Until relatively recently, Russia’s economy was on the rise. For several years, the country’s strategic macroeconomic vision was allowed to flourish, unfolding against a backdrop of favourable international market forces. This period of unprecedented growth left Russia with an impressive ‘triple surplus’ and an extensive cushion of foreign currency reserves to weather any storm. In relative terms, the global financial crisis was little more than a bump in the road – Russia was one of the fastest countries to recover and, in subsequent years, its annual GDP growth came to exceed the European average fourfold.
To some, these times of enviable growth may seem like a distant memory. Over the last two years, one has often read in the media about Russia’s economy teetering on the brink, thanks to a volatile cocktail of geopolitical tensions, uncertain market tremors and deep-seated structural flaws. In Russia, there is even discussion about if – not even when – the country’s economy can ever recover.
Nobody can deny that the problems are real. The paramount importance of commodity exports to the federal budget has meant that, in one way or another, the redistribution of oil revenues touches upon virtually every sector of the Russian economy, leaving it at the mercy of shifting global energy trends. A drastically devalued rouble is highly problematic for many industries, but particularly for the fledgling emerging enterprises, which are instrumental in stimulating much-needed economic diversification in Russia.
Meanwhile, we are also left dealing with geopolitical muscle flexing in the form of economic sanctions against Russia. I question the logic and effectiveness of Western sanctions, which were ostensibly aimed at Moscow’s power elites, rather than the ordinary citizen. In truth, sanctions appear only to entrench the very retrograde elements of Russia’s political economy that they are meant to undermine.
It is easy to see how this situation would make many an investor pause for thought. Some have chosen to put their plans on hold, while others have simply cut and run. By the end of 2014, a record $151 billion of private capital had left the country – a damning indictment of Russia’s perceived investment climate. On the other hand, there are those of us who are less risk averse, who understand and believe in the long-term prospects that Russia has to offer and who are constantly on the lookout for new business opportunities. At VIYM, we are closest to this category – we thrive in tackling new challenges, even in the most uncertain times.
In Russia’s recent history, economic downturns have presented moments of unique opportunity – not just for private investors but also for those who shape our economic policies. The global financial crisis, as well as Russia’s own disastrous financial meltdown a decade earlier, both paved the way for Alexei Kudrin’s much-needed progressive reforms. There is no reason why Russia’s current predicament cannot serve as a moment of revelation, catalysing the country’s economy back towards prosperity.
Change cannot simply come from within, and it is in the interests of the global financial community to welcome Russia back in from the cold; after all, the importance of Russia’s economic stability reverberates far beyond its borders. Sanctions are part of a dangerous game that, in the long term, serves only to hinder the trust that underlies any thriving, mutually-beneficial relationship. That said, every cloud has a silver lining, and the present geopolitical dynamic has compelled Russia to re-evaluate some of its priorities. Russian counter-sanctions have elicited a turn to import substitution, which, for all its protectionist implications, has actually started to benefit the country’s agricultural sector – a long neglected priority. Meanwhile, in the international arena, the freeze in relations with the West has prompted Russia to look more closely to its Asian neighbours. Russia’s pivot to the East is an ambitious venture, and although it will take time to develop and may never fully substitute relations with the West, Russia will eventually benefit from a degree of geographic diversification to its key international relations.
There can be no doubt that Russia’s potential is unbounded. While the country’s vast landscape and wealth of natural resources have always provided a platform for growth, Russia’s greatest resource has always been her people. Nowhere is this truth more evident now than in the knowledge-based sector of the economy. In the emerging technological industries, domestic Russian entrepreneurs have developed innovative ways to grow their businesses. Software businesses continue to flourish, and with around seventy per cent of Russia’s 2,300 software companies catering for the export market, software is one of Russia’s most internationally profitable industries.
The paradigm of Russia’s software industry is not an isolated success – it exemplifies the untapped potential of the country’s small and medium sized enterprises. In most of the developed world, it is precisely these businesses that have ensured sustainable growth and formed the backbone of a healthy, diverse economy. Yet in Russia, SMEs account for a mere one fifth of the country’s GDP and employment. I have often heard it said that, aside from energy export dependence and geopolitical anxieties, the most fundamental barrier to the effective, long-term development of a truly modern Russian economy is the lack of investment – precisely because underinvestment is what stifles diversification.
For those of us who are not merely impartial observers of this story, but rather active stakeholders in its unfolding, these issues constantly colour our thinking. I should, of course, declare my hand at this stage. I am a co-founder and partner at VIY Management (VIYM), a UK-based firm which invests significantly in Russia. I have a vested interest in seeing the Russian economy get back onto a path of growth. And it is also my aspiration to use my position to help create additional channels of communication between the UK and Russia – channels of communication which I believe are needed now more than ever.
In today’s world, financial capital truly knows no boundaries, and I hope that through this blog I will be able to relay a vision of Russia that may often surprise you. It cannot be denied that Russia’s cultural and political history has always been intertwined with the trajectory of the European continent. Throughout the centuries, business has often been the medium that bridged political differences. As far back as the High Middle Ages, the vibrant Hanseatic city of Novgorod was a testament to the centrality of Russian commerce to the European heartland. Even the British connection dates back to the mid-16th Century, when the legendary explorer Richard Chancellor returned to London in triumph, having secured a host of lucrative trade assurances from Tsar Ivan IV.
Five hundred years later, we remain intimately bound to one another. Russia’s abundant exports remain indispensable to the rest of the continent, and, even in today’s uncertain climate, Russia is still the EU’s third largest trading partner. And while Russia should always seek to expand its network of international partners, it can never turn its back on Europe – the source of fully three-quarters of all foreign direct investment into Russia.
It is also a self-evident fact that the health of a nation – even in purely economic terms – cannot be confined to a matter of financial calculations. At least as important is the capacity for unleashing the creative potential of the next generation. As such, I intend for this blog to develop beyond my commercial interests to address the pertinent issues in education, science and innovation.
If you are an international investor looking for fresh thinking and new opportunities, I hope you will join me on this journey.Andrey Yakunin / Андрей Якунин