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Russia Faces Major Changes Even If Putin Wins Election

MOSCOW—Russian strong man Vladimir Putin — twice president, now prime minister — is expected to win back the presidency in this weekend’s election against an active but disorganized opposition.

Vladimir Putin
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Vladimir Putin

But analysts on the ground in Russia still say it will be nearly impossible for the former KGB agent from St. Petersburg to maintain the status quo of a regime that many Russians believe is corrupt from top to bottom.

The main question is not if there will be change, but how soon and how much?

Already, in the lead up to the election, Putin appears to have loosened the reins of the media, allowing coverage of his opposition on state-run television and even the airing of a critical BBC biography “Putin and the West.”

At the same time, Putin lashed out at his opponents and the West with ever-strident rhetoric as election day neared.

"We ask everyone not to look abroad, not to run to the other side and not to deceive your motherland, but to join us," he told a crowd of around 130,000 supports at Luzhniki stadium in Moscow last week. "We won't allow anyone to meddle in our affairs or impose their will upon us, because we have a will of our own."

Putin has accused newly arrived American ambassador to Moscow Michael McFaul of fomenting protests in the street.

But observers here say the protests are real, a sign of a wealthier Russian population demanding greater political rights.

They are also a sign of dissatisfaction among the educated elite, who felt betrayed in September when Putin announced not only that he had decided to swap positions with Prime Minister Dmitry Medvedev and run for the presidency, but that, in fact, the decision had been made four years earlier and kept secret. Simmering frustration erupted in December amid widespread belief that parliamentary elections had been rigged.

Still, Putin is likely to win this Sunday’s election for two reasons. First, there is no obvious opponent with enough popularity to beat him. Putin faces opposition from Communist Gennady Zhuganov, Nationalist Vladimir Zhirinovsky and billionaire Mikhail Prokhorov, best known in the West for his ownership of the New Jersey Nets.

Initially seen as sponsored by the Kremlin, Prokhorov’s campaign has since exerted some independence, making some observers believe he could be a future leader of real opposition in the country. Asked about Prokhorov, a taxi driver in the provincial city of Krasnodar, 750 miles south of Moscow, responded simply, “Not yet.”

Second, enough wealth has filtered down to ordinary Russians that, in general, their lives have improved and they still praise him for the stability he restored to the country from the chaos that followed the breakup of the Soviet Union.

Polls show Putin’s popularity has risen again, from a low of around 50 percent during the protests to north of 60 percent now.

“The vast majority of Russians still don’t understand how basic rights, the right to earn and go abroad, can effect their daily life. You can't eat politics,” said Sergei Strokan, a political analyst at the daily business newspaper Kommersant. “And these people really support Putin because he gives them something — he gives them pensions, he gives them salaries.”

Russian per capita income is now nearly $13,000, almost double what it was five years ago. Because the government privatized most apartments, a large part of the average Russian’s income is disposable. Chevrolet is the best selling foreign brand here in Russia, with the Detroit automaker selling 173,000 cars in 2011, up 49 percent in a year.

Indeed, it is hard to find Russian cars on the street in Moscow, amid the foreign brands, including Mercedes, Lexus and BMW. (Russia automaker Zhiguli is still the best seller at 578,000, but it registered the lowest growth among the 10 biggest sellers last year at 11 percent).

After sharp declines following oil prices declines and the global financial crisis in 2008, Russia bounced back smartly with two back-to-back years of growth of 4.3 percent. The unemployment rate has fallen to a post-Soviet low of 6.3 percent. Inflation has declined to just 4.2 percent year on year, a fraction of the hyperinflation of the 90s and the lowest in modern Russian history.

Still, compared to the billions of dollars pouring into this country from its vast oil and gas and other natural resources and the 101 Russian billionaires — a third of all of the super-rich in Europe — average Russians could and should be doing much better.

Basic infrastructure — from health care to the transportation system — is severely lacking. And Western businessmen who have been here for decades say the level of corruption, which was thought to be bad in the 90s, is far worse now. Ordinary Russians believe it to be directed directly from the Kremlin. Even Putin has called corruption out of control.

But the cold question from an investment point of view is whether Russian shares are appropriately priced for the harsh Russian reality and the promise. Its market is by far the cheapest of the BRIC nations. Russian oil companies carry even lower valuations than counterparts in Sub-Saharan Africa.

Stephen Jennings, CEO of Renaissance Capital, the biggest independent investment bank in Russia, says those investing in Russia should be prepared for scaling incredible heights and then bungee jumping.

“We're probably halfway through this massive modernization and normalization,” Jennings said. “The good news is there's a heck of a lot of stuff — institutions, corruption and so forth — still to be fixed up and modernized. But if we see the same rate of change and development in the next 20 years, or even half of what we've seen, we're going to see a very different country 20 years from now.”

Investors who have taken the ride from the beginning of the Russian Trading System Index in 1995 and stayed on the rollercoaster have seen returns of 2,500 percent, one of the best returns anywhere in the world. Over that time period, they suffered through an 89-percent decline in the worst year, 1998. The RTS is up 45 percent since the October lows, but remains down 13 percent compared with a year ago.

Hanging over the country’s investing reputation are infamous cases like the jailing of Mikhail Khodorkovsky on tax evasion charges and the nationalization of his massive oil company. Pioneer Russian investor Bill Browder had a company stolen from him by government bureaucrats, including a $300 million tax refund. He was refused entry into the country and his lawyer was found to have been fatally tortured in jail.

And still, in fits and starts, there is progress. On their breaks, young Russian programmers play pool and ping pong and even jam in a music room at Yandex, one of only few Russian internet search companies in the world to beat Google at search in their own country. The company’s IPO in New York raised $1.4 billion and was oversubscribed.

In Krasnodar, 44-year-old retail magnate Sergei Galitsky is making a play to be the Sam Walton of Russia. He’s built a $10 billion retail giant from scratch. His Magnit empire boasts 5,300 stores around the country, 15 warehouses and 3,000 trucks. He’ll open 800 new stores this year and add to his tally of 123,000 employees.

Even in Krasnodar, cranes dot the skyline and thousands of new apartments have given Russians a chance to move out the old Soviet-bloc housing.

Jennings, who has been in Russia for two decades, advises that investors need to understand Russia on its own terms, not compared to anything since the situation is so unique and volatile.

“People try and pigeon hole Russia. It fits in this box or it fits in that box. Russia fits in the Russia box. And I think investors who can see Russia in context and see the challenges and opportunities in context, they tend to do very well.”

(Click here to see more about Russia's upcoming presidential election.)

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