|
For a decade, from the birth of the Russian stock market in 1994, to 2004, Sovereign was the largest institutional portfolio investor in Russia.
The Iron Curtain Falls
Even in the final stages of Communism, Russia's economy ranked as one of the largest in the world. On the basis that it contributed half the GDP of the USSR, this placed it ahead of Germany, at around USD 1 trillion (on a purchasing power parity basis). But with its emergence as an independent state following the collapse of Communism in 1991, Russian GDP contracted severely, slipping to 10th in the world behind China, India and Brazil.
Starting with the birth of the Russian stock market in 1994, Sovereign made equity investments in companies including Unified Energy Systems, Mosenergo and Irkutskenergo in the electric utilities sector, the Novolipetsk steel mill and various oil and gas companies including Gazprom, Lukoil and Surgutneftegas.
Meeting Governance Challenges
In 1998, Russia defaulted on its USD 40 billion domestic debt obligations, causing the Rouble to plunge and the stock market to fall 95% in Dollar terms from its mid 1997 highs. However, as economic and political uncertainty diminished and commodity prices strengthened, Russia began the road to recovery. In addition to economic opportunities, all market participants in Russia's rapidly changing economy of the 1990s were faced with ethical and moral choices. Dilutionary share issues, intimidation and fraud were considered tame at a time when bankers were being murdered and competition for valuable resources often devolved into a test of force by private militias.
It was clear that if Russia was to develop a trustworthy and prosperous capital market then capital market participants - whether domestic or foreign - would have to stand up for investor property rights and ethical corporate governance. This is what Sovereign did with its investments in Novolipetsk and Gazprom.
Energy Drives a Strong Recovery
By April 2006, the windfall of high energy prices had driven foreign exchange reserves over USD 200 billion. In the preceeding six years, economic growth averaged 6.7% and the stock market increased five fold. |
 |
Background
Oil and gas exports are currently fuelling Russia’s economic boom and increasing its geopolitical influence. Since 2003, the economy has grown by an average of 7% annually, real disposable income has doubled, and a series of banking and financial sector reforms has improved investor confidence. Income inequality remains pronounced, however, and economic development is hindered by pervasive corruption, a weak rule of law, and increasing political authoritarianism. HIV infection rates are rising, and there are high levels of narcotics and alcohol abuse. Russian security forces continue to battle insurgent movements in Chechnya, and Islamic separatists in neighbouring Ingushetia. A conflict in Georgia has dramatically heightened tensions with the West.
For more information, please visit the Legatum Prosperity Index country profile of Russia:
|