syrian regime with calls for more sanctions countries set for a referendum on a new constitution to end single party rule vote for torn country set for sunday some opposition groups calling for a boycott. america's intelligence community rules out allegations that iran is building nuclear weapons including that sixteen separate agencies a real iran is under heavy international pressure for its nuclear program which it insists is peaceful. also no war against iran and resisting foreign pressure over syria russian prime minister that he that plans to keep policy issues has to run for the country's top job next week. but people of elle's on the money is next . hello and welcome to on the money where the business of russia is business i'm

peter lavelle russia protests in the election and perceptions of political risk how investment friendly will russia be after election day. to discuss russians going to the polls in the perceptions of political risk i'm joined by quinn martin he was the founding partner at frontier and simon fenton fletcher he is a portfolio manager with renaissance asset managers we also have tom monty he is chief strategist at a critter and nick poole he's archy's business editor but first let's have a look at the issue of political risk in russia as perceived by investors. in the last decade investors had their eyes and russia's nylander stability backed by high oil price and political certainty the protests against tele geishas of voting fraud in the recent parliamentary election brought the issue of political risk to the forefront after a significant drop the stock market soon regained all its losses and further

protests did not trigger such a nervous reaction on the stock exchange it became clear that the protests had a peaceful character and the arab spring scenario was ruled out nonetheless banks are split on the level of political risk citigroup estimates the political risk premium of two hundred basis points assuming there are many issues which could spark for the protest a different perspective is expressed by renaissance capital those who underestimate putin's ability to transform himself into a modest reform in order to maintain his clout and popularity are in for a surprise but the truth is somewhere in between because it's no it's no secret that domestic. domestic banks tend to. underestimate the political risk and it's the opposite with the four with foreign banks but i think my opinion is that political risks are differently very high currently and will be on the investor's

agenda some claim political risk also contributors to net capital outflows that last year amounted to eighty four point two billion dollars it is clear however that political risk could be only one of the manufacturers to seeing investors leave the market one of the main facilitators was clearly the european debt crisis while global volatility remains a crucial factor for investors eyeing russia prime minister vladimir putin is reacting to the concerns of the business community put in has also promised he would strive to see russia in the top twenty countries in the world bank index for investment attractiveness he has recently pledged to introduce a tax on luxury goods and laid out an agenda on in the voting the economy it remains to be seen whether putting two point zero is more than just a pre-election rhetoric givenchy current from renaissance capital believes pushing can pull it off the great macro economic transition from twin deficits to twin surpluses combined with putin's desire to remain in power provide

a powerful incentive to deliver most experts believe putin will return to the presidency and that is the safest option for investors at the same time the protests at that center chill down the spine of some investors may eventually turn out to be positive for russia's investment story with the protests opening up a public debate about change the current political elites may be more responsive to people's demands than ever steady growth budget surpluses foreign currency reserves have made the russian economy attractive. to the promised reforms in the social and economic sectors investors could only benefit however there is little russia can do when it comes to external shocks. for on the line. ok gentlemen we have a very interesting mix right here so i mean if i can go to you first in one week's time russians will be going to the polls you would have

a look at what are investors looking for global investors like stability and one of the most important things is that they have that they don't operate in a situation where there is uncertainty over the last twelve years we've had significant and you've always had a millpond of political change and one of the things that we've seen with the recent protests is that people have been coming out and voicing anger not necessarily at any one particular thing other than corruption interestingly we've had a complete mix we've had the far right. protesting with the far left this is interesting times but for investors the most important thing is i think where i think we all understand that we will see putin in again until it is candidate putin saying the right things when it comes to certain political risk do you think i think that he's he's saying many things to many different people he's well he's a politician politically i mean you know we've recently had that he's going to be increasing the defense spent expenditure where increasing pensions he's

a political capital is being spent all over the place i will say well look he's not the first politician to be populist never know but this is an interesting thing i mean when he first came to power there are fundamental thing was getting the country working again this is now this is now happened and there's been an evolution and the political political parties of it have evolved i think this is thirty positive ok if i can go to you i would take issue with that i don't think the political parties involved nearly enough and i think that's one of the issues when it comes to change is a candidate putin making the right sounds when he is the election nears. well the truth is that no person as a candidate for president is creating two faces one is a pro reform face that he's presenting largely to the opposition groups as well as to the western investment means you can see no reason needs them on side as well he may not admit it but he knows that and that's a pro reform face he talks about political prayer isn't he talks about tackling

