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.
There’s one country dominating European news channels at the moment – the events in Ukraine seem to be moving with ever increasing speed. Most reports of course are concerned with the country’s political future and it’s relationship with Europe and Russia.
However there is another crisis which is looming for whoever ends up being in charge of this divided country – an economic one. The country is hugely indebted and relies heavily on the one country it is seeking to distance itself from – Russia. In fact there is a major lending programme in place which is essential to Ukraine’s survival agreed with the Russian government and currently only 20% of it implemented. It would be highly unlikely to continue if the new EU friendly Ukraine turns it’s back on it’s powerful neighbour.
It is estimated that Ukraine needs about £21 billion over the next couple of years to maintain stability. If the Russians pull the plug on aid, which seems likely then it is to Europe that the country will look. It has already been mentioned by several important European officers who are well aware that the country will require substantial economic aid. The US Treasury secretary has also said that international support would be the best way forward probably via the IMF.
So will the US and EU fill the ever growing hole in the Ukrainian finances? It has happened before but the previous lending programmes with the country have not been overly successful, with the Ukranian authorities not sticking to the agreed policies in return for financial support. There were many problems but the central one was probably the reluctance of the government to raise the country’s energy prices. The subsidies cost Ukraine finances which they couldn’t really afford, it also meant that there was little encouragement for being more fuel efficient in both industry and domestic markets.
But it’s not all gloom and doom for the country, there are many resources the country can turn to with a modicum of political and financial stability in place. Like many former Soviet countries, there is a strong educational system in place and Ukraine has a large population of young well educated young people. There is also a large entrepreneurial spirit, and many people are highly active in the global digital economy. They use technologies such as VPNs, proxies and even these Smart DNS technology like this to break down digital borders that many countries have put in place.
There is a huge potential in the country, like most former Soviet countries when they broke away their economies contracted rapidly as they struggled to transform from a centrally planned economy to a western style capitalist economy – it’s never an easy process. There’s a lot of coverage in the media throughout Europe but some of the best is possibly in Germany through their domestic broadcasters – for those outside the country and with the necessary language skills you can use this technique to help bypass the geo blocks which normally block access.
The credit rating of any country is obviously vastly important, if you want your economy to grow – credit is essential and the cost of that is determined by the ratings assigned by the various credit agencies. Last month Ukraine was hoping for some small improvement in their overall standing however Standard and Poor reiterated the current Junk credit rating. Worse still the respected agency modified the economic growth prospects of the former Soviet republic which could mean there is worse news to follow.
The rating for Ukraine currently averages out at ’B’, which is over four steps below investment grade. While the outlook is negative there is only downward pressure on the rating and hence the investment prospect for Ukraine. Experts predict there’s probably a one in three chance of a further downgrade in the rating unless the Government can bring in some foreign currency to service Ukraine’s substantial debt.
It’s not all bad news, there have been frequent discussions with the IMF on the possibilities of a substantial loan to secure the country’s economy. Ukraine even recovered from recession in the first quarter of this year and GDP actually rose half a percent. This recovery has already weakened though, this is partly due to many parties awaiting the proposed IMF bailout.
So what’s the problem with Ukraine? There are many positives in the economy and certain sectors which are beginning to boom. Ukraine has many digital and technology businesses which are doing very well. If you get yourself a Ukrainian proxy like this to access the main digital sites you’ll see some impressive success stories.
It’s opportunities like this which perhaps will help a lot of countries like Ukraine. The global digital economy can be a significant factor in bringing employment and opportunities, many of the old USSR countries have extremely high levels of education which benefit this sort of development particularly. You can see other options in this video which explains how to bypass geographical blocks online.
The problems are unfortunately all too familiar, weak foreign demand for it’s major exports are at the core. The metals and machinery which Ukraine companies are famous for are simply not required with the rest of Europe in similar recessionary situations.