Russia: Other Points of View

RUSSIAN FEDERATION SITREP

by Patrick Armstrong

MAGNITSKIY. Yet another one-sided piece of re-typing has hit the West. The posthumous “trial” of Magnitskiy is being described as bizarre, Kafkaesque, absurd and so on without any background Here is some. A couple of years ago the Russian Constitutional Court ruled that, in cases where the defendant died before the verdict, a trial could/should be held so that the defendant’s name could be cleared (or not, as the case might be). Unusual perhaps, but there is a certain amount of sense. (For example, many of the people condemned by Stalin have been re-tried and exonerated; see here, for example, from 1988). The process in the case of Magnitskiy began about a year ago. For whatever reason, his family does not like the idea. The trial was immediately postponed at the objection of the family, so maybe that’s the end of it. I am informed that British law has a similar procedure which is called a “judicial inquiry” but otherwise proceeds very like a trial. Given all the accusations that have been slung around in the Magnitskiy case, one would think that an inquiry would be welcomed. Or are there parties who only want one verdict? Where is RT in all this, by the way? Isn’t it supposed to give the Russian point of view? But the shape of the story has now been set and it will be added to the indictment.

NOT WASTING THE MONEY. We hear little about how Russia spends all the money it pulls in because, I suppose, it wouldn’t fit the easy meme of corruption and anti-democracy. In Ottawa we take snow removal seriously (230 cms a year) and I was interested in this film of snow removal in Moscow showing an equally serious and capital-intensive operation. Note how much of the equipment is foreign-made.

RUSSIAN FEDERATION SITREP

by Patrick Armstrong

Corruption. The OboronServis scandal expands with former Defence Ministry official (and, some say, former Minister Serdyukov’s girlfriend) Yevgeniya Vasilyeva  charged with large-scale fraud and placed under house arrest. A spokesman for the Investigative Committee said that companies controlled by the Ministry had embezzled more US$250 million this year; not, it appeared, just from this particular swindle. No charges have been laid against Serdyukov but they may be coming pending investigation. It is also reported that the new Minister has so far brought with him 14 senior people from his previous jobs which suggests that he wants people around him whom he can trust to be clean. In other investigations a case has been opened against two military officers in the Far East for embezzling ration money; a former officer of the Federal Drug Control Service was sentenced to jail for drug trafficking and an ex-FSB officer was arrested for fraud. We’re definitely touching the organs of state security here. Stay tuned.

Duumvirate. Levada finds a slow decline in Putin and Medvedev’s ratings, although each remains at over 50%; on the other hand VTsIOM finds United Russia is back to where it was a year ago – just under 50%. Still, by world standards, pretty high but another indication that Putin’s return might not have been such a good idea. He was the right man for the job then but is he now? The population seems to be coming to think not.

RUSSIA IN CONTEXT: CLIMBING OUT OF A HOLE

FINANCIAL ANALYSIS

by Chris Weafer

“Step up to Red Alert? Sir, are you sure? It does mean changing the light bulb”
Kryten (from Red Dwarf) 

Bernanke’s Jackson Hole speech will dominate. The last week of August is usually one of the quietest of the year for markets. Investors take advantage of the last week of summer vacation ahead of the start of the new investment season that immediately follows US Labor Day (next Monday). But investors will hardly even need that excuse to stay on the sidelines again this week. It remains very unclear whether the US Federal Reserve will add another round of QE, Germany will agree to restructure Greece’s bailout terms and China will take any action to buoy slowing economic growth. The first question may only be answered when Fed Chairman Ben Bernanke addresses the Jackson Hole conference on Friday.

Uncertainty will last until mid-September, at least. This global market context will remain the dominant driver of Russian asset valuations. The current high level of uncertainty will likely persist through the first half of September, as the ECB and German government may not make any decisions concerning additional support measures until Germany’s Constitutional Court rules on the legality of the country’s participation in the ECM. That ruling is due September 12, which is also the day when the next US FOMC decision is to be announced and a couple of days after China releases its next macro report. More of the same until then.

Oil to get support from expected IAEA statement. Oil may be more of an issue this week as the IAEA is expected to say that Iran has added more centrifuges and placed them deeper underground following a meeting between IAEA and Iranian officials last Friday.. The threat posed by the latest Gulf of Mexico hurricane has boosted prices today and reversed Friday’s decline. Strong oil will help the ruble and, while further aiding Russia’s fiscal and budget execution, it is of little concern to equity investors so long as global threats dominate.

To access the full note, click here Download Chris weafer_Ru_economy 

FLOUTING THE ECONOMIC LAWS OF NATURE?

