The three big themes of 2006 will continue in to 2007;
- The Presidential election (sic)
- Energy security, or Russia flexes its energy muscle; and
- Continued domestic growth.
In reverse order, or in order of which they are more likely to be correct.
Russia Is Growing
Occasionally you will actually get to read a story about continuing Russian domestic growth, usually tucked into in the business section of a newspaper, when another multi-national in the consumer industry announces that its growth in profits and revenues has been driven by the Russian (CIS) economy, or indeed when another Russian IPO hits London. There will also be news of more banking and financial industry deals as Russia slowly develops its domestic financial sector.
If there is to be bad news, which you will be able to read on the front page, inflation will continue to be a worry for Messrs Kudrin and Gref. As the remainder of the Russian government will adopt its customary Kanutian approach to generally accepted economics, Gref's and Kudrin's focus will be especially important. Inflation should be contained, at least headline inflation, until Putin's appointee is safely ensconced on his, or her (yes there is a female option) throne. Which would be known in Rugby as a hospital pass. Currency inflation (or dollar deflation) may put a bit of a damper on some domestic industry but with revenues growing at least as sharply as costs, 2007 may be the year which real management begins to make an impact. With energy prices now definitely set to rise 2007 should also be the year that Russian industry starts to wean itself of cheap energy. Notwithstanding, growth will continue to be the rising tide that covers many sins. The Regions will join the party and the feel-good factor will still feel good. With many more people enjoying a full stomach, and those already full demanding higher quality goods and better services the chance of agitation for anything other than the status quo will be nil. Which is as it should be. Stability to an investor is like a fix for a junkie.
Amongst other things this will be good news for Russia's broadband sector which by the end of 2007 will begin to look like a poster child for new media, in Moscow at least. This will principally be good news for the Ruminator's bank account.
Oil and gas, energy security or the new playground of the new Cold War
This is an analytical minefield. Last year started with Ukraine blaming Russia for Ukraine's stealing of Europe's gas and ended with the death of the Turkmenbashi and the Belarus sandpit squabble. In between, the oil price breached $80/bbl and retreated to $60/bbl and Rosneft IPO-ed on LSE. The net result was mostly noticed in Moscow's restaurants and, of course in London's, real estate prices and the board rooms of Shell, BP, ExxonMobil, Total etc., and unfortunately etc. Somewhere along the way the G8 summit in St. Petersburg (home of the 5th Directorate Thugs) epitomized much of what will remain wrong with relationships between the US and UK, France and Germany and new Europe, on many sides and Russia, on the other. Thinking back without a crib sheet, the Bush / Blair conversation stands out as revealing the paucity of much of the UK/US foreign policy; Putin's barbs as the confidence that Russia had re-found through its supposed strength in oil and gas. Supposed, because as Claude Mandil at the IEA had been pointing out all year, Russia has failed to invest in its gas industry properly for sometime and would struggle to meet just about anyone's forecast demand scenarios. As the year progressed having failed to prove the case that Russia was an unreliable supplier the heat was turned on Russia for failing to produce enough gas to keep Europe warm in our increasing old age. With Vladimir Milov able to broadcast his complaints from just about any platform Russia itself sought to address the demand supply issue, and partially succeeded - balancing a number of legitimate concerns (demand stimulation and inflation) and one illegitimate one (maintaining VVP's good Tsar halo). And then the Turkmenbashi finally shuffled Brezhnev-like. When you are relying on Turkmenistan to produce an unrealistic amount of gas to fill the under-investment gap losing the guarantee of supply highlights the paucity of Russia's gas policy.
