Wealthy Nations Daily Update - Russia

Further falls in the oil price is forcing governments reliant on oil revenues to review and revise their budget estimates and target further expenditure cuts. Russia remains prudent announcing a further RUB700bn of cuts (~10%) targeting state investments and administrative expenses. The potential privatisation of some state assets is also under consideration. Details are still emerging but this prudent approach is credit positive.

Russia is less constrained than some governments as the exchange rate can adjust to offset some of the weakness in oil prices and keep the balance of payments in surplus. Plus, it has sizeable reserves and sovereign wealth funds it can tap into; the Reserve and Wellbeing Funds were USD50bn and USD71.7bn respectively at the end of December and gold and foreign exchange reserves were USD370.2bn as of 8 January. But even so with Brent crude prices now languishing in the low 30s further cuts are needed to keep the fiscal deficit from exceeding 3 percent of GDP.

Another issue is whether Europe and the US will repeal sanctions imposed on Russia for its involvement in the Ukraine which would be seen as positive by investors. The key to this most likely still lies in the successful implementation of the Minsk II agreement whose deadline for implementation has been extended into 2016 by the “Normandy Quartet” (Vladimir Putin, Francois Hollande, Angela Merkel and Pyotr Poroshenko). Minsk II still requires that local elections are held in the separatist areas but these have been pushed into 2016 to give enough time to comply with the terms of the agreement and make them legitimate. Once international observers declare the election legitimate, and powers have been decentralised to the separatist area as envisaged by the Minsk agreement, Russia and the separatists must then cede control of the border to Ukrainian forces.

One of the main areas of contention remains the interpretation of the form decentralisation should take in the separatist areas: the Russian Foreign Minister Sergey Lavrov noted that this should be on a “permanent basis” and that it “means the right to speak the Russian language on the territory of Donbass, the right for special economic ties with Russia, the right to take part in appointing prosecutors, judges, have their own law enforcement agencies, including people’s militia, and many more things that were personally signed by German Chancellor Angela Merkel together with French President Francois Hollande." But he notes that the Ukrainian interpretation is much weaker referring to “some special rules in the sphere of self-governing.” Vladimir Putin also noted in an interview with Bild “The Ukrainian Government introduced the law on the special status of those territories, a law that had been adopted earlier, into the transitional provisions. But this law, which they incorporated in the Constitution, was adopted for the duration of three years only. Two years have already passed. When we met in Paris, both the German Chancellor and the French President agreed that this law should be changed and included in the Constitution on a permanent basis. Both the President of France and the Chancellor of Germany confirmed that.”

If Minsk II does get implemented the removal of sanctions becomes more likely. One of the key attractions for Russia of seeing Minsk II implemented and the repeal of sanctions is easier access to international capital markets. Certain companies such as Gazprom and Norilsk Nickel have been able to raise funds with eurobond issues in the last quarter of last year but the sanctions are still constraining offshore capital raising. For the Europeans, Syria and the migrant crisis is a pressing issue and Russia remains a critical player in any resolution of the Syrian crisis. Clearly, keeping sanctions in place makes multilateral cooperation on international issues such as Syria, ISIS and tensions in the Middle East more challenging. 

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.