Tim Millard – Russia At The Crossroads?

There is not a great deal of good news to be found at the moment and even my (forced) optimism is starting to evaporate under the harsh midday sun of economic and geopolitical reality. Even if the fundamentals for the commercial property market remain sound, at a certain point they become irrelevant and it is all about sentiment – that is very negative at the moment and may not be easy to turn around.

I sense that we are at something of a crossroads. The current course should (I hope) look very different to the Russian authorities in light of Brent at $82 / barrel, rising inflation, declining consumption and stagnating investment. No doubt the first of these is the biggest concern. Although Russia seems endowed with plentiful rainy day resources, a sustained period of oil prices below $90 per barrel will quickly have an effect (and that is seeming the more likely scenario). The changes felt in the medium term will be the most pernicious. A lower oil price and the indirect and direct effects of sanctions (negative sentiment, availability of debt, investment in future oil capacity) will negatively impact future production of oil and gas at a time when existing fields are maturing. This could combine with a diversification of supply in Western Europe due to the perceived unreliability of Russia as an energy partner. In such a scenario Russia’s economy would be severely weakened, as it has not followed through on the reform agenda, which was advanced as part of the response to the global financial crisis. The country remains, therefore, overly reliant, some would say dangerously so, on oil and gas revenues.

Vision and strategic thinking is required in order to avoid this most negative of scenarios but decisions made in the next few weeks and months could determine the course of the Russian economy for the next decade or more. My assumption is twofold. Firstly that this fact is appreciated; and secondly that the long-term health of the Russian economy is considered important and not a distant second to the country’s perceived might (and this is mostly an internal perception). Hence my belief that there will be a softening of the brinkmanship and a return of Russia to its more natural economic path*. If, as and when that occurs then we will be looking back at the next 6 to 12 months as having been the golden time to have invested in Russia!

Russia’s strength is her unity of purpose, her political will and the lack of a need to build consensus. That gives her a considerable edge particularly vis-à-vis the EU. However her dependence on the oil price, lack of an diversified economy and apparent lack of a longer term plan can quickly trump that strength. Russia seemingly loves zero sum games and should therefore consider this – when oil is above $100 per barrel (under current budgetary circumstances) she can win just about any game she chooses to play. When the price is below $90 per barrel that calculation very quickly reverses.
That is an uncomfortable position to be in and really ought to be sufficient reason to reform the economy – if for no other fact than this: the uncomfortable truth is that as things stand Russia’s strength is dependent on a factor almost completely outside of her control.