available. Years vary, most in the last 5 years
6
Income inequality comparedGini coefficient – 100 = completely unequal; 0 = completely equal*. Rank is out of 91 countries.
Russia’s middle class
77
% of population in middle class
Source: State Statistics Service
11,7
18,8
26,9
34,5
40,4
45,9
05
101520253035404550
2005 2006 2007 2008 2009 2010% of population with monthly per capita income over 15 000 RUB
53%
39%
20%
9%
14%
55%
0%
10%
20%
30%
40%
50%
60%
US UK Brazil India China Russia
Source: UN Database
8
Well educatedPercentage of school leavers going on to tertiary education
The wiring of Russia
99
Number of people using the internet in Europe, mn
Source: Internet World Stats
0
10
20
30
40
50
60
70
Germany Russia UK France Turkey Italy Spain
Internet penetration, selected countries, %
Source: Internet World Stats
0
10
20
30
40
50
60
70
Brazil Russia India China Greece Spain Italy
Source: Internet World Stats
Growth in language use on the internet, 2000-2011, %
0
500
1000
1500
2000
2500
3000
Increase in internet penetration, % of population
Source: Internet World Statistics, ITU
0
5
10
15
20
25
30
35
40
45
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Russia World
Economics
10
Annual GDP growth by country
Source: IMF
Russia
-10.0
-5.0
0.0
5.0
10.0
15.0
China
IndiaBrazil
US
Russia is not an easy place to do business, and it also has a perception problem
• Russia is ranked as the 123rd worst place to do business on the planet
• It is also ranked as less transparent than Nigeria and Pakistan…
• ...yet Russia ranks alongside Chile and Hungary, and just behind Italy, in terms of actually paying a bribe
11
Inability to run a business
Group CountryGroup 1: 50% or more
Afghanistan, Cameroon, India, Iraq, Nigeria, Sierra Leone, Uganda
Group 2: Between 30 and 50%
Bolivia, Kenya, Lithuania, Mexico, Pakistan, Ukraine, Vietnam
Group 3: Between 20 and 30%
Chile, Hungary, Peru, Russia, Thailand, Turkey, Venezuela
Group 4: Between 6 and 20%
Argentina, Austria, China, Greece, Italy, Japan, Singapore, Taiwan
Group 5: Less than 6%
Austria, Brazil, Korea, Norway, UK, US
% Of respondents who report paying a bribe to any of nine different service providers in the past 12 months
Corruption Evidence Table
Source : Transparency International
Ease of Doing Business
Source : World Bank
Country Rank 2010 (123 out of 183)Singapore 1UK 4US 5Germany 22China 79Italy 80Pakistan 83Russia 123Brazil 127India 134Nigeria 137
Corruption Perception Index
Source : Transparency International
Country Rank 2010 (154 out of 178)New Zealand 1Switzerland 8UK 20US 22South Africa 54Brazil 69China 78India 87Nigeria 134Pakistan 143Russia 154DR Congo 164
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
0%
5%
10%
15%
20%
25%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Net available capacity at peak, MW (rhs) Reserve margin, % (lhs) Technically acceptable minimum reserve margin, % (lhs)
Search for a new paradigm – Aging Infrastructure
12
Source: UES, InterRAO, Russian Statistics Agency
Investment in Russia – reaching the end of Soviet legacy
0
10
20
30
40
50
60
70
China
Saud
i Ara
bia
Cana
da
Braz
il
South
Kor
ea
Indon
esia
Arge
ntina
Mexic
o
Germ
any
India
Unite
d Stat
es
Unite
d King
dom
South
Afric
a
Italy
Fran
ce
Japa
n
Turke
y
Russ
ia
Source: Gallup
13
Russians are most pessimistic about the future (2009 data)Gallup Personal Economy Index (mean scores based on adults' responses to four questions about the local job market,local economy, and personal living standards)
14
Russia is, in many ways, a typical country shifting from weak autocracy to weak democracy…
• A middle income economy
• A rapidly growing middle class
• Well educated
• Wired with information readily available.
• Suffered a sharp economic downturn
• An unresponsive government
• Deteriorating public goods.
• And naturally pessimistic.
The question today is whether Putin is capable of correcting the mistakes of Putinism.
Russia – Pregnant for political change.
15
• Russia today – the politics of the economics.
• Russia tomorrow – can Putin solve the failures of Putinism?
• The market – what are the implications?
Source: BP, CIA World Fact Book, Metal Bulletin
Resource endowment – Natural resources
% of Global Production and Reserves
Russia is the world’s Central Bank of resources…
• It has a quarter of the world’s conventional gas.
