Hearty Russia to take G8 podium

Vladimir Putin

Russia will chair a summit of G8 countries for the first time next weekend looking a true member of the economic super league, thanks to vast oil and mineral wealth which is enabling it to free itself of foreign debts.

Some accuse President Vladimir Putin of an authoritarian style and heavy-handed energy diplomacy, but with coffers brimming with petrodollars, there is no doubt about Russia's growing clout on the world financial stage.

Not only is Russia a hot destination for investor cash, its growing external investment is increasing its economic muscle, as cash-rich giant firms like Gazprom and Severstal scour the world for acquisitions.

"A new superpower is clearly emerging. If the Soviet Union used to flex its muscles using nuclear weapons, Russia is doing it with oil," says Peter Westin, economist at Moscow's MDM Bank.

Russia last winter cut gas supplies to Ukraine and Georgia in what many saw as an effort to get pro-West countries to toe Moscow's line. It also threatened to re-route gas exports to Asia if European states block acquisitions by its companies.

But Westin says the G8 will be reluctant to bring up these issues.

"Language towards Russia with oil prices at US$60 ($100.62) a barrel is totally different from oil prices at US$20," he said.

With debts to the Paris Club creditor nations repaid and a newly-convertible rouble, the Kremlin hopes a float of shares in oil firm Rosneft will be a potent curtain-raiser to the July 15-17 St Petersburg summit, raising US$11 billion.

"Clearly there's a political wish to declare the debt out of the way and say Russia has a convertible currency," said Kaspar Bartholdy, head of emerging market strategy at Credit Suisse.

"I think there is a sense of satisfaction in being able to sit down with the G8 countries from a starting point in which Russia does not owe any money to them," Bartholdy added.

The initial public offer (IPO) of Rosneft shares is set to be the world's fifth-largest ever.

Niall Paul at Morley Fund Management does not plan to take part in the deal but says no emerging market equity portfolio can afford to omit Russia.

"Russia's oil and gas sector registers as one of the most attractive on a global emerging market basis. We are very bullish on oil and Russian corporates have a commanding position in the sector," said Paul, who manages US$2.5 billion.

Paul is not too worried by the state's growing control over the economy and its willingness to use oil as a bargaining chip.

"Russia is acting in its best interests both economically and politically. From an investor's point of view, providing your company's interests are aligned with government policy, the situation is fine," he said.

The flip side of the high oil price is a slowdown in reform momentum and a lack of enthusiasm for foreign direct investment (FDI).

While Russian firms raise billions of dollars via syndicated loans, bonds and IPOS, and foreigners own 70 per cent of the buoyant Russian stock market, Moscow has scored net per capita FDI of just US$90 since 1991, says MDM's Westin.

This compares with US$5000 in the Czech Republic.

"What we see is a state-led investment programme which is far less effective," Westin says. "FDI as a complement is vital. Without it, Russia's huge potential will be not realised." Without FDI and foreign expertise, oil and metals output growth may slow as heavy taxation leaves Russian firms with little to reinvest in new projects. Investment is also key to rebuilding ramshackle infrastructure and lifting per capita gross domestic product of US$4500 -- far below levels in other G8 countries.

Russian firms are avid buyers of foreign assets from football clubs to metal smelters.

Data provider Dealogic estimates Russian companies bought overseas assets worth US$6.5 billion in 2005 compared with US$7.1 billion in foreign purchases of Russian assets.

Negative net FDI will likely be the trend, given Moscow's reluctance to allow foreigners access to its larger assets.

"From an investment perspective, markets are looking more at what Russians will do outside the country rather than what foreigners will do in Russia," said John Davitte, head of emerging markets research at IDEAGlobal in London.

As Russia's cashpiles grow by a whopping US$9 billion a month it has started questioning the dollar's role as a stand-alone reserve currency -- and markets are listening.

"With US$250 billion, Russia has a big impact on the status of the dollar versus euro and yen," Davitte said, forecasting Moscow to also start pushing the rouble as a global currency.

- REUTERS