Russian Roulette Russia’s Economic Outlook Not As Good As Other Emerging Markets

March 9, 2010

Story Highlights:

>Emerging Markets as a group have thus far led both the stock market and economic recovery, briskly outpacing the developed world.
>Though EM overall will likely continue to lead growth, not all EMs are equal. >Despite factors working in its favor, the Russian economy looks like it may be facing some economic headwinds.
>Some weakness from Russia won’t likely hold back global economic growth, and the Russian economy isn’t likely to see a sharp pullback-as long as the global economy keeps moving ahead and demanding Russian resources.

________________________________________________________________

Celebrating the one-year anniversary of the bull market’s beginning as the global economic recovery continues, it’s important to note recovery hasn’t been universal across nations. This is perfectly normal-even during periods of robust growth, some nations lead while others lag. Still, certain countries that looked like they dodged the bullet initially may still face relative weakness ahead.

Emerging Markets as a group has thus far led both the stock market and economic recovery, briskly outpacing the developed world. Though EMs overall will likely continue to lead growth, not all are equal. For example, despite factors working in its favor, the Russian economy looks like it may be facing some economic headwinds.

Micex (Russia’s stock market index) was the best performing last year among 90-plus indexes tracked by Bloomberg. Russia emerged from recession in 2009, posting two straight quarters of growth. The country’s vast natural resources meant it was well poised to take advantage of recovering, input-hungry countries like China.

But unofficial reports in February show the Russian economy likely slid 0.1% quarter over quarter and only expanded 0.5% compared to February 2009. Additionally, Russia’s unemployment rate continues to climb, even as many other countries are reporting strengthening labor markets. Bank data also suggest consumers are shifting away from spending to saving-retail loan portfolios fell in January for the 12th straight month while retail deposits climbed for the 10th straight month.

One major Russian stumbling block: Government policy. It’s pretty clear Vladimir Putin (the man behind the man) is using the recession to consolidate power, strengthen the central government, and expand the sphere of Russia’s regional influence. This includes some positives-like the recent banning of private security departments (read: militias) at Russian firms. (Whatever you think about Putin, roaming militias are typically a negative for businesses, property rights, and the rule of law.) And some decided negatives-like major government influences in key industries and heavy-handedness with the private sector (e.g., dismissing CEOs at whim).

It also doesn’t help that Russia’s initial monetary and fiscal stimulus efforts lagged the aggressive global response. Russia initially raised interest rates in Q4 2008 (while most nations were aggressively cutting) to counter currency appreciation before assuming a series of gradual rate cuts in 2009. And while many other nations have stopped cutting, are planning exit strategies, or are beginning to implement tightening strategies thanks to healthier economic climates, Russia is still in a cutting cycle. Russia also just launched a “cash-for-clunkers” program Monday, far behind the US, Japan, and UK.

Still, some weakness from Russia likely won’t hold back global economic growth, and the Russian economy isn’t likely to see a repeat of Q1 2009’s -7.0% GDP contraction anytime soon-as long as the global economy keeps moving ahead and demanding Russian resources. But don’t expect Russia to be on pace with other Emerging Markets. When investing in any broad investing category, understanding potential individual problem spots could help avoid being hit by a stray bullet.

Disclaimer: This article reflects personal viewpoints of the author and is not a description of advisory services by its author’s employer or performance of its clients. Such viewpoints may change at any time without notice. Nothing herein constitutes investment advice or a recommendation to buy or sell any security or that any security, portfolio, transaction or strategy is suitable for any specific person. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.