[LINK] "Can Things Get Any Worse for Russia? You’re About to Find Out"
Bloomberg's Ksenia Galouchko and Henry Meyer note how the Russian economy is set to worsen.
For a decade, Dmitri Barinov has been following the volatile economy of his homeland from the safe distance of Union Investment’s offices in Frankfurt. Last year, as other money managers were steering clear of Russia’s broken economy, the Moscow-born Barinov pulled off something of a coup: He persuaded his bosses to take the plunge and buy Russian government bonds. It was a narrow bet, but he ended up winning because the central bank-after implementing the biggest interest rate hike since the Russian financial crisis in 1998 to prop up the collapsing ruble-changed course and aggressively backtracked. In the first 10 months of 2015, ruble-denominated government bonds handed investors such as Barinov a 25 percent return in dollar terms, the biggest gain for local bonds anywhere.
This year not even Barinov can spot an escape from the rubble of an economy mired in its longest recession in two decades, Bloomberg Markets magazine reports in its forthcoming issue. Sanctions imposed by the U.S. and the European Union to punish President Vladimir Putin for meddling in Ukraine remain a drag on growth. And oil’s decline to a 13-year low has been catastrophic for Russia, where almost 50 percent of government revenue comes from crude and natural gas. “With oil, you rely on a very volatile factor,” says Barinov, who oversees about $2.6 billion in assets. So as far as he’s concerned, “all bets are off.”
A persistent glut in crude supply could push prices to as low as $16 a barrel this year, according to former Russian Finance Minister Alexei Kudrin. Kudrin won plaudits overseas for his stewardship of Russia’s finances during Putin’s first decade in power. As the current crisis deepened, Bloomberg News reported in December, he was in discussions about a possible return to government. (He declined to comment on that.) A Putin ally, Kudrin remains negative about Russia’s prospects. “Over the next year to 18 months,” he says, “Russia will suffer major economic difficulties.”
[. . .]
With the 2015 budget based on $50 a barrel, says former Deputy Economy Minister Mikhail Dmitriev, “even $40 a barrel is a dangerous scenario for Russia.” The country holds parliamentary polls in September and a presidential election in 2018, when Putin is expected to run again. The election cycle puts pressure on the government to spend beyond its means, says Dmitriev, who five years ago accurately foresaw the street demonstrations over allegations of vote rigging in legislative elections that turned into the biggest protests of Putin’s rule. “If social dissatisfaction boils over,” he says, “Russia will adopt a populist economic policy for an extended time.”
That kind of spending could exhaust Russia’s National Wellbeing and Reserve funds-currently totaling about $120 billion-within a year or two, says former Russian government adviser Sergei Guriev, who takes over as chief economist of the European Bank for Reconstruction and Development in mid-2016. “After that,” he says, “they will have to increase taxes on businesses, which will undermine incentives to invest, resulting in continuing capital outflow and a further decline in GDP.”
For a decade, Dmitri Barinov has been following the volatile economy of his homeland from the safe distance of Union Investment’s offices in Frankfurt. Last year, as other money managers were steering clear of Russia’s broken economy, the Moscow-born Barinov pulled off something of a coup: He persuaded his bosses to take the plunge and buy Russian government bonds. It was a narrow bet, but he ended up winning because the central bank-after implementing the biggest interest rate hike since the Russian financial crisis in 1998 to prop up the collapsing ruble-changed course and aggressively backtracked. In the first 10 months of 2015, ruble-denominated government bonds handed investors such as Barinov a 25 percent return in dollar terms, the biggest gain for local bonds anywhere.
This year not even Barinov can spot an escape from the rubble of an economy mired in its longest recession in two decades, Bloomberg Markets magazine reports in its forthcoming issue. Sanctions imposed by the U.S. and the European Union to punish President Vladimir Putin for meddling in Ukraine remain a drag on growth. And oil’s decline to a 13-year low has been catastrophic for Russia, where almost 50 percent of government revenue comes from crude and natural gas. “With oil, you rely on a very volatile factor,” says Barinov, who oversees about $2.6 billion in assets. So as far as he’s concerned, “all bets are off.”
A persistent glut in crude supply could push prices to as low as $16 a barrel this year, according to former Russian Finance Minister Alexei Kudrin. Kudrin won plaudits overseas for his stewardship of Russia’s finances during Putin’s first decade in power. As the current crisis deepened, Bloomberg News reported in December, he was in discussions about a possible return to government. (He declined to comment on that.) A Putin ally, Kudrin remains negative about Russia’s prospects. “Over the next year to 18 months,” he says, “Russia will suffer major economic difficulties.”
[. . .]
With the 2015 budget based on $50 a barrel, says former Deputy Economy Minister Mikhail Dmitriev, “even $40 a barrel is a dangerous scenario for Russia.” The country holds parliamentary polls in September and a presidential election in 2018, when Putin is expected to run again. The election cycle puts pressure on the government to spend beyond its means, says Dmitriev, who five years ago accurately foresaw the street demonstrations over allegations of vote rigging in legislative elections that turned into the biggest protests of Putin’s rule. “If social dissatisfaction boils over,” he says, “Russia will adopt a populist economic policy for an extended time.”
That kind of spending could exhaust Russia’s National Wellbeing and Reserve funds-currently totaling about $120 billion-within a year or two, says former Russian government adviser Sergei Guriev, who takes over as chief economist of the European Bank for Reconstruction and Development in mid-2016. “After that,” he says, “they will have to increase taxes on businesses, which will undermine incentives to invest, resulting in continuing capital outflow and a further decline in GDP.”