Strategy Bulletin  

03/11/2015

HAS RUSSIA SEEN THE WORST ?

Russia’s recent economic woes can mainly be ascribed to the decline in oil prices, given the country’s high dependence on hydrocarbon. A strong correlation can indeed be observed between the rouble (the Russian currency) and oil prices. The abrupt drop in oil prices during the summer of 2014 led to a sharp drop in the rouble, pushing the Russian economy into the notoriously vicious circle of higher inflation, higher interest rates, lower growth and, in turn, an even weaker currency.

That being said, the Central Bank of Russia (CBR) has been able to begin loosening monetary policy in 2015, thanks to some oil price strengthening during the first half of the year. Going forward, in line with the US Energy Information Administration, we expect a slight rebound and stabilisation of oil prices in the USD 50-70 per barrel price range. Should this prove correct, it could give the Russian economy a welcome breather.

So, will the Russian economy also rebound and stabilise?
To answer this question, four key elements need to be reviewed: monetary policy, fiscal policy, external debt and investment.
Starting with monetary policy, the good news is that the rouble has likely bottomed out, barring negative surprises on oil prices. Inflation should thus recede, enabling the central bank to adopt an easier stance – within limits.

Indeed, the CBR is currently facing capital outflows, which can be countered in two direct ways. The first is to sell part of the large pool of international reserves accumulated during the boom oil years and use the proceeds to purchase domestic assets. This has already led to a USD 150 billion decline in Russian reserves over the past 2 years. Although they do remain very large at USD 371 billion, such a pace of sales cannot be sustained forever. The CBR has thus also had to resort to the second tool at its disposal: maintain interest rates at levels sufficiently high to attract capital. Unsurprisingly then, the end of 2014 saw the key central bank interest rate rise in tandem with foreign direct investment outflows.
Since then, thanks to a stabilisation of inflation, the CBR has been able to lower its policy rate to 11%, significantly below the peak of 17% reached in December 2014. Going forward, a lessening of price pressures should justify some further easing. However, interest rates might not come down as sharply as could be hoped for until inflation gets closer to the official CBR’s 4% target and outflows abate.

Turning to fiscal policy, the Russian economy has avoided the worst. Indeed, with close to half of government revenues coming from oil and gas, the country’s budget deficit could have soared dramatically. Thankfully, the large currency depreciation offset the impact of falling oil prices, as evidenced by the fact that the price of oil in rouble terms has held up. As a result, the budget deficit only deteriorated to 2.9% in June 2015. That being said, the government’s 3% budget deficit target is in view, implying that fiscal policy should not provide strong support going forward, which is unfortunate in a context where both consumption and investment are already faltering.

Russia’s external debt burden has taken a substantially hit from the weakening of the rouble and consequent one third drop in the USD value of the country’s GDP (using IMF data and forecasts for 2015). Indeed, although the absolute level of Russia’s external debt labelled in foreign currency has shrunk by over USD 100 billion since the beginning of 2014, its share of GDP has risen above 30%. There is no cause for alarm at this point, since Russia’s international reserves still cover roughly 80% of its external debt in foreign currency. But we are far below the 125% levels seen in 2012, and further external deleveraging will be an additional obstacle to a revival of  investment, consumption and growth.

Finally, investment and productivity perspectives remain bleak. They have been declining for some 5 years now (see chart 8, page 3) and the current environment is clearly not conducive to a trend reversal with, amongst others, the international sanctions related to the Russo-Ukrainian conflict, the Russian businesses’ lack of confidence in future economic perspectives and numerous geopolitical uncertainties, the latest being the Syrian conflict. Not to mention that Russia is only 62nd in the 2014 World Bank “ease of doing business” ranking, and 136th out of 175 countries in the  transparency International 2014 corruption perception index. On that front, government economic reforms could be a welcome sign of a future revival in investment.

Overall, the current economic snapshot of Russia is mixed. Positives include very low public debt levels, large reserves and a positive current account balance. Negatives include rising external foreign currency debt as a share of GDP (although default is very unlikely), a deteriorating budget deficit and very depressed growth levels. Finally inflation remains high and monetary policy tight, even though the worst is likely behind.

