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I have an MBA in Finance from the Booth School at the University of Chicago and a masters degree in Industrial Engineering from the University of Cincinnati. I manage our investments and advice my friends & family on financial decisions. I work in Marketing Research using stats to support... More
  • Putin's years of decline ahead, Russians along for a bumpy ride 5 comments
    Aug 20, 2009 5:39 PM
    Russia is a petro dollar state masquerading as a recovering global superpower. In the short term their fate is tied to the price of Oil but my outlook is fairly poor for the following reasons.

    GDP: The downturn has been more severe than in other parts of the globe. GDP in the first quarter shrank 23% from the previous quarter. Predictions for 2009 range from down 5% (Roubini) to down 7.5% (World Bank) with a moderate recovery in 2010.

    • Russian oil production costs are higher and need price to be in $80 range to meets its budget, debt and trade needs.
    • Forced to sign a deal with China at low rates to supply oil over a 10 year period.
    • Population in Russia is projected to shrink 25% in the next 20-25 years. Russia is an emerging country dealing with a shrinking workforce and limited upside for production, likely to get old before it gets rich.  Russian mortality (all that vodka!!) is certainly not helping

    Industry: This has driven down industrial production severely for all manner of things (Cars down 80%, Fertilizers down 42%). 

    • The real economy and the people in it have lost their jobs, are getting paid less and seeing access to bank loans shrink. Not that different from the US but an “Ex Superpower” can overestimate their powers.
    • Retail sales as shrinking with the economy and companies that meet the demand are suffering.
    • Proposed development of Gas Pipeline from Iran by exasperated European customers will likely reduce its current monopolistic power.
    Capital Markets & Risk:
    • Currency Risk: Russia had built up a significant reserve of hard currencies (>$130Billion, Euros) over the past decade. As the crisis unfolded in 2008 the oligarchs and elites started moving money out of the country and primarily into dollars. Russian central bank spent over $200 billion defending the ruble.
      • Budget deficits have limited options as oil prices dived down to $30 in March. Increasing the need for foreign capital
    • Risk Tolerance: Foreign capital has become more risk averse to Russia and demand higher interest rates and superior stock market returns.
      • Russian market from September – March 2009 was down nearly 70%. The recovery this year from the lows are still leaving a very deep hole to climb out off.
      • Putin and his cronies have aggressively attacked entrepreneurs (some like Beresovsky might indeed deserve it) and capital providers.  
      • Jailing the founder of Yukos (then the largest oil company in Russia) and forcing the sale to the state owned Gazprom.
      • Forcing British Petroleum to sell their interest in a joint project on Sakhalin at a significant loss
      • Threatening Mechel with the fate of Yukos
    • Political Risk: Threatening the neighbors with Gas cutoffs in the middle of winter (Ukraine), invading and supporting separatists (Georgia), other muscular actions outside the cold of Siberia. This has increased the political risk associated with the country.
    • Banking system in Russia is suffering the same problems well documented elsewhere in the world
    Disclosure: Long TREMX
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Comments (5)
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  • Tom Au, CFA
    , contributor
    Comments (6879) | Send Message
    Russia rises and falls with the price of oil. Another reason to wish for low oil prices.
    20 Aug 2009, 07:56 PM Reply Like
  • Plant the seeds
    , contributor
    Comments (226) | Send Message
    Author’s reply » I would add that they also raise with the broader commodity complex especially metals and natural gas.
    25 Aug 2009, 11:58 AM Reply Like
  • Gatev
    , contributor
    Comment (1) | Send Message
    ""Population in Russia is projected to shrink 25% in the next 20-25 years. Russia is an emerging country dealing with a shrinking workforce and limited upside for production, likely to get old before it gets rich. Russian mortality (all that vodka!!) is certainly not helping""
    I am a Bulgarian living in Russia in the last 8 yrs. My impression is that the young people here do not drink (alcohol) more than,say,the young Brits in the UK, or Canadians,or Scandinavians. The Russian "vodka - culture" is a myth from the past.
    Who projects the "shrinking of the population by 25% in the next 20-25%" ?
    Projections for such a long period are unreliable Projection for shrinking of the population in Russia is based on the emmigration in the last 20 yrs, but the trend has changed.


    16 Sep 2009, 12:13 AM Reply Like
  • Plant the seeds
    , contributor
    Comments (226) | Send Message
    Author’s reply » Gatev,
    The UN projected in 2005 a 30% reduction in the growth, if current trends continued, the population decreased in 2008. Please see the Wiki post on this. Your point is true about emigration but it is also caused by the low birth rates and high death rates as well.


    On the vodka culture, a bit subjective on my part I admit, I did pull from my brother's experience while he studied in Russia for about 7 years. But your point is well taken.
    Thank you
    16 Sep 2009, 11:44 AM Reply Like
  • GoneFishing_73
    , contributor
    Comments (41) | Send Message
    Those are some scary stats. How is Russia going to be in the Caucausus?
    3 Dec 2009, 04:37 PM Reply Like
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