Known unknowns – or uncertainty is a certainty


We all crave certainty in life and even the most open-minded person has resistance to change. The current forces at work in Russia are therefore baffling for many of us. Even if the root causes are deceptively simple. The devastation wrought on the rouble and which is spreading to the broader economy stems (almost) entirely from sanctions and the oil price. There are contributing factors, such as the missed opportunity to diversify the economy during the fat years – but these are the principal catalysts.

Selection_554The logical conclusion is that the timing and the pace of any recovery will also depend on the future path of these 2 factors. Unfortunately neither of them is even remotely easy to predict. 5 minutes of research will allow you to find forecasts of the average price of oil (Brent) for 2015 of varying anywhere between $45 and $70, and there are commentators even outside of that range. There are some truly alarming predictions for how low the oil price can go supported by an array of conspiracy theories focused on the collusion of the US and Saudi Arabia to the detriment of Russia. There does seem to be a general consensus however that there will be a sustained period of low oil prices by the standards of recent history that will last at least 18-24 months. Beyond that increases are broadly expected although not to the levels to which we have become accustomed.

Sanctions are an entirely political decision and are therefore at the whim of the ruling elites in the EU and the US. However – experience tells us that US sanctions, once in place, enjoy a surprising amount of inertia and are therefore likely to remain in force for an extended period of time. EU sanctions, in contrast, have a natural shelf life and require unanimity to extend, either in time or in breadth of effect. They are likely therefore to be more short-lived, particularly in a period of continuing economic difficulties and uncertainties, mostly in the Eurozone.

Russia in the past has proved itself particularly adept at playing on the divisions in the EU and some of the current political currents, for example the new Greek government, play even more to this strength. On the face of it EU sanctions seem to be a more endangered species than their US cousin, but the ongoing conflict in Ukraine and the potential for escalation should not be underestimated – and nor should German resolve, particularly in the guise of their Chancellor Angela Merkel, not to allow the perceived Russian adventures in Ukraine to go unnoticed, unchecked and unpunished.

Uncertainty then is the order of the day and this is the biggest enemy of investment. You may be surprised to hear, therefore, that I remain relatively upbeat in my assessments of the prospects for investment in Russia and for the Russian Real Estate market (my chosen specialized subject) over the short to medium term. Yes I see very soft sentiment and therefore a weak investment environment for the next 6 months, and perhaps 12, but beyond that I expect improvement and potentially quite a rapid one. In most real estate sectors, with the exception of offices where a supply overhang will mean a recovery 12 months after other sectors) there is a structural undersupply. Current vacancies will quickly evaporate as economic activity improves on the back of a better macro environment, long awaited diversification of the economy and the extraordinary resilience of the Russian consumer.

Many expats seem to believe now is the time to desert the Russian market. For this reason as well as the ones above I see plenty of opportunity, even if a little patience is required in the short term.

Addendum: As I finish writing this the RTS is down 2.5% on the day, oil is down 2% on the day and the ruble is heading back towards 70 vs USD. However – my underlying optimism holds!