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A turbulent start to 2015

Russia was in the headlines last week, with economic figures breaking recent records, and the overall situation appearing quite dire. Brent crude has fallen to a five-year low, dipping temporarily below $50 a barrel, Russian foreign exchange reserves have fallen to the lowest levels in the last four years, the cost of insuring Russian bonds against default rose to the highest level in almost six years, and the Rouble fell again to around 63 per dollar.

Against such a backdrop, it is particularly interesting to note the conflicting reports on Russia’s sovereign debt that were issued by the world’s two leading rating agencies. One comes from Russia’s largest trade partner, with $90bn of gross border trade in 2014 and accounting for approximately $4bn of FDI inflows (up 73% in 2014). The other is from a country that does not even make the ‘top 10’ list of direct investors into Russia, and has a meagre, decreasing volume of bilateral trade with Russia. Which one would you consider to have a better insight into the prospects of Russian debt?

Well, according to China’s leading debt-rating company, Russia is more creditworthy than the US. Dagong’s “2015 Global Sovereign Credit Risk Outlook” has predicted that Russia’s debt repayment and domestic credit environment is expected to stabilise in the medium term. It is important to note the constantly growing influence of China on the world economy and its efforts to boost trade and investment with Russia. As William Pesek recently noted in Bloomberg, China is strengthening its role as a world lender “of last resort”, firmly stepping on the toes of the IMF and World Bank. On the other hand America’s Fitch lowered Russia’s credit rating from BBB to BBB- on Friday, in part due to falling oil prices, leaving the rating just one notch above junk level.

I am convinced that the impact of falling oil prices and the Rouble are short-term. In an in-depth piece on Russia in bne, Evgeny Gavrilenkov, chief economist at Sberbank, has argued that the problem in Russia is the lack of stability in the Rouble and oil prices, rather than the level they fall to. If both stabilise quickly, then the devaluation of the Rouble will lead to a surge in import substitution investment and give the Russian economy a boost that will keep growth positive in 2015.

What compounds the current situation, is that there is no agreement among experts and analysts on how low Brent crude can fall, nor what the new average price per barrel should be. A number of new predictions have been floated: the Gulf economies are reportedly budgeting for an assumed oil price of around $60 a barrel this year; Igor Sechin, Rosneft’s chairman, expects oil to recover in the second half of 2015 and fluctuate between $70 and $75; Russian ministers have cut their 2015 oil forecast to $80 per barrel from $100 a barrel.

In truth, predicting the rise and fall of oil prices to any certainty is extremely difficult. A myriad of factors will influence the price and its recovery, ranging from decision-making at OPEC, overall supply and demand, the state of the shale industry, geopolitical events, and market behaviour.

Oil supply-demand 2013-14

Oil supply vs demand in 2013 and 2014. Supply was almost double the demand in 2014. (Source: International Energy Agency)

The falling price of oil does have a significant, immediate impact on Russia. It is an oil producing and exporting country, and the Rouble is highly sensitive to its price movements. It has been widely reported that Russia will face new economic and financial lows, last seen in 2008-09, and that investors are deserting Russia and Russian equities without much afterthought. But many appear to be in panic mode, with the price of oil as the main cause. As Chris Weafer, senior partner at Moscow-based consulting firm Macro Advisory, has said: “For the economy, investors and business in Russia the only factor which matters, or matters above all else, in 2015 is the oil price. Everything else is mostly background noise.” On the other hand, investors should note that a weakening currency is not all bad for the Russian economy, as it sells oil mainly in dollars, which balances out the declining domestic currency.

The price of oil is bound to stay low for a considerable amount of time, most likely below the $100 per barrel mark. At the moment, as Kingsmill Bond, Sberbank’s chief strategist, has stated, Russian equities are among the cheapest in the world and are trading on fear, ignoring the country’s strategic depth. Dagong’s rating is a clear indicator that Chinese investors will move on the lucratively priced opportunities in Russia for 2015. The big question is: will the rest of the world miss out on this window of opportunity?

With Russians coming back to work from the Christmas and New Year holidays, I am keen to see how many of my peers in the industry will be on the road fundraising this year, and how many will not have Beijing and Hong Kong on their road show itinerary.

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