On April 24, Russian citizens will be voting on a sweeping constitutional reform that – if approved – would allow President Vladimir Putin to run for office again in 2024 and potentially in 2030. While the changes have been criticized profusely in the West, their effect on Russian financial markets, which already suffered from investors pricing in a disproportionate amount of political risk, is likely to be muted. Additionally, Russia’s prudent fiscal policy stance even amidst record low oil prices is likely to allow the country to better withstand the demand shock caused by the coronavirus pandemic.

Russian President Vladimir Putin’s latest move seems designed to remove any remaining doubt that he will continue to call the shots long after his current term ends in 2024. While it was widely considered unrealistic that he would transfer his powers anytime soon, there was a fair amount of speculation on how he was going to exercise them when he was constitutionally obliged to step down as President.

It is unclear why he changed his mind – as it was initially thought he would in fact give up the office of the President at the end of his second consecutive mandate - or as to how he chose to keep a long-designed plan so close to the vest. What matters is the endgame, and that was never really in question.

As for the Sberbank sale by the Central Bank of Russia, it is best assessed as a move towards a more orthodox role for the Central Bank, which is not supposed to own a majority of the largest (supposedly) private sector bank in the country.  The move was structured mostly as a paper shuffle, with the State dipping into its reserve funds to pay the central bank for the stake, and the latter turning around and putting the bulk of that cash back into the State Budget.

Putin’s aggressiveness on the global geopolitical stage is also a pretty consistent feat. I am not convinced that a fight against OPEC is his wisest strategy, particularly as he is taking on the Saudis, though I suspect they will reach an agreement – at some point - to bolster oil prices. For the time being, both are happy to bury the US shale business as a welcome side effect.

In Syria and Ukraine, Putin is clearly attempting to project power against the US and Europe, which seems to serve both his internal popularity and his external political designs.

There is no question that an overt oil price war increases risk in the Russian public capital markets.  It hurts government revenues and impacts risk sentiment. That being said, a couple of points:

  • While the collapse of OPEC+ was a catalyst for further volatility in the oil market, the demand shock caused by Covid-19 will likely generate more lasting damage to oil demand and therefore price.  And as we now know, this dynamic would have likely happened even assuming OPEC+ cooperation.
  • Russia is well positioned to weather a prolonged decline in oil prices.  It has been stockpiling surplus revenues for the multiple years when oil prices were in excess of USD 40, the price the Russian government uses as a point of reference to build its budgets.  The country has little corporate or government debt and while it is a large energy exporter, it is also an exporter of other USD-priced commodities (like steel and nickel) that benefit from cheaper energy and a weak domestic currency.

The market has likely already priced in an excessive amount of idiosyncratic risk in Russia, and thus we should be careful of calling a market that just dropped 40% riskier.  Clearly, it was vulnerable to what happened, and riskier before the fact, but after that the risk-reward function has shifted.  Certain Russian equities, in particular, continue to be some of the cheapest and highest dividend paying large-cap, high-quality company stocks in the world.  There is an opportunity there, albeit one that will likely come with plenty of additional volatility.

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