Forbes
Sanctions, Wars And Falling Oil Prices No Match For Vladimir Putin
http://www.forbes.com/sites/kenrapoza/2 ... mir-putin/
Russia has gone postal.
Not in the crazy sense, as the street term suggests. But in the sense that neither snow nor rain nor heat nor gloom of night can whither the Russian economy. At least that is Vladimir Putin’s view. Speaking at a Labor Day ceremony on May 1 in Moscow, Putin said Russia has proven it can weather the storm of sanctions, civil war in Ukraine and falling oil prices.
“The country’s movement forward has always rested on the shoulders of those who take responsibility onto themselves, who understand that their personal efforts and the fruits of their labor benefit not just individual enterprises, industries, towns or cities, but the whole country,” Putin said.
This is a favorite rhetorical speech of Putin. In gatherings with foreign investors –whether its in St. Petersburg International Economic Forum or Russia Calling in Moscow — Putin has repeatedly said that the country was prepared to handle crisis.
That doesn’t meant there will be major potholes along the road. Last week, Gazprom reported quarterly losses of 7%. General Motors said in March that it was closing its only assembly line in the country. The economy is expected to contract by 4% in real terms, though Russia fund managers prefer to look at it in nominal terms. In that case, there will be no contraction.
“Russian GDP is going up, no question it will grow nominally,” says David Herne, a fund manager at SPRING Investment Group in Moscow. “If you calculated Russian inflation the way you calculated U.S. inflation, it’d be lower.” Russian inflation is currently 16.9%. Herne thinks Russia’s economy grows around 8% in nominal terms.
Perhaps these are the numbers Putin looks at as well.
Regardless, there are two facts worth mentioning and none have anything to do with Putin.
First, Russian Central Banker Elvira Nabiullina has been a stalwart of the ruble. In December, things could not have looked worse for the free-floating ruble. It hit an intra-day historic low of 70 to 1 against the dollar. Oil prices were threatening to fall below $40. A month later, Goldman Sachs forecast the ruble would remain in the 70s. There was talk that currency controls were on the way. Russia had hit bottom.
Fast forward a few months and Nabiullina has managed to secure the ruble. Short sellers who thought 70 was the norm are now dealing with a ruble closer to the 40s than to the 60s. And if economic forecasts can be trusted, consensus is for oil prices to slowly rise over the next two years. All of this is positive for the Russian economy, due to its over reliance on energy prices in the government’s budget.
Then there is the market.
Investors aren’t buying Russia because they like Putin. There are three reasons they’re buying, says Arent Thijsen, director of a family office near Amsterdam with about $250 million under management. The three reasons: “Value, value and more value,” he says.
“There is a lot of rubbish information out there on Russia on all sides. There is propaganda from Europe, from America and from Russia,” he says. “Investing in Russia is like this…fear arbitrage. You saw that a lot in January and December. You had new sectoral sanctions in September against the energy companies. But you also had some strength in the Russian economy that people didn’t look at.”
How does Russia weather these storms?
The debt to GDP is ratio in Russia is low at around 14%. There is almost no leverage in the economy — not on the household side, surely not on the government side and even most corporations are not over-levered with debt.
That makes it easier for Russia to insulate itself. Shocks will come. Markets will crash. But Russia always manages to come back. Over the last 12 months, the Market Vectors Russia (RSX) exchange traded fund has reversed course. It is now down just 10%. Year-to-date ending May 1, RSX is up 35.8% while the MSCI Emerging Markets Index is up just 9.8% and mini-QE China is up 24.5%, based on the iShares FTSE China (FXI) ETF. Russia is winning.
Russian equities have almost completely recovered since sanctions began in March 2014 following the annexation of Crimea. Russia annexed the Ukrainian peninsula on March 17, 24 hours after the local government held a referendum with the locals to secede from Ukraine. Since then, RSX is down 8.9%. If oil prices remain stable, with expectations for a better 2016, Russian equities would have completely recovered from the punishment of sanctions in under two years.
Despite upheaval on the Ukraine-Russia border, the resulting sanctions, and weak energy prices, Russia is an investor favorite.
This year’s CFA Institute survey of global asset managers put Russia at the fourth market investors expect will bring them the biggest returns this year. So far, it’s the No. 1 market for returns this year, at least among the top four chosen by CFA, which included in order: the U.S., China, and India.
“Russia is difficult to hurt, so sanctions don’t work out,” says Thijsen. “Companies will have a loss, some bigger than others, but next year it will be better. And the year after that, even better. When you have a high levered economy, then a little down fall brings a lot of trouble. We sold out of our Russia positions a year and a half ago, and have started coming back this year based on valuations in the ruble and in Russian equities. Everyone was selling Russia but we learned a lot from Warren Buffet: whenever everyone is fearful, be brave.”
Meanwhile, if Ukraine president Petro Poroshenko has any say, the wars in eastern Ukraine will continue. He told Kyiv broadcaster STB-TV that “The war will end when Ukraine regains Donbass and Crimea.”