REPRINTS

Carnegie Council for Ethics in International Affairs

June 4, 2012

By David C. Speedie

Director, U.S. Global Engagement Program, Senior Fellow

Barely one month into his third term as Russia's president, Western Moscow watchers have been avidly reading the tea leaves of Vladimir Putin's early actions and policy signals. High on the list of speculations is the matter of Russia's economy—its current state and likely future trajectory.

Here, the president's moves to date have been, as an analysis in the Financial Times of May 31, 2012 suggested, "symptomatic of the fraught balancing act Mr. Putin must perform." As the FT article points out, Putin's economic advisors cover a broad spectrum, from cabinet "liberals," such as Igor Shuvalov and Arkady Dvorkovich, to the "hawkish energy tsar," Igor Sechin.

Putin himself, of course, is the man the West and the West-leaning Russian opposition love to hate and, in that spirit, his three-week record on economic performance and projection has already come under fire. At the center of the bull's-eye for the attacks have been the measures of "modernization" and growth the president has ordered the government to attain. These include:

RUSSIA WEEK - PLUS ca CHANGE... OR, MAYBE NOT

FINANCIAL ANALYSIS

by Chris Weafer

Anybody that thinks there is safety in number clearly hasn't been paying attention to the stock market pages.

Irene Peters

After last month’s US non-farm payrolls report fell well short of expectations, investors will be very keenly focused on the next update, which is due on Friday. The low number last month set the backdrop for increased investor nervousness and weak markets through April. Was that data point a blip or part of a new trend? The answer will be a major factor in whether investors again retreat from markets and risk through the summer months, or whether this will be one of those rare years with a summer rally.
 
The headlines in Russia will be about the imminent inauguration of Vladimir Putin next Monday (May 7) and speculation about the make-up of the new government, which will be appointed during the same week. Both the president-elect and prime minister-elect have been spreading word of their policy priorities in recent weeks, and some individuals, widely tipped to be in the next cabinet, are also talking about their view on policy priorities and budget issues in particular. That said, nothing dramatic and few surprises are expected.
 
In stock terms, the trend in favor of safer domestic themes should continue, as both global concerns and tax uncertainty hangs over the extractive industry exporters. Stocks in this theme will likely see continued volatility and short-term trading opportunities, but with little prospect of a steady price appreciation until the major external risks are resolved. The exception may be Norilsk Nickel. The price of copper rose 3.2% last week and looks set for further gains on the back of concerns over supply and falling inventories. In addition, the news that Russian oligarch Alisher Usmanov is increasing his equity stake in the company (by 1.2% in the recent move) may raise speculation that the long drawn out stand-off between the two core shareholders (Vladimir Potanin and Oleg Deripaska) may be about to enter a new phase, which could lead to a final resolution.  
 
Take note that there will be a quiet start to the week, as Russia takes a two-day holiday to celebrate May Day. Moscow’s bourses will be closed Monday and Tuesday, while the GDR and ADR markets in London and New York will trade as usual. The local prices will adjust for the missing two days at the start of trading on Wednesday.

To access the full note with supporting statistics, click here  Download Rus_Strategy_Week_Apr_30_'12

RUSSIA WEEK - PASCAL'S WAGER....RUSSIA IMPROVES AS THE ATTRACTION OF EM ASSET CLASS DETERIORATES

FINANCIAL ANALYSIS

by Chris Weafer

" Belief is a wise wager. Granted that faith cannot be proved, what harm will come to you if you gamble on its truth and it proves false? If you gain, you gain all; if you lose, you lose nothing"

Blaise Pacal

Further global market upside looks more likely. Notwithstanding the constant reminders of still viable threats to global growth, the list of those threats with medium term destructive potential has eased markedly. As a result, investors have become much more hopeful. US growth indicators are staying just above consensus, business and consumer optimism in developed economies is rising and, at least for now, investors are more inclined to the view that any signs of slowing in China will soon result in extra easing. While all this may easily change later this year, the outlook over the next few months looks net positive and that is persuading an increasing number investors to take a sort of "Pascal's Wager". The downside appears relatively limited while the upside from now to summer is potentially significant. 

Russia domestic story is improving. Russia looks good within that scenario. The oil price remains resolute even as OPEC promises to add more oil supply and questions over China's economic growth are growing. But, with the oil disruption risk-premium unlikely to ease much over the short-term, the more significant question mark over the oil price hangs over the 2nd half of the year. Russia's Industrial Production growth for February, released late Friday and showed year-on-year growth of 6.5% from 3.8% in January, confirms that the macro recovery story remains intact. The broader macro report for last month, to be released mid this week, should confirm that trend. 

To access the full note with the graphs and tables referred to, click here  Download Russia_Week_Mar_19

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.