Russia Macro-Politics: Friends Reunited

By Chris Weafer, January 2, 2014

Oil&Gas Eurasia offers this opinion piece on the Russian economy, excerpted from a recent investment brief by Chris Weafer, head of Macro-Advisory, a bespoke investment consultancy for Russia and the CIS (

Economic weakness is the dominant concern for Russia. The headlines from Russia are dominated by two issues currently; the rapprochement between Russia and Ukraine and the still weakening domestic economy. In terms of possible market impact the former is potentially very significant for the longer term, especially if Ukraine were to move further and start talks to join the Customs Union. The latter is of much more immediate concern and unless reversed the weak macro data will soon lead to a scaling back of domestic earnings growth assumptions. That would hurt sentiment towards many of the domestic economy equity market themes and add more pressure on the ruble. 

The Iranian deal may impact oil later next year. The international headlines are today dominated with the deal between Iran and the UN to curtail the country’s nuclear program. That news knocked almost $2.5 p/bbl off the price of Brent in early Monday trading and adds to concern that further, more significant, price weakness may deteriorate Russia’s budget execution in 2014 and add further downward pressure on the ruble. 

Friends Reunited

It is a case of “friends reunited” for Kiev and Moscow, for former Finance Minister Alexei Kudrin (he has been brought back into a formal Kremlin advisory role) and now for Tehran and the UN. The investment implications for all three have been factored into Macro-Advisory’s 2014 macro forecast assumptions.

Gazprom may have to suffer a new gas deal with Ukraine. The big question arising from the possible/probable strengthening of Russia-Ukraine relations is what does this mean for Gazprom and for the South Stream pipeline?  Gazprom’s share price traded down, against a rising market, in late November as investors fear that a new deal on the gas price may hurt Gazprom’s bottom line. Gazprom – and the other major gas producer NOVATEK – is one of the top stock picks in Russia for 2014.

But cash flow and dividend may benefit if South Stream is changed. The major reason for the South Stream pipe is to bypass Ukraine as a transit route for Russian gas to the EU. But if Kiev-Moscow relations actually do improve then a deal over the ownership and upgrade of the existing trans–Ukraine pipeline is also possible. The question is: “Has it come too late?” The project to build the Serbian section of South Stream has officially been launched. It is not hard to imagine that the timing of that ceremony was planned to send a very clear signal to Ukraine.  But the most challenging and expensive part of the project is the section across the Black Sea. Utilizing an upgraded Ukraine pipe might make that unnecessary. Russia’s Finance Ministry would certainly welcome that as it would cut Gazprom’s capital investment programme and free up more cash to pay the demanded higher dividend.