 

News

La vigueur de l’euro devrait encore durer

Thought leadership

16/08/2017

Well-designed wealth – Life insurance

Thought leadership

31/07/2017

Emerging Markets - China spreading its influence

Quarterly Investment Strategy

20/07/2017

Japan - As good as it gets

Quarterly Investment Strategy

19/07/2017

Rethinking family governance

Thought leadership

18/07/2017

Europe - Euroscepticism losing ground

Quarterly Investment Strategy

17/07/2017

France Embraces Digital Revolution

Thought leadership

13/07/2017

United States - Neither inflation, nor recession

Quarterly Investment Strategy

12/07/2017

Mid-year review: so far, so good

Quarterly Investment Strategy

10/07/2017

Q3 2017 Investment Outlook

Q3 2017 Investment Outlook

Investment Strategy Podcast

06/07/2017

RETHINK EVERYTHING

Thought leadership

28/06/2017

Les philanthropes, la finance et la cité

Thought leadership

20/06/2017

RETHINKING EDUCATION

Thought leadership

15/06/2017

RETHINKING HEALTHCARE

Thought leadership

31/05/2017

Rethink Fixed Income with Climate Bonds

Thought leadership

29/05/2017

Rethinking “Next-Gen” Philanthropy

Thought leadership

24/05/2017

Gestion des fondations en transformation

Thought leadership

23/05/2017

The 100% Impact Investor

Thought leadership

19/05/2017

Asset Allocation – Keep looking on the bright side

Quarterly Investment Strategy

18/05/2017

China to take control of Asian trade

Investment Strategy

11/05/2017

French Elections Investment Strategy

French Elections Investment Strategy

Investment Strategy Podcast

10/05/2017

French presidential elections

Investment Strategy

08/05/2017

Hedge funds and rising interest rates

Investment Strategy

01/05/2017

French Elections

French Elections

Investment Strategy Podcast

25/04/2017

French Presidential Elections

Investment Strategy

24/04/2017

Japan: The longevity issue

Quarterly Investment Strategy

24/04/2017

Europe: Towards the end of negative rates?

Quarterly Investment Strategy

21/04/2017

Le Pen, Frexit and the future of the EU

Investment Strategy

10/04/2017

Q2 2017 Investment Outlook

Q2 2017 Investment Outlook

Investment Strategy Podcast

03/04/2017

Le franc, refuge des élections en Europe

Thought leadership

16/03/2017

Rethinking sustainable cities with Monocle

Rethink everything

24/02/2017

Brexit: Surviving outside the single market?

Investment Strategy

19/01/2017

Japan: an accidental winner?

Quarterly Investment Strategy

29/12/2016

Emerging markets: Recovery still in its early innings

Quarterly Investment Strategy

28/12/2016

Europe: Still much political risk on the horizon

Quarterly Investment Strategy

23/12/2016

United States: a tired economy about to get a vitamin boost

Quarterly Investment Strategy

22/12/2016

Investment outlook 2017

Investment outlook 2017

Investment Strategy Podcast

19/12/2016

OPEC rises from the ashes

OPEC rises from the ashes

Investment Strategy Podcast

04/12/2016

Diabetes : a game-changing technology

Numeric health

18/11/2016

Post-US election investment outlook update

Post-US election investment outlook update

Investment strategy podcast

16/11/2016

Positioning portfolios for President Trump

Positioning portfolios for President Trump

Investment strategy podcast

10/11/2016

Donald Trump elected President

Investment Strategy

09/11/2016

US election update

US election update

Investment Strategy Podcast

24/10/2016

Q4 2016 Investment Outlook

Q4 2016 Investment Outlook

Investment Strategy Podcast

21/10/2016

United States: Will policy support prolong the expansion?

Quarterly Investment Strategy

21/10/2016

Japan: Alone at the forefront

Quarterly Investment Strategy

19/10/2016

US presidential election: potential market impacts

Investment strategy bulletin

12/10/2016

A politically heated final quarter

Quarterly Investment Strategy

07/10/2016

The metamorphosis of philanthropy

Philanthropy

20/09/2016

US elections 2016: more status quo than system reboot

Investment strategy bulletin

16/09/2016

ASIAN PERSPECTIVES ON ENTREPRENEURSHIP

Entrepreneurship

25/08/2016

RETURN OF THE ‘NOTORIOUS BoJ’

Investment strategy Asia

09/08/2016

CAN GOLD REALLY ACT AS A HEDGE?

Investment Strategy Bulletin

22/07/2016

WHERE ART AND INSPIRATION MEET

Partnership

19/07/2016

POLITICAL RISKS AND ECONOMIC COUNTERFORCES

Quarterly Investment Strategy

14/07/2016

Q3 2016 INVESTMENT OUTLOOK

Q3 2016 INVESTMENT OUTLOOK

Investment Strategy Podcast

13/07/2016

POSITIONING FOR BREXIT: WHAT NEXT FOR THE BANKS?

