Pictet: "Dispatches from Russia: an unlikely land of opportunity"

Even after enduring two years of sanctions, Moscow feels vibrant, with few signs of recession. The restaurants and shopping malls are full, and every timeI visit it feels more and more like a wealthy Western European city. Russiamay remain in the cold politically, but things are definitely warming up for the economy – and thus for investment prospects.

A very good crisis

Sanctions did affect sentiment, but I feel the economic impact has been negligible.What has hurt, clearly, is the massive fall in oil prices, which collapsed from well over USD 100 a barrel in mid-2014 to less than USD30 at the start of this year.

As this coincided with the long-planned end of the ruble’s soft peg to a euro-dollar basket in late 2014, it meant the currency took most of the strain of the oilprice adjustment. In some respects the timing of the float could not have been more advantageous, as it acted as a kind of safety valve for the economy.However, this hurt many ordinary Russians, who found they could no longer afford holidays abroad and had to cut back on a wide range of imported goods.There has been a significant decline in real disposable incomes over the past two years. Consumer-focused companies have had a difficult couple of years as a result.

On the flip side, energy companies are in pretty good shape. The depreciating ruble eased the pain of falling crude prices for Russia’s oil and gas giants,making their production costs very competitive. In the end, despite the oil market collapse, Russia’s economy contracted by just 3.7 per cent last year and the employment market has remained stable throughout. So, all things considered,I think you could say in retrospect that Russia had a very good crisis. This is the third crisis that I have witnessed since I started looking at Russia in 1997– and this one felt the least detrimental, so maybe practice makes perfect... I would argue that investors should give some credit to Russia for prudent fiscal and monetary policy, and that evidence of this prudence should have a positive effect on equity prices through a lower risk premium.

Rate cuts on the cards 

The economy has now troughed; forecasts for next year’s gross domestic product growth range from the government’s conservative 0.6 per cent (basedon USD 40 oil) to Goldman Sachs’s 2.5 per cent, with further acceleration expectedin 2018.

Notably, this recovery started without help from the central bank, which – mindful of a history of runaway inflation – had been very hawkish until this summer. Only after a steady easing of price pressures did the central bank decideto lower interest rates. This year’s two cuts should be followed by more next year.

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