Russia’s Olympic Ambitions Ambush
Russian shares remained sluggish in January prior to the Sochi Winter Olympic Games debut as suicide bombers struck in nearby Volgograd and Caucuses rebels previewed further attacks on the costly $50 billion event, with private builders getting 70 percent funding from state bank VEB, which has also been tapped for $30 billion in recent bilateral loans to Ukraine, Belarus and Hungary. Oligarch-owned Basic Element and Interros are major participants and already have requested repayment and tax relief to recover their investments. The preparations have overshadowed $10 billion in consumer goods IPOs in the pipeline after standout 2013 performance in the sector, as headline inflation retreats toward the 5-6 percent target range. With GDP growth at just 1.5 percent and the PMI below 50 the central bank has let the ruble go toward 35 to the dollar and signaled a full-floating regime by 2015 under new chief Nabiullina. As energy exports wane Gazprom has altered course to cut deals including long-term supplies to China and an EU compromise over monopoly allegations in addition to the Kremlin-ordered rollback in Ukraine’s natural gas prices as part of its December rescue package. It will also renegotiate terms with its Hungarian partner as Moscow separately offered $10 billion in credit for two nuclear reactors. The Kiev injection slightly improved negative MSCI Frontier trends and lifted reserves to $20 billion as the currency settled at 8.3 to the dollar. Previous lines from Russia banks were reimbursed as the initial cross-border wave of $15 billion in Treasuries was subscribed, saving President Yakunovych from urgently turning to the EU and IMF before 2015 elections. The local banking system is one-third dollarized and NPLs are at 15 percent, and foreign parents trimmed their presence before the latest economic and political crisis with violent confrontations continuing between police and protesters in the main city square. Opposition party leaders continue to call for strikes and the government’s resignation despite the crackdown which has drawn the ire of US Senators demanding sanctions and a future veto on IMF support.
Turkey’s Prime Minister Erdogan is also under siege, with the stock market down 35 percent on the MSCI Index in annual terms and the lira approaching a 2.5 to the dollar record low, as non-resident capital outflows persist under the weight of a deep corruption scandal and current account deficit. Cabinet ministers and regulatory bodies have been purged in a ruling Islamic coalition internal struggle as investigations continue into alleged construction company kickbacks for showpiece infrastructure projects. Credit card and luxury item curbs have been introduced in an effort to slow demand, which may leave GDP growth at 2-3 percent heading into local and presidential elections. The central bank has drawn on reserves for currency backing and allowed for occasional overnight tightening in its latest meeting, but refuses to raise interest rates outright in keeping with the Prime Minister’s attacks on that “lobby.” Ratings agencies warn of sentiment reversal with the decade-old leadership alignment off its game finally.
