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
Russia’s surprise cut in its key interest rate to 15 per cent from 17 per cent on Friday was primarily a product of political pressure and may do more harm than good to Moscow’s twin aims of restraining inflation while softening the impact of an incipient recession, analysts said.
“The CBR’s (Central Bank of Russia) move will likely have quite a reverse effect on inflation,” said Vladimir Tikhomirov, chief economist at BCS Financial Group, a Russian investment bank. “The market is already increasing pressure on the rouble which, in turn, will transform into higher – rather than lower – inflationary expectations going forward.” 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 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 Relte Stephen Schutte, Markit
In spite of what you might expect to be a “perfect storm” scenario for Russian stocks, inflows of investment capital into Exchange Traded Funds (ETFs) – investment funds traded on stock markets much as a stock would trade – have remained strong.
Net inflows into the 23 Russian tracking ETFs have proved buoyant in the last three months in spite of continued sanctions by the US and Europe and Moscow’s destabilising actions in Ukraine. Such inflows take 2014 net inflows into Russian ETFs past the $1bn mark (see chart), an extraordinary performance given the negative newsflow surrounding Russia. Read more
By Andrew Foxall, The Henry Jackson Society
Western sanctions against Russia, first imposed in March, have strengthened that significant body of Russia’s elite who want to see a much more state-led style of development. During last week’s Valdai Club meeting in Sochi, President Putin argued that sanctions would help Russia’s ambitions by reducing its economic dependence on the West.
While Russia’s emphasis on self-sufficiency pre-dates the Ukraine crisis, its statism has intensified as Russia’s economy has started to show the strain of sanctions. Read more
If you’re an emerging market and there’s a geoeconomic grouping you’re looking for, you’ve got a few to choose from. In Asia there is Asean - ten countries in search of common ground. In Latin America there is Mercosur - five countries in search of common tariffs. And from the Atlantic west to the Black Sea there is Asia-Pacific Economic Co-operation – four adjectives in search of a noun.
But none of these has the distinction of having been a marketing campaign by Goldman Sachs got out of control. The Brics nations, apparently noticing a small clearing in the densely-thicketed field of international relations, seized on the designation to set up their own diplomatic process. The sixth leaders’ summit will take place next week in Fortaleza, Brazil, with the host nation hopefully performing better than at its other major international gathering.
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. Read more
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. Read more
As Russia steps up control of the internet, electronic payment processors are feeling the heat. Qiwi and PayPal cited security concerns when they halted co-operation with RosUznik, a Russian charity that supports political prisoners, this week. RosUznik suspects political motives.
Founded in late 2011 as a wave of anti-government protests erupted in Moscow, RosUznik collects charitable donations to help fund legal aid for opposition activists undergoing trial or in detention. Read more
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. Read more
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. Read more
A wave of patriotism is sweeping Russia following the annexation of Crimea. But will the euphoria last long enough to have Russians invest in the Black Sea peninsula and support the local economy by holidaying there? Dmitry Medvedev, Russia’s prime minister, chaired a government meeting on Monday to discuss how to make Crimea a going concern.
It sounds like a daunting task. The Kremlin took a huge risk when it redrew the map of Ukraine last week and took possession of Crimea. Western powers have condemned the move as a land grab and are threatening Russia with painful sanctions and decades of international isolation. Read more
By Christopher Granville, Director of Russia Research, Trusted Sources
For investors exposed to Russia and the wider market fall-out from Russia’s military move in the Crimea, it may be helpful to recall the lessons of a previous shock that threatened to undermine the investment case for Russia. The analogy I have in mind is the Yukos affair.
Then, as now, President Putin perceived a paramount interest that he decided to pursue regardless of the high costs to business and financial market confidence. Read more
The 5th in our series of guest posts on the outlook for 2014 is by Chris Weafer of Macro-Advisory
In economic terms 2013 was Russia’s Annus Horribilis. From growth of 3.4 per cent in 2012, and early expectations of a repeat performance this year, the economy is much more likely to report growth of only 1.3 per cent. That is still a good number in global terms but a long way off the 4 to 5 per cent growth that the country actually needs. A second consecutive year of poor growth will feel like stagnation and lead to a raft of earnings forecast downgrades in companies exposed to the domestic economy.
The good news is that the President and his Kremlin advisors are finally starting to pay attention. Read more
Onishchenko: he say no
Yet another conflict is brewing between Russia and one of its post-Soviet neighbours.
On Monday Russia’s consumer protection agency announced it had halted dairy imports from Lithuania, citing excessive quantities of yeast and mould in certain Lithuanian dairy products after weeks of holding up Lithuanian transport trucks for longer than normal periods at border control. Read more
By Chris Weafer
The outcome of Sunday’s election for mayor of Moscow, and similar elections held in several other Russian cities, shows that the political landscape in Russia is changing. The protests of late 2011 and early 2012 are finally starting to deliver a positive legacy. The critics will of course say that the outcome in Moscow was predictable and nothing has changed. But they are wrong. Read more