11 March 2016
How are the low commodity prices affecting Russia and how they are coping with sanctions? What consequences does this have for international politics? How will China’s new five year plan affect the international community?
SCC FOCUS spoke to Marcus Svedberg, Chief Economist at East Capital, an independent asset manager specialising in emerging and frontier markets, about Russia, China and emerging markets in the developing world.
Marcus Svedberg has extensive knowledge on the subject. Before joining East Capital in 2007, hewas Chief Analyst at the Stockholm Institute of Transition Economics, a think tank focusing on the economic and political development in Eastern Europe. He has provided extensive written material for governments, international organisations as well as the private sector. Svedberg has also worked for the Swedish Trade Council and Kreab, as well as for a number of research institutes across EMEA. His scholastic background includes a masters degree in political economy from the London School of Economics.
At East Capital, Svedberg is responsible for macroeconomic and political analysis as well as risk assessment with a special focus on Eastern Europe. He travels extensively within the region, interacts with policymakers, analysts and market participants. Marcus Svedberg is also a regular commentator in international media such as FT, Bloomberg, Reuters and CNBC.
How is Russia coping with the low commodity prices, in particular oil? For how long will they manage? How is Russia managing international sanctions overall?
The Russian economy is dependent on commodity exports and the dramatic fall in oil prices have intensified the economic recession. But the economic weakness does not necessarily mean that Russia is vulnerable from a financial point of view. The reason is very much connected to the exchange rate and the currency reserves. The Central Bank abandoned the currency peg at the end of 2014, allowing the Ruble to float freely, which means that it no longer has to waste reserves to prop up the exchange rate. It also means that the Ruble revenues per exported barrel of oil remains high, which in turn has resulted in large trade and current account surpluses. Russian reserves are therefore increasing, rather than being exhausted as some analysts predicted.
The currency weakening did, however, push up inflation and that has had a negative impact on consumption. And since consumption is the most important component of the Russian economy, it has intensified the recession. The fact that the oil price seems to have bottomed out and even increase a little, give support and inflation is falling fast, but growth will stay negative and the Finance Ministry has announced budget cuts. The economic sanctions matter much less than the oil price and the exchange rate, but exacerbate the situation somewhat. Russia has responded by importing less from abroad and even if this import substitution is negative for the economy as a whole, certain sectors are clearly benefitting.
The combination of the floating exchange rate, large reserves and import substitution suggest that Russia can manage this situation for a long time. The big questions are whether they will use this period to push through overdue reforms and whether people will start protesting against the economic weakness.
To what extent does the economic instability in Russia affect their actions in international politics, such as in Syria? In what ways are the Anglo-Swedish community/Sweden affected by the Russian turmoil?
I think one should be careful in relating the economic developments with foreign policy engagements, whether it is in Ukraine or the Middle East. Russia wants to play a role in global politics and President Putin has actively sought to re-engage with world leaders through the G20 and in Iran and Syria. And it seems like Moscow has been let in from the cold by Washington even though there are substantial policy differences.
The combination of aggressive geopolitics and a weak economy have made foreign business leaders and investors more cautious about Russia while Russian businesses has turned more inwards for economic and financial reasons. The result is reduced commercial relations, evident in everything from frequency of airline connections to tourisms to trade and investment flows.
Another very interesting subject is that China recently published their new five-year-plan. They aim to go from a manufacturing driven economy to a consumer based economy. In what way will this affect the rest of the world?
The new Chinese five year plan can be summarized as more of the same. The economic rebalancing that started years ago – and has more or less developed according to plan – is expected to continue with a gradual shift from manufacturing towards consumption. The economy is expected to continue to decelerate – the medium term target is 6.5%, down from double digit growth a few years ago – as a result of the rebalancing. The rebalancing/deceleration makes a lot of sense as the “new sectors” are more value-added and also labour intensive, resulting in a higher quality growth. It is a very difficult balancing act though, especially as they are also trying to liberalise financial markets, and there is an element of scepticism that Chinese policy makers will manage.
The rest of the world is impacted a lot as China is the second largest economy. Less domestic production means less demand for commodities while more consumption open up for other types of exports to China. Beijing also wants to export its manufacturing capacity, especially to the less developed parts of Asia and Africa. New initiatives like the AIIB, NDB and the Silk Road can be analysed through that prism.
To hear Marcus speak extensively on the subject and for a chance to ask questions, make sure to reserve your seat for next week's Financial Focus seminar on the 17 March at Gowling WLG's offices.