Expert opinions, Interviews

Christopher Granville: Russia is among the highest yielding equity markets

Investment climate in Russia was one of the subjects discussed at the anniversary Gaidar Forum at the Russian Presidential Academy of National Economy and Public Administration in Moscow. Invest Foresight, Forum’s main media partner, met with Christopher Granville, Managing Director at TS Lombard and an outstanding expert on Russian economic affairs, to learn his views on various developments in the national economy.

According to Christopher Granville, “Over the past two decades, most qualitative improvements in Russia can be observed in the economic policy environment and the regulatory environment, as it directly affects portfolio investment opportunities in debt securities and equities, and also regarding quality of issuers. In policies, in Russia there have clearly been dramatic and very positive developments. The macroeconomic policy environment in Russia has developed in a very positive way and the quality of Russia’s macroeconomic policy is exemplary.”

The present-day difficulties for some economic activities in or involving Russia, have not made all foreign investors leave Russian markets. Apart from international portfolio investors, the share of domestic investors in Russia is also growing, though at a slow pace. To expand domestic investments, “the pension investment is of cardinal importance for the future of Russia’s capital market. The channeling of a much greater portion of domestic savings from the public into long-term investments, especially equities, will create a basis for demand for stability, improved corporate governance, improved valuations, which will attract attention of foreign investors.”

In view of Mr Granville, “Real exchange rate of the Russian ruble creates very positive environment for a sustainable growth of earnings. Russia is now among the highest yielding equity markets in the emerging world. Russian asset valuations are relatively low when compared with many other emerging markets. The reasons for that are clear and include external risks, sanctions risks, economic imbalance, domestic risks to property rights and to secure return on investments. Real exchange rate of the ruble and its stabilization in macroeconomic terms is a crucially important factor for Russia’s sustainable development allowing the Russian economy to exploit its natural comparative advantages. In the previous decade Russian economy was growing very fast, living standards were increasing. But the real exchange rate of the ruble was strengthening all the time making it very difficult for sectors of the Russian economy (other than those of oil and gas) with comparative advantage and export potential to develop normally because they were made uncompetitive by the relentless appreciation of the ruble exchange rate in real terms. That has now changed. The real exchange rate of the ruble is now stable and the currency is getting more competitive. That creates profitable opportunities which many sectors of the Russian economy including chemicals, biochemicals, petrochemicals, agriculture, food processing, get in the external markets and in domestic markets. This creates opportunities investors would take advantage of and this creates a sustainable pattern of growth. These changes are not widely or fully understood and appreciated so far by the community of global financial investors.”

Still, some (not all and not even most) portfolio investors start paying attention to new opportunities opening up in Russia. “For investments, an important factor is a correlation between the quality of the environment and the valuations. The valuations are extremely low in Russia relative to other emerging markets and that reflects real risks. Sanctions are clearly a very important risk. The question is, are the risks underpriced or overpriced. There is a case of concluding that the risks are overpriced, they are excessively priced. So some investors see these valuations as attractive,” Mr Granville noted.

Commenting on the strategies of the Russian authorities, he pointed out, “Any serious reform agenda will always involve making sacrifice of short-term growth for longer-term gains. Populist decisions are easy. But the strategy of the present government is clearly to try to promote in the long term a sustainable model of investment-led growth which will drive productivity, and productivity growth is the only secure and sustainable basis for increasing living standards without volatility and populist gestures.”

“There is a considerable and adequate political capital in Russia and it is being used for the sake of a longer-term program and for continuing the present policy course which in principle is attractive for the investment case,” Christopher Granville concluded.

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