Russian Corruption Holds Back Metals, Commodities

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"Corruption keeps assets depressed, metals investors nervous."

Russia is narrowing its discount to other BRIC stock markets thanks to strong oil and metals prices but needs to beat corruption to erase the gap, investors and analysts said on Thursday.

Debate at a major Moscow investment forum on the relative merits of the BRICs—the large economies of Brazil, Russia, India and China—turned controversial as a skeptical audience challenged the bullish view from the stage.

"If you invest in an asset where there is no guarantee that it won't be taken away, then you need a risk premium. Asset values will therefore be depressed," said Paul Bate, chief investment officer at emerging markets fund manager Matterhorn.

Perceptions that Russia is a risky place to invest have long kept its stock market priced at a discount to the other BRICs, but that gap has narrowed.

"Russia had a good end to 2010 and we expect that trend to continue as commodity prices remain high," said Aivaras Abromavicius, fund manager of East Capital, which has $4.8 billion invested in Russia.

The bullish case depends on Russia capitalizing on China's resource-intensive boom.

"It is the greatest economic synergy on Earth: China the consumer of resources and Russia on its doorstep," said Christopher Granville, whose Trusted Sources consultancy covers the BRICs, an acronym minted by Goldman's Jim O'Neill in 2003.

"Russia has the opportunity to 'feed the dragon'."

Granville, chairing the BRICs debate at the Troika Dialog conference, conceded when challenged that Russia's corruption problem was "the beast in the room that needed to be unmasked".

Russia ranked 154th out of 178 countries in a corruption perceptions index released by Transparency International last year—by far the worst among the BRICs—and President Dmitry Medvedev has put the issue at the heart of his reform agenda.

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