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October 23, 2007 at 08:00 PM
Vladimir Putin, the former KGB agent who succeeded Boris Yeltsin as president of Russia in 2000, has said he may place himself at the mercy of the Russian electorate after his presidential term expires next year, and stand for prime minister on the United Russia slate.
Russia has enjoyed unprecedented economic growth over the seven years of Putin’s reign, due largely to surging oil and gas export revenues. One could argue Russia deserves a break, after 370 years beneath the czars, 74 beneath the Bolsheviks, and the chaos, corruption, and near-collapse of the perestroika and Yeltsin years. At any rate, the commodity price surge jump-started the economy–as well as the government to repay its international debts–leaving the ruble devaluation, debt default, and financial crises of 1998 far behind.
And of equal if not greater importance, Putin has re-introduced stability to Russia–largely by following the czarist and commissar model of concentrating significant power in his own hands.
All of this has met with the overwhelming support of Russian masses. His current approval rating is around 82%, according to the Russian Public Opinion Research Center. “It should come as no surprise that Putin will try to keep his grip on Russia’s reins after his second term as president ends in early 2008,” says Julian Mayo, investment director at London-based Charlemagne Capital, a money manager specializing in emerging markets, who says the prospective prime-minister bid is merely one of many possible ways Putin will seek to hold onto influence after stepping down as president.
Mayo describes Putin’s plan as “positive” for the Russian economy in that it reduces uncertainty.
John Connor, portfolio manager of the Third Millennium Russia Fund (TMRFX), one of the few all-Russia investment vehicles available to U.S. investors, says Putin installed a team of “excellent economic advisors who managed a very conservative and successful fiscal program.” It has built up huge surpluses, Connor says, both budgetary and trade, resulting in reserves that rank just behind Japan and China. GDP, which grew by about 6.7% last year, appears set to grow 7% to 8% annually over the next several years. Russia — now the world’s tenth largest economy – should ascent to fifth place by the middle of the next decade, Connor thinks.
Borge Endresen, portfolio manager of the AIM Developing Markets Fund (GTDDX), offers a dissenting view. Putin, he says, has benefited from a confluence of benevolent factors outside of his control.
“Russia’s main export–oil–went from roughly $25 per barrel of oil equivalent (boe) when he was first elected in mid-2000 to about $80/barrel today,” Endresen says. “Russia remains primarily a commodity exporter and it has benefited from price surges practically across the entire range.”
Indeed, any discussion of the Russian economy invariably focuses upon its dominant energy sector. Russia possesses the world’s largest known natural gas reserves (with Western Europe as its biggest customer), and is second only to Saudi Arabia in oil production.
But Connor does not see much growth coming from Russia’s oil and gas sector. The Third Millennium fund only has a 13.3% allocation to energy stocks (down from 50% last year). Connor explains that despite elevated crude prices, Russian oil stocks will remain under pressure since their revenues are dollar-denominated amidst an environment of a strengthening ruble and faltering dollar.
The Russian government also imposes a heavy tax burden on its energy companies, Connor notes, although these are likely to be relaxed after next year’s elections.
Endresen says Russian economic growth “most likely would have been even higher without Putin, as many energy producers in particular curtailed investments after he imposed massive tax increases.” These tax hikes also account for a dramatic fall-off in production growth over the past few years, Endresen says.
