just might be. economic down in the final. deal and the rest. will be. welcome to on the money where the business of russia is business on peter lavelle today two thousand and fourteen has been a slow year for the economy and consensus growth projections remain modest while far from a gloomy picture the government has its work cut out for it to return the economy

to dynamic expansion will it succeed. discuss this and more i'm joined by timothy crouse he is the head of the russia bank opportunity funded i see asset management company we also have simon phantom fletcher he is the portfolio manager at renaissance asset managers and we have. he is the chief economist at deutsche bank russia. start out with you they had hoped january would have been a better month what kind of picture do you see unfolding for the first quarter. well i think certainly january was quite weak and the main culprit was fixed investment so the investment side continues to be the weakest link in russia's growth performance but there was hope. we might have some recovery especially on the consumption front because we have the. picks and according to various estimates

the contribution from the olympics for russia's g.d.p. could be as high as zero point three to zero point four percentage points for the year as a whole so on a monthly basis it could be even more emphatic. so for the quarter as a whole it will be a difficult period but there are some rays of hope and some triggers that may make russia look a bit better than in january tim you. bring if i might look just beyond the first quarter just a little bit because i think we're rushes today they need to think about dealing with some of the structural problems in the economy effectively getting away from the oil and gas and commodity reliance that they have which has been a theme now for quite some time but we're coming to the end of the sort of decade when we could rely on those revenues and we need to diversify into different industries i think if we don't do that russia risks being stuck around two percent g.d.p. for in that extent in there to the economy hasn't been used to for

a long time absolutely and this is this is really the big change here is that it's not that there's slow growth that is it compared to the decade preceding this is extremely slow growth now yeah i mean two percent two percent feels like recession of one point three percent last year and it hurt you know russia has been used to five six seven percent growth and certainly has so this is a significant slowdown that is relatively speaking is feeling like like a recession even though it's not it's not forget that we are still seeing significant some some growth specifically within the consumer sector the consumer sector last year was that was the thing that drove russia g.d.p. growth as we already had you know fixed income capital expenditure which was down only you know not where we're hoping that that will pick up but the problem looking forward into the future is potential slowdown of the consumer if the conditions but always been the golden egg particularly the last five or six seven years absolutely the consumer was. the main force and russia's economic growth partly it was due to

the budget financing which consistently supported especially the lower strata of the population in the middle class and of course the external conditions were relatively favorable as well with high oil prices and that was a key factor supporting the consumer now more recently in the past several years we've seen a significant growth in lending and consumer lending that started to become a major factor it even to such a degree that it became a concern for the central bank for the monetary authorities because it was actually too fast so too much of a good thing bad western habit was out of the green so i totally agree i mean this i think peaked last summer it's now coming down a little bit but if you look at the level of debt that the average russian consumer has consumer debt it's really at a level that is very comparable with eastern european countries it can't go much higher right now and beyond that it's not secure debt it's not mortgages it's not

cars it's basically cash loans that have been used for consumption so this worries me a little bit even though the consumer is still the major driver of the economy i am not confident that this can continue for a long time you know we see we've seen impalements across all banks and rising significantly and if you go outside of russia i believe it's about forty percent of net disposable income is spent on interest and capital repayments which he says it's a major state where it's going to searing i would say even before two thousand and eight personal debt was something that was hardly talked about it already this country yeah i mean one of the things that the banks obviously the c.v.r. is as i stepped in and with the new leader is increasing provision of course a large number of russian banks and we're seeing the proliferation of nine hundred russian banks being shrunk shrinking down which is a good thing we want strong sustainable banking sector that isn't pushing at my growth you know twenty thirty. eighty percent and you know that's that's

unsustainable and you know we're all talking about you know since the middle of last year but this is when the government shifted gears ok because there was an expansionary policy and then what i call russian austerity came in but there was a plan behind that is that it would slow down the economy though in the second quarter third quarter of this year we would see the for wishing the fruits of that plan is it's still on track yeah i think the understanding is that. quality matters probably even more in the near term explain to our viewers what that means because of the world but all of that we want this to productivity we want. through greater efficiency rather than just through high oil prices and partly because of that i think there is a certain we think in terms of the economic strategy whereby they're looking to the government as looking into budget spending looking into the possibility of cutting back some of the things there that proved to be inefficient there is there seems to

be you know a measure on the part of the government to try and evaluate the efficiency of various parts of government something new for this economy because i haven't heard this kind of talk before we've all talked about diversification and we've been document that for a decade but this kind of quality growth the issue productivity this is something that's new on the internet you know i think this is the diversification of economic growth this is what you're talking about the question is how do you actually get it to happen it's not a simple question. in my view the key is for private sector entrepreneur rules to unlock the regulations to unlock the bureaucracy that holds them up from starting businesses and there's many things like that so if russia can do that i think the seeds for. better distribution of growth amongst the economy is there and that would make the country so much less file tile going down the road no depends on the commodity cycle or much less than we see. so i mean is this you know we're looking

at kind of a threshold here a turning point here and i think you know what tim just said is very very interesting because it's now moving away from state companies because that's you know mistake protects the state company's image been so much focus on that so much money thrown out it does well here but it hasn't addressed the productivity issues and from what tim just said here now we have to look at the private sector more i completely agree that the the problem is we're not getting the growth in entrepreneurial young russian businesses where there are there are fewer startups now than there were a few years ago whether it's because of bureaucracy whether it's because of the collapse in the ruble there are many factors but e.t.c. it is something that needs to be addressed and not just from the from above it needs to be if you have a groundswell of russians wanting to push forward where they see where they've stopped doing because of structural reform or because of many other fears that they may have it's something that for the future of russia the dam needs to break and

they need to be. a mass of young twenty's and thirty's pushing forward and start in the room businesses very few of the number of s s m e's is significantly lower than it needs to be does the government get it from what we just heard. it seems like the government to starting to look into the possibility of compiling a new reform program precisely along the lines of structural efforts directed at boosting productivity finally the focus is more short term previous programs reform programs where for ten fifteen twenty years now the focus is on the next several years so hopefully that kind of effort will lead to something akin to what we saw in two thousand and two thousand and one during putin's first term the most successful reform program that we've had in decades the graph program if something like that is rolled out later this year i think this is one of the potential drivers for the economy and for the markets this year can they don't have much.

choice do they i mean this is you know this is we have a. government that has been able to garner support because the economy has been relatively successful and we've all remember the one nine hundred ninety s. and remember their early to thousands now again this kind of turning point where they it's not the if they want to do it they have to do these things well i hope they see it that way peter but i'm i'm not sure yet let's see there are a couple other tools i think that are out there that could really help this economy the first is more investment in infrastructure which is something that mr putin talked about a year ago it's easier said than done but it's terribly needed in this country and it would really that's that's a disappointment which it as i was saying you know the short term get there is in many ways they have to start thinking more short term and infrastructure that's a big big it's a big one but we shouldn't forget some of the medium long term ones the other thing is building institutions that will support private businesses like financial markets i think the work that's been done in you know rebuilding the stock exchange

here improving the registry system all of these sort of technical things which most of us don't spend time thinking about that's how you get to have institutional investors start to bring money into russia and that's how you get russian companies that start to be able to raise money in russia so these things shouldn't be forgotten either i think there has to be and they're very doable yeah i mean absolutely i mean the cost of the thing is significant over to europe there will security it makes a big difference there's more local shows and. as well as we had previously and this is something that you know we do want institutional money we don't want traditionally the russian stock markets be very flighty offer an awful lot of money flowing in and out whenever whenever you want a high beta for russia to be have long sustainable long term growth you need the institutional substantial institutional money from overseas to be flowing inside and there's little changes make to make a big difference you know some people are going to break you a comment on that yes i think this is for. size lay the issue for us the stock

market has been underperforming throughout the past several years on one issue there are squalid we need quality investors we need long term investors saw there were forms that were conducted they certainly were very important we need more ok gentlemen we're going to go to a short break and after that she will continue our discussion on russia's economy stay with r.t. . i

. depression. for. you to prove your. are you.

know. the. winter is when the sorrow comes to life. always is palm trees are being harvested. people are waiting for the biggest event of the year. the desert festival. this is the. leading camel races have spent the last year preparing for the grueling marathon. the day before the race there's a heavy storm overcoming the power of nature is a neverending challenge. a desert winter.

welcome back to on the money where the business of russia is business i'm peter lavelle to remind you we're talking about russia's economy you know everybody coming into this program my staff my friends my landlord my cleaning lady we all want to know one thing what's going on with the ruble well the thing with. it's very interesting that starting from last year it started to track emerging market currencies such as the troika the brazilian currency the south african currency so it's now within this war tax of the currency crisis and you know to some degree you look at it from within russia you think why is. vortex because really you look at russia's sovereign balance sheet it's much stronger than a lot of these emerging markets russia has a current account surplus the level of oil prices is relatively comfortable sold to some degree this is certainly i think to a large extent an external factor that is impacting russia again and something that

again underscores the significant dependency of russia on external factors. so i would just add two things i think one we can't forget what's going on in the united states with tapering which is really been the catalyst for almost all of the problems in the emerging market currencies and russia has not been as affected as much as some countries like turkey argentina in three days there are few sixteen percent down i mean it was an absolute disaster i think russia like you said because of its reserves and its approach to the currency is a little more isolated insulated then these other countries so i think the other factor here is that the central bank is no longer targeting the value of the currency per se they're looking at inflation they're looking at domestic interest rates and so you can't have both and so right now the tradeoff seems to be will tolerate a little more weakness in the ruble as long as we can continue to stimulate growth

domestically that's a trade off is that a good mixture there yeah i mean i would also have to oversleep depreciating ruble is not great for inflation. and with central bank targeting inflation you know that maybe there may be you know we've talked about potential growth prospects prospects in russia. rising inflation is not great and it's a perennial problem that this country's had in there over the last it was just really i mean it was fundamentally i think that will weaken this is not great for us not just near term but longer term as well because the ultimate issue for russia is the need for trust trust on the part of the population on the part of the economic agents banks and the will and russia's assets and that sizable depreciation is of course a bit of a blow to the will and that regard and i think short term of course and terms of consumption this weakness in the world will is a negative factor so i think certainly this is

a key risk factor for us this year and a lot again depends on this u.s. tapering issue how it will progress on how emerging markets will react let's talk about. capital outflows continues to increase i mean it was a bad month in december. january was even a little bit worse here what's driving them may be capital outflows right now. you know i think it is the same phenomena that's been driving it for years which is i think a lack of trust in keeping assets in this country and also a lot of investment inflows and we just don't have as much coming in as we should have i would say so i think it's the combination of those two things unfortunately most russians that i know want to have assets outside of russia so this is a fundamental i think culture that needs to shift that plus attracting institutional investors to come in only then can you have a balance what kind of trigger does russia need to have this the capital and capital flows coming into the country just coming on air flows before it for i mean

we have to remember that one of the hunt for is actually russian companies investing overseas so the headline number he's. bad but does include these very positive number that should give russia a major benefit in the future it's true i mean this is the number itself is an exaggeration because this is russian money ok it is being parked someplace else exactly and that actually if you look at the scale of these outward investments by russian corporates a lot of them blessed by the kremlin coordinated with the kremlin. abroad and to europe and to the united states i mean the scale is quite significant and is a significant part of the overall outflow the other issue is that a lot of this investment is very inefficient so there is a lot of work that needs to be done by the government in coordination with the corporate sector to try and make sure that going forward state companies are for far more efficient in terms of how they approach these these outward flows and

another issue is of course the offshore ization that was very prominent last year and probably will continue to be a significant issue during russia's. presidency and the g eight that's something that is going to be a major topic there and of course the issue for russia is not just to you know make sure that there are no loopholes with regard to the two off shores but also there are some carrots there are some factories that sort of yeah bring in whatever investment well it's about time isn't it i think offshore financial centers is now become a global issue and i think the last year and really escalated i can tell you within the world bank right now we look at this very very carefully and anybody that doesn't pass the global alliance test in terms of an offshore financial center we will not invest there and they're going to be more and more investors that do this so i agree i think that this problem absolutely needs to be resolved and i think it

we're making good progress i mean i'm going to join a consensus we go well for if it's not complete agreement. as an idea is just slowly dying it's something that will slowly would go away ok let's talk about you know this quarter and moving forward what kind of external things should the russian economy be looking at because if i remember correctly about a year ago it was we still were bullish on the emerging markets and then developed markets it was a cloud over them it seems like it's reversed right now yeah i think one issue is certainly the us tapering that's going to be probably the key issue for the year as a whole for emerging markets overall the other concern is that not only are there signs of weakness in emerging markets but we need signs of weakness in the developed world so the question is is it really proper for the developed world to start thinking so aggressively about tapering the stimulus and then of course within the emerging markets world there is the issue of ukraine there is the

issue of china posting that we figures so there is a a still. range of risks downside risks for the global economy this year this year downside no i i agree i would just maybe focus on europe for a little bit because it was never in the last five years really an engine of growth for russia now we're starting to see a softer form i don't know how much. sort of energy it is behind it i don't know if it's going to last but it's very important to russia in terms of trade i mean it's just fundamental and it's also the largest investor as well it's actually was so i think if we if we see continued improvements in the overall economic situation in europe this is the biggest potential plus for russia the second thing which i think is more of a risk in the medium term is china because it's really the elephant in the room i would say and china i think is going to have

a pause in terms of growth in the next sort of six to nine months simply because i think at the municipal level and somewhat at the national lover the country is overextended and so it needs to be leveraged itself a little bit and i think that this is going to have not such a positive effect on the prices of commodities and oil and gas which is of course key to russians economy something you had a shot a shadow banking in china is really the problem i mean your fictional banking sector is enormous the shadow banking sector well basically you know deposit it is going to try and get above over and above the official you for sure healed. is beyond extended way starting to say a large number of defaults with with companies that are barred from that sector it's a it's an issue that needs to be addressed the chinese know they say i mean again if they haven't fully aware of it but it is a major problem to the world economy i will agree that europe i think ace and of the flat earth as they seem to have got something right out of the time being for

the time being they've benefited from the rest of the world growing and that they've just been refloated naturally but i think that will significantly benefit russia. will be a negative for the the warming iran and u.s. relations and what that does to a potentially just oil price for me that's a that's a little concern for looking so far the gold price has been quite comfortable. quite stable it's one of the amazing things about the past several months you know how you know it's you know worry about iranian oil worried about libya i think there's always going to be talking about your game i want to just have your little bit. talk to our viewers here how does the russian consumer feel right now and what is the russian consumer thinking about well i think the russian consumer is. more in secure than say last year over the past several years because of the ruble dynamics certainly the ruble depreciation is a significant blow. related to that of course is ruble depreciation leading to

potentially higher inflation. the other factor is the slowdown in consumer lending that's something that is actually seen by the central bank as a good thing but on the other hand in terms of headline growth figures this is a bit of a negative so it's basically a transition i think for the economy but also for the russian consumer for from quantity to quality and to some degree because of that will see i see. that the dynamic here in this market here is that patterns are changing your people want better quality but maybe if you were good stiff i was going to say i think that the average consumer is becoming more sophisticated in many ways in terms of quality the products that they choose but also looking from the banking side also in the price of the credit they take so this is a process making is very new in this country and people are just getting used to the idea of understanding gee if i paid this percent and i paid this fee that's

a lot i'm not going to do that so i think this is a good thing but you know consumer credit is still growing it will probably grow twenty five. per year this year and so it's not shrinking so i think what consumers are doing is using their their their roubles and their credit more judiciously they're not buying big things like cars and that and that they're focused on things that make a difference in their day to day life seconds. the consumer is actually slowing down quite significantly retail sales across russia were necessarily down year on year this is a worry looking forward as we've all talked about the consumer being part of the growth ok gentlemen many thanks to my guests and thanks to our viewers for watching us here on the money see you next time and stay with our team.

i marinate join me. for in-depth impartial and financial commentary interview and much much. only on bass and. the future. show we're going to talk about stuff where we meet some of his son's innovators in the nights. we find out how to save black wings for companies that craft. the world in a modern day viking but still money takes some smocks for the album said. here on

r.g.p. . the future. silence on. child . rights. to the. pain of the young girls cam all for of a future hunter. between two and three hundred million guns united states so you can act like they're not here and keep kids away from them. the pass' that is they won you know i mean this teaches them a lot of for us both ability and simply come to pay through the eyes of children if we can do it for our children move for our future what holds all the country will smooth.

the cholesterol pianist depression. these efforts to. change and improve your life. are you found some. form of those that's. closing in on the hearts of.

transit route to vnukovo report you'll best way to the heart of moscow. ukraine's parliament rules former prime minister an opposition icon yulia timoshenko must be freed from jail as anti-government radicals seize the political heart of the country. the president flees the capital to the east where local authorities in deputies say they're taking full control of their regions from now on a claim the crisis deals with the opposition in kiev were made under duress. six pm in moscow a mattress i bring you our breaking news coverage here on r.t. ukraine's president says there's been a coup in the country while opposition icon and former prime minister yulia timoshenko is to be freed from.