Russian economy flourishes like UAE’s

With oil prices remaining high, Russia is enjoying a similar economic boom to the Emirates, and has amassed $500 billion (Dh1.83trn) in foreign currency reserves. GDP has been rising sharply at around seven per cent per annum for the past seven years. And as emerging stock markets like China and India have sold down rapidly since last October, 48 and 35 per cent respectively, the Russian bourse hovers near an all-time high.

Last week came the news that Dubai World and OAO Roskommunenergo are to bid $5.3bn for Russia’s biggest wholesale power producer before price caps end in 2011. This will be the first Russian Energy investment by a GCC oil state, and part of a $34bn sale of electricity generation and distribution assets since 2006.

Dubai-based entities have a mixed record for buying foreign assets in recent years. Property giant Emaar bought UK estate agency Hamptons just in time for the market to slump, and acquiring the second-largest US housebuilder John Laing was arguably even worse on timing. But then Madame Tussauds in London proved an excellent buy and was sold on for double the sale price. Then again last August Dubai World agreed to invest $5.1bn in Kirk Kerkorian’s MGM Mirage company in Las Vegas as part of Dubai’s diversification plans. Since then Las Vegas has gone into an unprecedented slump with tourism falling in a city once thought recession proof.

OGK-1 has four plants in European Russia and two in Siberia, and supplies electricity to Moscow and the oil-rich Tyumen region. Only time will tell if this is the right time to buy. It is only too easy for foreign investors to become the latecomers to any investment party. But the omens are very fortuitous in post-Putin Russia. The economic transformation runs deep and is being overlooked by the Cold War mentality of some observers in the West.

Arriving back in Russia after a year's absence last week there is an immediate sense of economic prosperity in the air, and none of the near panic seen in the UK, US and parts of Europe. Indeed, the most apparent change is that inflation has surged in Russia, usually a sign of economic strength or possibly overheating. The cost of the train ticket from Moscow to St Petersburg has doubled in a year, similarly ballet prices have shot up and even the price of art on the streets is double what it was two years ago. Even gas at the pumps sells for US prices these days.

However, average salaries in St Petersburg are now around $20,000 a month, an amazing transformation from my visit in 2001 when take home pay was around a quarter of that level. House prices are up 10-fold in that time. Russian housing was privatised back in 1990. This combination of rising salaries and house prices has created a large and prosperous middle class of consumers that just did not exist in the chaotic Yeltsin years of the 1990s.

They all seem to be buying new cars. Total Russian new car sales this year are estimated to exceed 3.3 million, and for the first time Russia will overtake Germany as the largest car market in Europe. This is a middle class on the move, quite literally, and this increase in gas consumption does not bode well for future demand pressure on oil prices either. By contrast Russian oil output is expected to fall for the first time in a decade this year, by one per cent.

The Russian consumer, therefore, looks well capitalised and prepared to spend. Moreover, Russian consumers do not carry heavy personal debts like their counterparts in the UK, US and even the UAE. Consumer credit is growing but still in its infancy. It is only very recently that mortgage interest rates have fallen to reasonable levels, so the consumer-led economic expansion seems to have much further to go. The economic gap between Russia and the European Union is closing but far from closed.

Against this background Dubai’s bold move into energy assets looks intelligent, although the specifics of the price paid are hard to judge without access to the accounts. Russia is deregulating electricity prices and will free prices completely in 2011. The country needs to invest $185bn to modernise and expand power plants and infrastructure in the run up to this historic price liberalisation.

DP World’s Limitless subsidiary has also said it will build a new Moscow suburb with a local partner to create homes for 12,000 people, and clearly sees Russia as a prime emerging market for expansion. But an earlier property deal in Russia by Limitless was cancelled without explanation. This does remain an emerging market with higher than average risks as BP has found in managing its difficult relationship with joint venture partners recently.

But ultimately Russia may prove the best investment in emerging markets at the present time, ahead of China, India and even Brazil. Commodity prices are sky high and keeping the economy red hot at a time when the European Union looks set to join the UK and US in recession before long. The big question is how long commodity prices can stay up when the consumer economies are heading down?

For all its foreign exchange reserves and consumer strength, the Russian economy is quite highly geared to expansion and would take a commodity price fall badly. But OGK-1 could still prove a very good deal for Dubai and another Madame Tussauds rather than a John Laing Homes, although this is likely best seen as a long-term investment in a country that is in the process of achieving a permanent upward shift in its standard of living.