In the face of the unprecedented COVID-19 pandemic and plunge in oil prices, Russia’s economy looked somewhat resilient. Economic data, which at times portrayed weakness, this, brought about by the inevitable consequences of the pandemic, improved, at times beating market estimates. Now that the rate of contagion is once again accelerating, against the backdrop of increased political uncertainty, the desired economic recovery is under threat.
In the second quarter, Russia’s economy, consequent to the ensuing lockdown measures put in place to contain the spread of the deadly virus, as well as falling oil prices - a crucial factor for Russia’s economic development, inevitably was hit economically. In fact, the economy shrank by 8 per cent year-on-year, the said figure beating preliminary estimates of 8.5 per cent.
Upon the gradual removal of movement restrictions, PMI indices – an index of the prevailing direction of economic trends in both the manufacturing and service sectors, significantly improved, exceeding pre-coronavirus levels. Notably, Russia’s manufacturing PMI August reading, pointed higher to the first monthly expansion in factory activity since April 2019, amid a faster upturn in output and a renewed rise in new orders. Similarly, services, battered at the peak of the pandemic due to the closure of service providers, pointed to the second straight month of expansion in business activity, after months of gradual improvement.
Despite the said improvement in economic figures, reflecting the resumption in business activity, the better-than-expected recovery is once again under threat. Albeit reporting a steady decline in new cases, since reaching the peak in mid-May, Russia – now the country with the fourth-highest number of COVID-19 infections, has once again witnessed a sharp increase in new infections.
Although the resurgence, adjusted for population figures seems to be less severe when compared to Europe’s current worst hit; Spain and France, Russia’s infection trajectory is rather worrying, intensifying fears that new lockdown measures may indeed be necessary.
In a bid to limit the damage on Russia’s economy, this by mitigating the spread, Moscow’s mayor, Sergei Sobyanin urged residents, aged over 65 and those with underlying health problems to remain indoors, warning of the terrible consequences from the COVID-19 pandemic overlapping with seasonal flu. Additionally, Sobyanin encouraged businesses in the city, where possible, to shift their operations, into a remote mode.
The threat of renewed lockdown measures, thought to be initially lifted to conduct a national referendum on a new constitution that will allow President Putin to rule as president for an additional 12 years, apart from negatively impacting the economy, is undoubtedly politically sensitive. This, adding to further political uncertainty currently in place, mainly revolving around the possibility of sanction imposition which may materialize before the end of the year.
With the alleged poisoning of opposition leader Alexey Navalny, fresh allegations of meddling in US elections, and intervention in Belarus, amongst others, political uncertainty has in recent weeks, certainly picked up.
Egoistically speaking, as historically witnessed, uneasiness surrounding Russia, particularly from the sanctioning front, triggered numerous investment opportunities. A very practical example takes us back to 2017, when spreads of solid credit stories remarkably widened following the imposition of sanctions, allowing investors to partake in credit names which held strong cash buffers and could operationally withstand the headwinds brought about by political risks. Corporates that today possibly fall within this category include the world’s largest producer of palladium; Norilsk Nickel and multinational Energy Corporation; Gazprom.
In reality, despite the current undesired economic outcome, Russia, given its natural resources supremacy, remains in a strong position. This is indeed reflected in; the comfortable debt-to-GDP ratios, standing at approximately 12 per cent, a relatively low unemployment rate at 6.4 per cent, and a still yet attractive interest rate of 4.25 per cent, with the latter even an avenue to attract foreign direct investment.
With that said, we believe that in times of volatility, one should consciously take the plunge in investment opportunities which will pose generous returns in the medium to long-term.
Disclaimer: This article was written by Christopher Cutajar, credit analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.
For more information visit https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.