So what for 2007. Firstly the rhetoric cannot continue at this elevated level for long. A number of concurrent events should see the bluster cool and the temperatures head in the other direction; firstly Germany takes over the Presidency of the G8 and the EU. Whilst Merkel is no friend of Putin's neither is she a Cold War warrior or in need of a bogeyman to divert attention from her other foreign policy misadventures. In the US it looks as though Bush will be tied up trying to create his legacy (?) through some sort of solution in Iraq (already doomed to failure.) In the UK all attention will focus on Brown's ascension as Prime Minister some time in May (or June, July, August etc), although the UK's genuinely independent courts might yet scupper any Berezovsky extradition deal. Which will cause Russia's two shrillest critics (Poland is so shrill that only the dogs and Edward Lucas are listening) to leave Russia alone. For the first half of the year the failure of winter to be winter (its +3 in Moscow as I write this) should see oil prices drop towards $45/bbl, albeit that a huge number of knowledgeable commentators (T. Boone Pickens amongst them) would fundamentally disagree. Europe and the US worry about the El Nino fueled increase in temperatures, but global warming is no where near as scary if you can afford to pay for the petrol to worry about it in your 4x4. It won't be the heating season that drives up prices but the air conditioning season which will start early and finish later than usual. As an aside its time to worry about coral bleaching again.
The last forecast is tied up with the Presidential election and should be included below. But as it is all about oil and gas it will stay here. 2006 in Russia was mostly about positioning in advance of the 2008 Presidential appointment. In the oil & gas sector that meant personal financial positioning using national oil and gas policy as the driving force for all sorts of nasty shit. After the Rosneft IPO one clan was deemed to have fed at the trough enough and was told to get its house in order. Gazprom finished the year by eating at Shell's trough. I would be surprised if there is much more troughing to come. As always, SurgutNG acquisition stories will circulate but unless a deal is done by at the very latest end of June 2007 the Ruminator will confidently forecast no more deal doing until after the election/appointment. There is a huge amount of work to be done in both Gazprom and Rosneft to fulfill their roles as national champions. With oil prices definitely on the way down, gas prices should move in lock-step, albeit in less liquid markets, the challenge in 2007 will be larger than either company will be able to manage. Gazprom, in particular will have a challenging 2007 as it seeks to bring the next generation of super-fields in to production without much help from those with the expertise to do it either inside the company or internationally. After firing Ryzanov late last year Gazprom now contains no one who knows anything about gas E&P. If you want an early prediction for 2015 here its is; Shtockman will not be producing - feed that in to your gas supply models and go long fur coats - providing we still have a winter then.
The Presidential Election
We will know who will be elected President in 2008 either just before or just after the 2007 July/August break. Feeling optimistic I will plump for just before and will undoubtedly be wrong. As a result no big deals will be done after March 8th until we know what, how, who and why (actually we will never know why.) The Ruminator has no desire to stick his head above the parapet to make too many forecasts as to who. Putin will not stand again (this time around), Medvedev and Ivanov are the front runners, Kozak would be a nice to have, Matvienko might squeeze her way in to the mix - the conspiracy theorists certainly think so. The quasi-anarchy that characterised the end of 2006 (Kozlov, Politkovskaya, Litvinenko amongst others) has either ended or will end shortly. Sometime around the May holidays we will bemoan the lack of excitement in Russian poliitics - and thank goodness for that. Depending on how much intra-Kremlin wrangling was resolved over the holiday period there will be a domestic driven rally in 2007 which will announce, much like white smoke from the Vatican, that Putin's successor has been nominated and the market insider like the stability that should flow as a result.
In the meantime nothing will be done that might upset the narod. Inflation will be kept down (at the expense of local business if needs be), the shelves will be stocked with an ever increasing range of high quality goods and Russian made food which will remain mostly flavourless and inedible. Of all my predictions for 2007 none is more likely to be true.
Extreme nationalism, otherwise known as racism will continue to make Russia a less than welcoming place to anyone whose natural pigmentation was a result of anywhere south of Moscow. Moscow needs immigration to counteract Russian's unhealthy desire to eat Russian food (male life expectancy is a massive 58 years - up from 54 in 1998) and drink vodka. Nationalism has now taken hold and will be a very difficult virus to kill-off. Not sure who will build the buildings.
So there is my big picture for 2007. Along the way there will undoubtedly be some more bureaucratic madness, more Khordokhovsky trials and Berezovsky extradition attempts, more Russian floozies caught in cars in Monaco when they should be in bed with the mumps. Your Ruminator will be busy, very busy. In the first quarter work will keep him from blogging, in the second half of the year it will be personal life that will prevent me from blogging the bizarre and Russia's business environment.
Enjoy it, it will be another year to make money in Russia.
Technorati Tags: Russia