Not too long ago, top officials within the Russian government said Western sanctions were not going to hurt. A couple of months later, reality has settled in.
Russia’s Economic Development Minister, Alexei Ulyukayev, said the economy had many obstacles and entered a negative growth cycle. In an op-ed published in the Vedomosti newspaper Monday, Ulyukayev wrote, “ It could be said that we have entered a negative stage of the economic cycle. Lack of demand is a significant obstacle on the way to restoring steady growth.”
Sanctions are not helping matters.
Russia’s economy was slapped with sanctions from Brussels to Washington starting in March because of the country’s involvement with the ongoing civil unrest in eastern Ukraine. The sanctions began immediately after Russia annexed an important piece of Ukrainian real estate, the Crimea peninsula in the Black Sea, home to historic cities like Yalta and Russia’s Black Sea Fleet. Crimea, then an autonomous region of Ukraine, voted to secede following the toppling of the pro-Russia government in Kiev led by Viktor Yanukovych.
Russian companies are feeling the pain of Moscow politics.
On Monday, Statoil said it was putting on hold a number of joint ventures it had with Russia’s Rosneft due to sanctions, The Wall Street Journal reported. ”This will be a bureaucratic process, so that things will take more time,” Statoil Chief Executive Helge Lund was quoted saying.
Europe banned E.U. energy companies from selling equipment used in oil and gas drilling. The U.S. banned selling fracking equipment or any technological sharing of information with regard to fracking. That didn’t stop ExxonMobil from going ahead with a large Arctic Circle drilling operation in the Kara Sea. Each company is analyzing sanctions differently.
“Europe and Russia will be energy partners for many decades to come,” Lund said. “Our aim is to continue the Rosneft partnership, and we hope for diplomatic solutions,” the WSJ quoted him saying.
The Russian economy began slowing since 2012 due to weak domestic growth. Europe’s slowdown also impacted Russia. The E.U. is Russia’s most important trading partner, accounting for the majority of its oil and gas exports. Ulyukayev said the government needs to spend money wisely and start investing in development again during these hard times.
“Having introduced import restrictions in response to the sanctions, we are presented with a great opportunity to develop crucial sectors such as agriculture and food processing,” he said.
Russia banned imports of major food items from Europe and the U.S. two weeks ago.
Russian equities have become a market for bottom-feeders buying on deep value and technicals. That’s been the case since February, when Yanukovych was ousted by extra-legal means.
The Market Vectors Russia (RSX) exchange traded fund is actually outperforming the MSCI Emerging Markets Index by 200 basis points, up 2.7% in the last four weeks. It is down against the benchmark over the last three months, six months and year to date, however.
“There have been a lot of innocent victims in these sanctions,” said Andrey Goltsblat, of the Moscow law firm of Goltsblat BLP.
The Russian subsidiaries of U.S. companies have to comply with sanctions. So when they are getting paid by their customers, those subsidiaries often run into problems with sanctioned bank clients, like Rossiya Bank and the VTB Group, for example.
“Russia is a big underweight for us,” said Nicolas Jaquier, an emerging markets economist for Standard Life Investments in the U.K. The firm has $333.6 billion under management. But Russian companies aren’t seeing much of it. “We have two fixed income funds — one local and one hard currency — and we own nothing in hard currency. We are very negative on Russia since the Ukrainian crisis erupted. It’s just not a great long term story.”
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