The Russian pivot
A confluence of shocks delivered
a devastating blow to the Russian economy. The conflict in the Ukraine, sanctions and the collapse in commodity prices left the country reeling.
The central bank expects the economy to contract by 2.5 per cent y/y this year, and some private economists believe that it could shrink by more than 4.5 per cent y/y.
Most companies lost their access to the international capital markets, forcing them into alternative sources of funding. The easy days are definitely over, but the country has rolled up its sleeves and gone back to work.
Like many times in the past, it is wrong to write off Russia. The country always manages to claw its way back with a vengeance.
Moscow needs to be applauded for its forceful response to the crisis. The central bank did not blink when it implemented a draconian adjustment. Interest rates were raised to 17 per cent, the ruble was allowed to devalue by more than 40 per cent and the country's vast arsenal of international reserves was deployed to provide the banks with the funding they needed.
The sector is now going through a brutal consolidation process, and there will be more concentration of banks, but Russia did not experience the type of devastating financial collapse that is typical of emerging market crises.
The central bank quickly relaxed rates as soon as the currency stabilised. However, real rates will remain high in order to replenish international reserves. A similar process is occurring on the fiscal front. The government reduced public-sector wages, slashed spending and put several major investment projects on hold.
The combination of tight fiscal and monetary policies made Russia a hallmark of austerity, and it is one of the important reasons why many private economists believe that the recession will be much deeper than the government's estimates.
Of course, the maxi-devaluation also sowed the seeds for its economic recovery. Russian exporters have become hyper-competitive. Even with the decline in commodity prices, most Russian exporters are on a tear.
Furthermore, the devaluation sparked a major import-substitution effect. The imposition of sanctions and government restrictions on certain imports from the EU furthered the process. Oysters from the Black Sea and buffalo mozzarella from the outskirts of St Petersburg are examples of the products that are now being sourced domestically.
Reorientation of the economy
Yet, the most important development has been the reorientation of the Russian economy. China has always been a natural trade partner. Its mammoth population dovetails perfectly with Russia's bounty of natural resources. However, there has been a historical animosity between the two.
During the Cold War, they were bitter rivals, despite the fact that they shared a common ideology. After the collapse of the Berlin Wall, and with the onset of globalisation, Russia should have done more to attend the burgeoning Chinese market. But, it didn't. Most of its workforce was in the west, as was the infrastructure used to export metals and energy.
However, the deterioration of relations with Europe and the United States has forced Moscow to look eastwards. As a result, Russian firms are pouring billions of dollars into new export facilities for the Chinese market.
No one is more emblematic of the pivot to Asia than Gazprom. The energy giant is investing US$55 billion in new pipelines and processing plants. The company will expand its gas fields in Siberia and the Far East, particularly in the regions of Krasnoyarskly, Irkutskly, Yakutskly and Sakhalin. The biggest part of the build-out will be the construction of the gas plants at Amur and Gomo-Altaysk.
Since 2008, Asia has been the top-growing market for natural gas.
Chinese demand soared 103.8 per cent. Japanese demand increased almost 40 per cent, mainly due to the idling of its nuclear reactors following the 2011 tsunami. South Korea increased its demand by 18 per cent y/y.
Some of these countries import all of their gas needs. For example, South Korea imports 99.3 per cent of its natural gas, while Japan imports 95.7 per cent.
Given its geographic location, no one is better poised than Russia to attend this booming market. Not surprisingly, investors have developed a new respect for Russia due to its impressive response to the crisis.
There are even some signs that the frosty attitude of the West towards Moscow is starting to thaw.
History has taught us never to underestimate Russia. As we learned seven decades ago, it is at its best when the chips are down. Therefore, the recent episode was a brief pause, but the economy is rearing to go.
Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.