Russia – separating noise from reality

It is like 2014 all over again… I have written three draft opinions in recent days – only for them to be overtaken by events. In the deluge of news and volatility I have but one message:


I believe markets have overshot and will correct. We are already seeing the Russian stock market rise as investors see a buying opportunity. With so much noise it is worth remembering a few facts (with a nod to Macro-Advisory and Chris Weafer for some of the stats):

  • Russia has adapted to previous sanctions and is now expert at doing so
  • There is political stability and the President is genuinely popular
  • Russia has the biggest population in Europe and has the highest per capita spending power and household wealth amongst developing nations
  • We have the sixth lowest level of national debt and sixth highest financial reserves in the world
  • Russia is the biggest supplier of extracted materials including oil and gas (although less aluminum than a week ago!)
  • Russia benefits from a higher oil price with the budget based on $41 per barrel
  • With the current oil price there will be a healthy budget surplus
  • More uncertainty is likely to drive the oil price higher, which would benefit the Russian economy
  • Inflation is historically low and sustainable
  • Despite recent ructions in the Forex market interest rates are likely to continue to fall later this year, making debt more affordable
  • GDP growth is accelerating, although it may now be under pressure for 2018.

For the real estate market the risks are less immediate. The occupational markets are now largely ruble denominated so ruble volatility is less of a problem. Geo-political issues are unlikely to have much effect on Russian consumers. Real wages will continue to rise as will consumer spending – and this will support the retail and warehouse sectors where supply is already starting to get tight.

Sanctioned business and government entities are not significant in the Russian office market, often being owner occupiers. With economic growth, a rising oil price and falling interest rate business activity will also continue to pick up speed. Market conditions are positive for the office sector.

However, investment sentiment is likely to be effected by the noise and this may reduce capital markets transaction volumes. Conversely, as Russian investors have fewer alternatives available to them internationally they may buy more at home.

Ignore the noise – play the fundamentals. The Russian market remains very good value.

Disclaimer – since writing this there is a real risk of an escalation in the standoff between the US and Russia in Syria – if the situation degenerates into a conflict all bets are off.

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