Article / 19 December 2014 at 13:52 GMT

Russia’s crisis is also a huge opportunity

Chief Economist & CIO / Saxo Bank
Denmark
  • Russia's failure to reform made crisis inevitable
  • Ukraine détente imperative for Russian revival
  • Writing off Russia would be unwise
By Steen Jakobsen

Russia’s years of neglecting to invest and reform pointed to an inevitable crisis. In 2014, that crisis came on two fronts, first in the confrontation over Ukraine from early this year and the resulting sanctions, and then followed by the incredible collapse in oil prices over the last few months.

Russia and its citizens have been here before and know the drill. Everything looks terrible at the moment, but as the old saying goes, times of crisis are also times of maximum opportunity to chart a new course. 

So the positive spin from all of this is that we could see a new start from Russia in 2015. But a vital precondition for that new start is a definitive solution to the Ukraine problem that firmly lays to rest the political and financial standoff with Europe and the US. 

Without full integration in the global economy, any comeback faces impossible odds. Capital will simply not flow in and out of the country until sanctions have been lifted, and autarky (self-sufficiency) is not an option.

Former US Secretary of State Henry Kissinger’s suggested solution to Ukraine remains the most plausible outcome: make Ukraine a buffer zone between Russia and NATO. At his end of year speech to the Russian press and nation, Putin called the NATO front across Europe a “Berlin Wall”. Allowing Ukraine to remain in the Russian sphere of influence would at least allow a broader zone of Belarus and Ukraine to separate Russia proper from NATO countries. 

kissinger
Kissinger's buffer-zone idea for Ukraine may be the best solution. Photo: Johannes Simon 

As I write this, the European Union wants stronger verbal support of Ukraine from Putin, who is not backing down. But let’s give the process and the crisis another three or four months and both Russia and Europe will want to work more constructively toward a solution.

The macro risks remain very high if some of the recent dynamics spin out of control. But let’s hope that Christmas become a time of looking forward and of thinking practically instead of seeking confrontation.

I remain a long term bull of Russia. It may be naïve right now considering President Putin’s speech on Thursday but Russia has the resources and the people to be a great nation, just not with its present policy and economic focus, especially amid a huge external stand-off and sanctions. Hopefully, this crisis produces a positive mandate for change and a new and more balanced path forward. In other words, let’s hope that things have already become so bad that the only way is up. If that’s the way things turn out, Russia could be 2015’s biggest positive surprise.

putin
 Putin's jingoism suggests détente is impossible but let's wait a few months for things to cool.
Photo: Kremlin Picture Office

– Edited by Clare MacCarthy

Steen Jakobsen is chief economist and CIO at Saxo Bank – the home of social trading

3y
type568 type568
I agree there should be a wonderful buying opportunity somewhere in 2015, when the central bank starts to reduce interest rate. However, I almost don't see any connection between Russian economic prosperity & political cooperation with the west. The trade isn't banned, and no reason to think it will be. As of western capital- it's totally better to get western currency from own central bank for 1.5% than from U.S. banks for 4%(which was the case in the "good" times).

The only thing of matter though, is.. Petroleum. We need the price dynamics to reverse & stabilize. That's the only indication needed.

Oil falls- short Shale extractors & drillers. Oil rises- grab RSX.
3y
hulle hulle
Production price is the key. Russia needs usd +100/bll to make ends meet. We will see a consolidation i US shale production making usd 75,- profitable. That is where I see the price of oil q32015. Not higher for the forseeable future!
3y
Sam Me Sam Me
Russia will be the biggest surprise in 2015. But we should not only short shale but also energy companies (EON, RWE...). We have to be aware that Russia's dominance in the nuclear services market is in the range of 25 % of overall worldwide services, and some "tiny irrelevant" things like the production of yellow cake is in the range of 45 %!!! In fact a huge part of the nuclear material in the US power plants that's currently being used to prepare material for the next cold war nuclear missiles comes out of Russian hands. We should not be so naive to believe that this is going to continue. But maybe politics will one day realise this dependance (maybe in a long and cold winter) soon and stop this stupid sanction politics.
3y
Solidus Solidus
Very good, Steen. The EU should act for a workable solution with Russia and not pursue the encirclement policy invented by Bildt and Sikorski (with US support). Ukraine should be neutral like Finland or the eastern part should form an independent country if they want. The current part is dangerous with US arms pouring in. When the hard stuff is solved we can get rich by trade. Sweden did not support Napoleon's Kontinentalsperre and the current one is as stupid.
3y
fxtime fxtime
It would appear all the western world media are off the same view and will only comment on how the Russian people and economy are suffering but in truth history has shown how stoic Russians can be and sooner or later there will be a compromise between Putin and the World at large and then we shall have as you suggest a bullish move. A good overview of yours Steen.
3y
Al Lindner Al Lindner
Yes, placate Putin, give him Crimea and all will be well, unless you live Latvia, Lithuania or Estonia!
3y
wootendw wootendw
"Russia’s years of neglecting to invest and reform pointed to an inevitable crisis"
In a free market economy, investors and workers go where the money is. Until recently in Russia, the money was in oil and other natural resources. This means that, even if Russia had a free market economy (which it doesn't), it would make sense to have a significant portion of their economy in oil. That is the way it has been in the US the past few years in ND and Texas. Many of those people in the oil industry will have to change - in the US as well as in Russia. The main (economic) problems arise during the interim. But Russia is not as dependent on oil as other nations such Saudi Arabia.

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