Russia’s Vacant Victory Day Valor
Russian stocks were tied with Hungary’s up 35 percent as the 70th Victory Day commemorating World War II triumph was held in early May, also the first anniversary of EU and US-imposed trade and financial sanctions. The regime began with targeted company and individual measure against President Putin’s closest allies and then widened into blanket prohibition on new debt and equity raising and oil sector engagement. The economy teetered on recession before these pressures with commodity price decline, and according to consensus reviews export-related manufacturing and mining subsequently benefited from ruble correction and barely suffered output loss. Consumers and domestic business in contrast were battered by GDP contraction expected at 4-5 percent this year, and tighter credit as the government took emergency prudential and liquidity steps to aid banks.
The PMI has again crept above 50, and inflation may come down toward 10 percent plus as the central bank continues rate cuts after its recent 150 basis point slash. The anti-crisis fiscal plan drew on the sovereign wealth fund but may not have been as reckless as originally feared, with public sector salaries frozen and private pension contributions maintained. A balanced budget is again seen in 2017 with oil at $70/barrel, and the current account surplus could rise to 5 percent of GDP in 2015 with lower imports, enough to offset capital outflows mainly due to external debt repayment. Banking system dollarization has slowed, enabling stricter parameters for the special FX repo facility that was a lifeline in late 2014.
Central Europe’s exports to Russia and Ukraine fell almost 20 percent since the boycott but the portion foregone was less than 1 percent of GDP. In Hungary and Poland oil cost savings offset the blow, and Moscow’s counter food and beverage ban was barely registered amid abundant harvests and increased non-EU shipments. CIS members suffered large currency devaluations and swings; in Azerbaijan and Belarus they depreciated 35 percent against the dollar, and Georgia’s dram was battered by remittance reversal. Kazakhstan has resisted a second resetting but after President Nazarbaev’s repeat re-election another adjustment is widely expected especially with flat hydrocarbon revenue. State banks have managed to weather the squeeze so far with government funding access but smaller consumer lenders are under “severe stress” according to a May JP Morgan analysis. Corporate bond issuers with dollar earnings have been unharmed and syndicated loans have gone through with European and Asian sources despite sanctions. High-yield CEMBI components have been downgraded, but obligations through year-end should be met with the 2016 outlook more uncertain.
Share P/E ratios at 5 remain compelling and international fund inflows have resumed as an exception to almost $20 billion in EPFR-tracked exit for all markets. Tech listings have performed well and dividend payouts have attracted buyers. Sovereign spreads have roughly halved from their near 600 basis point maximum over Treasuries on the EMBI, despite ratings agencies’ negative outlooks. Real-money investors have not embraced the ruble’s recovery, and models show it may now be overvalued after recouping 2014’s meltdown. Weights in the benchmark corporate and sovereign indices have dropped below 10 percent, and the local currency GBI-EM share is 5 percent as the mixed march marks a second year.
