Less Bearish About The Russian Bear

For investors focused on geopolitical risk, few equities markets in the world appear as unattractive as Russia’s. For starters, the oil exporter has been one of the hardest hit nations on the planet by the sharp drop in crude prices. But when no one else is buying, there is often opportunity.

For investors focused on geopolitical risk, few equities markets in the world appear as unattractive as Russia’s. For starters, the oil exporter has been one of the hardest hit nations on the planet by the sharp drop in crude prices. Add to the mix the uncertainty posed by Russia’s conflict with Ukraine, and the related U.S. and European Union sanctions, and some investors may have written the market off entirely. But when no one else is buying, there is often opportunity. When it comes to Russia, Credit Suisse has posited that this could be the case. On March 3, analysts Alexander Redman and Arun Sai reduced their underweight on Russia equities from 50 percent below benchmark to 20 percent. In other words, they’re still concerned about all of the above, but less so than they have been.

Credit Suisse has become less bearish on two particular fronts. The first is the impact of Western sanctions. The restrictions have been quite damaging to the economy and have exacerbated the declines in the currency caused by low oil prices. The Russian government has been forced to use the country’s foreign reserves, which have fallen by 27 percent to $368 billion since November 2013, and the ruble has fallen 82 percent since last June to 61.49 per dollar. Sanctions introduced last September block European companies and citizens from buying or selling new bonds or equity issued by any of the five major state-owned Russian banks or the three major Russian energy companies if they have a maturity exceeding 30 days. Even those companies not literally under sanction are finding it difficult to borrow from international creditors loath to lend amid the uncertain economic and political environment.

There is the possibility that the second round of the Minsk ceasefire accords, agreed to in February, could lead to a relaxation of European Union sanctions. British Foreign Secretary Philip Hammond has gone so far as to say that the European Union will unwind sanctions if Russia fully complies with the terms of that agreement. It is however critical that this happens no later than 12-24 months from now as Russia will probably be able to cover its external debt obligations only until then given its surplus net international investment position — the value of its overseas assets is $233 billion greater than the value of domestic assets owned by foreigners, according to fourth quarter central bank data.

And then there’s the price of oil. While the decline has been devastating in terms of revenues, it’s already happened, and analyst estimates have all been readjusted to reflect the lower-price environment. What’s more, the likelihood of oil prices rising in coming months seems higher than them moving much lower. Credit Suisse expects the average price of Brent to increase to $71 per barrel by the end of 2015 from its current $56 per barrel, which would help Russian equities. At the very least, corporate earnings revisions should actually improve in 2015 as exporters benefit from a cheaper ruble.

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