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
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
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
By Yoel Sano, Head of Political Risk, BMI Research
Following Russia’s annexation of Crimea and its destabilisation of eastern Ukraine, a military confrontation between Russia and the West over the Baltic states is no longer unthinkable. Under what circumstances could this happen? How would such a conflict play out, and what might happen once such a war ended?
The notion of large-scale warfare in Europe – even without the nuclear dimension – would send shockwaves around the world, threatening to overturn the entire post-Cold War order. If the North Atlantic Treaty Organisation (NATO) failed to defend the Baltics or were to lose against Russia, then Asia and the Middle East would also be destabilised, as doubts grew over the reliability of the US as an ally. This would usher in a much more unstable geopolitical climate, akin to the 1930s. Read more
When General Motors, citing “very challenging long term prospects,” slammed the brakes on its Russian investments this week, the Kremlin said it was making a big mistake. Russia’s car market would eventually rebound from the crisis and the US auto company “would find itself among the losers,” said Dmitry Peskov, spokesman for President Vladimir Putin. Read more
By Oleg Babinov, The Risk Advisory Group
On February 2, the Financial Times reported that ExxonMobil is considering acquisitions to ‘strengthen its long-term production potential’. Exxon’s Vice President said that the current business climate “presents a number of really good opportunities” and investment analysts expected the company to take “advantage of depressed oil and gas valuations”. And with falling oil prices, it’s likely that other buyers and sellers across the world will be looking to do the same and start the hunt for potential acquisitions.
Could some of these acquisitions take place in Russia? Yes, I think so – in spite of the international sanctions and, in a way, thanks to them. Read more
The Bric countries – minus India – embellished their growing reputation as laggards in the emerging market (EM) universe in January as manufacturing activity in Russia and China declined and Brazil turned in another subdued performance, data published on Tuesday shows.
The result is that, as a bloc, the Bric countries (Brazil, Russia, India and China) are diverging from the rest of the EM universe in manufacturing output and the trajectory of GDP growth. Other EM countries, meanwhile, are reaping the benefit of positive global demand and assuming a role as the key engines of developing world growth. Read more
By Vladimir Tikhomirov, BCS Financial Group
Russia’s central bank faces a dilemma at its monetary policy meeting on Friday. It stated when it hiked interest rates to 17 per cent last month – to their highest levels since 2003 – that this increase would be a temporary measure to defend the rouble. However, inflation stubbornly remains high, restricting the bank’s room to manoeuver.
Indeed, recent inflation data suggests that the new interest rate could stay for much longer. According to the official statistical agency, in December Russia’s consumer price index (CPI) jumped by 2.6 per cent month-on-month which is the highest level on record since the period of mid-1990s when inflation was running at unsustainable high double-digit rates. Read more
A year ago when the Olympic torch arrived in Sochi, many observers were warning that interest in the Russian Black Sea resort would fizzle out once the 2014 winter games were over. But that was before western sanctions and falling oil prices began weighing on the Russian economy and sending the rouble into a nosedive.
Russians no longer able to afford foreign ski holidays and chalets are now flocking to the slopes of Sochi and investing their depreciating rubles in mountain side homes built for the Olympics. For the first time Sochi has been included in the annual ranking of the world’s top twenty ski resorts by price growth for prime residences, compiled by Knight Frank, the global real estate consultancy. Read more
By Daniel Gallucci
Half a world away from snowy Moscow, Russia’s deepening economic crisis is reverberating upon the palm-fringed beaches and castaway islands of Thailand. The droves of holidaymakers from Russian cities visiting Thai resorts are dwindling, deterred not so much by the southeast Asian nation’s military coup earlier this year as by the rout of the rouble.
As the chart below shows, Russians seeking a warm refuge from the prolonged winter of home were relatively unfazed in early 2014 by the mounting political tensions in Thailand that led to the May military coup. Read more
Russian asset prices have taken a severe battering this year and are now ranked as among the cheapest in the world. The obvious question many are now asking is, “is this a good time to buy” or “is there more pain to come” which might lead to even lower prices and valuations in 2015?
Apart from the cheap valuations, the reason why investors are asking that question now is because, during Russia’s previous two recent crises, in 1998/’99 and 2008/’09, we had similar situations where the reasons to continue avoiding the country were overwhelming but it was, nevertheless, exactly the right time to buy. Read more
By Timothy Ash of Standard Bank
This time last year I was asked to contribute an article for beyondbrics on the outlook for 2014, and I chose Ukraine (see Hello 2014: Ukraine’s crisis may run and run, December 20, 2014). That post turned out to be prescient, although even I could never have imagined the remarkable turn of events in that country this year.
