For all the opinion offered on Russia these days, the key operating rule to keep in mind before reaching any conclusion is that the exact opposite of what’s being said is also true.Many in the international media have conjured up an image of Russia as a hyper petro-power run by an authoritarian regime with a cold-war vision for the country. While there’s more than an element of truth in such a portrayal, it would also be fair to say that Russia has been working hard to reduce its dependence on oil, the Kremlin has rarely mattered less for the people on the street and capitalist fervour continues to sweep the economy.Russia is increasingly turning out to be a tale of two different countries. At one level, the state is becoming more assertive and is seeking to broaden its influence in the “strategic” sectors of the economy as it looks to use oil as a weapon. This is undoubtedly undermining the investing environment and preventing the country from realising its full potential in the natural-resources sector. But the rest of the economy is caught up in one of the most powerful domestic-demand booms in the emerging-market universe.The divergence in performance between the natural-resources sector and the rest of the economy is evident in the stock market. Shares of banking, media and consumer companies remain on a tear and have risen more than their emerging-market counterparts even this year. Meanwhile, stock prices of oil and gas companies have been drifting aimlessly over the past year, with a “Russia” discount assigned to them, as investors fear further government intervention.But in sum, it is rather remarkable that Russia’s economy has expanded an average 7 per cent over the past five years, despite negative population growth and a per capita income of $7,000 — a relatively high base compared with most other developing countries. That dynamic has made Russia an attractive destination for foreign direct investment, or FDI. This year about $30 billion in FDI is expected to flow into the country, with most of it headed toward the non-oil economy.Investors who have looked beyond the sensational headlines in the international media have made extraordinary gains in Russia. China and India may have registered faster growth, but companies catering to domestic demand have been able to achieve higher profitability, as the reduced hype surrounding Russia has resulted in less intense foreign competition on the ground compared with the opportunity presented by the economic boom.To be sure, the bull market in oil is not insignificant in fueling the demand surge. However, the Russian economic-renaissance story goes well beyond oil. What distinguishes Russia from many other oil-rich countries is the quality of its human capital, something that’s helping the country rapidly converge with the more developed nations in terms of a thriving business and consumer culture. Several companies backed by solid managements have cropped up in Russia over the past years to cater to massive pent-up domestic demand. These companies have been facilitating the explosive growth in new mortgages and credit cards, as people have access and the confidence to leverage for the first time.In an ideal world, Russia would have adopted democratic, free-market principles wholesale, becoming a paragon of economic and political transition. There are many Russians who say this path was not an option in the wake of 1990s reform — a process they believe resulted in more “shock” than “therapy.” True or not, the international commentariat is so consumed by Russia’s backsliding on the democratic front and the government’s increased interference in natural resources that it is missing the real story.A very large part of Russian society is aspiring to reach European standards of living. The Kremlin’s antics have done little to derail the journey. Moscow increasingly looks like any European city (albeit with a nouveau riche touch). The latest models from the various luxury carmakers jam the city’s narrow arteries. Many of the world’s leading fashion brands have outlets in Moscow. For pop singers on the global concert circuit, a performance in Moscow is a must. The nightlife of the city is the talk of the international partying crowd. This is hardly the stuff of a place yearning for its communist past.Neither is it a Mumbai or São Paulo, where political demonstrations will be tolerated. But while there are constraints on political freedom, there are no such curbs in the social and religious spheres. Similarly, businesses are free to compete in sectors related to domestic demand, while companies in oil or other natural resources have to worry about keeping off the government’s “strategic radar.” There are two different systems in place, and, not surprisingly, Russia is emerging as a tale of two different countries.The writer is head of emerging markets at Morgan Stanley Investment ManagementNewsweek
