Our Opinion: 2015

The Russian recovery

With the focus on Greece, few investors have noticed that Russian stocks have recovered well this year, with the Micex index up around 30%.

In 2014, both stocks and the Russian currency, the rouble, plunged as the West imposed sanctions on Russia after it invaded Ukraine, and the oil price plummeted.

The currency hit a record low against the US dollar, stoking inflation, and the central bank raised interest rates to stop foreign money from fleeing and undermining the rouble even further. The economy fell into recession.

In the past few months, however, the outlook has improved.

The price of oil, a key Russian export, has risen. That’s bolstered the currency, which is now up by around 20% from its low point against the dollar. Along with higher interest rates, this has helped control inflation. Interest rates are expected to fall gradually for the rest of the year.

However, the recovery may be delicate. The bounce in the oil price looks precarious. Russia needs oil to be over $65 a barrel in order to encourage growth and keep its foreign-currency reserves topped up. If oil remains around $50, Russia could exhaust its reserves by the end of the year. Brent is currently around $62 a barrel, but more likely to fall gently than rise, given the enduring over-supply in the market.

The corporate sector – which has had trouble refinancing large debts to Western lenders due to sanctions – has also been a drain on reserves. EU foreign ministers have just extended their trade restrictions, centred on the banking, technology and defence industries, for another six months. And there is no sign of Russia handing back control of Ukraine’s eastern border to Kiev, a key prerequisite for the lifting of sanctions.

The upshot, according to Capital Economics, is that the downturn is set to wipe 5% off GDP this year, with a tepid recovery in the second half underpinning growth of 1.5% next year. And this assumes no further deterioration in the Ukraine situation, which could spur another round of capital flight, and also no renewed dip in oil prices.

The recent rally is likely to have run its course.