Russian Leadership Succession – A Private Equity Perspective
The topic of Russian leadership succession is very consequential both domestically and internationally.
On January 15, 2020, Russian President Vladimir Putin shocked the world by putting forward a draft constitutional amendment that appeared to weaken the Presidency by shifting power to the Parliament, Constitutional Court, and State Council. The proposal also includes changes related to national security - and social benefits – with a provision on minimum living standards.
On balance, it appeared to be a potential improvement in the quality of governance, with the key element – when it comes to the very delicate topic of Putin’s succession – being the two-term limit for a President (instead of “two consecutive terms”), which would have eliminated the loophole that Mr. Putin used to return to the presidency in 2012. Uncertainty ensued as to whether and, if so, how Mr. Putin intended to remain in power after 2024 –perhaps as Parliament Speaker, or Head of the newly empowered State Council, or Head of the Constitutional Court.
Then, in a swift about turn, on March 10, 2020, another constitutional amendment was introduced to allow Putin to run for re-election as President in 2024 – making it yet another option for him to remain in power (even if in a somewhat weakened capacity) and also making it clear that he is determined to keep tight control over his own succession.
The changes will almost certainly be approved in a national referendum to be held later in 2020, as Putin’s approval ratings remain high (though below the historical high of 70%+), and the recent opinion polls show support for the draft law.
It’s still to be seen how the Russian leadership will evolve after 2024, the year of the next presidential elections, and a lot may change until then. In the meantime, by keeping people guessing, the Russian leadership has performed a balancing act of (i) avoiding the “lame duck” phenomenon as nobody knows if the current leadership will leave, and (ii) avoiding the commitment to a particular course of action that could result in a period of political chaos.
History shows that power transitions in Russia are risky. In this recent opening salvo, the current leadership is beginning to pave the way for a transition, while preserving the perceived status quo.
This week’s price war in the oil market
On March 6, 2020, the Russian leadership decided to reject the call by OPEC to further deepen oil production curbs, which spelled the end of their collaboration. As the decision was taken while the world was coming to terms with an exogenous shock caused by the coronavirus pandemic, and given an aggressive OPEC reaction, oil prices tumbled to almost unprecedented low levels.
Russia’s collaboration with OPEC (aka OPEC+) – which began in 2016 - always had its limits due to Russia’s different economic structure compared to core OPEC members, as well as the important factor of the US shale oil industry. The recent breakdown of OPEC+ is driven by economics and was likely inevitable. Russia has been voicing two concerns with the existing OPEC arrangement:
1. OPEC regulates oil production, while Russia has been proposing to regulate exports instead. Russia has a higher share of domestic consumption in its total oil production than other OPEC countries, and thus lower exports in relative terms, so a cut in total production has a relatively higher economic cost to Russia. OPEC has been consistent in rejecting this proposed change in methodology.
2. The very dynamic US shale oil industry has been quick to pick up any slack left by OPEC+ production cuts. US shale output grew by over 20% in the last three years as OPEC cut production. In this environment, continuously cutting production delivers diminishing returns, and at some point becomes uneconomical. Russia would certainly reach that point sooner than core OPEC members – and after the last round of cuts Russia believed that it had.
Oil price at the low levels we are witnessing now is not beneficial to any of the main players in the long run. Both Saudi Arabia and Russia are net exporters and will lose export revenue with significant fiscal implications, while the US may see a temporary retreat of its important shale oil industry with possible political implications.
It is likely that over time the oil market will return to a more reasonable equilibrium. Until then, however, shaky oil markets will continue sending both economic and political shockwaves around the world.
On the private investment side, recent events have a low impact on the already weak investment case. The investment risk for an out-of-market professional PE investor is already high due to sanctions uncertainty and FX volatility, other country-specific risks, and now the coronavirus complications - and this risk is not adequately reflected in valuation multiples.
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