Most of Russia's recent problems were of its own doing, though of course oil's precipitous fall from around $100 a barrel to $45 in a 12 month period didn't help. Nor did Russia's involvement in Ukraine. After it annexed Crimea, home to its Black Sea Fleet in southeastern Ukraine, Vladimir Putin became the bad guy in a revived Cold War. Sanctions became stricter in July 2014 and again in September, with Washington and Brussels double teaming Russian energy and finance. Russia also sanctioned the West, by banning certain food imports.
The resulting mess?
A 41.5% rise in the Market Vectors Russia (RSX) exchange traded fund, the best emerging market performer this year. And a 17% gain in the ruble year-to-date. It is now trading in the high 40s against the dollar (as yours truly mentioned here, thanks to sources who are much smarter than I am). Goldman Sachs said it was going to 70. And I'm giving you these insights for free! I'm a Russia disruptor. But I digress...
Last week, Russia's biggest food retailer,
According to JPMorgan's view, however, the Russian government’s financial situation is "quite healthy" thanks to low government debt.
While the sanction were Russia's fault, the stabilization of the Russian economy has been because of Russia too. Central banker Elvira Nabiullina has become the best emerging markets banker around, overseeing the country's worst currency crisis in a decade. Nabiullina is now at a point where she can begin easing monetary policy, and could even lower interest rates to 9.5% by the end of the year, JP Morgan fixed income analysts said in a report.
Russia's current budget surplus is expected to rise to $70 billion (5.5% of the GDP) by the end of the year, up from $59 billion (3.2% GDP) last year.
The weakening of the ruble, the increase in interest rates, and the recession are the three main factors putting pressure on Russian banks. But most non-financial corporations like Magnit have managed to cope with the economic downturn on their own, using internal sources of capital for debt repayment due to restricted access to foreign markets.
Yes, Putin haters...Russian GDP contracted 1.9% year-on-year in the first quarter of 2015. It's still a tough slog. Russia has massive structural problems we've all heard of ad naseum. However, the economy is doing better than expected.
Economic data released on Friday was only a flash estimate, really. There was no breakdown by industry or expenditure. Industrial production was negative but performed better than expected, thanks to a weaker ruble.
"The data has prompted policymakers in Russia to turn much more optimistic on growth prospects for 2015, and some revision of forecasts is probably warranted," says Craig Botham, an emerging markets economist at Schroders in London.
Russia recently jumped from 55th to 26th place in The World Economic Forum’s “2015 Human Capital Report”, an index that ranks nations by their human capital endowment, defined as the skills and capacities that reside in people and that are put to productive use. That puts Russia ahead of start-up nation Israel, and far ahead of the rich, but going-nowhere-fast Euro outdoor museum nations of Italy, Greece, Portugal and Spain. Russia also surpasses Brazil in this regard. And after Russia it's space bar, space bar, space bar, space bar...Ukraine.
The market ignored Russia's economic contraction today, with RSX rising over 1% compared to 0.4% growth in the MSCI Emerging Markets (EEM) ETF.
Late next month, the European Commission will meet to discuss Russian sanctions. My guess is sectoral sanctions will end this year, though probably not in July. Given the fact that sectoral sanctions began in July and September, the base case is that they will end on their respective 12 month anniversaries. Add oil prices hovering in the 60s instead of the 40s and Russia starts to look all right. The market is cheap. Foreign investors are buying equities and bonds. Corporate investors probably won't want to ignore it either. As it is, major European food companies like Danone risk losing Russia market share.
Still, the bear is not out of the woods yet, Botham warns. Political risk and oil price risk remain a concern. If sanctions are extended and the Ukraine imbroglio worsens, then their goes the neighborhood.
"Warning lights might be improving for Russia," says Botham. "But only to shift from one hue of red to another, not from red to green."