corruption and talks about greater transparency in the management of state companies but on the other side of that he's presenting a very populist face to his core voters which is increasing pensions increasing salaries increasing rages levies against privatized companies from the one nine hundred ninety s. taxes on luxury goods all of that for the majority of investors is bad news and what foreign investors want to see is a is an evolution of political pluralism and they want to jump if you think you create don't want to see putin go. i was going to get you i mean but if you find the right balance i mean this is a campaign here i mean and it's a mixture of promises he's making to different audiences do you how does he have the right balance in your opinion. i think he's i think you struck him quite a good balance and what is very important about this election he's very likely to win but it's the manner in which he wins he needs to win religious in the least be perceived to win the just with legitimacy so that he can push through what's

a very difficult reforms that we think he really doesn't understand from an economic perspective that needs to be pushed through in russia and most important much more important almost in political priorities and is addressing the issue of terror realisation getting russians to pay the proper market price for utilities that they it that's costs are reducing russia's dependence on the uprising and we think that that's what he'll push through after the election has a small timeframe to probably two years so we think that this reform story will will triumph over the populist agenda that he's pushing pre-election but key key key is that just in this he needs to win with a just an a c. ok given given what the protests about the parliamentary election i think that the candidate putin and all the other candidates one is transparent as possible let you know but we just before we started this program you and i were actually talking about you know the protest movement in a lot of them are people that still enjoy the perks of the soviet era and tom was just mentioning that you know paying for water paying for you electricity i mean the middle class here which i think is

a very vibrant and exciting right now but they still like the perks from the past because they don't have to pay for it that's going to be a tough political decision for putin to make absolutely and i mean one of the sort of ironic elements of the protest movement that came out of the parliamentary elections in before christmas time was that in fact many of the people who had been the greatest beneficiaries of stability under president putin and then prime minister putin over the last decade are the very people who are who are coming out on the streets driving the reemergence of political risk which would really really been absent essentially for a decade. and so that's why. of the great ironies of this of this protest movement that the greatest beneficiaries in a sense of stability under putin are driving driving political risk i think it's really interesting here in what we just heard is that

this protest movement is based on higher expectations not deprivation ok and i think this is what makes it very different than the from the arab spring because a lot of people like to make the comparison i don't see any comparison whatsoever because we have an emerging middle class to just want a greater voice they want more accountability from government and they want to continue their path of prosperity without seeming putin is successful next week i think that probably gives him an advantage it is quite good natured protests so that allows him the space at least take some time to implement reforms doesn't have to do it tomorrow there's no you know great urgency about it that needs to happen seems to be the case but as long as people can see that there is progress being made give them the benefit of the now the. aspect of political risk that i don't think will change is that until there is a clear and emergent opposition so you get a more pluralistic political system you're talking about maybe like

a political party for example yes that they become a viable opposition and that there is a clear system by which transitional power will take place and the system of government becomes stable rather than relying on the stability around one one sort of particular person you know so i mean if i go back to you i think one of the things i find interesting about this protest movement as opposed to what we've seen over the last twelve years is that people want more empowerment of themselves when i was a couple days ago after one of the protests that you saw these s.u.v.s with white balloons and ribbons which is the symbol of the opposition movement i mean the image of s.u.v.s and these protests symbol really kind of struck me is that you know again these are people that are much more autonomous state they want to cut down and they want corruption cut down and they want to have their say in the political process absolutely i think it's completely aspirational as we said it is and it's not it's not from desperation or these people have substantially benefited

for over over many years and it is pushing they want to push forward the liberalization of their country which is wholly to be commended what we'd like to see is are as we've just heard a political. and political opposition evolve i mean in greece we have the far left is splintered into many different organizations and it's the same here in russia it's very splintered there's not really one one one main opposition as if there is in the u.k. for instance ok gentlemen we're going to go to a short break and after that short break we'll continue our discussion on the level of political risk in russia at stake. well into the future to keep to the looking glass at what will be the homes of the future where the walls might just be smarter than the residence every day trash or takes you from the elements outside and the whole system works to save you money to

shine the spotlight on the latest building projects all around russia technology i'm doing here on r.g.p. we used to. play welcome back to on the money on people about ok jim and let's continue our discussion on the investment environment in russia before the election. ok tom if i

can go back to you let's take a look at the nature of the opposition here i mean i'm a bit disturbed but not surprised by how western media looks at the opposition there are many oppositions right here and there are elements of the opposition that are very much against the market against capitalism itself we have a far left this movement and there are people that we've mentioned before our utilities people don't want to see increases in utilities and then there's the tax issue too that's very sensitive for a lot of people so it's a very disparate group and i'd like to throw in that there's a lot of nasty nationalist part of this group as well and as nick pointed out earlier in the program you know this is not one big happy family it's very disparate at this point. yeah and i think this is something that the only foreign investors recognize but i mean the truth of it is that there is it there's very disparate and fractious opposition but it's not because many of the mainstream opposition groups not the far left and much of the far far right don't have very valid points it's because systematically over the last ten years they've been

excluded from politics it's very difficult to get a party into a party registered and it's very difficult to get a party into the duma and that's the nature of transitional politics that's not such a bad thing that united russia has a very strong mandate from the lower house now you want you want a party that can push through reforms and i think russia's now got the next stage in transition where it is it has to push for grace representation of other parties of opposition parties in the duma but it needs to be broader than that there needs to be a greater involvement of civil society in russia in general and i think that that could be the key change that we see over the next five years of the next dream and so. the big question i think for investors and the concern is the extent to which a growth in the opposition will impede the ability of putin potentially the next president of united russia to push through unpopular reforms and bear in mind is still the communist party here the second biggest party in their country and it's

the communist party's manifesto that runs completely in the opposite direction of esther's wishes i mean that manifesto is the renationalisation of the economy foreign investors do not want to see the communist party challenging the united russia in the lower house obviously not but that does need to be a greater representation of the more pro market more put more liberal more pluralistic society and that means that he's represented in the duma and i think we'll see that over the next five years i think putin and united russia recognize that that is very very important to placate for example the protest vote that we've seen over the last few months ok quinn i think that you know time brings up some very excellent points here and i'd like to remind our viewers here is that we saw a lot of political changes during putin's first two terms in office. and it did tighten up the political system there were too many parties in the one thousand nine hundred that was too much chaos most of the one thousand nine hundred were spent to do spent most of its time impeaching yeltsin or attempting to impeach yeltsin and i think a lot of our viewers may not be aware of that or forgotten and i think some people in the opposition forgotten the very bad years of the one nine hundred ninety s.

now this pay a pendulum has to swing back a little bit i think what tom was saying making it easier for a political party to get registered and that we would see more of. them but we would at the same time we wouldn't see the chaos that we saw in the one nine hundred ninety s. i think that the kind of investors that i work with would very much welcome. that kind of that kind of orderly transition right now a lot of money is sort of sitting on the sidelines waiting we've seen that you know sort of most obviously in the equity markets. you know pulling back sharply at the end of this and of last year and rebounding a bit and in the first two months of this year but we also work with a number of private equity and venture capital players who are considering investing in russia and. and what they tell me is is that they'll they'll be making their sort of final decisions on potential transactions in march

and in april so they're waiting to see how how the elections play out see what the popular reaction on the straits is and we may very well see some significant events and vestments foreign direct investment into russia in in march and april and potentially even sort of a reversal of some of the big headline capital outflow numbers that have been getting a lot of attention in the press and it's interesting that when we look at political change here there's on the one side there are people who are saying that needs to be changed because the political system has been virtually frozen for a decade but when there is change people find that there is the uncertainty and that's bad for investment i mean how do we. find the right mix right there because the change will actually help foreign investment because you'll see that the political system here is my lot more dynamic and a lot more receptive to voters and citizens in large here but you know if you push one too far then you get instability and nobody makes any money i think it's going

to have to be an insider i think that instigates that change. by that i mean who emerges as the opposition at some stage and i think it's quite interesting that what's happened with alexy could written since he stepped down as finance minister or was actually fired as finance minister and he's come out quite strongly as a sort of opposing politician saying pushing quite hard for liberalization autum ocracy and he was a person that foreign ministers listen to as well he is and also i think that mr putin used to listen to. and he's sort of trusted insider he was finance minister for eleven years so he has the sort of clout within the kremlin and the trust within the kremlin to be sort of allowed to speak his piece. couldn't i think it's not that populist so he's not going to he's not so great was that oh yeah i mean if we're going to and so how do you build a party around the last two presidents every time

a given state of the union address and say they're going to spend money could really get very very upset but it is interesting that these people are going to speak out and it's only two bits of former prime minister he's beginning to say the same sorts of things so you've got these kind of you know want to stop just figures beginning to sort of present a different point of view to act in a sort of oppositional type way ok so and i mean it looks like we have a couple things in play right here and i actually agree with nick here and said we're going to have it from the inside out still very traditional russian model of top down ok but that doesn't work very well some very efficient and certainly not always popular so we'll see a growing opposition movement getting organized and as we see reform within the establishment itself alexy could win for example could be a good. arrogant for that yeah absolutely i mean could it is extremely well respected internationally it obviously had putin's in for a long time there actually been speculation that led to the slightly move aside and could and could move in as as you've said couldn't quite and keep huge amounts of

public expenditure they could be quite an interesting discussion obviously mr putin has been saying it will have increases in public expenditure paradoxically though i would say the tax take on the threat and that might that might jeopardize some of the the easing through of the reforms post-election obviously siberian oil fields pressure is reducing which is potentially reducing the tax take overall so yeah that could be an interesting economic dynamics to the reform element post-election ok tom we've heard lots about reform over the last decade or so how does this go russia compare when it comes to political risk to its like bric appears ok let's kind of put it into an international perspective here i mean if if russia is really serious about reform investors will take a serious look at russia do you think again candidate putin is saying the right things to attract capital to come to russia because he said it's russia do very much need to have foreign investment here he says that are the right policies

coming out as a result. yeah it's actually quite a it's quite a complicated questions answered but i mean my perception is that by political risk this exists everywhere right i think russia is getting punished rather justifiably because it's quite clear that putin is going to come back as the next president and it's quite clear to us that he's understood for a long time and s.s.t. for reform you can go all the way back to two thousand and five in the monetization of social benefits and he found popular peace reform at the time now with this process for younger students understands the political necessity for the for the bigger question for me is not so much this element of political risk is the risk the russian puts because of its budgets reliance on the oil price it's a huge amount of volatility importance in russia next the markets because of that that's why the earnings yield on the r.t.s. for example the benchmark index is very very wide indeed it's a they're trying to set that's a much much higher than any other bric countries so what foreign investors are looking at with russia is that saying we're at the moment it's a very high it's

a play on the oil price with some political risk thrown in and that's why they've been on the sidelines for quite a long time and that's why there's a huge discounts while the bric countries. what putin i think understands now is he needs to implement unpopular reforms to reduce that relationship with the oil price in the budgets for lives and high oil prices if he can do that and if he can develop the economy if he can diversify the economy risk premiums in general will come down much much lower than they are and there's a third point as well as the which actually is quite uneasy when is that the government needs to be or the president needs to have the perception of improving things like corporate governance among state run companies and back to distributing what you were to be high cash flows into dividend yields and companies like gazprom will be at the forefront of market focus can they turn these companies around by getting them to be more efficient and basically that scrubs if they can do that then they certainly would see premiums risby mimms be there after nomic be driven and be they politically driven come down but i think russia is in quite

a good position and i think a lot of this are. is unjustified what do you think about that coup in that you think it's unjustified the risk premium that everyone talks about particularly mainstream media absolutely. compared to the global emerging market average russia trades at about a forty five percent discount so that's not compared to western markets that's compared to other emerging markets that also have issues of political risk corporate governance issues transparency issues. i think that the key word just used i think the key word here is perception there are of course significant corporate governance corruption and political risk issues in russia but there's a perception gap between the reality of that i think a lot of people like us that that live on the ground here understand and and the headlines in in the leading western newspapers printed in london and and new york

if russia could close that perception gap if they could do a better job in public relations both on both on a corporate level and on a federal national level. that could that could result in tremendous increase in the capitalization of of russian companies. so i would i would call for you know if if i'm thinking about reforms coming out of these this election absolutely the reforms that tom and simon has spoken about need to be need to be executed but at the same time i would advocate a. public relations campaign for russia inc that could close some of that perception gap and end result in much higher capitalizations for companies which of course benefits the state directly as they are the largest shareholder and they're going to run out of time in. we'll have another discussion

after the election thanks to our viewers for watching us here on on the money state of art to. me is the abuse.

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