A couple of years ago, myself and several potential investors attended a presentation by a whole host of people and managers urging us to invest in Russia. At the time it seemed like a very sensible thing to do, however a few short months later it’s looking like exactly the opposite.
The Russian economy doesn’t seem to have much to look forward to anymore with political and economic events combining to push it deeper into recession. This week those prospects were underlined as Moody’s cut Russia’s debt rating yet again, bringing it down to ‘junk status’.
Unfortunately these ratings often become a self fulfilling prophecy as the fall in ratings will inevitably affect capital investment and the cost of borrowing. Standard and Poor have already taken this step and reduced the rating last month. Both agencies predicted a deep recession which will carry on to 2016, consumer confidence is key with domestic demand also falling in light of such reports.
So what has caused Russia’s fall from economic prosperity so quickly? There are obviously many factors but most could be managed except for one – the fall in oil prices. The market is now awash with oil due to the global recession and other factors like the US fracking boom – Russia’s economy is linked directly to the oil price which of course has plummeted. All of Russia’s other problems could easily be handled if there was a high oil price, there isn’t so it’s running a severe deficit until it recovers.
Much of the rest of Russia’s woes are largely self inflicted, the sanctions which have been imposed are due to it’s intervention in Ukraine’s territorial problems. Unfortunately control and access to the media is tightly controlled, so there is significant spin on these events. Although some Russians have access to other sources of news by using VPNs to access things like the BBC abroad – http://www.iplayerabroad.com/. Most people are restricted to the Russian controlled media. This means that Russian’s are further likely to adapt a siege mentality when it comes to domestic spending.
The likelihood is that Russia will suffer further sanctions unless it pulls back in Ukraine, which at the moment seems likely. Despite Putin’s rhetoric, the economy is likely to continue to decline over the next few years, especially with a major hike in the price of oil looking likely for a significant period.