Page 18 - bne_newspaper_July_21_2017

Opinion
July 21, 2017 www.intellinews.com I Page 18
MACRO ADVISER:
It's the oil price, stupid
Chris Weafer of Macro-Advisory
When it comes to assessing sentiment towards the Russian stock market there is usually a long list of topics discussed. Currently that includes sanctions risk, the macro-economic trends, both domestic and international politics and, recently, the egregious action taken by Rosneft against Sistema. In reality, at least when it comes to the indices that measure international investor activity in Russia, only one factor has ever mattered: the trend in the price of oil. This year is no different.
Russia has made great progress in broadening the economy away from hydrocarbon dependency and risk. This year the federal budget would balance with an average price of crude at approximately $70 per barrel. The recently published three-year budget expects a deficit of 0.8% of GDP in 2020 based on an assumption of $42 average oil. That is a far cry from the $115 per barrel needed in 2013. It is the same story when it comes to tax revenue. In 2013, hydro- carbon taxes accounted for 52% of all federal budget revenue, while this year it will be less than 40%.
But despite that drift away from hydrocarbon vul- nerability, international investors still see Russia primarily as an oil play. In 2016 the price of Brent gained 52.4%. The USDRDX Index, which tracks all Russian DRs listed internationally, gained 52.1%. Over the first half of this year the price of Brent dropped 14.2% and the USDRDX Index lost 14.9%.
In a world where facts play a secondary role to sentiment, the trend in the oil price will continue to play that important sentiment-conducting role for some time to come. Partly that is be- cause most investors see little reason in looking
too deeply into the Russia story for now. There
is far too much noise and too many risk factors swirling around Russia, especially for the big emerging market money managers in London, Boston and Switzerland to justify looking too far beyond the headlines. Even local investors ap- pear to have lost the will, or the ability, to fight
the negative international sentiment. The ruble- denominated MICEX Index was also down by more than 15% through the first half of the year.
The clear message is, at least until the domestic story emerges strongly or external political risks start to peel away, it will be the oil price which determines the volume and direction of investor flows and where the equity indices trade. This is especially the case where ETF funds now domi- nate emerging market volumes. In that respect, and despite the fact that relative equity valuations are again cheap, the outlook for the market in the second half of this year does not look good. The price of Brent is struggling to stay in the $45 - $50 per barrel range and, barring some major supply disruption, the prospects for the price to return to $54, the average per barrel price over the first five months of this year, look very dim.
The Opec-Russia agreement, which aimed to cut approximately 1.8mn barrels from daily produc- tion, worked very well for about six months but has now run its course. Russia earned an addi- tional $2.25bn per month between December and May based on the average price of crude at $54 per barrel rather than at $45 per barrel, i.e. the price crude was trading at prior to the deal an- nouncement.