By Septimus Knox, Alaco
Remote, long-forgotten industrial towns rarely make the front pages in Russia, never mind internationally. But for a few days in September Norilsk, home to the world’s largest producer of nickel and palladium, hit the headlines, although for all the wrong reasons.
A chemical spill turned the Daldykan River red, and photographs of the contamination went viral. Norilsk and other so-called monotowns are located in some of the most inhospitable parts of the country. Centred on a single factory, plant or mill, they fuelled Soviet-era industrialisation.
They remain key to Russia’s economy, yet many are now in terminal decline. Read more
Over the past five years Russia has reinforced its dependence on hydrocarbons in exports and in domestic use. It has continued to increase and modernise oil and gas production, initiated a pivot to the east to diversify its export markets, and accelerated construction of transit avoidance pipelines on the European gas front.
Its recent history of championing pipes to Bulgaria and Turkey showcases Moscow’s agility in mixing geopolitics with hydrocarbons. Through the leadership of Novatek, a relative upstart, Russia is fast approaching liquefaction and shipping of LNG in material quantities. By most measures, and despite sanctions, Russia is a formidable force in the extraction and commercialisation of hydrocarbons. Read more
Tourists steer clear of Brazil, Russia, India and Nigeria because of onerous visa requirements, EM Squared reported last week. But even with easy tourist visas in place, these emerging market giants won’t reach their full potential. The real key lies in enhancing the ease of doing business and developing adequate infrastructure.
Visa policies are certainly a real barrier to tourist arrivals. No matter how beautiful or intriguing your country is as a tourist destination, if you make it too complicated for tourists to visit, they will stay away. That problem is not limited to emerging markets. A few years ago, US Travel Association estimated that the US lost the equivalent of 467,000 jobs due to the difficulty for citizens of primarily Brazil, India and China to obtain a visa. Read more
Russia is suffering, that much is clear. After two years of dramatically lower oil prices and western sanctions the economy is shrinking, the fiscal deficit is growing and the budget gap is becoming increasingly hard to plug.
Russia is fortunate that its professional central bank has played a key role in stabilising the macroeconomic picture. But still one in seven people – that is, 20m — live under the poverty line, effectively eliminating a decade of economic growth. Since July 2014, the rouble has devalued by more than 50 per cent. Inflation continues to hover around 7 per cent. And the Russian economy ministry itself predicts that that real incomes will fall by 4 per cent this year alone. Read more
How should we read Russia, and Vladimir Putin’s game plan with respect to the US, the west and Ukraine?
My own view is that Putin is in waiting mode, reflected by the fact that Russia has stepped back from further military intervention in Ukraine and seems to be adopting a holding pattern in Syria. In both conflicts Russia would likely have to commit significant military resources to ensure delivery on its strategic objectives, and this side of elections to the Duma (September 2016) and perhaps also the presidency (March 2018) this just presents too many risks. Read more
One difference between the Cold War and today’s confrontation between Russia and the west can be found in the weapons being used to prosecute it. While the balance of military power in central Europe still matters, it is only one dimension of a wider struggle being waged by mostly non-military means.
Different instruments – technological, economic and administrative – are being adapted and combined to find new ways of exerting pressure on the opposing side. What they often share in common is an attempt to turn the features of a more open and globalised world into sources of vulnerability that can be exploited for strategic advantage. Read more
The debate on the future of Europe and Britain within it is heating up. This week, Boris Johnson highlighted the problems with “EU foreign policy-making on the hoof”, suggesting that it had contributed to the protracted conflict in Ukraine. He was quickly branded a “Putin apologist” by adversaries.
None of Boris’s critics seem to have noticed that this is a clear case of shooting the messenger. What Boris has done is raise a legitimate concern. He is giving Europe a long-overdue reminder that in order to survive, it needs to get stronger. Read more
A survey of recent writings on Russia by western scholars reveals a widely-held view that the largest of the 15 post-Soviet republics has continued to decline in the 21st century.
