President Vladimir Putin is the world’s enemy. He wants to go to war with the US, and recent sanctions are making that even more likely. He meddled in the US elections to help Donald Trump beat Hilary Clinton. He’s "oppressive" 1, "cruel" 2 and "dangerous" 3. But how much truth is behind the headlines we read? The media often want to grab their reader’s attention with catchy headlines. It’s how they sell stories. But sometimes headlines are misleading and stories fail to address what’s really going on, especially from an investor’s perspective.
So, what is really going on in the Russian economy?
Most people’s perceptions of the country are not good. Putin may have his drawbacks and there’s no hiding behind Russia’s geopolitical risks, but how often do people read about the economic progress made in recent times? I dare say a lot because that’s not what the headlines portray.
I had the chance to talk with President Putin late last year. He made it very clear that he did not want to go back to the 1990s, which was a period that saw Russia experience high inflation. Government spending was also out of control.
Policy makers have learnt their lesson though. Since the mini-crisis over the past two years, the country has kept a very tight grip on government spending. In 2015, the government didn't raise public sector wages, even though inflation was relatively high. It’s a similar story today and debt-to-GDP remains very low. In short, the team behind Russia’s monetary policy decisions deserves more credit. They have rigidly stuck to the economic text book and aren’t afraid of taking tough decisions. Allowing the ruble to depreciate rather than propping it up artificially is a prime example.
The results are starting to feed through too. Fiscal consolidation has paved the way for a vast improvement in Russia’s current account while foreign exchange reserves are trending upwards. Economic activity indicators are surprising to the upside as well. Most recently Russia’s economy has softened a bit, annual real GDP growth was 1.8% year-on year in the third quarter after 2.5% in the second quarter, and the first high frequency data for Q4 showed growth slowing in both industrial production and retail sales. So the strength is not in data, but rather in the stability of the economy and its external balances. In addition, inflation has fallen faster and beyond expected, printing at 2.7% year-on-year in October.
We readily acknowledge that Russia is not perfect and risks persist; the European Union has extended its economic sanctions on Russia to January 2018 while the global oil glut remains another key concern. Despite this, economic data implies stronger growth momentum than many would have forecasted at this stage in the economic recovery and this can only be seen as a positive.
In terms of our positioning, we retain our position in local currency bonds, although we trimmed some exposure after taking profits earlier in the year. Hard currency (or US-dollar denominated) bonds still look relatively expensive in our view, so we remain underweight in this space.
Looking ahead, we are sanguine about the progress underway. The sanctions imposed on Russia by the US may look bad, but they will have too great an impact on the economy.
We can only praise the cautious monetary policy of the central bank, which broke the inflation inertia and inflation expectations. The central bank has cut its policy rate to 8.25% at the end of October, and will possibly deliver another cut just before Christmas. Meanwhile, the currency remained stable, and Russia’s agreement with the Organisation of the Petroleum Exporting Countries (OPEC) is supposed to ensure that it stays that way
Russia’s presidential elections will take place in March next year, and Putin is expected to seek re-election for a second term. If so, his chances of victory are very high, which will - for better or worse – bring continuity.
Brett Diment, Head of Global Emerging Market Debt, Aberdeen Asset Management
1Newsweek, August 2017
2Bloomberg, July 2017
3Wall Street Journal, July 2017
4Seasonally Adjusted Annual Rate
The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested.
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