Russia: Other Points of View

RUSSIAN FEDERATION SITREP

by Patrick Armstrong

Putin platform. An article in Izvestiya lays out the outlines of Putin’s election platform. And perhaps we have a clue as to why he thinks he must return as President. It’s one of the most concise statements of his desire for gradual reform he has ever given us. “A recurring problem in Russian history has been the elites’ desire to achieve sudden change, a revolution rather than sustained development. Meanwhile, both Russian and global experience demonstrates how harmful these sudden historical jolts can be… This is balanced by a different trend, a diametrically opposed challenge – in the form of a certain inclination to inertia, dependency, the elites’ uncompetitiveness and high levels of corruption.” Perhaps he feels that only he has the political muscle to steer between these twin shoals. He reiterated the long list of achievements since 2000 when many “foresaw one future for Russia: bankruptcy and breakup.” In short, vote for me, you know what I’m doing, you’ve seen what I’ve done. He promises more such pieces. I was also interested to see what I believe to be his first public reference to Khattab – a figure not as well known in the West as he should be.

RUSSIA WEEK: NEW GAME - NEW RULES

FINANCIAL ANALYSIS

by Chris Weafer

"The inherent vice of capitalism is the unequal sharing of blessings;

the inherent virtue of socialism is the equal sharing of miseries"

 Winston Churchill 

There are three events in the diary for this week that have significance for Russia’s markets as we head into 2012. The first of those is the migration of the RTS cash equity business to MICEX today. The second is the first session of the new, and likely more demanding, Duma on Wednesday. The third is the next mass protest planned for central Moscow on Saturday. All have potential implications for government policy, foreign investor activity in, and perception of, Russia assets and for some specific stocks and themes. 

These events come after a generally good news week for the investment story in Russia, which, because of the dominance of external drivers and political risk dominating the headline in international media, had less of a market impact than they deserved. Russia’s WTO membership application was approved after almost eighteen years of negotiations; PM Putin made a few, but significant concessions during his televised Q&A session; macro data confirmed a steadily improving growth trend in the economy and national balance sheet that is already one of the best in the world. The decision taken by OPEC ministers also creates a better basis for assuming an average oil price of between $100 - $110 p/bbl for 2012, albeit we may still see Q1 weakness before Mid East regional risks rise again in Q2.

As western markets now head into the usually quiet Christmas and New Year holiday, there should soon be less external impact on the domestic market and the domestic news headlines will be more of a dominant driver. But, before we get to that period, there is the potential for a few more external bumps as, e.g.  the war of words continues over the rating agencies review of European sovereign ratings debt ratings and we get the usual end-year populist statements from political leaders across the region. Euro area Finance Ministers will hold a conference call later today to try and advance the rescue talks. The death of North Korea's leader also adds an additional element of uncertainty into already nervous markets. Asia's bourses are lower across the board at mid-session today as investors again prefer the dollar as the haven asset. One month Brent is at $102.69 p/bbl, copper is off 0.9%, gold is dowb 0.3% at $1,597.6 per ounce, silver is off 2.1% and the dollar-euro rate is at $1.3015.

To access the full report, click here  Download Russia_Week_Dec_19

RUSSIA EQUITY STRATEGY: MOSCOW IS A LONG WAY FROM CAIRO

FINANCIAL ANALYSIS

by Chris Weafer

 “If I were there, protest music would be important. But I’m not going”

Nina Simone  

Yesterday’s sharp fall in the Russian equity market was an over-reaction to reports of Moscow street protests. While events across North Africa and the Middle East earlier this year suggest it is foolish to dismiss such events as not having consequences, in Russia those consequences are much more likely to play out over the term of the next parliament rather than dramatically at present. 

Sharp market reaction 

Equities and the ruble took a hit. Russian equities fell hard yesterday as a reaction to media reports of widespread public protests against Sunday’s parliamentary election. Reports referred to multiple protests and arrests alongside a heightened security presence in Moscow and other major cities – the clear impression being that Russia is in danger of experiencing its own Arab Spring event and that the election outcome may mark the start of a winter of discontent in Russia marked by social instability and political uncertainty. That fear was the major reason for the 4.7% fall in the RTS Index, the 4.0% loss on MICEX and the 6.4% decline in the IOB GDR index. Those losses compared with a fall of 1.3% for the MSCI EM Index. The ruble was another casualty, falling 24 bps against the dollar and 11 basis points against the euro by the close of MICEX trade yesterday.

