Emerging Markets Weekly
The Russian economy has endured a deep recession in 2009 as a result of the global credit crisis. The stock market has sold off heavily as a result and since recovered with very strong gains. Yet it is still highly undervalued and an opportunity for investors with patient money who can wait two years at a minimum for a return to healthy growth.
What started as a lack of liquidity in the banking sector in 2008 has led to a widespread and deep recession in Russia. A sharp contraction in household consumption—the main source of growth in Russia in recent years—has been caused by rising unemployment and weak consumer confidence.
There are signs that the Russian economy bottomed in June after a devastating fall in output of roughly 10% in the first half of the year. The sharp fall in private consumption expenditure has been exceeded by a drop in investment and a rundown in inventories.
The fact that inventories have contracted suggests that as in the developed world, the fall in output exceeded even the fall in demand and bodes well for a period of growth due to restocking. Household consumption contracted 2.2% in the first quarter of 2009 well beyond the 15.2% fall in fixed capital investment in the first quarter.
The Central Bank of Russia (CBR) has steadied the ruble exchange rate since March when we first pointed out that Russian energy producers were dirt cheap (they have since rallied 70% or more). The CBR raised interest rates (since lowered on weak inflation reports) and ended the capital flight that occurred in the first two months of the year
The rise in oil prices is a very positive development for the country’s finances and bodes well for long term value of the ruble and for government finances. Investors should now expect slow and steady ruble depreciation over the next year.
Russia is expected to transfer US$43.7-billion out of its Reserve Fund, a sovereign wealth fund funded by petrodollar revenues, to funds its first budget deficit in a decade, that is expected to clock in at 8% of GDP in 2009.
Russia remains a viable long term investment opportunity due to its large energy reserves, sizeable foreign exchange reserves and long term potential rate of output. Its economy will return to modest growth in 2010 and is likely to recover more strongly by 2011. Its stock market is highly undervalued-- trading at around half the valuation of the other BRIC markets.
What started as a lack of liquidity in the banking sector in 2008 has led to a widespread and deep recession in Russia. A sharp contraction in household consumption—the main source of growth in Russia in recent years—has been caused by rising unemployment and weak consumer confidence.
There are signs that the Russian economy bottomed in June after a devastating fall in output of roughly 10% in the first half of the year. The sharp fall in private consumption expenditure has been exceeded by a drop in investment and a rundown in inventories.
The fact that inventories have contracted suggests that as in the developed world, the fall in output exceeded even the fall in demand and bodes well for a period of growth due to restocking. Household consumption contracted 2.2% in the first quarter of 2009 well beyond the 15.2% fall in fixed capital investment in the first quarter.
The Central Bank of Russia (CBR) has steadied the ruble exchange rate since March when we first pointed out that Russian energy producers were dirt cheap (they have since rallied 70% or more). The CBR raised interest rates (since lowered on weak inflation reports) and ended the capital flight that occurred in the first two months of the year
The rise in oil prices is a very positive development for the country’s finances and bodes well for long term value of the ruble and for government finances. Investors should now expect slow and steady ruble depreciation over the next year.
Russia is expected to transfer US$43.7-billion out of its Reserve Fund, a sovereign wealth fund funded by petrodollar revenues, to funds its first budget deficit in a decade, that is expected to clock in at 8% of GDP in 2009.
Russia remains a viable long term investment opportunity due to its large energy reserves, sizeable foreign exchange reserves and long term potential rate of output. Its economy will return to modest growth in 2010 and is likely to recover more strongly by 2011. Its stock market is highly undervalued-- trading at around half the valuation of the other BRIC markets.
Posted at
7/24/2009
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