PUTIN'S LEGACY DISCUSSED AT EMTA Spring ForuM IN NYC
Veteran market guru Larry Brainard (Trusted Sources) delivered a special presentation at EMTA’s Spring Forum. The event, hosted by Bear Stearns, took place on April 19, 2007 in New York City and was attended by over 100 market participants.
Brainard‘s presentation focused on the legacy of Russia’s President Vladimir Putin, and an analysis of his potential successors. Russia’s presidential elections will be held in March 2008.
Brainard began by asking whether it matters who is elected president after Putin. Many analysts have argued that Putin will continue to exercise some sort of influence after his successor takes office, and Brainard agreed that “it is very clear that he will continue to have a very significant impact and influence on political developments.”
Brainard stressed that “the most significant aspect of his term was his achievement of stability,” clarifying that stability from Putin’s viewpoint meant “reasserting federal authority and state control of strategic sectors of the economy…some above board, a lot below board.” In addition, Putin will also leave office with a reassertion of Russia’s role in world affairs. Finally, he has improved Russia’s financial picture.
A second argument for ignoring the upcoming vote is that crucial financial stability is under the control of the Finance Ministry rather than the president; and the new 3-year budget “essentially fixes all the major projects that the next president will have to continue.” Brainard discussed innovations in the budget which, one could argue, will insure the power of the Finance Ministry.
Political control is actually based elsewhere than in the presidential office according to a third argument that the elections are meaningless; “conspiracy theories” abound concerning ex-KGB agents and others who missed out on the first wave of privatizations and now are hungry to get back in power. Individuals motivated by the uncertainty of property rights fear a new president could undercut them, according to this reasoning.
Brainard switched gears and then argued for the importance of the outcome of the presidential race. “Stability does not in and of itself guarantee a dynamic longer-term growth in the economy,” he asserted.
Secondly, “the stakes are very high,” with the economy in need of “serious reform” to sustain growth, reform that would likely arise under a new leader. Brainard discussed the “calculated gamble” Putin appears to be making in moving Russia towards controlled political competition. Such limited political competition entails less stability but less risk; the question remains will it work and can Putin succeed in controlling the opening of the democratic process.
Brainard discussed the two leading presidential candidates who have emerged in this controlled political liberalization, Dimitri Medvedev, a pragmatic modernizer and Sergei Ivanov, more of a man in the “traditional Russian mold, a tough patriot.” It remains to be seen whether Putin will endorse a successor, and Brainard argued that it is probably advantageous that he resist doing so, as he would quickly cast himself as a “lame duck” (which he also avoids as long as there is some discussion of a third term, Brainard noted).
Trusted Sources’ view is that Medvedev is the most likely election winner. At 42, he reached adulthood during the final years of the USSR, with his perspective affected by the fact that his early professional life took place during the turbulence of 1991. Medvedev has experience in the private sector and has had a similar kind of training as Putin. While Medvedev continues to lead in polls, Ivanov’s numbers are rising as he becomes better-known. If Medvedev wins, he will “clearly have a significant impact, particularly in the area of reform…he is very clearly a modernizer,” according to Brainard.
There are reasons for optimism with a Medvedev victory, Brainard concluded. International reserves continue to grow, the balance sheet remains strong and public debt has declined. Finally he referred to a recent opinion poll on Putin’s tenure which showed that the commonly held view among Russians is that the president’s main achievement was to strengthen the country’s standing in international affairs, while opinion on raising living standards were divided. Putin also enters his last months in office with an approval rating of roughly 80%, which Brainard contrasted to other G-7 leaders. “We may disagree on whether what he is done in the economy is good or bad or indifferent, but it is true to say that he very much reflects the wishes of the Russian people,” he ended.
A panel discussion of Emerging Markets experts moderated by Bear Stearn’s Carl Ross followed the keynote presentation. In his introductory remarks, Ross noted that since Bear Stearns began hosting the Spring Forum several years, the tone has been one of “caution and disbelief at where spreads are, with a general consensus that there is no value in sovereign debt.” Ross countered that there has been a major shift in thinking, with the market now convinced that spreads can go even tighter despite record levels that have already been achieved.
David Spegel (ING Financial Markets) provided an analysis of the short-lived market correction in February, as well as risks to the market. He concluded “any sell-off remains a buying opportunity, the supply-demand mismatch is too favorable.” Spegel highlighted that the increased issuance of lower-rated corporate debt has not been matched by an increase in corporate debt analysts on the street monitoring that credit risk.
Bear Stearns’ Alberto Bernal admitted his surprise that Mexican President Calderon was able to pass a “decent—not good, but decent” pension reform through Congress. However he reiterated a market perform rating on Mexico based on current spreads.
Jim Barrineau (Alliance Bernstein) announced he was more bearish on Ecuador than most sell-side analysts. “Even if they pay the coupon in May, it is clear that fundamentals have deteriorated,” he stated. He also praised Colombia’s actions to shift debt-issuance from dollar-denominated to COP-denominated obligations.
Other panel topics addressed by the panel included the ramifications of central bank accumulation of foreign reserves for EM portfolio managers, which Barrineau labeled the “single issue that matters in Emerging Markets – nothing else matters in the least – no policy decisions, no political reforms, it’s all about reserves and liquidity.” He warned that those avoiding local currencies because of concerns of a correction are more likely to be un-employed than to be employed next year.
The panel concluded with analyst recommendations. Spegel spoke enthusiastically about corporates generally despite the concerns he had raised earlier. Barrineau asserted he was more optimistic than the consensus view on Brazilian rate cuts. “But I don’t know what to do with that, because if you are not long by now, you have missed an awful lot of the party,” he stated. Michael Gavin (Citadel Investment Group) spoke in favor of both Indonesian currency and credit plays, and was also bullish on Latin currencies in general. Bernal was bullish on Argentine GDP warrants.
Asking the panel for thoughts on the marketplace in five years, Barrineau ventured that with an investment grade-rated Brazil, EM will become a subset of global investing and will cease to be considered a separate asset class. Gavin suggested Colombia spreads will be tighter than Mexico. Spegel forecast that there would be an increasing scarcity premium on EM sovereigns, and Mexico would be A-rated. Bernal speculated that there would a currency union between Ecuador, Venezuela, Bolivia and Cuba.