For 2015 I think Ukraine will remain in the headlines, but its future is likely at least partially to be determined by events in its eastern neighbour, Russia. The new reform administration in Kiev can succeed, if Moscow gives it some breathing space and scales back its own direct intervention in Ukraine. Read more
By Joseph Dobbs, European Leadership Network
Russian aggression towards Ukraine this past year has seen Vladimir Putin, the Russian president, lambasted by Western leaders. China has desisted from such criticism and instead signed two major gas deals worth hundreds of billions of dollars, co-operated in establishing a new development bank, and conducted joint military exercises. For some, Russia and China’s co-operation demonstrates their potential to challenge the global order. But in reality Russia’s pivot east faces too many hurdles to represent a viable alternative to working with the West.
Russia and China have much in common. Both states are increasingly nationalistic and share a common perceived threat of Western containment. In Russia’s case this threat comes primarily from the potential expansion of the North Atlantic Treaty Organisation (Nato). China’s perception of US containment strategies derives mainly from the American military presence in East Asia. Leaders in Moscow and Beijing have both watched with unease as the West supported the Arab Spring and the so-called “colour revolutions” that rocked the likes of Georgia, Ukraine and Kyrgyzstan. Read more
Vladimir Putin seemed pretty emphatic on Monday that Russia would stop construction of the South Stream gas pipeline, shelving a strategically important project that Moscow was counting on to cement its influence in south-eastern Europe.
Speaking after talks with President Recep Tayyip Erdogan, his Turkish counterpart, in Ankara, Putin said Russia would abandon the project to bring Russian gas to Bulgaria under the Black Sea, bypassing Ukraine, unless the EU dropped its opposition.
But does this really mark the full stop that it appears to be? It is true that Alexei Miller, CEO of Gazprom, the company charged with building the pipeline, told reporters: “that’s it, the project is closed”. But analysts see a more subtle game in play. Read more
By Timothy Ash of Standard Bank
The drop in the oil price has been long coming but the surprise over the speed and extent extent of the fall reflects how we tend to get cosy with established norms. In the past few years there has been an entrenched idea that with EM growth and the rise of the EM middle class, structural demand for oil and commodities was a long term, one way trend.
This ignores one of the first lessons we should all have learned in Economics 101. Read more
A story told in the Bank of England goes like this. Shortly after the fall of the Berlin Wall, a group of Russian central bankers with solid grounding in Marxist economics came to London for a training course at the BoE. They patiently absorbed the theoretical run-down of supply and demand curves and how prices were determined, and then asked “But who sets the price?” A world without a state official with a clipboard announcing the cost of everything was unthinkable. Eventually the exasperated BoE economists took them on a trip to Smithfield meat market in the City of London to see the magic in action.
After the Wall came down in 1989 – triggered by a single unguarded remark by an East German Politburo member in a press conference – the speed and size of changes in the economies of central and east European (CEE) and the former Soviet Union (FSU) were unprecedented since the Second World War. Twenty-five years later, with currency crises wracking Ukraine and Russia, and FSU economies like Belarus and Moldova struggling to emerge from the Soviet era, the dispersion of performance has been dramatic. Read more
One of the most powerful emerging markets fund managers in the US is accusing the west of acting “capriciously” by imposing sanctions on Russia.
Justin Leverenz, who controls the $42.3bn Oppenheimer Developing Markets fund, and who has put 7.2 per cent of his fund into Russian stocks, questioned the wisdom and the motives of a confrontation with the Kremlin over the Ukraine. Read more
Source: Thomson Reuters
The Russian rouble dived deeper to new lows on Friday, as the central bank’s decision on Wednesday to let the currency float failed spectacularly to put a floor under the exchange rate. It went briefly through Rbs48 to the dollar during the morning before recovering slightly, down from a low of Rbs45 to the dollar on Wednesday.
“People are in disbelief. The rouble is being smashed again,” said Timothy Ash of Standard Bank. “The central bank is nowhere.” Read more
Two central banks surprised the world last week with unexpected hikes in interest rates in the face of panicky financial markets. Raising rates a startling 150 basis points, the Central Bank of Russia was reacting sharply to yet another week of runs on the rouble. (It fell further this week nonetheless.)
The other, the Central Bank of Brazil, increased the cost of borrowing by a more modest 25 basis points. It seemed to be attempting to re-establish its independence credentials after the previous weekend’s presidential elections and subsequent worries that economic policy would tend towards the populist and the inflationary.
Yet just as with the advanced economies’ central banks – the Bank of Japan ramping up quantitative easing just as the Fed withdraws – monetary policy has diverged rather than unified in the big emerging economies. Read more