The full note can be downloaded here  Download Strategy_Moscow_long_way_from_Cairo

RUSSIA TODAY: COOKING WITH GAS

FINANCIAL ANALYSIS

by Chris Weafer

Italian news will dominate. Asia’s markets are alternating between a small gain and small loss this morning as investors wait for what they see as a crucial vote in Italy’s parliament later today. A loss for the Prime Minister will widen the bond default gap and send all markets lower at least as an initial reaction. One bright spot for Russia is that oil is again higher, trading at $114.5 p/bbl at mid session, along with copper (+0.9%) and some other metals as China demand is holding steady. That should again help the oil majors and the ruble to add to yesterday’s gains, albeit modestly. Gold is also better, up 0.2%, an silver is 0.5% higher. But, net net, it will be a case of nervously watching, and reacting to, news from Italy today.

Today: Apart from waiting for news from the Italian parliament the other events today include an update on UK industrial production and the 2012 oil market outlook from OPEC. The IEA will publish its 2012 oil market outlook tomorrow. Neither report is expected to contain any major surprises and both are likely to re-state that the oil price remains dependent on the strength of demand from China, other Asia and other developing economies rather than from developed economies.

RUSSIAN FEDERATION WEEKLY SITREP

by Patrick Armstrong

Note from the author: 

NO MORE SITREPS UNTIL LATE NOVEMBER.
 
Dear Readers: today’s is the 611th of these since the first one in March 1997. I normally have no difficulty in filling the page but, of late, I find that that it is more and more difficult. This is, I believe, another indicator of the increasing stability and “normality” of Russia’s situation. In former times we had “the Eastern Question” or “the German problem” and so we have had “the Russian problem”. But, as the others faded away (over time and much pain) so will this.

I will consider, when I get back, whether I can continue the weekly schedule or switch to every two weeks.

Demographics. The Russian demographic problem – which, incidentally, has its roots in the Soviet days and is mirrored in most FSU countries (Latvia perhaps the worst) – was the consequence of problems at each end. Low birth-rates and high infant mortality combined with too many early (and largely preventable) deaths. But, contrary to the customary poorly-sourced pieces that the Western MSM is rife with, progress is being made. Anatoly Karlin has been posting on the subject for several years and is well worth reading. His latest argues that Russia’s population has actually increased and is today higher than it was in 2009. While the natural population increase is still negative – but less and less so every year – the increase has come from immigration. Improvements have been made at both ends of the problem but Karlin provides data showing that deaths by alcohol, suicide and homicide have seen great reductions. They are still rather higher than they should be but these are factors where comparatively easy resolutions can be found. In short, it appears, barring some new disaster, that the Russian demographic crisis is on the way to being solved; that the various government programs are having their effect and that increasing prosperity will continue to raise life expectancy and reduce infant mortality. Thus Russia’s “demographic crisis” is yesterday’s news and the improvements – with more expected – serve as another of the many reasons that Russians generally approve of the Putin team. It cannot be said too often that the reasons for the Team’s popularity, trust and support in Russia is not that opinion polls are fixed, or that the mass media is as it was in the Soviet days or that Russians are naturally subservient (all assumptions of the Russophobic tendency) but because Russians can see every day the effect of a governing team that, generally speaking, does what a government is hired to do.

RUSSIAN FEDERATION WEEKLY REPORT

by Patrick Armstrong

On and on. The reaction. I’ve been reading a lot of reactions and I believe they can be summarised as follows. To Russophobes it was confirmation of their line that Russia is a dictatorship, always has been and always will be. Russian liberals are disheartened, some to the point of despair. There are the beginnings of mockery and the re-appearance of political jokes. (Here’s bald and hairy). People like myself (I leave the classification to you, Dear Reader)  are also disheartened and see The Decision as a failure of Putin’s imagination and confidence in the political system that he created. Many (probably most, in fact) Russians, however, support his return to the Presidency. And here I see several themes. A common one is that Medvedev was unsuccessful – a few are very condemnatory. They argue that he was unable to move “modernisation” forwards and failed to get much response from the West to his overtures. Another common theme is that Russia faces dangerous or difficult times ahead at home and abroad and that only Putin can be the timoneer. Some argue that with Putin at the top and Medvedev as PM, “modernisation” can be pushed through to the finish. Among these commentators we often see a conviction that stability and predictability take priority over everything else. And maybe that’s the clue. Russia had a pretty miserable time in the Twentieth Century and the Putin years do stand out as much better than anything then. Primum non nocere is engraved on Russian hearts. A quiet life is a lot better than the alternatives that Russia has lived, and died, through.

RUSSIAN FEDERATION WEEKLY REPORT

by Patrick Armstrong

Police reform. The Interior Minister says police who may be exposed to temptations of bribery will have to take regular lie-detector tests. He is pretty pleased with the results of the “combing” process. I think, to put it mildly, he’s over-optimistic. The Investigative Committee says that police officers have been charged with 70 crimes in the last 10 days. And that’s the ones they’ve been charged with. Obviously the teeth on the comb were set too far apart.

