The Russia Forum 2013: Second day summary—Russia’s sectors: Potential, possibilities, and risks

April 19, 2013

 

Participants of the discussions on the final day of The Russia Forum 2013, which was hosted by Sberbank in Moscow on April 18 and 19, identified the key challenges for the securities and capital markets, outlined the main development trends in the most important sectors of the economy, and analyzed the problem of building a modern infrastructure in Russia.

Without building a modern network of railroads and highways, improving port infrastructure, and communication channels, Russia’s prospects—especially in the country’s outlying regions—cannot be viewed in a particularly optimistic light. This was the conclusion reached by the panelists of the session titled “Can Russia Replicate China’s Infrastructure Miracle?” which was moderated by Alexander Bazarov, Senior Vice President and Member of the Management Board of Sberbank, Co-head of Sberbank CIB. An interactive survey held among the audience revealed that those in attendance were mostly optimistic and expect an infrastructure boom in Russia in the next 5-10 years. According to Alexander Nazarchuk, BoD member, Global Ports, the main task right now is creating infrastructure that will help improve and make more efficient the current commodity-based economy. The main problem here, however, is the lack of adequate laws and regulations. Christian Heurtebis, Director of Vinci Concessions, is convinced that the optimal solution is large-scale infrastructure projects under the framework of public-private partnerships.” Mr. Heurtebis emphasized that the majority of PPP projects are completed on time and in accordance with the budget and that the private sector needs to be given the opportunity to introduce innovation, not just at the building stage, but also during the operation of completed facilities.

The panelists of the session “Where does the big money go?” moderated by Anton Rakhmanov, General Director of CJSC Sberbank Asset Management, turned their focus to investment in emerging markets, precious metals and the corporate sector. A point of emphasis was the need to diversify portfolios by using a range of instruments. “Right now gold is selling off. The current volatility in the market is a short-term trend,” said Max von Bismarck,
Partner and CEO – Europe, SkyBridge, adding that “right now in the investment world, everything is going from one extreme to the other. Hedge funds should look a year and a half ahead and diversify with three to five new opportunities.” For his part, Norihiko Nakagawa, Director, Government Pension Investment Fund of Japan, talked about the necessity of balancing portfolios: “Our portfolio consists of 60% Japanese sovereign bonds, 13% Japanese equities, and 13% foreign bonds.” The participants agreed that Russia remains a relatively cheap and promising market. Rick Lacaille, Global CIO, State Street Global Advisors, observed that “investors often ignore opportunities in other markets as they concentrate on their own problems.” He added that the question was how much foreign capital Russia needs.

Investment in Russia was the topic of discussion of the session “Paths of Development for the Stock Market,” which was moderated by Bella Zlatkis, Deputy Chairman of the Management Board of Sberbank. The future of Russia’s stock market will hinge on structural reforms and political stability. According to Sergey Shvetsov, Deputy Chairman of the Bank of Russia, in addition to creating a mega-regulator, the market needs a reform of the mechanisms of self-regulation as well as changes to the structure of corporate management so as to reduce the risk for minority shareholders. “This is not the time for a revolution—the revolution has already happened, but there remain a number of small but important things to do,” emphasized Mr. Shvetsov. Alexander Afanasiev, Chairman of the Managing Board & CEO of the Moscow Exchange, believes that the creation of a central depositary opened up the possibility of providing investors a number of new products. “We need to become better than other exchanges so that investors come to us,” added Mr. Afanasiev. The experts agreed that providing Russian pension funds access to the stock market would be a main catalyst for the market.

The second block of panel discussions was devoted to particular sectors of the economy. According to Tatiana Mitrova, Head of Oil and Gas sector development Department for Russia and the World, The Energy Research Institute of the Russian Academy of Sciences, who moderated the discussion “The Domestic Gas Market: on the Path to Increased Competition,” the oil and gas industry has experienced massive changes (shale gas has started being developed, European market restricted) and the export potential for Russian gas currently seems limited. The domestic market is becoming more attractive, partially due to rising prices. Evgeny Karpel, Head of Strategic and Corporate Development at Gazprom Mezhregiongaz, forecasts that domestic demand for gas will stagnate despite reductions in production capacity and an increase in the provision of gas service across the country. The sector driver and one of the key niches may be the natural gas fuel market. Sergey Kogonin, General Director of KAMAZ, said that his company was ready for a “gas attack.” “It would make sense to switch 50% of freight transportation, 50% of bussing, and 25% of automobiles to this very promising form of fuel. But for this we need the support of the state and the willingness of consumers,” said Mr. Kogonin.

The discussion at the session “Russian Retail and Consumer: How to Play the Theme in 2013?” centered on this sector’s prospects. “Retail is currently undergoing what many are calling the ‘third revolution’—the development of Internet commerce. Our customer is different now,” remarked Alexander Tynkovan, President of M.Video. Agreeing with him was Maelle Gavet, CEO of Ozon Holdings, who added that “offline retailors are now more and more looking at the Internet as a powerful channel, as they try to integrate the Internet with their large warehouses and extensive logistics.”

New trends were the focus of the panelists of the session “Finance and Telecoms: Two Sectors Converging.” Andrei Dubovskov, President of MTS, believes that there is great synergy among the sectors. As a result of this, the company recently acquired a blocking stake in MTS-Bank. MegaFon CEO Ivan Tavrin agreed, adding that he thinks that partnerships between banks and mobile operators are the future and that out of this synergy a lot of new products will emerge. Maxim Nogotkov, President of Svyaznoy Group, and Oleg Tinkov, BoD Chairman, Tinkoff Credit Systems, held opposing views, saying that they aren’t inclined to overstate the synergetic effect of these different businesses. Jane Zavalishina, CEO of Yandex.Money, added that, “People aren’t ready to entrust their money with mobile operators, therefore it’s too early to talk about a convergence of banks and telecoms.”

Elvira Nabiullina, Aide to the President of the Russian Federation, offered some summarizing thoughts during the CNBC Summit “Banking on an Unconventional Future,” which examined monetary policy, privatization and the crisis in Cyprus, “It’s time for the central bank to rid itself of the illusion that fiscal actions can fix our problems. For Russia, it’s very important to continue to reduce inflation. This year inflation is expected to be 6%. It’s also important to continue to maintain flexibility in our exchange rate policy,” commented Ms. Nabiullina. “We have every possibility of attracting investment to Russia. It’s important to remember that Russia is fundamentally a high-capacity market; it has 140 million people who are highly educated and consume at high levels. Market institutions have been created and we have large supplies of natural resources. We just need to make adjustments in the legal framework.”