Article / 24 November 2015 at 11:03 GMT

Downed plane halts Russia's blind equities optimism

Russia oil and gas expert
United Kingdom
  • Russian SU-24 downed over the Turkish/Syrian border this morning 
  • Russian equities slide over 3% but only after it emerges one of the pilots died
  • Investor sentiment almost still completely skewed to the upside
  • Ukraine, Syria and the oil price all demonstrate that downside is a major factor

The downing of a Russian fighter jet this morning on the Turkish/Syria border demonstrates 
the geopolitical risk, yet the surprise is that equity markets have not fallen further. Photo: iStock

By Nadia Kazakova

The downing of a Russian SU-24 fighter jet over the Turkish/Syria border this morning has finally thrown a spanner into the Russian equities wheel which for the past seven trading days or so had looked like a coiled spring, compressed and ready to jump.

After more than a week of sustained gains, the RTS Index was climbing again this morning until the news broke at around 0900 GMT of a Russian military airplane shot down on the Turkish-Syrian border. Yet, even the downing of the plane alone was not enough to lead to a massive selloff.

Only when it emerged that one of the pilots had died in circumstances that are yet to be confirmed did the index take a turn for the worse. The index had lost 3.42% at 1056 GMT.

The other pilot has been captured reportedly by Syrian Turkmen, who are opposed to the regime of President Assad.

Claim and counter-claim continue to muddy the waters.

The index drop has more than wiped out the previous day's return and yet the surprise is that this hasn't fallen much further. It's still up approximately 4% on one week ago.

It seems that investors see more chance of the Russian market going higher rather than sliding lower. In other words, upside risks outweigh the downside ones. The question is whether the desire not to miss the action overwhelms all other considerations, making some investors wilfully blind to some existing and emerging threats.

It needs merely an excuse, be it a hint on early removal of sanctions or an inkling of a higher oil price. No one wants to miss a rally when it arrives. 

The upside risks are familiar territory. The oil price seems to have found a floor and there are many reasons why it can bounce back strongly, taking Russian assets with it. 

The Opec meeting on December 4 is less than a fortnight away and while the status quo is likely to be maintained, it has probably been already priced in. Many of the other downside risks — Iraq selling oil at knock-down prices, Iran increasing output, US producers pumping oil to keep their banks happy, speculators going short, etc — have also been priced in. 

On the other side, any price-positive news sends the oil prices sharply up. Again, it seems that the risks are skewed to the upside. 

Yet, there is still much speculation that the oil prices will fall from here, towards $30/barrel for WTI, taking the Brent and Urals oil prices with it. For Russia, the Urals price moving down by $10/b to $35/b would be much more damaging, than gains from a $10/b rise in the oil price to $55/b. 

Potential outcomes of such a $35/b scenario for the Russian economy (apparently run by the central bank of Russia) have not been disclosed so drastic could it be. The Russian media quoted the deputy governor of the Russian central bank as saying that they did not want to scare the public

The Central Bank of Russia wants to make sure ordinary Russians go about
their business as normal and avoid any potential scare stories. Photo: iStock

The Central Bank of Russia is at least aware of such a risk and can run a macro forecast to assess the consequences. A professional private investor has no capacity to correctly assess the risks and is likely to underestimate them. Especially if a radical policy response such as capital controls ensues. 

Another major variable for the Russian equity markets is the political risk. The equity prices jumped last week on speculation that anti-Russian sanctions might lapse as soon as early next year. It seems implausible. The most likely scenario is that the political decisions to extend the sanctions will be taken on December 17/18 at the EU summit in Brussels. 

The market, however, does not seem too concerned and still seems to assume that the sanctions might be soon lifted. There is nothing too wrong with such an attitude, if it did not make investors much less aware (or willing to pay attention to) the military escalation in Donbass region and the political and economic escalation around the Crimea.

The Crimea was cut off from electrical supplies from Ukraine on November 21, as the remaining high-voltage pylons on the Ukrainian side were blown up. 

The Ukrainian authorities said that they could repair the damage within 72 hours, but could not get access to the site. It has been blocked by protestors who demand the release of political prisoners in Crimea (representatives of the Crimean Tatar ethnic minority) and advocate for the total economic blockade of the peninsular.

The protest seems to reflect the popular mood in Ukraine and the Kiev administration has little choice but to make some concessions (announce a ban on cargo traffic to the Crimea) and hope that the situation will get resolved rather than will get out of control. 

The Crimea receives most of its electricity from Ukraine, the territory has around a month's worth of fuel supplies to generate some electricity locally while extra fuel has been requested from Russia. A new electric supply line directly from Russia is due to be put into operation on December 22, but it is by no means a certainty

On Monday, schools and businesses were closed for an improvised public holiday, water and electricity supplies were intermittent and there were reports of panic buying of supplies. The weather is relatively mild, which means that at least the heating is not yet an urgent need.

This Crimea crisis (and the deteriorating situation in Donbass) shows how tense and unpredictable the situation remains. It also shows that the Ukrainian administration is mostly firefighting, a step or two behind as the events unfold. 

Hopefully, the electricity cutoff of the Crimea will not lead to a major standoff between Russia and Ukraine. The risk is that events will take the lead in Ukraine, and get out of control. The same might apply to Syria. 

These are the risks that the Russian equity market seems eager to downplay.

Vladimir Putin's diplomatic skills are likely to come under severe strain after
a Russian SU-24 was downed over the Turkish/Syrian border. Photo: iStock

— Edited by Martin O'Rourke

Nadia Kazakova is a Russian specialist, particularly on the oil and gas sector.

Clare MacCarthy Clare MacCarthy
TRY now 1% lower versus USD
Martin O'Rourke Martin O'Rourke
USDRUB spiked around 30 bps as the news broke on the downing of the fighter plane to head above 66.3500 before heading back down towards the 66.1000 area. Chart courtesy of SaxoTraderGO.
Martin O'Rourke Martin O'Rourke
The rhetoric is escalating as Vladimir Putin labels Turkey "accomplices of terrorists" and warns of "significant consequences." The heated language refers to the downing of the fighter plane as a "stab in the back" . He finishes: "Today’s tragic event will have significant consequences, including for Russia-Turkish relations. We have always treated Turkey as a friendly state. I don’t know who was interested in what happened today, certainly not us. And instead of immediately getting in contact with us, as far as we know, the Turkish side immediately turned to their partners from Nato to discuss this incident, as if we shot down their plane and not they ours."
Nadia Kazakova Nadia Kazakova
President Putin called the downing of the plane "a stab in the back by supporters of terrorists". He insists that the plane was attacked when it was one kilometre away from the Turkish border and fell down four kilometres inside the Syrian territory. He said that investigation is required but it might have serious consequences for Russia-Turkey relationship
Nadia Kazakova Nadia Kazakova
Most of Putin's reaction/rhetoric is probably aimed at the Russian audience. I think it is very unlikely that either the Russian and the Turkish side would would to escalate the situation, either politically or economically. Hence there is relatively little risk of, for example, Russia cutting back gas supplies to Turkey.
Nadia Kazakova Nadia Kazakova
RTS was down another 1% on Putin's remarks, it is now trading down just over 4% for the day
Brian Twomey Brian Twomey
Paper How EUR/JPY Switches Allegiance From EUR/USD to USD/JPY Brian Twomey


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