Politkovskaya. Perhaps a break-through: a former policeman, Dmitriy Pavlyuchenkov, was arrested and charged with organising her murder. The theory is that he was a contractor and the investigators say they know who ordered her death. The prosecution theory has always been that the man who ordered it is no longer in Russia. Pavlyuchenkov’s name came up early in the case but he seems to have been able to avoid charges and apparently functioned as a sort of secret witness for the prosecution. From the beginning I have believed that she stumbled – perhaps unknowingly – across some piece of information a Chechen “biznesman” didn’t want known. Nothing to do with Putin or the government.

RUSSIA TODAY: OIL AND LIBYA FACTOR

FINANCIAL ANALYSIS

by Chris Weafer

Asia's markets and most commodities are tracking higher this morning as investors wait in hope that the US Fed may announce some new measure to try and boost economic growth when it holds its annual meeting at Jackson Hole, Wyoming starting Thursday. Sentiment remains very fragile and while investors will try to extend those gains across other markets today, any disappointing data point will reverse that trend. 

The initial knee-jerk reaction to the news of the surprisingly quick advance of opposition forces into Tripoli yesterday was a $2 /bbl fall in the price of Brent as traders started to factor in a quick return for Libyan oil to the export market. A more sober reflection suggests that while a quick return of 300-500,000 bbl/d is possible, it may take anything up to 18 months for full recovery. (See more detailed note below). The price action of the past 24-hours supports the bullish case for oil and reflects the net long position in then Futures market. This is a very positive backdrop for the Russia investment case once the rest of the world settles. 

Brent crude for one-month delivery is trading at $108.79 p/bbl in Asia currently and that is now higher than Friday's close. WTI is at $85.03 p/bbl. 

RUSSIAN FEDERATION WEEKLY SITREP

by Patrick Armstrong

Then and now. The 20^th anniversary of the 1991 coup attempt and its sequella is upon us and I agree with Gorbachev’s comment that the coup planners “were truly idiots, and they destroyed everything. And we proved ourselves to be semi-idiots, myself included.” The 17 March referendum  showed, with important exceptions, that the bulk of the population wanted to remain united. (The results foretold much of the coming fighting and secessions too). But it didn’t happen and there was no small misery in consequence of the breakup. However there is an interesting piece comparing ordinary life in Russia then and now in terms of purchasing power. In essence, despite much remaining poverty (20% or so), per capita income is up about 45% since 20 years ago. 45% is not that much perhaps over two decades, but the growth comes post-Putin after the seemingly unending fall throughout most of the 1990s. No wonder most Russians support Putin/Medvedev. It would be interesting to see a similar calculation in the other 14 former SSRs. In that connection, I leave you with this quotation from Ukraine’s then-PM Kuchma in 1993: “…like everyone else, I believed that Ukraine is so rich that it provided for the entire [Soviet] Union. It turned out that it is, in fact, rich. However, was it really a provider?” I believe many SSRs thought that they put in and the RSFSR took out and the moment Moscow was gone they would be better off. Not true, as they have had opportunity to learn and reflect on.

RUSSIAN ECONOMY: FRAYING NERVES (plus WEEKLY FUND FLOWS ANALYSIS)

FINANCIAL ANALYSIS

by Chris Weafer

Although investors are still clinging to the belief that because the consequences of a default are so disastrous, a deal will be done even at one minute to midnight on Tuesday. But, the longer we wait for the deal the greater the level of nervousness. That was reflected in US market trading last night and across Asia again this morning where most equity indices are off between 0.5% and 1.0%. Expect a similar pattern on Moscow's bourses this morning and, likely, for most of an expected quiet session. A majority of traders will simply stay away until the US uncertainty is resolved.
 
Weekly equity fund flows. (see more detail below). The total volume of money invested into emerging market (EM) funds last week was relatively low, even for mid summer, as investors prudently remained on the sidelines while waiting for a resolution of the US debt talks. But, although low, the net flow remained positive as a majority of investors expect a deal ahead of the default deadline. Russia funds reported a small ($13 mln) outflow for the week bring the net loss for July to a modest $158 mln. Year to date, Russia funds are still well ahead of other big EM country funds with a net inflow of approx $3.2 bln while others are still showing net redemptions.

Today.The dollar continues to fall against the yen, Swiss France and other "less troubled" currencies. It is higher against the euro, at $1.4297, as investor dears over the US and eurozone debt threats are interchangeable. The price of gold is at $1,615.9 per ounce and one month Brent last traded at $117.27 p/bbl (WTI at $96.97 p/bbl). The stronger dollar is the cause of the slight oil and gold price weakness.