Russia has emerged in far better economic shape than many other European markets and with low debt, inflation under control, a large consumer base primed to buy goods and services, and the price of oil recovering, Russia may be the most dynamic place on the continent.
At the end of 2008, gross debt levels within Europe were about 300% of gross domestic product, according to industry data. Some economies were even higher, with Spain at 350% and the United Kingdom at 380% of gdp. By comparison, Russia has a total debt of 71% of GDP: 5 percent from the government, 10 percent from households, 16 percent from the financial sector and 40 percent from the corporate sector. This means Russian consumers are able to spend, the Russian government has significant room to maneuver, and there is no need to endure a long and painful process of systemic deleveraging - all of which make Russia a smart play for growth-oriented investors.
For the first time since the end of the Soviet Union, the country has inflation rates now in single digits for the past year and likely to be under 6% in 2010. This allows consumer borrowing at reasonable rates (mortgage rates are 13% and falling), businesses can borrow to invest in rubles and at low maturity (the average duration of the domestic bond market may double by the end of the year), and money is encouraged to stay at home.
Meanwhile, Russia still has tremendous potential, as a market with 140 million consumers but with penetration levels for most goods and services at well under half of those in Western Europe.
For example, mortgage penetration is 3% of GDP, and only 20 percent of people have cars. Service sectors are still in their infancy, with retail, restaurants and broadband companies looking forward to many years of high growth.
The foundation is of course oil and an oil price of more than $60 is now necessary to keep the current macroeconomic parameters of the country on track. Russia is looking to improve its delivery infrastructure by building pipelines, roads and ports in the east and such investments will help create more consumers with disposable income, as well as provide an infrastructure for other businesses to use as they enter this market.
In this contrast is opportunity: As growth in Russia is compared with stagnation in Europe, I expect to see more capital flow towards the East and into Russia.
Massimiliano Ballotta
Senior partner, LegaLife Moscow
Tel.: +7 495 937 5915
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