Russia’s Depleted Energy Entanglements
Russian shares were down 25 percent despite P/E ratios toward 5 as lower oil prices and currency intervention dented the $400 billion reserve pile and gas talks with Ukraine again degenerated into payment ultimatums as the breakaway East held separate parliamentary elections from the rest of the country due to back President Poroshenko’s makeshift coalition. The ruble continued its 15 percent tumble past 40 to the dollar and ratings agencies added demotions that may shake investment-grade status. Domestic government bond auctions were scrapped on 10 percent yield demands as Rosneft raised its external repayment claim on official coffers to $50 billion. The economy may soon tip into recession as inflation heads toward 10 percent and may prompt central bank tightening. Sanctioned state banks have a reported $30 billion in international assets to meet obligations while new fund-raising is barred as a repo facility for the same amount was launched at home to remedy dollar shortages. Oligarchs under EU freeze orders have petitioned the European Court of Justice to invalidate them as the Kremlin has told pro-transparency organizations to sever Western ties. Officials denied consideration of capital controls or reversal of currency float intentions but allowed that geopolitical imperatives may prove decisive as President Putin repeated US culpability for the standoff. He angered German chancellor Merkel with intransigence during a brief encounter and raised ire in Italy with a courtesy call on disgraced former Prime Minister Berlusconi. In part to counter dependence on Gazprom imports EU members agreed to accelerate their green push to curb carbon emissions in preparation for the next global summit. Vulnerability was an issue in Bulgaria’s presidential contest won by previous incumbent Borisov, who will try to assemble a ruling patchwork to tackle the Bancorp collapse as an immediate priority. Heading into winter the compromise price with Kiev for past and future shipments remained intact but Moscow insisted on up-front coverage before the deal proceeds. The Baltic States relying most on supplies have experienced large stock market falls, with Estonia off 30 percent on the MSCI frontier index. They have accused Russia of border incidents and Lithuania’s track to euro entry and international bond issuance was interrupted by armed infiltration scares.
Ukrainian equities have gained 30 percent with the EMBI debt component flat as Naftogaz honored a USD 1.5 billion October payment with Prime Minister Yatsenuk meeting with the IMF on expanded program potential with the war and lost output costs. Although public debt is likely at the 60 percent of GDP trigger threshold, Moscow has held back from accelerating the total due from its pre-transition bailout, as its banks may have blocking majorities on outstanding Eurobond placements. GDP will shrink 10 percent by year-end as the currency hits 13/dollar despite trading restrictions and intervention. The agricultural export ban added to counter-sanctions will cost $20 billion according to Kiev, which has already identified three banks for urgent recapitalization as steelmaker Metinvest with a CCC rating unveiled a distressed exchange in line with popular mood.
