I had the fortune of living in Russia for three great years so, when the task of putting together a series of ‘Thought Leadership’ articles was put my way shortly after I joined Nordea Markets, I couldn’t help being thrilled at the prospect of revisiting Russia and discovering what makes it tick 20 years on.
When I say revisit of course, I’m not being literal. The wonders of Skype saw to that. But the next best thing was 45 minutes in the diary with Nordea’s erudite Russian expert Tatiana Evdokimova on all things Russian. Or at least, all things Russian that could be covered in the space of just under an hour. It was illuminating.
Of course, it wasn’t long before the disruptive incumbent in The White House occupied centre stage. Briefly, at least. Donald Trump’s decision in October to tell the world he was pulling the US out of the nuclear weapons treaty that pre-dated the fall of the Berlin Wall and helped transition the globe from Cold War into a peace that has more or less held for more than three decades, was still fresh in the memory as we talked.
“Russia takes this as just another episode in the overall hostile relationship between the two countries,” says Evdokimova, with the Skype equivalent of a rueful shrug. “It’s unfortunate that the tensions have shifted from the economic into the nuclear environment and there are connotations from the Cold War but this is the kind of unpredictability that we have come to expect of Trump.”
“When he came to power, there were some hopes of a softening in the relationship and maybe the turning of a new page, but I wouldn’t necessarily say they were very high. But it still kind of took everyone by surprise when the relationship went the other way.”
In an economic sense, the pain has most obviously been felt in the sanctions that began in 2014 over Ukraine piling misery on top of Russia’s ever-present ticking demographic time-bomb which, despite some moderately successful family-friendly policies and pension reforms, has left the country’s population skewed towards those of pensioner age for now and the foreseeable. And yet, despite an escalation in sanctions over Syria, accusations of election interference and the Skripals’ affair, Russia has not only managed to absorb the blows, it has, like a boxer bouncing off the ropes, proved remarkably adept at adapting to the new environment.
“I’ve been surprised at the Russian economy’s ability to adapt,” says Moscow-based Evdokimova. “It’s been four years now. It was far more painful in 2015 and 2016 because Russia was also taking a double hit from low oil prices, but now business has pretty much adapted to the new reality and capital markets have started to open up.”
Evdokimova reserves particular praise for Bank of Russia governor Elvira Nabiullina who she says has done a “fantastic job steering the Russian economy through turbulent times” keeping a check on inflation and creating the kind of environment that has enabled business to, if not exactly prosper, at least keep things ticking over.
“Russia has managed to find some new partners where necessary, business continues as normal in spite of the political sphere and we have even seen some foreign direct investment recovery,” says Nordea’s chief analyst for Russia. “Russia has had to go through a very painful deleverage and sanctions have undoubtedly put some brakes on Russia’s growth. That has been the primary negative factor. Russia is locked into a growth rate of 1.5-2% per year and without sanctions, this could have certainly been better.”
The oil price has of course been pivotal. In 2008, it peaked at just shy of $150/barrel. In 2015, it fell to below $30/b. For Russia, that precipitous slide alongside sanctions was a double whammy of the most enormous proportions and called for desperate measures. Not for nothing then has Russia strengthened its ties with the global oil cartel Opec in the last two years, helping to establish a ceiling on production and, more importantly, manoeuvre the price back towards a $70-80/b range that has brought some much needed stability.
It does however point to a dangerous dependency on the vagaries of the oil price as a barometer for the success or not of the Russian economy, something that Evdokimova is all too aware of.
“Russia has actually done a lot to reduce its dependency on oil,” she says. “It is much less vulnerable to oil price shocks and one of the reasons for that are the new budget rules which stipulate that excess oil revenues generated by oil prices of more than $40/b goes into the national wealth fund.”
“Russia is trying to follow the example of Norway here. Because of this budget-rule mechanism, budget spending is less dependent on oil price moves than before and oil price shocks are less likely to fully translate into economic shocks.”
Russia’s also been pumping the barrels out at a rare old rate, breaking records repeatedly in the last two years to the point where 11 million barrels/day has become the norm on the back of an investment boom in greenfield sites some years ago that has begun paying dividends. But ironically, fresh investment is likely to be thwarted for now as a consequence of sanctions.