Yet an examination of the data suggests that Russia has actually risen in comparison with some of its western competitors. Read more
The furore over allegations that Lech Walesa collaborated with Poland’s communist secret police in the 1970s shows that the past is ever present in the countries that once made up the Soviet bloc. Intelligence files, real or fabricated, have often been used to destroy political opponents or settle scores, while laws on lustration and ‘de-communisation’ have played an important role in the efforts of central and eastern European states to define their post-communist identities. Vladimir Putin has also been an active participant in these ‘history wars’, rehabilitating the symbols and personalities of the Soviet period to encourage patriotic sentiment at home and labelling countries that try to erase their Soviet legacies as inherently Russophobic.
Divergent attitudes to the past are likely to remain a potential flashpoint in relations with Russia, yet it is no longer clear that the efforts many of these countries devote to repudiating the communist era serve any useful purpose in promoting or consolidating political change. Most of them completed their democratic transitions years ago and the danger of a communist revival is now wholly non-existent. If there is an internal threat to the open, pluralistic, market-oriented societies that successfully emerged from the wreckage of the Soviet experiment, it comes from a different direction altogether. In particular, it comes from a populist, authoritarian right that wants to build an illiberal Europe of closed borders and closed minds. Read more
In the spring of 1987, I flew to Moscow with a team of several dozen US officials to negotiate what would become the last trade and economic agreement between the United States and the Soviet Union. In reality, it became a bit of a blueprint in addressing the privatisation of the Russian economic system under then General Secretary of the Soviet Socialist Republics Mikhail Gorbechev. Over the course of several days the Soviet and US teams addressed most sectors of the economy from finance and tourism to legal structures and manufacturing. Although our approach was far from perfect, it laid a foundation, along with perestroika and glasnost, that allowed Russia to prosper for more than 25 years.
Since that time, I have watched as Russia has gone from state-centric decay, to black-market driven. I have seen the system devolve from broken socialist idealism, to rampant capitalist greed run amok. Read more
For much of the early 2000s, Brazil, Russia, India, and China (the Brics) were seen not just as “the engine of new demand growth and spending power,” as Goldman Sachs researchers put it in 2003, but also as the likely begetters of a new international order, in which the US – and the west more generally – would play a much less significant role.
Today, the idea that the Brics could lead the way to this new order seems more distant than ever. Read more
Investors in Russian equity and debt enjoyed, on average, a relatively better year than peers in other major emerging markets. The rouble-denominated Micex gained 17 per cent in the year up to Christmas week, while the dollar denominated RDX added only 0.3 per cent – the difference being accounted for by the 16.5 per cent year-to-date fall in the value of the rouble versus the dollar. Over the same period, the MSCI EM Index lost 17 per cent and the MSCI World Index was off 4 per cent. The yield gap applied to Russian sovereign debt, and that on issues from the biggest corporations, contracted substantially despite the cut to sub-investment grade by two rating agencies earlier in the year.
Valuations started 2015 excessively cheap because of political and economic fears that proved unfounded. The conflict in eastern Ukraine did not spread further and sanctions were not added to. Domestically the government’s response to falling oil revenues and tough macro conditions was pragmatic and effective. For sure nobody can say that 2015 has been a good year for Russia; what we can say is, “it could have been a lot worse”. Read more
Moscow seems intent on re-engaging with the international community after being relegated to the sidelines following the conflict in Ukraine. The Kremlin is not necessarily becoming more accommodative to the west, but there are changes in several areas that suggest President Vladimir Putin wants to play a more active role internationally.
The fight against global terrorism is the most recent and perhaps most significant example of how Putin has re-emerged as a key player. His role at the recent G20 meeting in Ankara stands in stark contrast to the meeting in Brisbane a year ago when he left early after being shunned by the other leaders. Russia has also tried to play a more active role in the Middle East. Moscow proved productive in the Iran negotiations over the summer and that Russia is now circulating a proposed constitutional reform plan for Syria in the UN points in the same direction. Read more
To hear some Russia watchers say it, Vladimir Putin will fight to the last Russian air bomb to keep Bashar al-Assad of Syria in power. But will he?
