Sunday, 11 April 2021 | 01:43
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Can Putin’s Russia Survive Weak Oil And The Coronavirus?

Sunday, 26 April 2020 | 23:00

Here’s the answer for the Putin haters: sorry, he will survive it, Russia will survive.

Now for the market.

Russia is being hit by the double whammy of weak oil prices and a pandemic. The economy is seen contracting by 2.5% in consensus base case scenarios from three different investment banks, to as low as -8.6% in a worst case scenario being considered by a group of Russian economists known as Liberal Mission.

The stock market, which closely tracks the fortunes of Brent crude, is down over 26% year-to-date and down nearly 30% from it’s 12 month high. The Russian bear is in bear territory.

The country has been on lockdown for a month. People are tracked to make sure they are obeying quarantine orders via a phone app. Users choose the reason why they are going out of the house and receive a barcode on their phone if permission to leave is granted. The barcode is needed if they run into police. Fines start at around 5,000 rubles for first offenders.

Some 68,000 people have contracted the virus, with 615 deaths, based on data compiled by Johns Hopkins University. It’s expected to hit peak and plateau next week.

Like here in the U.S., most of Russia’s large industrial companies are working as usual. Bank branches are open, with many services available online. Public and private schools are closed. All international flights have been cancelled. Restaurants can only work through online delivery. Many high-touch services such as hair salons and dentists are closed and all entertainment venues, parks and museums are also closed.

Investors think that Russia recovers quicker than most of Europe because they were more pro-active. Like the U.S., they banned travel to China early. They also started closing schools and banning all international travel when they had under 1,000 cases of the new SARS coronavirus.

Despite a multitude of approaches taken to deal with the epidemic by different countries, most of them follow a similar exponential growth path anyway.

It is too early to tell what the eventual toll is going to be, but Russia is on track to have less virus casualties per capita than many other countries.

The Russian economy also seems better equipped to withstand the double shock of epidemic and oil collapse than in 2008 or 2014 because it has little external debt, large currency reserves of more than $500 billion and more than 7% of GDP in the National Welfare Fund. It’s also fiscally conservative, so it has lots of room to spend.

Here’s what Russia’s relief package looks like:

  • Additional monthly instalments for families with young children of 5,000 rubles per child per month.
  • Increased unemployment benefits
  • One-off payments to the elderly
  • One-off payments to low income families
  • Simplification of personal bankruptcy procedures
  • The second phase of the relief package was aid for small- and medium-size enterprises suffering from compulsory closure demands by the government.

  • Tax deadlines were extended for six months
  • Social security tax’s marginal rate was cut in half from 30% to 15%
  • Borrowers whose income fell more than 30% can request a six-month delay in interest payments from the banks
  • A temporary ban on penalties for overdue debt, and…
  • Three month rent breather for properties rented from the government.
  • All the measures are equal to about 2.5% of Russia’s GDP.

“The idea of a universal basic income was also floated by some economists, but it is still considered too radical for Russia and is unlikely to be implemented,” says Denis Rodionov, head of research for SPRING, a hedge fund in Moscow.

When looking at Russian stocks, the ones that are suffering the most are in the commodity space, namely oil and gas, down between 40% and 50%; followed by domestic stocks like telecom and retail, down around 30%; and lastly were non-energy exporting industrials such as metal producers, fertilizers and even gold miners. Those guys were down around 10% in the first quarter, Rodionov says.

“The key unknown variable in any economic analysis at this moment is the length of quarantine measures needed to fight the pandemic,” he says.

There’s also the oil equation. What’s stopping oil from going to $10? It’s currently around $20.

All 50%+ drops in oil prices have been buying opportunities for Russian equities. So Wall Street has one eye on the coronavirus, the other on crude oil futures. When the pandemic winds down, for sure oil would have bottomed.

“When the Russian economy and equities are looking great, it’s probably time to sell; and when things are looking bad, it’s almost certainly time to buy,” write analysts from Renaissance Capital in Moscow in a note on Friday.

Baron de Rothschild’s famous “buy on the sound of cannons, sell on the sound of trumpets” was made for Russian equities.

In the 2008-09 global financial crisis, Brent oil fell by 77% from $146 per barrel to $34 and the MSCI Russia declined by 80% from peak to trough.

In the 2020 global pandemic, Brent oil fell by 75% from $69 per barrel to $17.30 and MSCI Russia declined by 51% from peak to trough.

Oil & gas account for 65% of Russia’s exports and around 30% of its budget.

“We expect a U-shaped recovery, which could allow many investors to enter the markets successfully,” says Grigory Sedov, global head of private clients at Renaissance Capital.

“In Russia, crises happen twice as often as in the rest of the world. That’s why Russian investors have to always be ‘on alert’, and is why many investors have been able to meet the current crisis in good shape. Those investors are active now, not in terms of purchases, but in terms of looking for and evaluating opportunities. We believe there is still plenty of time for looking,” he says, hinting that Russia’s stock market has further to slide.

And then there’s this man…
As far as Putin goes, barring a failure to mitigate the spread of the coronavirus, he’s not going anywhere.

The recent proposal of allowing for unlimited presidential terms does not necessarily mean that Putin intends to run in 2024, says Rodionov.

New requirements for presidential candidates are aimed at making it more difficult for opposition candidates to get on the ballot. One new rule requires candidates to have lived in Russia for 25 years straight, meaning no expats who spent a few years in Cyprus or London can apply for the job.

“Hardly anyone expected Putin to completely leave politics when his term expires in 2024,” says Rodionov.

The latest constitutional amendment, on hold because of the pandemic, is mostly a question of technicalities of how Putin plans his “exit”.

In the meantime, the country is focused on planning for the coronavirus exit, with hopes for a return to normalcy in Russia at some point in June.

Source: Forbes

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