The World Cup (unfortunately without Italy's participation) has just begun and will continue until July 15, when the final will be played. After South Africa and Brazil, Russia is the third consecutive emerging country to organize this event.
It is often debated whether it is convenient to host events of this magnitude, because they require particularly large investments. In fact, Russia is estimated to have invested $12 billion, which is just under 1% of GDP. In the case of Russia, it is an affordable investment considering the low debt/GDP ratio (14%). Even the next organizing country, Qatar, has an enviable debt, just over 40% of its gross domestic product.
For Russia, in addition to benefits in terms of reputation, there is an opportunity to relaunch the tourism sector: not so much due to the significant flow of fans during the tournament, but as a result of the infrastructural improvement prompted by the event. According to data from the World Tourism Organization, Russia attracts about 4% of tourists arriving in Europe, a figure well below countries such as France and Italy, and which places Russia on a par with Austria and Greece.
After a few years of transition, made necessary by economic sanctions and oil price fluctuations, the Russian economy has regained growth, also accompanied by tight fiscal discipline, which has allowed the credit rating to return to investment grade at the beginning of the year. We estimate that Russia's GDP will grow by 1,7% this year and accelerate further next year. But the growth potential of the Russian economy is much higher, considering a population of 144 million people, the existing high levels of education and skills, the low territorial density and, last but not least, the immense natural resources. However, its deteriorating relationship with the West has weighed on valuations of Russian assets in the markets and, to date, the Russian equity market is trading at a steep discount to other emerging markets.
This discount had narrowed over the past two years, mainly thanks to the recovery in oil prices (40% of government revenues come from oil and gas sales) and renewed economic growth, but Russian assets corrected again at April, following the new sanctions introduced by the United States. Precisely as a result of these measures and the resulting uncertainty, we have a neutral view on Russian equities despite the compressed valuations.
As far as bonds are concerned, the fundamentals are continuously improving, a trend that we believe could lead to further rating improvements. We introduced an overweight position on Russian bonds following the sell-off last April. The ruble has appreciation potential, but US sanctions weigh heavily and, despite sound economic fundamentals, further slides cannot be ruled out.
