By Vladimir Kolychev, VTB Capital
Russian President Vladimir Putin announced this month that Russia should aim to sell its oil and gas for roubles globally, because “the dollar monopoly in energy trade was damaging Russia’s economy”.
This was the clearest indication yet that Russia is serious about its plan to shift away from using the US dollar. Western sanctions against Russia have accelerated this process and encouraged Russia’s close economic alliance with China. Some may question this move but for Russia, a shift away from the dollar makes perfect sense.
By Chris Weafer of Macro-Advisory
Since the start of this year the Russian rouble has collapsed by 20 per cent against a basket of dollars and euros, by far the worst performing of the major emerging market currencies except for the Argentine peso. But Argentina defaulted on debt obligations, while Russia has less than 11 per cent sovereign debt to GDP and is running a triple budget, trade and current account surplus. It is therefore tempting to link the rouble’s demise with the country’s actions in Ukraine and the resulting sanctions imposed by western countries. A prevalent theme in many western political commentaries is that the rouble slide, in tandem with the steep oil price fall, will lead to a collapse in the economy which, in turn, will undermine public support for President Vladimir Putin and force the Kremlin into a more accommodating geo-political stance. Both of those assumptions are very wide of the mark. The reasons for the decline in the rouble are more serious than just sanctions and, at the same time, the central bank’s response and the oil price slide offer cause for some optimism that some positives may yet emerge from this crisis.
As the rouble continues its decline – hitting a new low against the dollar and euro this week – it is Russian consumers who will feel the sharpest pain, says Capital Economics, thanks to increasing inflation, which had already risen in September to its fastest pace in three years.
By Jim O’Neill, Bruegel
Is it all over for the rise of the BRIC grouping (Brazil, Russia, India and China)?
On one level, this seems like a rather odd time to be asking such a question, especially when the political leaders of the BRICS countries (the four named above plus South Africa) have recently agreed to set up a joint development bank to be headquartered in Shanghai. So, the BRICS name is certainly here to stay, and in terms of global governance, their influence is likely to rise as a group because of the bank.
As European leaders threatened yet tougher sanctions to punish Russia for its aggressive policies in Ukraine on Monday, Vladimir Putin was thousands of miles away in oil rich east Siberia making friendly with a visiting Chinese official.
“On the whole we are very careful about allowing our foreign partners in, but of course for our Chinese friends there are no limits,” Russia’s president said.
China is emerging as the winner in the Ukraine crisis even as Russia’s relations with the US and the European Union go from bad to worse. It has secured a huge gas deal with Gazprom and is making strides towards greater involvement in the Russian oil and gas production.
Rosneft has raised the stakes in its campaign to strip Gazprom of its monopoly over Russian gas exports. In a sharply worded statement on Tuesday, Russia’s state oil company threatened to take Gazprom to court unless it opened up a planned pipeline to China to rival gas producers.
Gazprom has been gearing up to build the Power of Siberia pipeline since signing a $400bn gas export contract with China in May. Linking vast Gazprom controlled gas fields in east Siberia with the Russian Pacific, the 4,000km pipeline will feed gas to domestic consumers and to the Chinese border.
By Andrew Foxall of The Henry Jackson Society
The prospect of Russia invading Ukraine may be receding, but Russia’s standoff with the West continues to affect the Russian economy by damaging its banks’ ability to access funding. It has also led Russia to step-up its efforts to decrease its dependency on the West, as part of which it plans to establish a joint rating agency with China.
After the imposition of Western sanctions against Russia in March, Igor Shuvalov, Russia’s deputy prime minister, warned that the biggest damage to Russia would come not from the targeted sanctions but from “hidden” measures, such as political pressure on rating agencies.
Last week, Alexander Lukashenko, president of Belarus, bafflingly announced he would sign a decree that would return to the status quo in 1861 and reinstate serfdom. When it comes to backsliding on economic modernisation, Mr Lukashenko is clearly a world-beater.
