Russia-State of real economy

A lot has been written about the faltering economy of Russia. Depreciation of rouble due to declining crude oil prices and sanctions by EU and USA and counter sanctions by Russia on import of food from these countries has resulted in spiralling food inflation.

A lot has been written about the faltering economy of Russia. Depreciation of rouble due to declining crude oil prices and sanctions by EU and USA and counter sanctions by Russia on import of food from these countries has resulted in spiralling food inflation. Rouble has depreciated by 40% in the current year while crude oil has declined by 25%. This has more than compensated and boosted profits of Russian oil & gas companies which have benefited government as majority of these companies are govt. owned. But rouble depreciation has impacted food inflation very badly and food prices have increased by about 20% on an average because Russia imports more than 40% of its food requirements. I believe there will be further food inflation shock post December when majority of old stock will be finishing and new imports will start coming at currency exchange rate. Majority of Russian metals and other companies buy their raw material on yearly contracts and so they have sufficient inventory till say January- February next year but after that the cost of their raw material will increase by about 30% for 2015 when they go for new contracts.

Due to very high food inflation, Russia’s consumption story will remain derailed as people buy only minimum food and not splurging like before. Also, companies would not be able to increase prices to pass on the increased cost due to slowing economy and lower real income. This will squeeze the margins of the companies. This is bad for retail companies like Magnit and Dixy.

Crude oil will stabilize around USD 70/bbl and so I see its time to invest in oil & gas companies like Surgeneftegaz, Lukoil, Gazprom, etc. Because I believe crude will again start going up though it may not happen soon in medium term. I see crude oil going up to its new long term average of USD 92/bbl over next 2 years. I also believe that gold will stabilize at USD 1,100-1,150/oz and will resume its upward journey along with oil over next 2 years. I believe new long term price average for gold will be USD 1,400/oz. So I believe gold mining cos like Polyus Zoloto will also do well over long term.

Banks will continue to struggle because of sanctions constraining their capital raising ability which in turn is affecting core lending business and growth and also increasing the cost of capital.

It’s time again to take a new look at all investment and start getting out of companies and industries which are users of natural resources like oil, commodities and were benefited by declining crude oil and commodities prices. It is time to start investing in natural resources and commodities companies once again.

The current state of political and economic situation in Russia gives big opportunity for India and Indian companies to do more business with Russian companies. The current mood in Russian government is to do more businesses with Asia, Africa and South America and reduce its business with EU and USA wherever it is possible. It has also pushed this idea as an unofficial policy advice to all Russian companies and I see Russian companies are looking for sourcing from India and also looking towards India for more business opportunities. I see big opportunity for business and cooperation for Indian companies in metals and mining, automobile, energy, IT, engineering, pharmaceuticals, food, etc. with Russian counterparts.