Investment Frontier is going to Russia.
We will be visiting Moscow and St. Petersburg next week. While Russia is neither a Frontier Market nor is it one of the countries that interests us (for a whole host of reasons); it does have the 8th largest economy in the world and a pretty meaningful impact on its tertiary countries. Many of those tertiary countries, are amongst those that we are interested in (Kazakhstan, Kyrgyzstan, Mongolia, Ukraine, Lithuania, and Estonia).
You can see Russia’s trade relationships around the world at MIT’s excellent ‘Observatory of Economic Complexity.’ Ukraine is Russia’s 4th largest export market and it’s 6th largest source of imports. Kazakhstan is Russia’s 7th largest source for imports and its 11th largest export market. What ends up happening in Ukraine is significant for both countries. The economic impact will also have ancillary effects to other countries in the region.
Russia’s economy as most of you may have surmised is in the doldrums. Political tensions are only exacerbating the situation. Russia grew 1.4% in 2013, down from 3.0% in 2012 and expects to now only grow by 1.0% in 2014. Capital flight is also an issue, $50bn has already left the country and up to $130bn is expected to leave by the end of the year. The Rouble is down -16.5% for the year. The MICEX is down -30.2% in USD terms. While Russia’s FX reserves are high, at $400bn, it also has the third-highest foreign currency debt to GDP ratio (12%).
Russia did not receive any lift from Sochi and appears unlikely in the near-term to benefit from any lift from construction related to preparation for the 2018 World Cup.
We will try to garner on the ground what sentiment is like, and how the economy is chugging along in the main cities (St. Petersburg and Moscow). The March 16 referendum in Crimea will be the key event over the next week, and is likely to clarify what the path in the short-term will be. We can hope for a peaceful resolution to all these issues, but in the event that this situation escalates, you can count on us to share our thoughts on how your Frontier Markets’ portfolio should be positioned.
Note: If there is anything in particular that you are curious about, while we are in Russia, please do let us know.