Rise of Russia – open for business. With care.
Russia has been the focus of political news in the US recently, but it’s also making headlines for positive economic reasons. With the country having pulled itself out of its longest recession in twenty years and enjoying renewed stability, economists are pointing to broad macro recovery during 2017 and a likely resurgence in inward investment.
Buoyed further by the November 2016 OPEC agreement to cut output ̶ the first such accord in eight years ̶ and the resultant recovery in the oil price, Russia is looking strong. Sanctions and low oil prices have helped force the oil and gas sector to be efficient, and Russia even took Saudi Arabia’s place in December as the world’s largest producer of crude.
Russia is eager to put the word out. Aleksandr Novak, the energy minister, was bullish in Houston in early March, telling investors “Russia is open” to investment and collaboration. Novak also highlighted vast as-yet undiscovered oil and gas resources, coupled with some of the lowest development costs in the world. Novak reportedly met with “13 global funds interested in investing in Russian oil and gas”, although he did not name them.
The signs things may be easing and the increased stability mean lower political risk and that means lower asset prices for investors. The Financial Times reported in February that a third of the 15 best-performing funds in the world in 2016 were specialist funds investing in Russian equities.
So what now? Ironically, considering the political news in the US, President Donald Trump’s positive vibes towards Putin have helped to reduce the perceived risk in investing in Russia. After several years of retreating from Russian positions, investors have started to venture back in, encouraged not only by the apparent entente cordiale but by the stronger rouble and more robust oil price, and by the growing possibility of the end of sanctions, slapped on Russia in 2014 following its military manoeuvres in Ukraine and eventual annexing of Crimea.
Darren Woods, who took over as CEO of Exxon when former incumbent Rex Tillerson accepted Trump’s offer of the US secretary of state role, met with President Putin, Russia’s energy minister and the CEO of Russian energy giant Rosneft in Moscow in early March, when a Kremlin spokesman talked openly about “special treatment” for the US energy major. Exxon, and of course Tillerson, have extensive experience in Russia and could well prove to be an obliging bridge for US energy companies looking to invest or to strengthen their hand in Russia.
BP’s Bob Dudley has also spoken particularly positively towards Russia recently, while Shell further bolstered its own position in Russia last year with an agreement with Gazprom to develop a Baltic LNG port.
Despite the upbeat talk, all may not be as rosy as Russia would like it to appear. The much-trumpeted Euros10.2bn investment in Rosneft by the Switzerland-based trader Glencore and Qatar Investment Authority ̶ announced by Putin and Rosneft CEO Igor Sechin on live television in December 2016 ̶ has since taken on a veil of what can only be described as murky. Details of the actual structuring of the finance only emerged in January, revealing that the “investment” is investments plural, by several different players and including a number of Russian banks; so not the huge foreign direct investment originally claimed.
Interestingly, for a country so rich in oil and gas, Russia has not downplayed its potential for clean energy or the potential opportunities there for interested parties, with Putin commenting recently, on the country’s position vis-à-vis the Paris Agreement on climate change; “Environment has been and of course will be a key element of our work as part of our domestic policy … Russia, as it is known, took on rigorous commitments and I have no doubt that we will fulfil them.”
Russia is undoubtedly back on the cards for canny investors with cash to spare ̶ but, as always, with a degree of prudence. Were sanctions to be lifted, the Russian economy would bounce further. There is much yet to unfold but, while global politics have a determined habit of producing surprising results, Russia’s resources are not going anywhere.