According to the latest research, Russia's economy continues to decline on almost all fronts, yet the number of investments into Russian assets is on the rise. Do investors know something we don't? Or are they just being reckless?
Oleh Kombaev, an analyst specializing in Russia's economy, has analyzed the latest data on the country's macroeconomic factors as well as the relationship between these factors and the inflow of funds in the Russian assets. And the expert has found some interesting trends.
Kombaev analyzed several macroeconomic indicators such as the state of the Russian industrial production, agriculture, retail and the levels of citizens' personal income. All of these factors have shown a significant decline in the past 2 years and are currently barely crossing the "zero" line, what points at serious internal economic problems.
Retail industry has been hit the hardest. The sector reached its bottom level last December, when the decline of the retail sector amounted to -14.1% YOY. At the moment, the industry is still in a very alarming state as consumer demand is still negative as compared to the last year's numbers. The analyst says that consumer demand should not be expected to get back to the "healthy" levels anytime soon because another macroeconomic factor, real wage growth, is also on a rapid decline.
The real disposable income of the Russian citizens has reached its record lows of the 2 years period, demonstrating a value of -8.3% YOY. This means that the population has fewer disposable income to spend (on retail) as ever. In addition to that, the Russian government plans to "freeze" the salaries of people working in budget-financed industries such as education, healthcare and governmental for up to 3 years, reports Vedomosti. This, together with the growing inflation, will only worsen the slump of the income levels and, as a result, the decline of retail.
The manufacturing industry is yet another key driver of Russian economy and, similar to retail, it has been going through some rough times the last 2 years. Only last year, industrial production was sinking 3% YOY on a monthly basis. However, this August, manufacturing has shown a "modest growth" that allowed to partially compensate for the last year's losses. According to Markit Manufacturing Russia, the manufacturing sector has recently received new order intakes, what helped the industry to grow 0.7% last month.
Yet, the researchers say that there is a big problem with work backlogs as the factories are consistently cutting more and more jobs in order to reduce all costs possible and get out of debt. And again, the major workforce optimization in the manufacturing industry only further contributes to the decline of personal income of the Russian citizens.
The Markit Russia PMI Index that indicates the performance of Russia's manufacturing industry was up 1.3 points since July and amounted to 50.8 points. However, Kombaev says that the 0.7% growth in the sector is so minor, when compared to the pre-crisis levels, that it should not be regarded as a sign of improvement.
“However, with goods producers lowering both their headcounts and inventory levels, along with further declines in backlogged work occurring, future production growth may struggle to gain traction unless improvements in these areas can be made. Until that happens, the story of the sector’s inconsistent performance looks likely to continue,” said Samuel Agass, Economist at Markit.
Up next is agriculture, the industry that, unlike all others, has shown a strong growth last month. According to the expert, this can be explained by the high harvest results this year that helped the industry indicators to climb. More than that, the peak period of agriculture traditionally comes in Q4, so the current positive performance is likely to grow even further next months. However, agriculture constitutes only a 4% part of the total Russia's GDP and its growth is only seasonal, meaning that the uplift in this industry is unlikely to have any significant impact on the economy in a long-term.
Overall, all key macroeconomic factors discussed by Kombaev are clearly not indicating any definite improvement in the Russian economy in the upcoming months. But what is most remarkable, is that the fund inflow into the Russian equities and Russia's RTSI index has drastically increased in August, indicating that the investors perceive Russia as an attractive investment choice. The expert says that the inflow of equity funds in the Russian assets amounted to $632 million only in the months of July, August and September (partially) and allowed to compensate for the negative flow of funds in the first months of 2016.
However, the analyst believes that investors who invest funds in the Russian assets are simply betting on a "quick fix" of the country's economy that they expect to come from the stabilization of the oil market. But, says Kombaev, they ignore some very important internal issues that cannot be magically solved even by the growth of oil prices. The significant and long-term decline in the key macroeconomic factors will seriously weigh down Russia's investment attractiveness even if the situation in the oil market finally stabilizes. But, as we have seen from yesterday's meeting of Saudi Arabia and Iran in Algiers, this is not likely to happen soon.
The meeting between the two main OPEC producers did not work out the way the market watchers hoped for. In the current situation of the major oversupply of oil, when Russia and Saudi Arabia are setting new oil pumping records, the meeting between Saudi Arabia and Iran could make a change in the alarming situation in the oil market. But it didn't happen.
Saudi Energy Minister Khalid al-Falih offered Iranian Minister Bijan Zanganeh to reduce Saudi giant oil output if Iran agrees to freeze its production as way to help the oil prices to climb back up, reports Reuters. Bijan Zanganeh refused to make an agreement on these terms. The talks about the production freeze have been going on for the entire year as the oil prices dropped more than 50% since 2014 levels due to a vast oversupply. According to Reuters, the analysts are not surprised by the results of yesterday's OPEC meeting as the relationships between Saudi Arabia and Iran are further complicated by the rivalry between the countries in several "proxy-wars" in the Middle East. On the news of the failed agreement, the oil prices sunk by almost 3% yesterday.
Overall, the sudden popularity of the Russian assets among investors is nothing but a short-term hype that will crash on the continuously declining economy quite soon, with the stock market reacting accordingly. If Russia to be considered a good investment choice again, it will not be until the major macroeconomic factors are back in shape.