“The government recently produced a paper with forecasts up to 2024 which were very optimistic as far as growth rates are concerned, but also recognised that the country is likely to face negative growth rates in oil extraction starting from 2022. Investment is definitely on the wane and one of the crucial issues is this access to new technology.”
Evdokimova adds: “If Russia is to develop oil in remote regions like the Arctic, then it needs high tech but the sanctions have put a cap on the possibility for cooperation with western companies that have this kind of technology.”
Russia’s efforts to replace this internally or turn to other sources on the international stage have met with mixed success, she says, but it is the geopolitical push towards China that could have global implications. In practical terms, that has been manifested in multi-billion dollar gas deals, various Silk Road projects, and, perhaps above all, the close relationship being forged between Vladimir Putin and China’s president Xi Jinping, cemented by a high-level summit in Vladivostok in September.
It’s an obvious turn for Russia, says Evdokimova, given Russia’s fractious relationship with the US and Europe, and she dismisses any sense of negativity around the notion that Moscow risks being cast into permanent ‘junior-partner’ status if it gets too locked into Beijing’s global ambitions.
“Russia’s been in the process of doing business with China directly for some years now and, while it is discovering that it is dealing with a very difficult and very cautious partner, the ties in terms of trade are developing, largely at the expense of the European Union,” says the PhD graduate from Moscow’s Higher School of Economics. “It’s a natural push towards the East but this is not an easy partner. Judging by the size of the economies, it is quite natural to expect Russia to play a secondary role but there is nothing negative in that.”
“On a geopolitical footing, it’s still more or less equal. China will quite soon become the world’s largest economy and I don’t see any problem in being the junior partner of the biggest economy in the world.”
It’s a shift that risks a repeat of history, of course. The Sino-Soviet pacts of the 1950s and 1960s ultimately gave way to a complete breakdown in the relationship in the 1970s including border skirmishes that eventually propelled China towards détente with the US, but the mutual interest to work together is clear given that both continue to face an onslaught of varying degrees from the Trump administration.
Russia’s pivot towards China has also been mirrored and, you could argue, is even meshed with its stated policy aim of ‘de-dollarisation’. It’s a strategy that, Evdokimova says, makes perfect sense in the prevailing environment.
“It’s a natural move given that Washington is trying to use the dollar as a weapon but it has been using it like that against a lot of other countries too. It’s already well in process in Russia domestically. Ten years ago, everything like house prices would have been debated in dollar terms, but now we talk in roubles, an indicator in itself that confidence in the rouble has increased.”
“The share of dollar-denominated imports is also already down to 45% which is ten percentage points lower than in 2014 and this decline is only likely to accelerate. De-dollarisation of oil-denominated exports is less straight forward as oil is quoted in USD.”
Might Russia ever be tempted to ‘weaponise’, say, its massive gas reserves through projects such as the yet-to-be-completed Nord Stream 2 pipeline into Europe in retaliation?
“That would be suicide,” says Evdokimova. “Gazprom is always trying to portray itself as a reliable and trusted partner and Europe is a very important market for Russia in terms of gas. If it were to even hint at the prospect of weaponising gas, Europe will look to other options. The long-term trend would not favour Russia.”
It is consistent with a theme that underpins Evdokimova’s thrust throughout the conversation. Despite the difficulties in the relationship right now, Russia still sees itself as naturally aligned with Europe in cultural and political terms and wants to keep those ties close.
“People who try to keep doing business are frustrated by the political noise but our clients in Scandinavia are still very attracted by the Russian market. The Russian elites have also got used to the European lifestyle,” she adds. “Europe is still our first and foremost partner in trade, after all.”
The hope for a less fractious relationship is a heartfelt one. The World Cup this summer proved to a watching globe that Russia could successfully host a global event and Evdokimova asserts that Russia remains a European country at heart.
“There is so much propaganda disseminated through the media, but at heart, Russia wants a good relationship with Europe. That’s the message from the leadership. Hopefully fantastic events like the World Cup can help that process.”
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