Buying Opportunities During The Russian Recession

by: Albert Goldson

Originally published on Dec. 7, 2014

Russian President Putin's brinkmanship is coming at a high price that may lead Russia to an economic precipice. As an autocrat he has the power to pursue one of two roads. The first is to halt and pull back his aggressiveness in Ukraine so that sanctions are lifted which will provide Russia access to global financial markets to ease their $365 billion corporate debt and stop the ruble's free-fall. Currently Putin's military adventures in Ukraine are draining Russian coffers, resulting in a negative return on investment like most military adventures do.

The other is to continue and risk not only bankrupting Russia but isolating it completely from the global community. Putin's $400 billion reserve was established for short-term economic shocks, not a lengthy one which is apparent with depressed oil prices forecast to remain well under the $100/barrel required to balance Russia's budget. And this figure may be artificially high because of Russia's intractable corruption. According to Transparency International, Russia ranks 136 of 175 countries.

Russian pipelines to supply gas to Asian markets that Putin boasts about is what many are derisively calling a 'pipe dream'. Construction of these pipelines will take years, a strategic investment, certainly not one that will solve Russia's short-term problems. Additionally, Asian current and future demand for Russian gas is not as robust as Putin claims.

The bottom line is that the West must provide Putin a third road, an option, to pull back while at the same time saving face. Essentially this amounts to a political tactical retreat. A cornered dictator is the most dangerous kind.

Most Western energy firms were either thrown out or given limited participation in developing Russia's oil and gas fields. These Western firms have by far the best experience and technology in the world to economically extract Russia's natural resources.

Inevitably these firms will re-renter the Russian market so that the Russian government can take advantage of an upswing cycle in oil and gas prices. With depressed prices in energy stocks, this would be the period to carefully research those firms who participated in the Russian market earlier and who are more likely to re-enter should Putin make the correct choice to embrace a more productive political path.

An excellent primer with respect to the Russian economic and political situation was discussed on the 2014 Emmy Award winning international TV program "Fresh Outlook" on December 6 by a panel of international business professionals including myself.

Disclosure: None.