Russia Is in Much Better Economic Shape Than You're Being Told

Fri, Sep 15, 2017
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The country is hard at work

Russia has quietly attracted investor inflow with its relatively high real yields and has served to some extent to de-link the ruble with oil prices.

Ruble bonds snapped up by foreign investors, also known as OFZs have risen above 30 percent for the first time in history.

While it is expected that the Russian Central Bank will look to cut the key rate by as much as 50 basis points to 8.5 percent this mid-late September it will not reduce the attraction and demand, as even with a cut real rates will remain close to 5 percent. Five percent in today’s investing climate is close to the top of the scale (only Brazil is higher), especially when combined with consistent, effective, conservative management that bodes well for the ruble remaining attractive going forward.

The steady increases in Russia's current account surplus support the accumulation of international reserves, at the same time maintaining a stable net international investment position (NIIP) surplus. This strong position will serve to assist the country in reducing future volatility effects due to rising global political tensions. It is worth noting that Russia has been fairly consistent and dedicated in diversifying its international exposure to currency risks. In my opinion Russia's current account surplus should expand to 2.6% of GDP in 2017 and similarly in 2018, up from 1.9% in 2016.

On the corporate side, Russian equities remain to be “discovered” by much of the investing world as the go-to investing destination via the MOEX. Aside from the small group of ADR’s and GDR’s traded outside Russia the vast majority of Russian companies traded remain little known, under-valued, under-owned and trading at distressed levels. At some future time, investors will eventually come to realize and debunk the noise surrounding Russia and refocus on the sustainable, stable economic and corporate performance in the country despite the several-pressured efforts to sanction it under the table.

Overall, the future looks somewhat brighter and more sustainable for Russia than perhaps many of the “developed” economies.

One trap many fall into when comparing one country to another is the simple reality that you really cannot.

Comparison ideally should be measured through a prism of a commonly shared line or mean, so comparisons are usually limited to what can be measured like the US Dollar, GDP, Current Account, Debt, in other words the numbers and business of things. They exclude the social, cultural, historic and similar life drivers, which tend toward the emotional and therefore cannot in truth be measured one against the other with any common sense objectivity.

Each country, usually based on historic or cultural priorities, adopts its own economic model that best suits its place in the economics of things. When an economic model depends on borrowing at a faster rate than income (GDP) it simply cannot be maintained for any extended and expanding period. Russia at this stage in its development, due to planning or geopolitical happenstance, has avoided most of the excesses related to binge borrowing.

So when making country comparisons, the numbers do tell a clear story. I recently saw a chart (below) which riveted my attention as an American. It reminded me of a seesaw, when the seated opposites are two kids called Sustainability and Unsustainability. More than that, I will not expand on in this article as I feel the chart tells its own story, and each of us who carefully assesses it can draw their own conclusions:

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