Economics 21/05/2009: Moscow's Greening Pastures?

Russian stock markets are enjoying some recovery - in line with the US and firmer oil prices. Since January, MSCI EM - a broader index of emerging markets shares - rose roughly 25%, while MSCI Russia appreciated 30%. Domestic RTS index was up 48% and MMVB +62%, implying that Russia is now in the top three most profitable markets. JP Morgan note reflected this by lifting their assessment of the Russian market from 'Negative' to 'Neutral'. This, of course, is a lagging indicator, catching up with the rally enjoyed to date.

Although oil prices are much firmer now at $62.04 last night (July delivery) - the highest level since November 10, 2008, the latest price increase was driven by lower inventories, not by rising fundamentals or falling output. Demand for Russian oil and gas remains weak and production and exploration costs are not necessarily falling. If anything, in the long run, these costs are going to rise as new discoveries are being pushed deeper and deeper into Eastern Siberian domain, characterized by much more complex geology and smaller fields.

Likewise, industrial production continues to contract: -16.9% in April 2009 y-o-y, more than double on -8.1% fall in March. Overall Q1 GDP fell 9.2% in y-o-y terms, but there is no deflation in the economy (inflation moderated to around 10% annualized rate). Ruble devaluation expectations fell, but many experts still see some room for the currency to fall in months ahead. At the retail level, even with a span of the last two days Ruble rose from ca 43.30-43.35Rb/Euro to 43.00-43.10Rb/Euro, but majority of the businesses I spoke to expect the retail rates to test 44.00-46.00Rb/Euro before year-end.

JP Morgan note gave some support to the theory that Russian Government response to the crisis has been exemplary to date, but what is really interesting from our, Irish, point of view is the continued pressure from Kremlin to restrict corruption in the public sector.

While our own politicians and bureaucrats enjoy very low transparency over the sources of their incomes, Russian President has signed into law a decree requiring all top Government, political and public sector employees, politicians and even the top management of the public enterprises (commercial and non-commercial) to declare all sources of their own and their family members' income, covering:

• combined annual income from all sources;
• all property holdings (including the size of each building, land parcels and the country where the property is located);
• all cars and other transport owned.

This information will be published on the web and will be accessible to public. Confidential information will also include:

• addresses of property held; and
• banking accounts.
  

These declarations will be subject to audit and false declaration of income will be punishable by immedeiate dismissal from the job and can lead to a criminal conviction.

And in contrast with the Irish Government, Russians are pumping state cash into SMEs - on Tuesday, Russian Government announced a 3-year $23bn fund for SMEs with a new target to increase SMEs employment levels from 14% of the total private sector employment today to 33% in 2012. Funds will be used to improve SMEs access to credit, reduce the cost of credit to the SMEs, some direct subsidies, increasing the share of state purchasing allocated to SMEs and reducing the 'red tape'.