Europe Economy

Investors, Stay Away From Russia for Now: Analysts

Russian stocks and the rouble held above the two-week lows they hit ahead of  massive weekend demonstrations against Prime Minister Vladimir Putin, but analysts said that, at least until Dec. 24, investors would be better off staying away from Russia.

Vladimir Putin
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Tens of thousands of protestors demonstrated on Saturday demanding a re-run of the parliamentary elections that took place on Dec. 4, saying they had been rigged in favor of Putin's United Russia party.

President Dmitry Medvedev has ordered an inquiry into the accusations of fraud but made no mention of demonstrators' calls for an end to Putin's rule and was insulted on his Facebook page by Russians who believed his response didn't go far enough.

Protestors have promised to take to the streets again on Dec. 24 if their demands are not met.

Liza Ermolenko, emerging markets economist at Capital Economics, said it is risky now to invest in Russia, as "nobody knows what will happen."

"It depends on whether on the 24th people will come out in the same numbers and continue protesting or whether they'll give up," Ermolenko told

The majority of protesters are highly-educated, middle class people who demand democracy and freedom, so they are unlikely to be appeased with subsidies or promises of higher incomes, according to analysts.

On Saturday, demonstrations went peacefully, but the Kremlin has a history of violent crackdown and arrests of dissenters, so it is unclear if the protesters will take to the streets again.

"It's very hard to say, but I don't think they will give up," Ermolenko said. "If you come out once, you might as well come out again. They'll probably be even angrier."

Business Environment a 'Persistent Handicap'

But they are unlikely to obtain the cancellation of the election results and a re-run of the polls, Simon Quijano-Evans, an EMEA economist at ING, wrote in a market note.

"Given the protests have been apparently initiated by the so-called middle class, one of the main points of focus will be how the leadership approaches the middle class, especially given existing issues such as the flat rather than progressive income tax," Quijano-Evans wrote.

ING has a "Neutral" recommendation for Russian stocks, but Quijano-Evans said the political dimension attached to shares now is positive for the medium term because it should push reforms on the right path.

To develop over the long term and meet the challenges posed by high income inequality, Russia has to modernize its economy further, the Organization for Economic Cooperation and Development warned in a report released on Monday.

"The business environment remains a persistent handicap for the Russian economy," the OECD said in a press release.

The organization urged the country to cut bureaucracy, speed up privatizing state companies and ease its restrictive foreign investment rules and foreign trade regimes.

"There is also a need to reduce pervasive state involvement in the economy, fight high levels of corruption and strengthen the weak rule of law," the OECD said in a statement.

Artem Arkhipov, head of macroeconomic analysis and research at UniCredit Bank Russia, said one trend that makes him cautious about the country's medium-term outlook is a growing outflow of capital.

"On the one hand, the reasons for outflow are obvious: The timing for investment in Russia is not perfect due to [unlikely but possible] political changes, and the situation in the rest of the world now is not suggesting [a great deal] of foreign investments as well," Arkhipov wrote in a market research note.

"On the other hand, available projects (especially large-scale and state-related) allow many opportunities," he added.

Current Prime Minister Vladimir Putin is likely to face fiercer opposition than expected before the demonstrations in the presidential elections in March next year, analysts said.

Billionaire businessman Mikhail D. Prokhorov, who owns the New Jersey Nets basketball franchise in the United States, announced on Monday that he would run for president.

In September, Prokhorov was removed as the head of a pro-business party, Just Cause, after having disagreements with Kremlin political strategists.

Former Russian Finance Minister Aleksei Kudrin, who was ousted after publicly disagreeing with Putin's decision to take Medvedev's job at the presidency, announced, also on Monday, that he will form a new political party to introduce liberal reforms.