Sector update - Brexit

04/07/2016

BREXIT: MAJOR CENTRAL BANKS EXPECTED TO ACT

Investment Strategy

24/06/2016

COULD MONEY FLY?

Investment Strategy Bulletin

01/06/2016

HAPPY ANNIVERSARY UAE

Corporate

09/05/2016

EMERGING MARKETS: AN UNEXPECTED PERIOD OF PEACE

Quarterly Investment Strategy

04/05/2016

INVESTMENT OUTLOOK

INVESTMENT OUTLOOK

Investment Strategy Podcast

29/04/2016

JAPAN: IN SEARCH OF A VIRTUOUS CYCLE

Quarterly Investment Strategy

28/04/2016

EUROPE: NO SIGN OF A CREDIT BINGE

Quarterly Investment Strategy

25/04/2016

THE US ECONOMY (READ: CONSUMER) STILL HAS STAMINA

Quarterly Investment Strategy

21/04/2016

THE END OF THE CREDIT CYCLE

Fixed income monthly

19/04/2016

A SWISS PERSPECTIVE ON BREXIT: PART II

Investment Strategy Bulletin

18/04/2016

MARKET OUTLOOK: LOW, SLOW AND STABLE

Quarterly Investment Strategy

15/04/2016

A SWISS PERSPECTIVE ON BREXIT

Investment Strategy Bulletin

13/04/2016

ASSET ALLOCATION: INVESTING BEYOND THE PANIC

Quarterly Investment Strategy

12/04/2016

SWISS FINTECH INNOVATION

Association

31/03/2016

UNTAPPING LATAM’S POTENTIAL

Investment strategy

23/03/2016

EN ROUTE TO NEGATIVE RATES

Investment strategy

24/02/2016

COMMITTED TO INDEPENDENT ASSET MANAGEMENT

Strategy bulletin

23/02/2016

THE ART OF MEASURING IMPACT

Investment strategy

28/01/2016

Q1 2016 INVESTMENT OUTLOOK

Q1 2016 INVESTMENT OUTLOOK

Investment Strategy Podcast

19/01/2016

QUARTERLY INVESTMENT STRATEGY: JAPAN OUTLOOK

Investment strategy

21/12/2015

QUARTERLY INVESTMENT STRATEGY: US OUTLOOK

Investment strategy

18/12/2015

HAS RUSSIA SEEN THE WORST ?

Strategy Bulletin

03/11/2015

HOW WORRIED SHOULD WE BE ABOUT BRAZIL?

Strategy Bulletin

12/10/2015

ADAPTING TO LOWER-FOR-LONGER OIL PRICES

Strategy Bulletin

06/10/2015

INVESTING FOR A "GOLDEN AGE"

Strategy Bulletin

28/09/2015

Expert view: The Fed holds its fire, again

Expert view: The Fed holds its fire, again

Investment Strategy Podcast

18/09/2015

FED IN FOCUS

Strategy Bulletin

30/07/2015

Q3 Investment Outlook from our European bank

Q3 Investment Outlook from our European bank

Investment Strategy Podcast

15/07/2015

GREECE: AFTER THE REFERENDUM

Strategy Bulletin

06/07/2015

TIME TO RE-VISIT EMERGING MARKETS?

Strategy Bulletin

03/07/2015

Expert view: What should you do with your cash holdings?

Expert view: What should you do with your cash holdings?

Investment Strategy Podcast

26/06/2015

OIL UPSIDE IS CAPPED

Strategy Bulletin

28/05/2015

Opportunities and risks in global markets

Opportunities and risks in global markets

Investment Strategy Podcast

19/05/2015

Our Q&A on Greece

Strategy Bulletin

17/02/2015

Economic outlook 2015

Strategy Bulletin

17/12/2014

LOWER OIL PRICES:GOOD NEWS, OR BAD?

Strategy Bulletin

01/12/2014

ROUGH TIMES FOR SOUTH AMERICA

Strategy Bulletin

03/11/2014

WHY COMMODITIES ARE BACK IN FOCUS

Strategy Bulletin

05/08/2014

WILL THE SNB HAVE TO FOLLOW THE ECB?

Strategy Bulletin

20/06/2014

EMERGING MARKETS: TIME TO DIFFERENTIATE

Strategy Bulletin

16/05/2014

CHINA’S DELEVERAGING STRATEGY

Strategy Bulletin

24/04/2014

ABENOMICS. THE EASY PART IS OVER

Strategy Bulletin

18/03/2014

WHAT ARE THE ECB’S OPTIONS?

Strategy Bulletin

13/02/2014

LOWER CHINESE GROWTH AND OPPORTUNITIES

Strategy Bulletin

21/01/2014