Could Trump make Russian equities attractive again? November 2016

Trump's conciliatory tone towards Russia during the election campaign, and the theory that his presidency could result in easing geopolitical tensions, has led to Russia being one of the best performing major equity markets in the immediate aftermath of the US election, according to Jupiter's Colin Croft, manager of the Jupiter Emerging European Opportunities fund.

“When I was in Moscow last month,” Colin commented, “one of the key worries amongst investors I met was the risk that a Clinton win could see the US take a tougher line in Syria, and potentially impose additional sanctions on Russia. The odds of this seem lower in the light of the election result and, provided that the oil price holds reasonably steady, which it has so far, this should be in itself enough to drive a rally in the stock market, given how under-owned Russian companies are by global investors.”

Oil more powerful than sanctions

“Sanctions are often ineffective in influencing policy or changing a regime and, as Russia can supply itself with necessities such as fuels and, to a large extent, food; run a trade surplus; and has a positive net foreign asset position, I don't see the current situation as being any different,” he continues.

“Nor is it possible to cut off its exports; Europe gets around a third of its gas from Russia. It would be impossible to replace this in the short run and it would be exceptionally challenging to do so even over a period of many years. Ultimately the oil price is far more important for the Russian economy than sanctions, which only served to make the oil-related recession of 2014-15 a little deeper than it otherwise would have been, while creating an external scapegoat for the downturn that arguably made it easier for the Russian leadership to maintain its popularity even as real incomes fell. In this sense, the sanctions may even have been counterproductive.

“Realistically, the chances of Russia ever relinquishing control of Crimea are pretty close to zero, given how popular the move remains domestically. When I was in Moscow, I spoke with a taxi driver. He was a trained economist with children to support who had lost his consulting job twice in the recession and was now driving cabs to make ends meet – but nevertheless strongly approved of Putin taking Crimea and “baring his teeth” at the west.

“If the same thing had happened in another country, the taxi driver might well be cursing whichever politician had cost him his job. But Russia is different. An assertive foreign policy is popular, even at the expense of some belt-tightening at home – the memory of the 1990s, in which Russia lost much of its global influence, is still fresh, so the idea that the country is at last defending its interests vigorously is viewed positively.

“Western policymakers may see the sanctions as a justified punishment for breaking international law, and may have hoped that this would create domestic pressure to change course – but the situation is interpreted completely differently by Russians, who source much of their information from Russian state TV.

“Even if the current US administration were to come to the same conclusion, it would be politically difficult for them to change course without securing any result. Trump on the other hand won’t have the same constraints, as he will be starting with a clean slate - and if he were able to secure a rapprochement with Russia, he could present it in a positive light.

“Consequently I think there is a good chance the new president will at least attempt to mend fences with Russia, in much the same way that Obama tried to with his “reset button” back in 2009. The lifting of sanctions would face several institutional barriers, as well as opposition from some US allies, and there are plenty of potential areas for disagreement that could prevent such an eventuality.

“I am thus cautious regarding the prospects of it happening soon, while not ruling out the possibility in the medium term. But. as I mentioned earlier, I don’t think the issue of sanctions is critical for the Russian economy, which has adjusted to the new norm and is already expected to return to growth as soon as the fourth quarter of this year.

“From the point of view of market sentiment, however, any moves in this direction would be taken very positively. A lot of potential investors in Russian equities have been sitting on the side-lines due to sanctions and the noise generated by geopolitical tensions over the past few years and, as a result, many missed out on this year’s rally of around 30% in US dollar-terms.

“If there is even a possibility that tensions might ease, or sanctions might be lifted, many of these investors will be tempted to buy into a market whose dividend yield in the tune of 5% is among the highest in the world.”