Business Watch
Chris Weafer
From Russia - Without Much Love
By Chris Weafer
The weekly funds flow report (see below) shows that while investors remain very confident of strong gains from emerging market equities, they are still ignoring Russia. Within the GEM space, Brazil is again the favoured commodities theme while in the EMEA space Turkey remains investor’s favourite. That is because Russia is viewed as having a weak domestic story – relative to others – and is but a derivative of the global story.
Race for the Arctic (and for FDI)
By Chris Weafer
Russia and Norway will today sign an agreement to end a 40-year dispute over sovereignty of a 175,000 sq km block that straddles the Barents Sea and the Arctic Ocean. The agreement will be signed in Murmansk in a ceremony attended by both President Medvedev and the Norwegian prime Minister. The details of the deal are not yet fully clear but media reports suggest that each country will get roughly half of the territory.
There are two main implications of the deal; one is geo-political and the other energy related. A familiar combination for Russia. The investment implications for Russia (and Gazprom) are neutral for now but the broader implications of the deal are net positive for the country longer term.
Improving Russia’s Image and Investment Credentials
On a geo-political level, this deal is yet another example of Russia resolving long standing disputes as it pursues a new and softer foreign policy. The draft of the country’s proposed new foreign policy approach was leaked to Newsweek earlier this year. In the document, the government’s proposal is that Russia should no longer have enemies or friends but only interests. Moscow is of course very keen to project this new softer and pragmatic approach as it looks to improve Russia’s image and investment credentials internationally. The government needs to attract a significantly larger volume of foreign direct investment (FDI) into the economy, especially into industries that will represent economic diversification such as technology and manufacturing. FDI, especially outside of extractive industries, has been running at far too low a level both relative to the FDI in other major developing economies and relative to what the country needs to create a more diverse economic base. Previous disputes with neighbours, such as the gas disruptions across Ukraine and the war with Georgia, have been cited as reasons why strategic investors have remained wary of Russia risk. Along with corruption, uncooperative bureaucrats, poor legal enforcement, etc.
Earlier this year, Moscow finally improved relations with Poland, albeit following the tragedy at Smolensk. Relations with the EU and the US are also much improved over the past two years. Now that there is also a better relationship with the Ukraine government, the threat of further disputes over energy has been greatly lessened. The two major outstanding issues on the geo-political stage involve Georgia and the dispute with Japan over the Kuril Islands. Georgia recently said that it would block Russia’s entry into the WTO and given that momentum has again picked up for Russia to join the global trade group, the dispute with Georgia may also be at least eased over the next year. More likely with pressure for a softer line coming in Tbilisi coming from Brussels and Washington. The Kuril Islands dispute looks like a total impasse but, equally, is unlikely to cause any major issues.
Energy Factor
The other reason for today’s agreement is energy. Most people believe that the Arctic region is the next, if not final, energy frontier and, below the seabed, lies untold energy and mineral riches. How much is there? The short answer is that nobody knows. But that of course does not stop lots of speculation about recoverable resources and that, in turn, has led to both this agreement and Moscow’s further attempt to persuade the UN to recognize its sovereignty over a much greater section of the Arctic based on the Lomonosov Ridge. Norway is now more likely to support Moscow’s claim at the UN.
Russia estimates that the recoverable resources in the block that is to be carved up today may equal the equivalent of 39 bln barrels of oil or 6.6 trillion cubic meters of gas or a combination of both. Others say it is less while some speculate it is greater. The point being that proper exploration work was not possible until today’s agreement was reached. Now it is expected that Norway and Russia will cooperate, probably a JV between StatoilHydro and Gazprom, on an exploration programme to answer that question. The results of that exploration will also be very important for what happens elsewhere in the Arctic region. Disappointing results will cool enthusiasm for exploration in the Arctic and give the environmentalist lobby a breathing space. Results that confirm the existence of a large volume of energy riches will trigger an energy race.
Chris Weafer is the Chief Strategist for UralSib Group
Spend Drift
Currency market moves will likely dominate markets today after the Japanese intervened to weaken the yen and increased speculation that the US Fed will add more liquidity. The effect is likely to support commodity prices, weaken most emerging market currencies and cause most equity markets to wait for a new catalyst. Japan’s Nikkei is up by over 2.5% as a reaction to the move but other Asian markets are more cautious as they fear a loss of competitiveness.
The New Centurions
By Chris Weafer
The better than expected August industrial output in China will help boost global market confidence on Monday morning. Output grew at 13.9% year on year while consensus was for an increase of 13.0%. That number will ease fears that government curbs on lending and speculative investment activity is slowing economic growth The better than expected report will also support the price of metals and oil at the start of the week as fears of reduced import demand will also ease.
Banana Skins, Eggs and Yellow Ladas
By Chris Weafer
Asian markets are generally trading higher this morning, following another good session in the US markets yesterday. Investors have again become more optimistic about the sustainability of the positive growth trend and that solvency risks in Europe are reducing. The MSCI Asia-Pacific Index is up close to 0.5% albeit China’s markets are down over 1.0% on worries that curbs in the property market may extend to other parts of the economy.
Bulgaria and the Bosphorus
Bulgaria’s Deputy Prime Minister is scheduled to lead a delegation to Moscow this week to discuss Russian proposals to try and get agreement for the long delayed construction of the Burgas-Alexandroupolis oil pipeline. The pipeline is one of two planned to take most oil tankers out of the congested Bosphorus. Freeing the Bosphorus from oil tankers, while providing sufficient alternative routes, is a critical element of Russia’s plans to expand external trade beyond extractive industries and to allow it remain a key player in the Central Asian energy sector. It is also a necessary pre-condition for the planned expansion of the CPC pipeline that carries Caspian oil via Novorossiisk.
Harvest Moon
By Chris Weafer
Political Optimisim v Economic Reality
No Rabbit in This Hole
By Chris Weafer
The main talking points over the next few days will come from the meeting of economists and central bankers in Jackson Hole, Wyoming. The tone is already more bearish than bullish and many of the scheduled speakers later today are not known for their cheery outlook. The increasingly diverging opinions between the US and EU over stimulus strategy, and the impotence of the Bank of Japan to halt the yen appreciation, are expected to become even more evident. That will only add more uncertainty to all markets – especially to currencies – over the short term. The location of the meetings is appropriate as policy makers have backed themselves into a real deep hole with very little room to maneuver. As that becomes ever clearer, investor fears will remain high and early autumn trading will be just as difficult as it has been all summer.All Revved Up….Going Nowhere
By Chris Weafer
The Moscow International Motor Show opens today and the auto industry is expected to widely laud the near 50%, year on year, increase in vehicle sales in July and the continuing recovery on the back of the state funded cash-for-clunkers programme. But, while one industry is celebrating recovery, the Deputy Economy Minister had less encouraging news for the broader economy (see below). Yesterday he said that the summer drought will mean higher inflation and a forecast growth rate that is less than half that expected in other so-called BRIC countries.