A visitor to Moscow inquiring about the outlook for Russia's economy
will often be met with answers that take a detour into the country's past.
Ask, for instance, why Russia runs such conservative budgetary and interest-rate policies
and you may be told that the trauma of default in 1998 bred a strong desire for low debt and low inflation.
Ask why property rights are weak and you may be taken further back, to the end of serfdom in 1861.
Until then many Russians did not even own their own souls.
Not all investors are history buffs. But looking at Russia through the lens of risk and reward they see a dichotomy.
On the one hand, the emphasis the authorities place on controlling public debt and curbing inflation
makes it an attractive place for bond investors. Russia is fixed income heaven.
On the other, the economy lacks dynamism, in large part because the venturesome cannot lay secure claim to their investments.
For equity investors, Russia can be hellish.
Start with its charms for bond investors. Their aim for their money is to get it back with interest.
They would also like it to retain its purchasing power. Their big concerns, aside from default,
are inflation and (unless they are buying hard-currency bonds) devaluation. So there is much to like about Russia.
The public-debt burden is light, at below 20% of GDP. True, a lot of tax revenue is tied to the vagaries of oil prices.
But Russia now has a fiscal rule. Its budget is based on an oil price of $40 a barrel.
Any excess revenue goes into a reserve fund. Last year the budget was in comfortable surplus.
By stopping the government from overspending, the fiscal rule also helps keep a lid on inflation.
The Kremlin allows the central bank to set monetary policy without meddling, to meet a goal of inflation of 4%.
The bank's governor, Elvira Nabiullina, is admired for her professional competence—
and also for persuading Vladimir Putin, Russia's president, to allow the rouble to drop in 2014.
Inflation has since come under control. She has cut interest rates slowly, to 7.5%.
For bondholders this is wonderful: decent yields, low debt and stable inflation. The rouble is steady.
American sanctions, imposed after 2014 in response to Russia's military intervention in Ukraine,
led many affected Russian firms to pay down foreign debt.