miƩrcoles, 13 de agosto de 2014

miƩrcoles, agosto 13, 2014

Heard on the Street

Russia and Markets: The Power of Weakness

Investors Anticipating Resolution in Ukraine Are Missing Russia's Bigger Potential for Geopolitical Upset

By Liam Denning

Aug. 11, 2014 1:06 p.m. ET
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Flags wave outside the Kremlin in March as Russia annexed Crimea. Weakness in Russia is likely to exacerbate the country's disruptive potential on the world stage. Zuma Press


For historians, Ukraine's crisis raises alarming memories of Europe's dark 20th century. From the perspective of investors, it seems to be little more than a neighborhood feud.

While financial markets have exhibited the occasional wobble over Ukraine, including this past week, the prevailing mood has been sanguine: The S&P 500 remains close to the record high reached last month.

Yet those looking forward to a neat resolution of the crisis are likely to be disappointed. This isn't a short-term squall, but a long-term change in the geopolitical climate. Russia's disruptive potential will likely grow, not diminish, in the months and years to come.

This isn't because Russia is growing in strength; rather, its underlying weaknesses are poised to reassert themselves. Tightening sanctions dominate the headlines. 

But these merely exacerbate existing pressures on the demographic and economic foundations of Russian power—feeding long-standing worries about the integrity of the country's borders.

It is telling that, despite Russia's relatively high income and wealth of natural resources, its stock market's valuation, using trailing price/earnings multiples, hasn't once in the past decade matched the average of the MSCI Emerging Markets Index, according to Deutsche Bank. And that period included the peak of the commodities boom. The discount is currently about two-thirds.

One big headwind is demographics. While Russia's population has stopped shrinking in recent years, as the number of births has finally overtaken that of deaths, this apparent stability will likely prove fleeting.

When the Soviet Union collapsed, Russia's birthrate went with it. One echo of that will become apparent in the near future

Russian males aged 15 to 29 peaked at almost 19 million in 1979, according to World Bank data. By 2012, that cohort had shrunk to fewer than 16 million. By the end of 2020, it is projected to be just 11.5 million.

Russia's population structure shows why the recent uptick in births won't arrest this. There is a bulge in the number of women aged 25 to 34, born in the Soviet Union's dying decade, according to Peter Zeihan, a geopolitical strategist and author of forthcoming book "The Accidental Superpower."

"These are the perestroika babies," Mr. Zeihan says. As they move through their prime years for having children, and the 1990s birth bust reasserts itself in a smaller cohort coming up behind, the recent baby boomlet should fade. Meanwhile, Russian men still suffer a high mortality rate, with an average life expectancy of only about 65 years, according to World Bank data, versus 76 in the U.S.

This matters in two big respects. First, the hollowing out of the conscription-age male cohort diminishes Russia's military strength, exacerbating its security concerns.

Second, it forms part of an overall shrinkage in Russia's population. Having numbered more than 100 million last year, the country's working-age population, male and female, is set to drop below 90 million by the middle of the next decade and keep dropping, according to World Bank projections.

These weakening demographics compound another glaring vulnerability.

Russia's economy is greased by exports of raw materials. Oil and natural gas accounted for 68% of total exports last year, according to the U.S. Department of Energy. They also fuel half of the country's federal budget.

The Russian stock market for years was strongly correlated with the price of oil. But that relationship, measured on a trailing 52-week basis, began to break down in early 2012, well before the current crisis. Indeed, Brent crude has remained relatively stable over the past three years but Russian stocks have dropped by about one-third.

Russia's economy has slowed sharply. This year, growth is set to be the weakest among the Brics nationswhich also include Brazil, India, China and South Africa—according to International Monetary Fund projections.

Looking ahead, the North American shale boom, if it is maintained, threatens to suppress the global energy prices on which Russia's economy is over-reliant. Moreover, the existing trend of more energy investment dollars being drawn back to the relative stability and newfound resource abundance of North America will likely accelerate.

To offset this pressure, as well as workforce shrinkage, Russia must boost productivity. Yet, measured as gross domestic product per hour worked, this was only around half the average for the Organization for Economic Cooperation and Development in 2012.

Reform—a perennial hope among Russia bulls—would help. But it is hard to see where the impetus will come from. The latest data from Russian pollsters at the Levada Center puts President Vladimir Putin's popularity close to an all-time high.

Facing an intensifying squeeze on Russia's demographics and economy, and aware of the public's backing for this year's forceful moves on the foreign-policy front, it is tempting for the Kremlin to maximize its geopolitical position sooner rather than later. Even the thought that Ukraine might one day host NATO bases is wholly unacceptable to Moscow.

Mr. Zeihan predicts that the next 10 years or so will see Russia not only continue to encroach on Ukraine, but also seek to reclaim traditional buffer zones in Belarus, the Caucuses—perhaps even the Baltic states, members of the North Atlantic Treaty Organization.

Geopolitical risk will continue to weigh on Russia's own economy and asset prices for years to come. But due its size, geography, and centrality to commodities markets, Russia's pains don't end at its borders. As Moscow tries to balance great-power ambitions with its eroding economic bedrock, the resulting struggles will also take periodic bites out of global markets.

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