Economy 2 October 2014, 11:17am

Putin eyeing expansion to the West is unnecessary concern

Portfolio

The Budapest Economic Forum 2014 conference organised by Portfolio kicked off with a presentation by Dmitry Polevoy, chief economist for Russia and the Commonwealth of Independent States at ING in Moscow. Polevoy, who has been experiencing the Russia-Ukraine crisis “up close and personal" for nearly a year, has tried to alleviate one of the biggest concerns in this respect, saying that Putin’s aggressive actions do not mean he plans expanding towards the West. He did confirm, however, that the crisis will deal the biggest blow not only to the Baltic States but also central and eastern Europe. Nicholas Spiro, managing director of Spiro Sovereign Strategy, said the crisis is taking its toll on Russia too, adding that, in his view, President Vladimir Putin “bit off a lot more than he could chew". Timothy Ash, a London-based strategist at Standard Bank, said you could benefit from Russia’s ban on western food import by purchasing Polish and Hungarian government securities.

Concerns about Putin’s expansion plans to the West unwarranted - 08:56

The growth rate of Russia and Ukraine is beginning to fall increasingly behind the average growth rate in the EMEA region, which is clearly, albeit not exclusively, a consequence of the current geopolitical crisis, Polevoy pointed out.

The relatively aggressive Russian approach (in Eastern Ukraine) was a response to the prevention of further enlargement of NATO. Another reason for that was Russia’s leadership felt it was time to react to western endeavours to shepherd countries on the eastern borders of the EU and NATO towards the West.

Highlights from Polevoy’s presentation:

It is but unnecessary speculation that Putin wants to keep going west from eastern Ukrainian territories, because the sanctions against Moscow have already seriously hurt the Russian economy;
The anti-Western rhetoric is supported by the Russian population, but the views are different in Russia and in eastern Ukraine’s Russian population.
There is no feedback between the power elite and the general population.
Polevoy does not think Russia’s top brass will sound the retreat therefore we should prepare a greatly prolonged crisis that will take place mostly on a diplomatic front.
In parallel with this we should expect Ukraine to try and tighten relations with the West.

Western sanctions against Russia “do not kill us, but really hurt." - 09:06

Polevoy gave his detailed views on how the specific sanctions could affect whom:

Baltic States and CEE countries will be hit the hardest in an economic sense by the sanctions imposed by the West on Russia and vice verse (primarily via decreasing trade).
The sanctions against Russia “will not kill us but really hurt", the analyst said, mentioning the depreciation of the RUB, serious rate hikes and financing problems at coprorates).
Polevoy noted that after the Western sanctions were put into effect Moscow started to talk about the possibility of higher taxes and also began to dampen expectations about reforming the country’s pension system.
Russian companies have to reimburse/refinance some USD 170 bn worth of external debt in 2015 (there will be especially large reimbursement obligations due this December).
The repayment, financing of short-term loans appears to be manageable therefore Polevoy does not expect a major, systemic crisis, but as the Russian financial system is a net (external) borrower, the sanctions imposed by the West could implement a lasting negative impact on Russian market players.
Inflation could rise further, partly due to the weakening ruble (which could continue and the RUB may stay weak for a prolonged period) and peak around 8% in the following months than trickle gradually lower. Overall, sharply rising in inflation is causing a major headache for the Russian central bank since CPI is well above the target range.