• It is the world’s biggest oil production, and it continues to rise, despite expectations to the contrary.
• It has 16% of the world’s water and one of the two last remaining major arable land sources.
• It has more timber than Brazil
Net hydrocarbon exports
Russia % of Global Russia % of GlobalOil (mn bpd)/(bn bbls) 9,6 12 80 7Gas (bcm)/(bn boe) 656,2 23 281 26Nickel (mt of Ni content) 320000 20 6600 10Platinum (ounces) 980 16 82137 12Palladium (ounces) 2668 41 308991 44Gold (mt) 162 7 3000 7Timber (mn cm)/(bn cm) 184 6 82 23Fresh water n.a. n.a. 4262 15Land mass n.a. n.a. 17075 11
Production Reserves
-600
-400
-200
0
200
400
600
Russ
ia
Saud
i Ara
bia
Norw
ay
Austr
alia
Indon
esia
Cana
da
Nige
ria
Qatar
Vene
zuela
Kaza
khsta
n
Libya
UAE
Mexic
o
India
China US
Millio
n to
nnes
of o
il equ
ivalen
t
The equity market produces return, with volatility.
17
Source: Bloomberg
Indices Levels Compared (All Rebased to 100 on 9/1/1995)
0
500
1000
1500
2000
2500
3000
RTS S&P500 MSCI EM MSCI China MSCI Brazil
Source: Verno Capital, Russian Statistics Agency
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Russia’s Trade Turnover with Europe:2000: 66.3$bn, 48.4% of Total2010E: 298.8$bn, 49.5% of Total
Russia’s Trade Turnover with CIS:2000: 25.4$bn, 18.6% of Total2010: 82.4$bn, 13.7% of Total
Russia’s Trade Turnover with China:2000: 6.2$bn, 4.5% of Total2010: 58.0$bn, 9.6% of Total
Russia’s Trade Turnover with USA:2000: 7.3$bn, 5.4% of Total2010: 22.7$bn, 3.8% of Total
Russia in a geographic context
0.1
0.8
1.0
2.2
3.5 3.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1500-1820 1820-1900 1900-1950 1950-2008 2010-2016 2008-2050
Long-term, trends are in Russia’s favour
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Global growth, GDP per head very long term % change per annum
Source: Angus Maddison, IMF, Citigroup Global Economics, Buiter 2011
The underlying trends in demand for commodities are very strong
20
0
10
20
30
40
50
60
China India
Source: BP
Japan South Korea Taiwan Africa
Oil consumption per capita
21
Russia remains one of the least understood growth opportunitiesGDP of the top 20 largest economies globally, selected years, USD bn – forecasts from IMF September global outlook
Source: IMF World Economic Database, September 2011
Country 2000 Country 2003 Country 2005 Country 2008 Country 2009 Country 2010 Country 2012 Country 2014 Country 20161 USA 9951 USA 11142 USA 12623 USA 14292 USA 13939 USA 14527 USA 15495 USA 16623 USA 182512 Japan 4667 Japan 4229 Japan 4552 Japan 4880 Japan 50333 Germany 1892 Germany 2428 Germany 2771 Japan 5459 Japan 6126 Japan 6440 Japan 67834 UK 1481 UK 1863 UK 2283 Germany 3641 Germany 3307 Germany 3286 Germany 3708 Germany 3820 Germany 39295 France 1332 France 1797 France 2843 France 2632 France 2563 France 2889 France 30626
China 5878 China 7744 China 9560 China 11780China 4520 China 4991
China 2257China 1198 China 1641 France 2138 UK 2679 UK 2182 UK 2250 France 3268
7 Italy 1101 Italy 1510 Italy 1781 Italy 2307 Italy 2117 UK 2604 UK 2894 UK 32248 Canada 725 Spain 885 Canada 1134 Italy 2055 Italy 22889 Mexico 672 Canada 866 Spain 1132 Spain 1468
10 Mexico 700 Spain 1601 Canada 1338 Canada 1577 Italy 2364 Italy 247611 Spain 582 Korea 644 Mexico 849 Canada 1503 Canada 1826 Canada 1965 Canada 210612 Korea 533 Korea 845 Spain 1410 Spain 1575 Australia 1694 Australia 180813
Brazil 3373Brazil 2617 Brazil 2971
Brazil 2090Brazil 1601
