Why invest in Russia

Dear colleagues, here you can get acquainted with the main macroeconomic indicators of the Russian Federation and important news of the financial sector of the country.

12.03.2020. Russian Producers Are Ready to Survive Flood of Saudi Crude

A flood of discounted Saudi crude is heading for Europe, but Russia might just have the only producers in the world equipped to compete with it.

With some of the world’s lowest production costs, a flexible tax system and a free-floating ruble, Russian companies can keep pumping, even in an extremely bearish price scenario, analysts from Bank of America Corp. to Raiffeisenbank say.

“Russian companies can ensure sustainable production until oil hits $15 to $20 per barrel,” Karen Kostanian, BofA’s Moscow-based oil and gas analyst, said.

Saudi Arabia has escalated a battle for industry dominance after the collapse of the OPEC+ alliance last week. The kingdom has slashed prices and announced a massive production increase. Russia’s Energy Minister Alexander Novak said his country’s industry will remain competitive “at any forecast price level.”

Pumping Cheap

Production costs of Russian oil majors were below $12 a barrel last year. Novak is set to meet with key oil producers later on Thursday at the energy ministry to discuss the situation on the global market and their output plans.

Three-Way Defense

It is the well-developed field infrastructure, as well as efficient railway and pipelines that enables Russian oil majors to operate at low costs. Last year, state-run Rosneft PJSC, Gazprom Neft PJSC and the top private producer Lukoil PJSC spent less than $4 to extract a barrel of oil, according to Bloomberg calculations based on the companies’ financial reports. Add to this around $5 to ship the barrel and $6-8 per barrel of capital spending, and you still get a barrel of oil for under $20.

The country’s fiscal system offers more protection. Last year, government levies formed the bulk of the remaining expenses for the Russian producers: the companies paid $34-$42 per barrel to the state in extraction tax and export duty, Bloomberg calculations show. However, Russia has a flexible fiscal system, which means as oil prices fall, taxes drop with them, said Dmitry Marinchenko, senior director at Fitch Ratings.

“Under the current tax regime, it is the Russian state that shoulders most of the risks associated with low oil prices,” Marinchenko said. With crude at $50 Russian producers pay more than 40% of their revenues in taxes, his calculations show. If the price falls to $25 the share of taxes declines to just around 20%, and in the $15-$20 scenario, the fiscal burden nearly disappears, Marinchenko said.

Finally, Russian producers, which earn part of their revenues in U.S. dollars and spend almost exclusively in rubles, are shielded by a flexible exchange rate. The ruble’s weakening to the dollar helped support the companies’ capital expenditures during the market’s previous plunge. As the ruble depreciated to 67.03 per $1 in 2016 from 31.85 in 2013, Russia’s top producer Rosneft grew its capex in rubles about 66%, investing in future production while its global competitors had to cut spending.

Familiar Threat

These factors help Russian companies through a short-lived price war, but they would start to feel some strain in a long battle.

The oil and gas industry is the single largest source of revenue for the Russian budget, generating around 40% of the total inflows and feeding Vladimir Putin’s multi-billion social-spending programs. The state budget envisions that all the costs over the next several years will be covered at oil slightly above $40. As a result, “oil falling below $45-50 almost inevitably leads to conversations about a higher tax load on crude producers,” Fitch’s Marinchenko said.

Back in 2016, when the government needed extra funds amid a bear market, it tweaked the oil-extraction tax formula to raise revenues, Evgenia Dyshlyuk, oil and gas analyst at Gazprombank PJSC, said. “If the state budget sees potential for a deficit, there is a risk of a similar move now,” she said.

The windfall-tax risks may emerge only if the bear market lasts for three to five years, Andrey Polischuk, Moscow-based analyst for Raiffeisenbank, argued. Price shocks lasting for several months will likely have no impact on the tax burden for producers, he said.

The industry’s resilience to pricing pressure won’t come without costs. With oil at $15-$20 a barrel, producers will need to cut their investment programs, undermining future output potential, and modify dividend policies, Kostanian said.

For now, the nation’s producers are staying positive. “It’s not the first time that crude falls,” Lukoil President Vagit Alekperov, who in the span of his 52-year oil career saw price levels of some $2 to $146, told investors this week. “We are used to operating in a volatile environment.”

Source: Bloomberg

17.02.2020. Russia becomes a safe haven in an increasingly turbulent world

A year ago the main concern of international investors looking at Russia was uncertainty due to its geopolitical showdown with the West. A year on and global economic uncertainty is the main worry, not geopolitics. Russia is now seen by an increasing number of investors as a safe haven in an increasingly turbulent and unpredictable world.

“Russia has seen a sharp change from the dominating attitudes from just a year ago: global uncertainty, not geopolitics, now seems the key risk factor. Russia is now seen as a “safe haven,” helped by reserves and sound macroeconomic policies. Low valuations are overtaking high dividend payments in importance and the new Russian government with Putin’s spending initiatives have been taken positively,” BSC Global Markets chief economist Vladimir Tikhomirov said in a note.

