Western media insisted recently on the growing difficulties of Russia for whom President Vladimir Putin would finally be forced to seek fresh funding in Asia. If the Western sanctions against Russia enforced since summer 2014 because of the war in Ukraine failed to break the Russian economy as Western leaders thought they would, Russia’s access to world finance markets has apparently become more difficult. The dramatic drop in oil prices contracted Russia’s GDP by 3.7% in 2015 – the steepest decline since 2009 – and weakened the value of the ruble (RUB) – Russia’s national currency – against the US dollar (USD).
“The sanctions are generally assessed to have helped exacerbate Russia’s macroeconomic challenges it was already facing,” wrote NATO Defense Economist Edward Hunter Christie in March 2015. The Russian economy has finally proved more resilient and the real issue in the near future is for the Russian government to prevent the current economic conditions – not so bad, but not good – from enduring. In the wake of the Brexit, the markets’ liquidity will likely decrease much and for weeks the situation will not be in favor of a country like Russia.
China for instance will observe how the situation evolves before building stronger financial ties with Russia, although there seems to be real political will in Beijing to do so. Whatever the resilience qualities of the Russian economy, Western sanctions managed to re-give it a reputation of a business environment reserved for audacious intrepid investors like Mark Mobius far from what’s needed namely an image of a stable advanced economy where typical companies and individuals can invest for the long term.
Beyond macroeconomic challenges that Russia has to meet, a significant part of Putin’s work should consist of turning the foreign perception of Russia from an exotic exciting investment opportunity into a more standard investment-grade destination.