Brazil 1655Brazil 642 Brazil 890
Brazil 556
India 1632 India 2477 India 3027India 2013
India 1265India 591 India 1251
India 476 India 809 Mexico 1094 Australia 989 Australia 1237 Australia 1572 Spain 1661 Spain 176414 Australia 401 Australia 543 Australia 1061 Mexico 879 Mexico 1034 Korea 1275 Korea 1465 Korea 168615 Netherlands 387 Netherlands 540 Australia 737 Korea 931 Korea 834 Korea 1014 Mexico 1242 Mexico 1369 Mexico 150516 Taiwan 326 Netherlands 640 Netherlands 875 Netherlands 796 Netherlands 781 Indonesia 936 Indonesia 1137 Indonesia 138217 Argentina 284 Switzerland 325 Turkey 483 Turkey 730 Turkey 614 Turkey 735 Netherlands 882 Turkey 949 Turkey 113318 Turkey 266 Sweden 315 Belgium 378 Poland 529 Indonesia 538 Indonesia 707 Turkey 802 Netherlands 922 Netherlands 96819
Russia 1661 Russia 2570 Russia 3088Russia 2117
Russia 1480Russia 1222
Russia 764
Russia 430
Russia 260 Belgium 312 Switzerland 372 Indonesia 511 Switzerland 492 Switzerland 528 Switzerland 727 Switzerland 745 Sweden 78420 Switzerland 250 Taiwan 311 Sweden 371 Belgium 507 Belgium 472 Poland 469 Sweden 630 Sweden 711 Taiwan 767
0
1 000
2 000
3 000
4 000
5 000
6 000
7 000
Greece USD 5Y CDS Portugal USD 5Y CDS Italy USD 5Y CDSIreland USD 5Y CDS Spain USD 5Y CDS France USD 5Y CDS
Source: Bloomberg
22
CDS spreads for Europe make 2008 look like a walk in the park.CDS spreads in Europe
23
What can Putin actually do?There will be two periods, pre-May inauguration and the first year of Putin’s presidency…
Tactics - Pre-May inauguration• Putin has repeatedly said that he will not make the mistakes of Gorbachev and liberalize quicklyNonetheless....• Free presidential elections, quite possibly with a second round• Better managed democracy• New faces promoted, old ones demoted• A public sector Khodorkovsky• A populist fiscal and monetary policy
Strategy - Post-May inauguration• The holy-grail of medium-term economic growth• The big infrastructure spend• Some increased accountability over government officials• Better management of state-owned companies• Another wave of reforms• Possibly capital controls
But in the end, whether Putin is successful or not depends as much on Berlin, OPEC and China as the Kremlin
24
Russia is clearly an integral and important member of the global community of fast growth economies…
• It is the global storehouse of natural resources
• It has a large and rapidly emerging middle class
• It is one of the world’s fastest growing dollar economies
• It has low government debt
• The economy is under-leveraged
• The private sector is dynamic and changing very rapidly
But, just like any other large fast growth economy, it also has its own, unique problems and challenges...
• As well as a relatively rich emerging economy, Russia is also the poorest of the European economies.
• Relative to many fast growth economies, Russia has a large and expensive ‘European’ set of social services
• The government is moving much slower than the private sector
• Russia is not in control of its economic future
• Russia lacks the institutional flexibility to adapt to changing domestic demands
• The middle class demands to be heard, making Russia in both the short term and the long term, inherently unstable.
Emerging Market or Stagnating Regime?
25
• Russia today – the politics of the economics.
• Russia tomorrow – can Putin solve the failures of Putinism?
• The market – what are the implications?
