Assessing the effects of the financial crisis
Overview:
Russia rode out the first year of the global financial crisis fairly comfortably. However, falling share prices, a weaker Ruble and a rapid depletion of the central bank's foreign exchange reserves since the summer have led to some comparisons being made with the 1998 financial crisis. Analysis of the economic data soon shows the underlying position is completely different, however, despite this episode of financial turmoil also having been triggered by a sharp fall in oil prices. In contrast with 1998, the central bank has huge foreign exchange reserves and the government's debt burden is very low. This is essentially a private sector liquidity crisis, although admittedly a very severe one. Financial market volatility may persist for a while yet if the oil price remains weak. However, the government has the resources to recapitalise the private sector if necessary.
Recommendation:
Despite recent events we retain our constructive medium-term view on Russian local currency assets. Any view on Russia is of course heavily contingent on the outlook for oil prices. We believe that cyclical factors may continue to affect the oil price negatively in the short run but that long-term supply shortages will ultimately boost oil prices and benefit a major net oil exporter like Russia. The Central Bank of Russia (CBR) will have to respond judiciously to this volatility and let the Ruble weaken if oil prices remain much lower than expected for any significant length of time. Moreover, the government must take this opportunity to implement long-awaited reforms to strengthen the financial sector. However, a recovery in oil prices and in the functioning of international capital markets in the medium-term will return attention to Russia's relatively strong economic fundamentals.