The majority of investors are already overweight Russian equities: 59% of dedicated funds are overweight, 33% are even weight and the remainder underweight.

Russian President Vladimir Putin has spent the last few years constructing a “fiscal fortress” of record high gross international reserves (GIR) that have now surpassed the pre-crisis peak and are approaching $600bn. At the same time, the budget has been overhauled and the break-even price of oil for the budget to balance has tumbled from $115 in the boom years to around $40 now – well below the average oil prices of the last few years. Under Prime Minister Mikhail Mishustin, when he ran the tax office, the tax take grew by 20% despite the tax burden only rising by 2pp. And both external and public debt are now covered dollar for dollar with cash. In short, Russia has probably the best macro fundamentals of any major country in the world.

All this has not been lost on bond investors, who have piled into the market and now own about a third of all the Russian Ministry of Finance ruble-denominated OFZ treasury bills – the ministry’s main source of financing the budget.

But last year the increasingly good story spilled over into the equity markets. Russia’s dollar-denominated Russia Trading System (RTS) index returned just under 50%, making it on of the top three performing equity markets in the world. This year got off to a very strong start with the market up 10% in the first two weeks, but the coronavirus epidemic in China took the wind out of its sails and the market is currently flat YTD, with the notable exception of the utilities sector, which is up a whopping 16% YTD.

The sell-off over the last few weeks is thought to be temporary, say analysts. The infection rate of the coronavirus is slowing, reports Renaissance Capital, which has been tracking the epidemic, and investors will return to the fundamentals when the first phase of infections peters out in the coming months.

Attention will then return to geopolitics, but here Russia is starting to look not like the opportunistic tactician it has been painted as over the last few years, but increasingly as a significant geopolitical player to be reckoned with. A report entitled “Westlessness” released as part of the recent Munich Security Conference bemoaned the fact that the West has lost the initiative to the rapidly growing emerging markets, which are increasingly acting on their own. As part of these changes French President Emmanuel Macron and German Chancellor Angela Merkel are now actively seeking a reset with Russia, which is also co-operating with the new Ukrainian President Volodymyr Zelenskiy to try to wind down the military conflict in Donbass. In short, the prospects for Russia’s, at least partial, return to the fold of the international committee this year are as good as they have been since sanctions were imposed in 2014.

And finally, investors’ interest has been piqued by the proposed heavy state investment into the Russian economy as the 12 national projects get underway, which is expected to boost both growth and personal incomes.

Global uncertainties

“It was hardly surprising that global uncertainties were the prime concern of investors when we met them this month. The news on the recent coronavirus outbreak – as well as lingering frictions in the global trade – underpinned the rise in risk-off attitudes,” Tikhomirov said.

In this world Russia stands apart, as it has spent the last five years preparing for shocks in the form of sanctions. But as the sanction fears recede, that leaves Russia best prepared for economic shocks from the virus and trade wars that are left.

“Ironically, the geopolitical risks that triggered this process – and led Russia to bolster its domestic posture – are no longer seen by investors as the prime reason for concern. Indeed, clients appreciate Russia’s achievements on the macro front – low debt, high reserves, sound fiscal and monetary policies, stable currency and limited downside to growth dynamic,” Tikhomirov said.

No longer afraid of the stick, investors have turned their attention to the carrot that is the national projects. While the associated spending will boost growth and incomes, there is still a great deal of uncertainty over just how effective the measures will be. That is apparent in the wide spread of the forecasts for this year's growth that run from 1.5% from the OECD to 2.6% from Renaissance Capital.

Confidence that something will change has been bolstered by the change in government. While the Medvedev administration was seen as weak and ineffective, investors overwhelmingly see the new administration of Prime Minister Mikhail Mishustin as an improvement.

“Not a single investor saw the recent change of government as a negative. A majority (58%) saw this as a positive development, while others held a neutral view. Nevertheless, the first steps made by the new Cabinet give cause for optimism – especially the new attempts to modernise the public service and to put new life in the national projects’ agenda,” Tikhomirov said following a road trip where BCS GM met with over 30 professional investors.

This renewed interest in Russia’s stocks and bonds will not necessarily result in a boom, as the optimism investors currently feel remains cautious; the main concern is the economy’s low growth rates and the new Cabinet remains untested. However, if growth starts coming in at the upper end of the forecast band enthusiasm could build quickly.

“Political change and the outlook for national projects were, perhaps, the most discussed topic,” Tikhomirov said. “Our view that the change in the Cabinet was initiated by Kremlin in an attempt to inject new life into the national growth agenda was shared by investors, although a majority said it was too early to make any viable conclusions on how successful the government reshuffle will be.”

Source: bne IntelliNews

24.10.2019. Russia entered the top 30 Doing Busines-2020 ranking

The Russian Federation rose three more lines, to 28th place, in the Doing Business rating of the World Bank (WB). The compilers of the rating in the new version took into account improved access to electricity, payment of taxes and protection of minority shareholders. Minister of Economy Maxim Oreshkin, commenting on the rating results, noted that the rating does not take into account the importance of regulatory stability for investors - the main task of the government for the coming years.