Equity Market – Big and Liquid
• Russia has a large and liquid equity market
• The top 2 most liquid stocks in EM are Russian
• However, it is more concentrated in energy than most of its peer group
26
Equity market – Breakdown by sector
Source: VTB Capital
0%10%20%30%40%50%60%70%80%90%
100%
China
Braz
il
India
Kore
a
Russ
ia
Taiw
an
SAR
Mala
ysia
Mex
ico
Indo
nesia
UtilitiesTelecomsITFinancialsHealth CareCons StaplesCons DiscIndustrialsMaterialsEnergy
Equity market capitalization compared, $trln
0 1 2 3 4 5
JapanChina
GermanyBrazilIndia
RussiaItaly
Spain
Source: Renaissance Capital
Equity Market Liquidity Compared
Source: Renaissance Capital
Company Daily Value Traded, $mn Market Cap, $bnSberbank of Russia 1153 79Gazprom OAO 1005 159Vale SA 859 182Petroleo Brasileiro SA 744 222Samsung Electronics Co Ltd 612 131Hy nix Semiconductor Inc 487 15China Mobile Ltd 434 198China Pacific Insurance Group Co Ltd 402 30Kia Motors Corp 381 21Industrial & Commercial Bank of China 370 234MMC Norilsk Nickel OJSC 259 59Lukoil OAO 220 54Rosneft Oil Co 214 89
Russian equities in context
27
Source: Thomson Reuters
Country P/E 2011 EPS Growth 2011, % P/E 2012 EPS Growth 2012, %Chile 15.8 5.1 13.6 16.4Hong Kong 13.0 21.4 13.9 6.3India 13.8 1.0 11.7 17.6Morocco 14.3 6.8 12.9 10.7Philippines 15.3 6.8 13.6 13.1Malaysia 15.4 11.9 13.4 14.8Indonesia 15.1 20.8 12.9 17.0United States 12.3 16.8 10.7 14.5Taiwan 14.0 -3.5 11.4 21.8Thailand 11.6 19.3 10.2 10.3South Africa 12.5 30.8 10.2 22.9China 10.0 14.7 8.7 15.3Poland 8.9 23.6 8.6 3.3EM 10.2 13.6 9.0 13.5Peru 11.0 37.6 9.8 5.3Turkey 9.1 -3.7 8.1 13.3Korea 9.1 18.7 8.1 12.5Hungary 7.7 16.2 6.6 17.8United Kingdom 9.6 17.0 8.7 11.2Israel 8.6 11.4 7.8 9.7Argentina 8.5 16.8 7.3 16.3Brazil 10.3 10.7 9.5 8.4Egypt 9.8 12.0 7.8 25.3Lebanon 7.8 9.0 7.1 8.0Pakistan 6.8 19.6 6.0 14.1Russia 4.9 19.8 4.7 5.2
Equity Market – Cheap on a sectoral basis
28
Russian equity market by sector
Source: Thomson Reuters
Sector Russia P/E 2012 GEM P/E 2012 DM P/E 2012 Discount/Premium Russia to GEM Discount/Premium Russia to DM Russia EPS Growth 2012Consumer goods 16.0 15.9 13.4 1% 19% 79%Energy sector 3.8 6.4 8.9 -41% -57% 0%Financials sector 5.9 8.4 8.4 -30% -30% 14%Materials sector 8.3 8.3 9.4 0% -12% 25%Telecommunications sector 7.6 10.6 10.9 -28% -30% 18%Utilities 8.2 9.9 12.2 -17% -33% 59%
Russia is a cheap market, with earnings growth
29
Source: Renaissance Capital
Chile
Hong Kong
MoroccoPhilippines
Malaysia
Indonesia
United States
TaiwanThailand
South Africa
China
PolandEM
Peru
Turkey
Korea
Hungary
United Kingdom
IsraelArgentina
BrazilEgypt
Lebanon
Pakistan
Russia
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
5.0 7.0 9.0 11.0 13.0 15.0 17.0 19.0
EPS
Grow
th 20
11, %
P/E 2011
0
200
400
600
800
1,000
1,200
Russia USD 5Y CDS China USD 5Y CDS South Korea USD 5Y CDS Poland USD 5Y CDSBrazil USD 5Y CDS Mexico USD 5Y CDS South Africa USD 5Y CDS Turkey USD 5Y CDS
Equity Market – Cheap compared to the debt market
30
Source: Bloomberg
Russia trades at a premium to EM debt
Cheap does not mean performance
31
Performance of top 5 cheapest and top 5 most expensive
Source: Citigroup
Company P/E 2007 31-Dec-07 31-Aug-11 Return5 Expensive OnesUralkali 53.2 37.3 50.5 35.6%X5 Retail Group 38.9 34.2 36.2 5.6%Magnit 34.6 10.4 23.8 129.0%NOVATEK 32.0 76.9 136.3 77.2%Eurasia Drilling Company 20.8 27.3 22.3 -18.2%5 Cheap OnesAFI Development 10.8 9.5 0.7 -92.6%Evraz Group 10.5 70.5 24.0 -65.9%Gazprom Neft 7.1 6.2 4.4 -28.8%LUKoil 7.4 86.5 60.2 -30.4%Norilsk Nickel 6.7 27.1 25.1 -7.3%The MarketRTS Index 2290.5 1702.3 -25.7%
Equity Market – Cheap On A Historic Basis
32
Source: Bloomberg
The gap between Russian P/E and EM P/E is bigger than it has been since 2002
0
2
4
6
8
10
12
14
16
18
Forw
ard P
/E
Russia EM
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