Macro Digest: The reverse Berlin Wall? Russia, Ukraine and markets.

 

Russia and Ukraine escalation over the week-end plus an aggressive central bank hike this morning only part of full story on Russia as PMI for the fourth month running is below 50.0

 

I visited Russia less than a month ago and I left concerned: Not since 2007/08 had I had so many "crisis" questions from both investors, clients and media. It was all about the weak Rubble, the EM crisis, and how bad a shape Russia was in.

Let me stress going to Russia is one of my favorite travels, despite them giving me -15 degrees Celsius last time around!

 

Russia to me is a politically, economically and strategically cornered. I will make no big political statement on Ukraine et al, as I think it talks for itself, but let me remind you of Georgia – it led to one of the biggest sell off in history for the Russian stock market(co-inciding with financial crisis) and according to several analysis' this morning have a parallel via the Olympics both happening at or around the time. In 2008 Putin was out of the country attending the opening of the Beijing Olympics this time Putin used the end of Sochi games to escalate. The point being trying to use the world media focus on the Olympics as a way to "get away with something harsh"…..

 

Russia's economy has moved from a 6-8% current account surplus pre-crisis to this or next year going into a deficit despite high energy prices. Growth in 2013 was less than 1.3% vs. government expected 3.0% - this year will see Russia in recession according to my economic models unless a real reform takes root.

 

The new central bank governor has been brave and steered a tight monetary policy which I interpret as being a policy choice of a "small crisis now, rather than a big one later" as unsecured lending came out of control, the 83 regions runs a 100 bln. USD deficit without Moscow really having control over the purse and a political leadership spending more money than they earn.

 

The Russia model is being challenged – Russia have all the resources, humanly and in the ground to be a super power, but economically reforms needs to start now.

 

Like in 1989 the Russia Bear is tired and we all risk that Ukraine become a new Berlin Wall, but this time the wall is going up not down – and lets remind ourselves that we will all be losers in that game! Europe needs Russia's energy, Russia needs Europe engineers, business people, but right now we are a part as we have been since 1989 – ironic as we are at the 25 years anniversary of that Berlin wall falling.

 

Conclusion:

 

Russia, Ukraine is fast becoming a "reverse" Berlin Wall. Economically and politically we will all lose. This will increase volatility and stock market will be under pressure as we all remember the 1998 devaluation

 

Any major crisis has a catalyst – I think Russia/Ukraine is one. We have an even bigger crisis though, that of political leadership and that's what really concerns me. The RUB will continue to weaken, the stock market globally could deleverage.

 

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The central bank this morning surprisingly hiked interest rates from 5.5% to 7.0% to help the weak currency:

 

 

Ruble hit all-time low this morning:

 

 

 

The Stock market is taking both Ukraine & rate hike poorly:

 

 

 

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

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