When should investors with actual or planned exposure to Russia sit up and take notice of developments in the country’s politics and foreign relations? My answer in present conditions would be: when a reformist leadership looks increasingly confident and stable, and when US-Russia relations are on a strongly positive track. President Medvedev’s visit to the US last week demonstrated how both those conditions are now in place – and, more interesting still, the close relationship between them.
To start with the US-Russia angle, the picture is nicely captured by the contrast between this week’s spy scandal (the FBI winding up a ring of 1990s-vintage Russian “sleepers” in the US) and last week’s hamburger diplomacy (Obama and Medvedev’s buddy lunch at an Arlington diner). Assuming the FBI’s complaint stands up in court, the whole episode shows how the KGB’s successor agencies are good at wasting taxpayers’ money (both Russian and American) – but not capable of setting the tone of bilateral relations, with both governments downplaying the affair.
The Arlington lunch, by contrast, recalls Vladimir Putin’s visit to President Bush’s ranch in Crawford, Texas soon after the 9/11 attacks. Such rituals signify that Russia is now regarded as being “on our side of the barricades”. Back in late 2001, that perception triggered what turned out to be a sustained re-rating of Russian equities (and the first phase of that re-rating unfolded against the background of a global bear market through until early 2003). A repeat of that pattern now – that is, a catalyst for improved sentiment and funds flows into Russia – could be clinched by Russian entry into the WTO. This is close to being in the gift of the Obama administration, since the remaining blockages are bilateral US trade issues with Russia (including phyto-sanitary, on which progress was made last week) and the implicit veto of Georgia (which, under its present government, has become a US client state).
But any such trigger is only relevant, of course, if the fundamental conditions for asset price re-rating are in place. Back in 2001, those conditions were the interrelated improvements in political stability, macroeconomic rectitude, structural reform and – above all – corporate governance. Since 2009, Medvedev has been championing a fresh reform drive (returning to many of the items in that original 2000 programme), while also adding something new. If the 2000s showed that Russia can achieve strong economic growth, the aim now is to show that Russia can join the world’s leading economies by exploiting its comparative advantage in scientific and technical education to make and commercialize innovations in certain sectors where the country should also have comparative advantage. (The five designated sectors are energy efficiency, nuclear energy, space satellite communications, medical equipment and IT.)
Most of the policies and initiatives launched by Medvedev are designed in one way or another to attract to Russia people who can contribute to this agenda – starting with the diaspora of Russian specialists in the tech sector, many of whom work in Silicon Valley and took part in discussions with Medvedev during his visit there last week. More generally, the president’s rhetoric is all about openness and not allowing Russia’s precious stability to turn into stagnation. The watchwords now are “flexibility” and “adaptability”. In his address to Stanford University, Medvedev declared that “stability can only last in a political system that is open to change” and that “focussing on resentments and past grievances is the path to self-isolation”.
Stanford is one of two academic partners for Medvedev’s own planned “Russian Silicon Valley” at Skolkovo (close to Moscow) – the other one being MIT, as Russia reaches out to the top flight of the US higher education system. Medvedev’s public remarks about the Skolkovo project were in notably relaxed vein. He said he was not sure it would work, but he was hoping for the best and ready to take the risk because Russia had to start somewhere, and needed the demonstration effect of success.
In answer to a question from the Stanford audience about his own political plans, Medvedev came closer than ever before in the spirit of his remarks to declaring his candidature for a second term in the March 2012 presidential election. As argued in our January 2010 report The Putin-Medvedev tandem at mid-term, a second Medvedev term would represent dynamic stability which is the best political background for Russian asset prices that can realistically be envisaged. Although the consensus may remain against me, I still reckon this is the way things are headed. Medvedev is visibly growing in the confidence and ambition required to become a two-term president.
With best regards,
Christopher Granville, Director of Russia & FSU Research
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