Why investors should care about the Russian elections

Putin's third jab at presidency has already seen massive protests and raised questions about the impact this could have on those investing in Russia.

Vladimir Putin is widely expected to win the first round of Russian presidential elections tomorrow, with the second round scheduled for March 25 if needed.

But Putin's third jab at presidency has already seen massive protests and raised questions about the impact this could have on those investing in Russia.

The December 4 state Duma elections caused markets to fall 10 percent. But some of those losses have been reversed this year. So far a Citi report by Kingsmill Bond says the Russian market's have responded to protests by a widening discount against its usual relationship with the price of oil and that this discount depends on a number of tail risks:

"We believe that this discount will stay for the foreseeable future and that there are tail risks (such as even larger protests, populist and nationalist rhetoric, conflict within business and/or political elites or attacks on individual oligarchs.) The market would fall if these tail risks transpired. "

And Daniel P. Ahn senior economist at Citigroup thinks oil prices could impact the Russian equity market:

"Russia's equity market generally tracks the price of oil and has been doing very well lately given high oil prices. It should probably continue to perform strongly as long as oil prices remain high and spending is boosted in the run up to the election. But there is a lot of political risk in Russia plus a slowing global economy may bring oil prices back down in the medium term."

The more crucial issue for financial markets will be the shape of the new government and the political uncertainty following the elections. Ahn expects that 'reforms' in the form of additional fiscal spending will benefit key constituents such as the military. According to Bond however, Putin can lead the government in three main directions.

Russia could see radical reform characterized by new Duma (lower parliament) elections, a tougher stance on corruption and a change in personnel. The second could be stagnation as characterized by higher military spending, and a crackdown on media freedom and protests, and finally, incremental reform which could see the return of former finance minister Alexei Kudrin, attempts to reform Gazprom, and talk of modernization and reform.

Who is exposed and how can you play them?

Bond says political change is come to Russia's rentier system -- an economy which derives all or a substantial portion of its national revenues from the rent of indigenous resources to foreign clients.

Many companies especially those in the metals and mining sector that have low tax rates benefit from the rentier system any changes to the system will make investors nervous about the profits they make from these companies.

Those that benefit from government support by way of gas licenses and loan guarantees are also likely to be impacted by such a change. Companies owned by oligarchs are also at risk from such changes, as are the oligarchs themselves.

Bond thinks those likely to benefit from higher government spending could make a goo bet for investors. These include retailers where most government spending is often channeled anyway. He also expects Gazprom, Russian oil-and-gas company Surgutneftegaz, and state-owned oil-pipeline business Transneft to benefit from better transparency, a focus on efficiency and a crackdown on corruption.

While much can be said leading up to tomorrow's election, investors can expect greater clarity on the direction in which things will go in April, with the new government to be inaugurated in May.

Don't Miss: 21 Things You Need To Know About Vladimir Putin >



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