Weekly Wrap-Up: Country of Contradictions

Страна противоречий – a country of contradictions. Ask somebody who has lived in Russia their impression of the place, and you may notice their answers do not necessarily agree with one another. I for one find myself nostalgic for some pretty decidedly unpleasant episodes there. But this goes for natives, too: the country has existed to varying degrees over the past three centuries both inside and outside Europe. To the point, Russia can be a very contradictory place, and in my view, some of those contradictions were on full display this week.

Investor climate vs. diplomatic climate. The only thing in Russia that seems to be keeping pace with gubernatorial resignations are IPOs (real and potential) and debt issuances. In the past month we’ve seen the Detskiy Mir IPO, Rusal’s bond placement (likely to be followed by an SPO), and Deripaska’s En+ gearing up for a public offering. The change here is not just that investors have warmed to Russia, it’s that Western banks have as well: at the very least they’re interested in organizing deals. This comes, however, as the oft-heralded prospects for a US-Russia rapprochement have dimmed notably in the past week or so. For the time being at least, President Trump lacks the political capital to deliver an improvement. The mood has darkened in Russia too it seems: while the media may not be attacking Trump, there are certainly fewer accolades these days – not to mention state orders to show him on TV less. Also of note, the MICEX index is down almost 5.8% since Putin and Trump failed to discuss sanctions during their call. That doesn’t mean investors are turning their backs on Russia — far from it — but it does look like the market is pricing in a slower-than-expected improvement in bilateral relations.

Austere stimulus? News this week of MinFin’s latest ‘tax maneuver’ is emblematic of a dilemma fiscal planners continue to face. Namely, that they need to boost state revenue while at the same time stimulating economic growth. The plan, by the way, would slash insurance premiums paid by employers while increasing the VAT. An aside, but how exactly increasing consumption taxes that stimulates tepid consumer demand evades me. Whether or not the new tax regime is implemented before the 2018 presidental election (keep in mind MinFin has a great many plans), the dilemma is a reminder that while Russia can make do at $55 oil, its not necessarily a comfortable place from a fiscal standpoint.

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