June 17 (Bloomberg) -- First Deputy Prime Minister Igor Shuvalov urged investors to be wary of Russian stocks as policy makers in the world’s biggest energy exporter try to prevent the economy from overheating and encourage long-term investment.
“I’d be very cautious about stock investments in this country,” Shuvalov said yesterday in an interview with Bloomberg Television in Moscow. “I would welcome real investors who can build factories, something new in this country.”
Shuvalov, 43, is leading Prime Minister Vladimir Putin’s drive to attract investment and overhaul the economy after the first global recession since the 1930s ended 10 straight years of growth with a record 7.9 percent contraction. The English-speaking lawyer jets around Russia with Putin, meets foreign investors and acts as a link to domestic billionaires.
Russia’s modernization needs time, patience and long-term investments, Shuvalov said. Optimal annual growth rates shouldn’t exceed 5 percent in the next few years as the government seeks to control spending, and the central bank shouldn’t rush to let the ruble trade freely to avoid hurting domestic producers, he said.
The Micex stock index followed oil prices lower in 2008, falling 67 percent, the most in a decade. The index surged 121 percent last year and is down 0.5 percent in 2010 as a barrel of Urals crude trades for $75, compared with a high of more than $140 in 2008.
The Micex fell 0.4 percent to 1363.96 as of 12:25 p.m. in Moscow trading. That compares with a 0.3 percent gain in the MSCI Emerging Markets Index.
“The conversion to a knowledge-based economy while having 7 percent growth rates is extremely difficult, because there’d be a big inflow of capital and everybody would want social spending,” Shuvalov said. “Growth of 4 to 5 percent would let us really modernize.”
President Dmitry Medvedev made modernization and innovation the catchwords of his administration after taking office in 2008. In the next 20 years, Russia should completely abandon oil and natural gas as a source of funding for the budget, instead funneling energy revenue into an investment fund as Norway has done, Shuvalov said.
The government plans to spend 110.5 billion rubles ($3.5 billion) through 2015 to build a Russian version of Silicon Valley, Vedomosti reported last week, citing a draft of the 2011 federal budget.
It isn’t fair to compare Russia with its BRIC peers Brazil, India and China, because of structural differences in their economies, according to Shuvalov. Russia is interested in “quality” changes to its economy rather than high growth rates, he said.
The Russian economy expanded 2.9 percent in the first quarter, compared with annual rates of 9 percent in Brazil, 11.9 percent in China and 8.6 percent in India.
Shuvalov earned a law degree from Moscow State University in 1987. He established links with the oligarchs when he worked at Alexander Mamut’s law firm, ALM, where clients included billionaires Boris Berezovsky and Roman Abramovich, owner of London’s Chelsea Football Club, Smart Money, a magazine published by the Vedomosti newspaper group, reported in 2008.
The deputy premier started his political career in 1997, a year before the country defaulted on $40 billion in domestic debt. During the credit crisis he was Putin’s liaison with the oligarchs, helping arrange bailouts for billionaires such as Oleg Deripaska, chief executive officer of United Co. Rusal, the world’s biggest aluminum company.
Shuvalov said he “doubts” Bank Rossii’s plan to let the ruble float in two years, because the government will need time to soften the impact of the change on parts of the economy such as the metals industry.
“We’re concerned about ruble appreciation,” he said. “We have to be prepared for a stronger ruble because we have to subsidize those industries which would not be able to adapt for the stronger ruble.”
Bank Rossii has “sharply reduced” the extent to which it steers the ruble’s exchange rate and will come “very close” to allowing the currency to trade freely in 2011, central bank Chairman Sergey Ignatiev said in April.
The ruble may gain 20 percent in the next three years against the currencies of Russia’s major trading partners with the effects of inflation stripped out, according to a government report released June 4. It also may strengthen to 28 per dollar by the end of 2012 and maintain a “trend toward appreciation” over the next three years, the government said. The ruble traded for 31.25 per dollar at the close of trading yesterday.
Speculative inflows are helping drive up the ruble, making domestic products less competitive than imports and hurting Russian exporters, such as oil producer OAO Rosneft, that have ruble-denominated costs.
Foreign direct investment slipped an annual 17.6 percent to $2.6 billion in the first quarter on an uneven recovery from the worst contraction on record, according to the Federal Statistics Service.
Overall foreign investment, including credits and flows into financial markets, rose 9.3 percent from a year earlier to $13.1 billion as investment in securities more than doubled, the statistics service said May 21.
While Russian stocks may be undervalued, Russia isn’t seeking investors interested in “quick and easy money,” Shuvalov said. The government prefers investors who will participate in state asset sales, which Medvedev wants to use to bring foreign capital into infrastructure projects such as roads and power plants.
“If we have investors wishing to buy, they are welcome,” Shuvalov said. “There will not be any kind of delay if we have a real investor who says, ‘We want a certain asset, please organize an auction.’ We need just 45 days.”
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