Yet other emerging markets, while not actually going backwards, have shown little enthusiasm in recent years for bold policy moves to streamline regulation, tackle corruption, improve the legal environment and, most particularly, build the infrastructure needed for a modern economy.
As western governments impose sanctions on Russia, international majors with interests in the country have stayed out of the fray, saying it’s business as usual. France’s Total, for one, was not going to let the Ukraine crisis halt plans to finalize a deal with Russian Lukoil this week that paves the way for exploration of tight oil reserves in western Siberia.
Total has entered a joint venture with Lukoil to explore the tight oil potential of the Bazhenov formation in western Siberia, the French company said on Friday. Lukoil will have a controlling 51 per cent interest of the project, with Total holding the remaining 49 per cent. After conducting seismic surveys this year, the partners expect to begin drilling in 2015.
By Andrew Foxall of The Henry Jackson Society
Russia may have completed decade-long negotiations to sell gas to China in a deal worth US$400 bn over the next 30 years, but the agreement barely begins to paper over the all-too-obvious cracks in Russia’s weakening economy. Moscow’s stock market reacted positively to the deal, but it is down 4.8% year-to-date. Elsewhere, all other indicators of economic prosperity in Russia have decreased since the start of 2014.
Russia is more dependent on the global economy than it ever has been. And it seeks even greater dependency – as President Putin made clear in his opening remarks to the St Petersburg International Economic Forum earlier today. On the one hand, dependency brings with it obvious benefits. On the other, it leaves a country much more open to the vagaries of investor sentiments and perceptions of political risks as well as expected economic returns.
By Demetrius Floudas of Immanuel Kant Baltic Federal University, Kaliningrad
Amid the growing political tensions between Russia and the West, the world’s top economists and politicians are unanimous that the Russian economy will get worse and worse under new waves of sanctions.
But none of them mention that Russia is just as likely to hurt itself with its own damaging monetary policy.
Indicators designed by the OECD to give a six-month lead in identifying shifts in the business cycles of key economies are showing an increasingly gloomy outlook for all four of the Bric counties – Brazil, China, Russia and India.
The most negative outlook is for India, followed by Brazil and China – while Russia’s performance may only be starting to slow, according to the Composite Leading Indicators (CLI) compiled by the Organisation of Economic Co-operation and Development.
With the Ukraine crisis casting a shadow over Russia’s gas trade with Europe, Gazprom has moved to shore up relations with Turkey, its second biggest foreign gas customer after Germany. In talks in Ankara on Monday, Russia’s state gas monopoly agreed to boost capacity in the Blue Stream pipeline that transports gas across the Black Sea to northern Turkey.
On a working visit to Ankara on Monday, Alexander Medvedev, deputy head of Gazprom, met Taner Yildiz, Turkey’s energy minister, for talks aimed at boosting gas co-operation between the two countries. The two men agreed that capacity in Blue Stream should be upgraded to to 19bn cubic meters a year from 16bn cubic meters a year to enhance Turkish energy security.
Russia brushed off the threat of western energy sanctions on Friday and pledged to press ahead with plans to build a new gas export pipeline that would strengthen its hold on European gas markets.
Russia is continuing work on the 2,500km South Stream pipeline that will carry gas across the Black Sea to southern and central Europe, Alexander Novak, Russian energy minister told a press conference in Moscow on Friday.
There is no doubt that emerging market (EM) investors have cheered up considerably of late. Following a torrid January and February, virtually all asset classes in the EM universe appear – on aggregate at least – to be gaining in value.
The bellwether stock index, the MSCI EM index, is up 9.6 per cent from its low on February 5. EM sovereign bonds are yielding an average of 5.51 per cent, down 0.37 per cent since January 1. Local currency bonds are, in many cases, producing stellar returns sharpened by windfall currency gains. Indeed, some EM currencies are among the world’s best performers, with the Indonesian rupiah rising 7.81 per cent, the Brazilian real gaining 7.3 per cent and the Indian rupee climbing 2.8 per cent so far this year.