Writing “A Hard Rain (is gonna fall)” Bob Dylan said that the ideas came flooding in – there was no time to think each one through – each line could have been a title of a whole new song. Trying to finalize this issue of T&B, we can only sympathise; someone appears to have hit the fast-forward switch – the past six weeks have brought enough market-moving news to fill a reasonably exciting year, or, for that matter, a dull decade…
As we go to press, after a catastrophic earthquake and tsunami, Japan is now faced with a meltdown – not in the figurative, but in a very literal sense; the Middle East is once again proving flammable in the extreme, as the decades of neglect of festering political sores play out in the only way they could have. Meanwhile, the US offers the tragically funny spectacle of a would-be national debate on an impending fiscal crisis with existential implications deteriorating into a political bun-fight, which abandoned any remaining pretence of relevance months ago, and now defies all attempts at parody. Europe is back in crisis mode (the only mode in which the European Union actually gets anything done) with yet another concerted attempt to deal with the peripheral debt crisis. We continue to believe that, having systematically exhausted all of the alternatives, the Northern Europeans will ultimately do the right thing, and the Euro will survive, indeed prosper. But that is a statement of hope… And we long ago learned to avoid laying large bets on the rational behaviour of horses or electorates.
Amidst all the ambient madness, Russia is increasingly assuming the mantle of the Switzerland of the Emerging Markets – boring, predictable, stable. For us old Russia hands, this takes some getting used to!
Economic growth is trundling along in the mid-single digits, the budget deficit is likely to become a 1.5% surplus thanks to surging oil prices, the Central Bank is increasingly targeting inflation, which is clearly not yet under control, and the foreign investors are once again voting with their feet. Russia is the only one of the BRICs seeing substantial inflows this year. We remain long the equity market, and increase rouble exposure.
The ruling duumvirate is gradually cleaning out the Aegean stables – Mr. Luzkhov particularly will not be missed. This begs the question of why he was not done in a decade ago, before he could permanently scar the face of Moscow, but politics in Russia – as elsewhere – is the art of the possible. Despite the fierce campaigns of disinformation run by the shills for Khodorkovsky and the deeply vindictive and manipulative Browder, our predicted rapprochement between Russia and the West is finally eventuating – largely on Russia’s terms. Certainly, the fireworks in the Middle East, and the fear of a true cyclone should anything untoward happen in Saudi Arabia, are focussing minds wondrously on the key role of Russia in global energy markets.
The key factor to watch will be the growing relationship between China and Russia. We have long warned that, by poking and prodding at the Bear, the stupidly misinformed and ideologically misguided Western powers would push Russia into the welcoming embrace of her large Eastern neighbour – what should be their greatest nightmare. This is eventuating as Russia increasingly prioritises the Asian market for her energy, commodity and, soon, agricultural exports. Perhaps the Atlantic States are coming to realise the depth of their folly – Mr Biden’s pilgrimage to Russia suggests that some hint of reality is finally creeping in. That said, we very much doubt that Washington is possessed of the political realism necessary to accept the fact that American views on domestic Russian politics are a total irrelevance; Russia no longer craves the approval of her Western neighbours, and is now an independent power with global interests and alliances, some of which will be inimical to the interests of the West. An interesting example will be the incipient Russo-Chinese alliance to block UN action in Libya. Before accusing the two of cynicism, one should consider the unstinting US support for a Saudi regime no more democratic than that of Colonel Gaddafi, or the mid-century British pillage of Iran and Egypt.
For the latest newsletter – in FULL (the above was just the entrée) – click on the link below: