Russia’s Devoid Davos Divination
Russian stocks led the region with a 20 percent MSCI index bump in the first half, as Central Europe crumbled on Brexit fears and Turkey’s gain was halved to single digits with cabinet reshuffling and an Istanbul airport terror assault. President Putin and his team, with technocrat former Finance Minister Kudrin back as an influential adviser, cited broad currency and financial market recovery at the annual Saint Petersburg forum nicknamed “Russia’s Davos,” but Western business executives and fund managers continued to stay away with Ukraine-related sanctions due to be extended another six months. The central bank slashed rates for the first time in a year around the meeting, even though inflation is double the 4 percent target as recession may linger into 2017. FDI has been absent despite a sharp reduction in reported capital flight and repeated senior official promises to protect company rights. The $50 billion Yukos international arbitration award was overturned on appeal in favor of the Kremlin, and allies have bankrolled a new film about the Hermitage-Magnitsky affair accusing them rather than tax authorities of abuses and responsibility for a $250 million fraud. The effort coincided with government proposals to raise taxes over the medium term to tackle the widening fiscal deficit at 3 percent of GDP, and reserve fund depletion as it struggles to cover mandatory pension payments. Prime Minister Medvedev was widely mocked on social media for a senior citizen exchange wishing her luck without a requested payment hike. Minority stakes in listed state companies may also be unloaded for revenue, but representatives are not considering a large scale privatization program. These firms were ordered to remit half of their earnings in dividends, but failed to meet the standard as a handful of executives try to revamp corporate governance practice. Another external sovereign bond may be in the works after May’s controversial $1.75 billion issue at half the target sum, but settlement network Euroclear will not participate in the transaction with the continuing US and EU boycott according to underwriters.
A breakthrough in Russia-Turkey relations came as President Erdogan apologized for downing a jet over Syria, and President Putin seemed to reciprocate the gesture by no longer discouraging tourism, already off 50 percent this year, to his neighbor. The relief will be hard to tap in the face of the end-June Istanbul airport bombings and shootings, with Islamic State following a strategy in Egypt and Tunisia to target foreign visitors. Kurdish rebels in contrast have focused on domestic sites mainly associated with the security forces. The tragedy followed buoyant Q1 consumption-driven GDP growth at almost 5 percent, as the current account gap was 1.5 percent through April against a solid capital account surplus. The lira stabilized despite an interest rate cut under the new central bank chief, as a longtime Erdogan loyalist took over as prime minister and former Merrill Lynch economist Simsek was retained as deputy. However his portfolio may be curtailed according to reports, and European investor sentiment in particular has been poisoned by continuing fights over the visa-refugee deal and Armenian genocide recognition as festering bilateral spats.