I argue not only that Putin could and should let Assad go, but also that Putin’s own record of behind-the-door diplomacy offers a clue as to how the Syrian dictator could step aside without losing face. Read more
For both liberals and conservatives in the Russian government, western sanctions and oil price volatility present new challenges and opportunities. Both camps hold the key to Russia’s economic and political stability.
The conservatives, led by Igor Sechin, dominate the oil industry through the state-controlled national champion Rosneft, where Sechin is chief executive. The liberals, represented by prime minister Dmitry Medvedev, finance minister Anton Siluanov, deputy prime minister Arkady Dvorkovich and central bank governor Elvira Nabiullina, steer the country’s fiscal and monetary policies. Read more
As always, there is a great deal of noise around the Russia story and that makes it difficult for investors to identify the core issues with the greatest impact on risk. There is a lot of concern and speculation over the next steps in eastern Ukraine and the possible consequences for sanctions. Russia is also viewed as being among the most exposed to any deterioration in China’s growth outlook and from the yuan devaluation. On top of which is the daily battering from the sliding oil price.
There can be no argument that Russia is in a very precarious and even dangerous position. The 4.6 per cent preliminary estimate for GDP contraction in Q2 confirms that. But, cutting though the noise and discarding extrapolations and exaggerations, there are two core issues which investors should now be most focused on and which will provide guidance as to whether investment risk is deteriorating or improving. Read more
Much has been said over the last six months about the collapse of the Russian economy as a result of sanctions and the falling oil price, on top of other negative factors such as bureaucracy and corruption, high inflation, inefficiencies in production, ageing infrastructure, a failure to innovate and diversify and capital flight. A slew of economic data point to a deep recession, and US President Barack Obama describes Russia’s economy as being in tatters. No one seems to be denying the long-term negative impact on the economy; even the government expects two tough years ahead, a prediction regarded as hopelessly optimistic by many economists.
However, anecdotally at least, it doesn’t feel like a financial meltdown here in Russia. Read more
Margrethe Vestager is one of the most influential women in Danish politics but it was her recent decisions as European Commissioner for Competition to take on both Google and Gazprom that turned her into a globally recognised figure.
The two cases are very different. Google’s dominance may be a fleeting one and its alleged ability to impose on its customers an inferior service – search algorithms favouring its own products – is limited by the availability of competing search engines. Gazprom, in contrast, fits better the textbook idea of a monopolist: switching to alternative energy sources is a considerably less trivial exercise than making Bing your new homepage. Read more
As revelations about cyber-attacks launched against the US last autumn show, Russia is engaged in a relentless intelligence war against the west. Other targets of Russian cyber-warfare have included Germany, Estonia, Romania, Ukraine and Georgia. As James Clapper, the US director of National Intelligence, recently told the US Senate, the Russian threat is “more severe than we have previously assessed”. The ability of Russian hackers to successfully access the State Department and White House computer networks should serve as a wake-up call. The US and its Nato allies must respond by developing a more effective tool kit for dealing with this threat. Read more
The Russian rouble has moved from above 70 to the US dollar in late January to around 50 in mid-April, making it one of the best-performing currencies in the world this year. This is particularly remarkable as the dollar has been quite strong during this period, continuing to appreciate against the euro. So, what is behind this sudden rouble strength?
For most of last year, the rouble traded on the oil price and geopolitics, so it could be assumed that either of those two factors has changed materially. The oil price has moved from $56 to $60 per barrel this year, and the so-called Minsk II agreement was reached on February 12. Is that enough to explain the recovery? Probably not, especially considering that the oil price has been flat over the past two months while the rouble rallied the most. The rouble thus seems to have de-correlated from the oil price, at least partially and temporarily. And there has been fairly broad international scepticism over the Minsk II agreement (which we do not share by the way), making it difficult to believe that that is the reason behind the rouble’s strength. Read more