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The double-headed eagle that features on Russia’s coat of arms is said to reflect its geographical position, facing both East and West. Maybe a more apt interpretation is Russia’s continued dominance in the old economy while thriving in the new.
In our view, Russia is in an enviable position when looking at a number of fundamental factors; it has very little sovereign debt, a current-account surplus and considerable foreign exchange reserves of US$570 billion, equivalent to 33% of its gross domestic product (GDP).1
Oil—an old economy sector—is Russia’s bread and butter, representing 35% of its GDP and 70% of exports. Therefore, it’s fortunate that Russia enjoys a number of advantages over many (or most of) its international peers such as low cost of production, costs denominated in local currency and—perhaps driven out of necessity from years of sanctions—a keen interest in developing its own technology to improve efficiency.
Take one of Russia’s top tier vertically integrated oil companies. It benefits from a strong balance sheet, long-term reserves estimated to be more than 18 years and is free cash flow positive with oil priced at just US$15 a barrel. Furthermore, it operates in a progressive-tax-regime environment, so when the price of oil declines, the government bears the cost and margins are almost unchanged.
In recent years, the company has been embracing technology and innovation through its own research and development lab, investing in upgrading its refineries and developing techniques to improve efficiencies and drive down costs.
New Economy Thriving
Elsewhere in Russia, the new economy is thriving. Russia’s leading bank, originally founded in 1841 by order of the Russian Tsar Nikolai I, is steeped in history but today claims to “compete with global technology firms, whilst remaining the first choice bank for retail and corporate clients.”
Certainly, from a traditional banking perspective, it appears impressive, as it reports that it services 70% of Russia’s population of around 92 million people through 15,000 branches.
But it is so much more than a traditional bank. Its digital ecosystem incorporates artificial intelligence (AI), big data and robotization. Already it reports that 40% of client queries are solved by its chat box, and it has created its own private cloud and collaborated with others to offer services such as video streaming, e-education, restaurant bookings and ride sharing.
Similarly, Russia’s leading search engine has built an impressive ecosystem. Already successfully competing with Google, it offers services such as e-commerce, ride sharing and online music in a similar fashion to Apple Music. Initiatives include a Russian version of Netflix with a plan to create its own content, and it is even developing autonomous cars.
So, we pose the question: Should outdated perceptions of Russia be revised?
It would seem that in addition to its continued dominance in the old economy of oil, Russia appears to offer a compelling investment pool for those wanting to ride the structural tailwind of the new reality where consumption and technology offer tomorrow’s drivers of growth.
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1. Source: Nations-Unies, Perspectives de la population mondiale, données de 2019.