Russia’s Friendly Takeover Tinkering
Russian shares continued to lead Europe after a 25 percent MSCI advance through October as 70 percent government controlled Rosneft bought out smaller state oil firm Bashneft for $5 billion and President Putin’s favored candidate Trump became his US counterpart. The energy tie-up represented a consolidation move and big name deal for the purchaser under international sanctions and the stock exchange which has lacked M&A activity. Rosneft’s biggest contract is with the Chinese for 25 years’ supply, and it had over $20 billion in cash to complete the transaction. The President insisted it met the privatization test with independent valuation, and a minority Rosneft stake will go next on the sales block with proceeds used to cover the budget deficit. British Petroleum retains a 20 percent share in Rosneft after it was squeezed out, and Western investors have since shunned participation with the chief executive also on the sanctions list as an individual, amid broader economic and governance fears as the state’s share of GDP had doubled to 70 percent in recent years. Officials admitted to Trump campaign contacts but continued to deny cyber-attacks against the Democratic Party opposition after the public release of confidential communications. The President-elect vowed friendlier relations with Moscow for joint goals like fighting ISIS in Syria, and tried to place Crimea’s return in historical context on his platform. His early campaign head had been an adviser to Ukraine’s ousted President and promoted Kremlin ties for his lobbying business.
Amid the intrigue, the central banks in both countries have managed tight monetary policies and sector cleanups to help restore foreign investor confidence. Russia’s regulator has closed almost 300 banks for questionable practices and prudential shortfalls, and the benchmark rate is 10 percent on 6.5 percent inflation. Governor Nabiullina has been a regular Putin counselor, despite early criticism over her handling of the 2014-15 crisis when she dipped into foreign exchange reserves and doubled interest rates to defend the ruble. The exchange rate regime has since moved to free float, and she has refused further easing to aid growth consider stymied more by structural factors. Currency stability has enabled Russian companies to resume external debt issuance, with September a strong month of oversubscriptions as European buyers creep back to the market pending further boycott clarification. Ukraine’s central bank chief likewise shuttered 85 institutions including number two private lender Delta, although the biggest Privatbank has thus far been spared despite half its book owed to connected companies. The average NPL ratio tops 50 percent, and recapitalization is a hallmark of the World Bank’s restructuring program supporting 1 percent GDP growth this year. Privatbank’s credit rating is near default and its owner, oligarch Igor Kolomosky, has become estranged from President Poroshenko after he underwrote Ukraine’s eastern defense against Russian-backed incursions. Despite a nominal cease fire the war zone around Donbas remains active, frustrating the efforts of international agricultural firms to secure land and farm export capacity. The conflict destroyed a Cargill seed processing plant, but it put $100 million into a new grain terminal, and Bunge the world’s largest soybean supplier has a presence as well. They still criticize the ban on outright foreign ownership and the high cost of local funding, but possible durable peace with Western reconciliation would increase the harvest.
