Should Russia’s internal issues scare long-term investors?

Should Russia’s internal issues scare long-term investors?

The Russian government is not doing enough to address social issues affecting large portions of its population. Is this attitude ultimately unsustainable?

The ruble’s well-publicised collapse, corresponding with the fall in oil prices throughout 2014-2016, left foreign policy experts scrabbling to define and proclaim a new era of Russian retrenchment. Still reeling from widespread economic sanctions imposed by the E.U. and the U.S., Russia was teetering on the edge of financial collapse.

Given the instability and uncertainty of Russia’s economy in 2015, the ruble has made a remarkable comeback, posting a 20 percent gain year-on-year. Capital flight, the scrooge of long-term capital investment, has slowed to a trickle compared to last year, with a reported $9.6 billion in the first 9 months of 2016. Russia’s stock market, once a manifestation of corruption and ineptitude, has been professionalized and is recognised as one of the most efficient and transparent amongst emerging markets. Russia’s MICEX’s recent gains of 12.9% since the election of Donald Trump and 24.3% year-on-year, have provided investors searching for maximum returns with an exciting and potentially prosperous opportunity.

With investors struggling to realise returns on Russia’s economic comeback, social economists and policy specialists are left wondering two things. First, is its current market sustainable? And second, are social and demographic conditions a forewarning and impediment for future long-term growth?

Recent demographic studies highlight critical benchmarks used to determine the future long-term growth of a country’s economy. For Russia, its labor market as a segment of its population is tenuous. Male life expectancy, currently hovering around 64 years of age, is almost 15 years younger than leading European countries. Demographic changes, although often cited in Russia-focused studies, are catalysing a situation perilous to long-term growth.

According to the Brookings Institution, “Russian economic policy will face the very serious threat rapid depopulation in the coming decades,” with the likelihood of immigration failing to make up for the discrepancies due to an overtly anti-immigration and nationalist fervour sweeping the country in recent years. Furthermore, immigration concentrates from former CIS countries whose migrants are often poorly educated and lack the skills for a modern economy.

Fuelling the rapid decline in the country’s work force revolves around Russia’s refusal to acknowledge the basic scientific conclusions on HIV/AIDS, drug and alcohol addiction, and the rise in pollution-related deaths. Russia has an estimated 1.5 million people with HIV/AIDS out of a population of only 140 million. Recent surveys from the NGO Phoenix Plus found that the HIV rate among homosexual men has increased from 12% in 2012 to 22% percent in 2015 – a dramatic increase that is on par with Sub-Saharan Africa in terms of prevalence.

Russia is fast approaching an inflection point: its current trajectory is forcing itself to come to terms with growing internal socio-economic factors that could be antithesis to growth and prosperity. For years, analysts and pundits have forecasted the fall of the Russian state only to be rebuked time and again.

Russia and the Russian state of mind is impossible to comprehend as a mentality, built over the course of its rich, tumultuous, and often opaque history. From Ivan the Terrible to the Tsars, Communism, and the managed state of Vladimir Putin, Russia continuously defies the odds of solvency. It remains to be seen whether Russia will continue to out-perform analysts’ expectations, and overcome issues that are not easily quantifiable.

Categories: Economics

About Author

Christopher Hellie

Chris Hellie is a consultant and advisor working in the United Arab Emirates. He is the founder and CEO of Traveling Wonk, a tour company focused on policy, education, and culture in Asia and the Middle East. He served as an officer in the U.S. Army deploying to Baghdad Province, Iraq from 2007-2009. He is a graduate of the University of St Thomas and holds an MA in International Commerce from George Mason University School of Policy, Government, and International Affairs.