The western establishment, including business circles, counted to see a liberal kind of president in Medvedev, and initially he did not disappoint them. However, after he signed the decree about recognition of Abkhazia and the South Ossetia, the attitude towards him changed. Naturally, a question arises: how can all that influence the mood by businessmen, European ones first of all? What will matter more for them: obvious advantages of conducting business in Russia and with Russia, or political aspect? Wouldn’t problems appear with international expansion of the domestic companies, including those with the state share in them, like Gazprom and Rosneft? Besides, Prime Minister Putin has already taken some economic steps driven with purely political reasons, for example, the factual ban put on import of chicken from the US. In case this trend towards isolationism proves stable, then we shall have to understand whether our economy is ready to substitute a bigger share of import in the home market and how long and painful such a process might be. There is also a good reason to start reflecting on whether interference by the state would increase, as it will have to substitute the market mechanisms where it hinders their functioning (for example, after the fall of stock markets the state had to carry out intervention in order to protect the shares of the leading companies from definitive collapse). Talking in general, can we say that under conditions of globalization the isolationism leads to greater administrative interference in the economy?          

All the questions above were asked by Novaya Gazeta to a number of leading economists.  

Evgeny Yasin, Research Manager at the Higher School of Economics:

Why should the attitude by the western business circles towards Russia come to a change? It’s too early now to conclude that Medvedev is no liberal. Besides, I don’t think that Medvedev can spoil the situation so much that it would not be possible to rectify anything. 

All businessmen, including European ones, have a task of getting profits. Did you notice that after YUKOS developments they got to like less to work in Russia and began to invest less money? I did not notice that. Advantages of having business in Russia do matter more than political aspects.  

There must not be new problems with international expansion by the domestic companies – everything remains without significant change. They were not allowed in before, and actually they did not want it too much. 

Natalia Orlova, chief economist at the Alfa Bank:

What is happening now has to deal with politics, not economics. Yes, we have seen the reaction by the markets, but markets always show prompt reaction. Anyway, there is no certainty at the moment. Naturally, certain alertness has appeared. I reckon that in case there will be no waves making and aggravation on the political level, the inflow of capital may restore after 6-8 months.   

One cannot say definitely which component – political or economic one – matters more. Both are important. I think that while on the political level positions are rigid and clear, people on the business level rather search for opportunities for a dialogue. As for the question of expansion of the Russian companies, it is rather mixed. The matter is not only about the Russia’s feeling or, say, the South Ossetian conflict. The matter is also about American and European economies, whether they will need capital and to which extent the investors from the Middle East would be able to meet their needs. There is no use saying ‘They closed their markets, and we closed ours’.    

We cannot say about changing from import to some domestic production. In case some import restrictions appear, the import would just become more expensive. I don’t think one can see any opportunity for development of the home production in that. Next half a year or a year, however, we are sure to see active growth of state expenses, as the state will have to compensate the lack of financial means. That’s obvious and is not to be doubted.  

Evgeny Nadorshin, economist at the Trust Bank:  

The reaction by the market to recognition of Abkhazia and the South Ossetia has been much less sharp than that to the events of 8 August. The moderateness of the reaction confirms that most players were ready to that course of developments.   

With high degree of probability it is expected having problems with expansion of the large domestic companies, as the outlook on Russia by foreign investors has been painted with some negative colors now.

Russia’s economy is no ready for replacement of a big share of import in the home market. For example, all the electronics is either imported in parts to Russia and gets assembled here, or it is already imported in a ready-to-use state. We have no technologies to substitute the import, including the food one.

I still hope that we shall be able to avoid isolation, especially the economic one. That would be too bad. However, looking at the current situation one may expect that the influence by the state upon the economy will be increasing.  

Finance and war

Firm sovereign rating

One of the main economic achievements of the Putin’s epoch was turning Russia out of a chronic and undisciplined debtor into a country with impressive financial reserve, a consequence of which is high sovereign rating. It shall be reminded that sovereign rating is estimation of creditworthiness by state, defined by specialized agencies. There are three of them – Standard&Poor’s, Moody’s, and Fitch. The higher is the rating, the more money can a state borrow and the better are conditions for doing that. Along with that, the sovereign rating influences significantly the credit ratings by the companies from this state; state-owned and private as well.       

One of variables used in calculation of ratings is so called country’s risks. This concept includes, roughly speaking, all the non-economic factors, including political aspects, that may influence significantly the ability by a country to pay off its debts.

After military operation in Georgia and factual beginning of the second cold war apprehension appeared whether all those worries may lead to revisiting the sovereign rating by Russia and restrict access by the state and by the private sector to leverage from abroad.

Frank Gill, the director of Sovereign Ratings at Standard&Poor’s, has tried to dispel our apprehension.  

Q: Can military operations by Russia in Georgia affect the sovereign rating by the Russian Federation? 

A: The military operations on the Georgian territory and in her breakaway regions have minimal direct influence on the Russia’s economy. The positive forecast for the sovereign rating (about obligations in foreign currency) is defined mainly with a good state of the Russia’s budget, which continues to be favorably influenced with top record prices for oil and gas, which causes good tax proceeds. Recently, Standard&Poor’s has reconsidered its forecast for the Russian current account surplus. Before, we expected its figure to be 3.2% of the GDP in 2008 and 1.7% of GDP in 2009. Now we believe it will be 7.4% and 3.5% accordingly.      

Q: Can aggravation of relations with the West influence the sovereign rating by Russia, and if yes, which way it might happen?  

A: Purely diplomatic argument between Russia and NATO is not likely to have a significant impact on the Russian economy that continues to grow due to high prices for raw materials and due to high investment activity. However, considering that a bit more than a quarter of the general volume of credits granted in Russia are financed from external sources, one may suppose that any reason leading to increase of the cost of borrowing for Russian banks may become the reason for a sag. And aggravation of access to foreign capital by the corporative sector may affect investment activities, which would have an impact on the long-term potential of the economic growth.  

Q: How is the rating influenced with political forecast?

A: When making a sovereign rating, Standard&Poor’s estimates the probability of default of the government in its obligations. There are cases where solvency is high, while readiness to pay gets reduced. In such cases, when studying the question of the credit culture by a country, Standard&Poor’s tries to define how stable its institutions are towards the changes in the political sphere. Talking of Russia, her institutions are not sufficiently strong; she lacks the system of checks and balances. A small circle of persons exercises great influence on the policy. On the other hand, after inner obligations default of 1998, Russia still managed to pay off most part of her bilateral and commercial debts, and she made farsightedly the reserve funds in the current amount of $163 bn, or 9.3% of the country’s GDP