Russia as a "Safe Haven" for Global Investors

A recent report by Alfa Bank, Russia's largest private bank, bubbles with optimism over the country's economic prospects. The report predicts at least 30 percent annual profits for foreign investors, regardless of the stocks they choose.

"Safe haven" is not a term typically associated with the Russian financial market. Indeed, many investors lost billions of dollars during the 1998 default, when the Asian financial crisis sent stock exchanges all around the world into a nosedive. In part due to poor banking legislation, the Russian government defaulted on its debt and subsequently devalued the ruble.

However, the ruble devaluation also strengthened the position of Russia's exporters and spurred an economic recovery. The country learned some important lessons from the debacle, and took significant steps toward cushioning itself from another financial meltdown. In addition to passing new legislation, the government channeled windfall revenues from high oil prices into a "stabilization fund." Russia's gold and foreign currency reserves are expected to top $535 billion this year, while GDP growth is forecast at 6.5 percent.

Investors are now revising their opinions about the Russian economy. The country looks prepared to weather the effects of both the U.S. mortgage crisis and the ensuing global economic slowdown. As the second largest exporter of oil in the world, Russia also benefits from high energy prices. This, complemented by the bullish growth of its stock market, is rapidly making Russia attractive for international investors seeking to minimize risks by moving funds from American and European assets.

Alfa Bank's analysts say political stability in Russia is an important positive strategic factor. "The election of [First Deputy Prime Minister] Dmitry Medvedev as president of Russia appears to be the most probable scenario. This promises four more years of political stability in Russia," the bank's forecast says.

Alfa Bank's analysts single out inflation as Russia's biggest sore spot. It exceeded planned levels in 2007, and with neither the prices of commodities nor the influx of petrodollars likely to subside, the government may also fail to restrain the growth of prices in 2008. Another serious problem comes in the form of competition from the rapidly growing economies of China, India and Brazil. They are vying for the attention of international investors, and have demonstrated their ability to realize sound economic policies. However, as long as the government maintains its commitment to attracting foreign investors and maintaining macroeconomic stability, Russia should further live up to its developing reputation as a "safe haven."

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