Russia: Trying to Move Its Ec

While other economies around the world have been slowing, Russia has experienced 3 years of vigorous growth. Starting with the devaluation of the ruble, which followed the IMF default in 1998, companies inside Russia were forced to adapt to a more competitive landscape and providing alternative products to higher priced imports. In addition to its shift in manufacturing, the recent increase in oil prices has provided a windfall of cash and given Russia a surplus budget. Now, with its improved manufacturing models and oil as its cash cow, Russia has watched its economy make the move upward, but has reached a point where it needs foreign investment to continue it ascent.

It was only four years ago when Russia had defaulted on its loans from the International Monetary Fund and looked like it was heading for an economic train wreck. Today, while the rest of the world is experiencing an economic headache, Russia has been growing and on the move towards economic stability. Mikhail Kasyanov, the Russian Prime Minister, just signed a new declaration in the beginning of November to restructure Russia’s old Soviet era debt. The debt is estimated around $6 billion and M

Of course the surge in Russia’s economy is having an adverse effect on its retention of domestic earnings. As the country’s population experiences the positive changes Russia is going through, they are also learning that inflation accompanies an expanding economy. A company like Sturgutneftegaz, which is one of Russia’s most conservative oil companies, has kept about $4 billion in cash on its balance sheet, but has watched the value get eaten away with inflation by holding cash assets in the ruble. By not investing offshore, purchasing other assets or holding currency from another country, and being largely dependent on purchasing foreign materials, