referendum on a new constitution but a defiant coalition led by the us piles on more pressure on damascus the so-called friends of syria group is refusing to negotiate with president assad whose supporters will be among the voters in sunday's poll. thousands of cash strapped students in spain again expected to unite in anger at education spending cuts similar protests earlier this week led to police being accused of heavy handedness when dispersing demonstrators. and waging a war on an unseen enemy america declares its fight against cyber criminals such as those who attacked several federal web sites in recent months but experts suspect the hype is just helping the sun to earn big profits from fear and an internet ignorance. coming up russians will vote for an extra next weekend for their next president on artie's on the money they assess how the result might sway investors moods stay with us.

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 finally 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 delegations 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 to 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 at 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 you know 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 baiting the economy it remains to be seen whether putting two point zero is more than just

a pre-election rhetoric event you can of 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 put in will return to the presidency and that is the safest option for investors at the same time the protests at the center chill down the spine of some investors may eventually turn out to be a positive for russia's investment story with the protests opening up the 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 and that's a bit softer 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 i mean 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 an 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 giving i think that 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 defense spent expenditure where increasing pensions he's a political capital is being spread all over the place i will say that 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 the 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 a 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 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 is 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 it and that's a pro form face he talks about political prayer isn't he talks about tackling corruption it talks about greater transparency in the management of state companies but on the other side of that is 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 purpose and they want to jump that you think you create don't want to see putin go. i was going to get your me but if you find the right balance i mean when 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 with legitimacy or least be perceived to win that just with a just in the sea so that he can push through what's a very difficult reforms that we think he really does understand from an economic perspective that need to be pushed through in russia and most important much more important almost in political pluralism is addressing the issue of tariff to provide station getting russians to pay the proper market price for utilities that they it that's costs are reducing russia's dependence on the or price 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 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 lectionary 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 the protest movement is based on higher expectations not deprivation ok and i mean 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 talking about maybe like a political party for example yes that they become a viable opposition and that 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 many things are 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 it was the image of s.u.v.s and these protests in a protest 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 on they want corruption cut down and they want to have their say in the political process absolutely i

think it's completely aspirational and as we said 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 holy 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 the 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 starting. we have a vote before the august war criminals we have

a lot of illegal call groups of the blue collar jews and sluices also argues in the whole more right enough to just my mouth it was like many of that knowledge that wasn't forced marriage was the smadi when i was fourteen yes although you can liberate other women and you certainly can't do it through the barrel of a gun only effective social changes can be the afghans themselves afghan men and women we believe i'm going to spy on them not to have a cross post without a fish on its chemical position and that a construction of that stuff people in the obama administration talking about how much they care about the women of afghanistan it's not true they don't care about the women of afghanistan.

is do you. do you. believe. to be. welcome back to on the money on people of oh ok german 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 have bit disturbed but not surprised by how western media looks at the op is. and 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 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 so 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 demon 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 them in their manifesto as 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 is that is represented in the duma and i think you'll see that over the next five years i think putin and united russia recognize that that is very very important supplicate for example the protest vote that we've seen over the last few months ok quinn i think in 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 forgot 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 pearlers 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 straights is and we may very well see some significant events investments 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 you know 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. 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 instigate change. by that i mean who emerges as the opposition at some stage and i think it's quite interesting that what happened with alexis 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 in 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. the problem with good and 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 so how do you build a party around that and the last two presidents every time may give a 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 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 i mean 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. sara get for that yeah absolutely i mean could it is extremely well respected internationally he obviously had putin's in for a very long time there actually been speculation that led to the slightly move aside and could and could move in as as you've said could range 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 what 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 in russia compare when it comes to political risk to its like bric pyrrhus 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 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 that's actually quite a it's quite a complicated questions answered but i mean my perception is that by political risk 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 perform at the time now with these protests very understandable 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 ports 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 where the bric countries. what putin i think understands now is he needs to implement unpopular reforms or 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 you 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 already rose 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 risk premiums be there after nomic be driven to be they politically driven come down but i think rush is in quite a good position and i think a lot of this were. 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 tom 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 a public relations campaign for russia inc that could close some of that perception gap and and 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 party.

please. just so. syria rate is a democratic referendum on a new constitution but a defiant coalition led by the us piles even more foreign pressure on damascus. thousands of cash strapped students in spain again.