Russia improved its position in the World Bank's Doing Business ranking, having risen from 31st to 28th place in a year (last year the Russian Federation advanced four positions, a year earlier - five). In terms of points, the result also improved - from 77.37 points from 100 to 78.2.

Among the Russian reforms, the rating took into account a reduction in the time for connecting to electric networks in Moscow and St. Petersburg, strengthening the protection of minority shareholders (increasing requirements for corporate transparency) and simplifying the payment of taxes due to the declarative procedure for VAT refund by reliable payers.
Russia remains the best of the BRICS countries, but competition is intensifying.
Source: Kommersant

31.10.2018. Russia Climbs to 31st Place in the Ease of Doing Business-2019 rating

Russia has made it to the 31st place in the Ease of Doing Business-2019, annual ratings published by the World Bank Group. This follows from the World Bank’s statement. It is a four-step climb for Russia, which ranked in the 35th position last year.

The aggregate evaluation of conditions for running business is measured over 10 indicators: company registration, obtaining construction permits, getting a connection to the electrical grid, property registration, obtaining loans, minority investor protection, taxation, international commerce, contract enforcement and bankruptcy procedure availability.

This year, Russia made it to the Top-100 in all the ten indicators: the country ranked 32nd in terms of ease of company registration, 48th in obtaining construction permits, 12th in getting a connection to the electrical grid, 12th in property registration, 22nd in obtaining loans, 57th in minority investor protection, 53rd in taxation, 99th in international commerce, 18th in contract enforcement and 55th in bankruptcy handling.

Zealand, Singapore and Denmark reaffirmed their Top three positions in the global rating. Besides these countries, Special Administrative Region Hong Kong, Republic of Korea, Georgia, Norway, USA, Great Britain and the former Yugoslavian republic of Macedonia made it to the Top ten places.
Source: Tass


2013

2014

2015

2016

2017

Key indicators of the economy*

GDP, Nominal, Domestic Currency, billion

73 134

79 200

83 387

86 149

92 037

Infliation Rate (CPI, annual variation in percent)

7

8

16

7

4

Unemployment Rate, percent

6

5

6

6

5

Population size, millions

143

144

146

147

147

International Investment Position. Main Components**

Net International Investment Position

131 736

310 105

331 728

211 433

267 768

Assets (USD mln)

1 474 598

1 275 056

1 170 497

1 232 785

1 341 181

Direct investment (USD mln)

479 501

411 270

367 593

418 034

470 882

Portfolio investment (USD mln)

53 743

56 629

68 119

72 060

73 905

Financial derivatives (other than reserves) and employee stock options (USD mln)

5 932

17 565

11 146

6 857

4 853

Other investment (USD mln)

425 827

404 132

355 241

358 092

358 799

Reserve assets (USD mln)

509 595

385 460

368 399

377 741

432 742

Liabilities (USD mln)

1 342 862

964 951

838 769

1 021 352

1 073 413

Direct investment (USD mln)

565 654

371 491

347 690

477 670

535 200

Portfolio investment (USD mln)

273 737

156 424

141 647

215 960

230 797

Financial derivatives (other than reserves) and employee stock options (USD mln)

4 355

21 530

9 245

6 455

4 505

Other investment (USD mln)

499 116

415 506

340 187

321 266

302 912

Financial Soundness Indicators***

Regulatory Tier 1 Capital to Risk-Weighted Assets, Ratio

11

9

8

9

9

Regulatory Tier 1 Capital to Assets, Ratio

12

10

8

9

9

Non-performing Loans Net of Provisions to Capital, Ratio

10

13

20

17

17

Non-performing Loans to Total Gross Loans, Ratio

6

7

8

9

10

Return on Assets, Ratio

2

1

0

1

1

Liquid Assets to Short Term Liabilities, Ratio

79

80

139

145

167

Residential Real Estate Prices, Ratio

4

5

-3

-3

-2



Period

28.07.2014

05.11.2014

12.12.2014

16.12.2014

02.02.2015

16.03.2015

05.05.2015

Interest rate, %**

8

9,5

10,5

17

15

14

12,5

Period

16.06.2015

03.08.2015

14.06.2016

19.09.2016

27.03.2017

02.05.2017

19.06.2017

Interest rate, %**

11,5

11

10,5

10

9,75

9,25

9

Period

18.09.2017

30.10.2017

18.12.2017

12.02.2018

26.03.2018

17.09.2018

17.12.2018

Interest rate, %**

8,5

8,25

7,75

7,5

7,25

7,5

7,75



* Data based by Federal State Statistics Service [Electronic resource]: http://www.gks.ru
** Data based by The Central Bank of the Russian Federation [Electronic resource]: http://www.cbr.ru
*** Data based by International Monetary Fund [Electronic resource]: http://www.imf.org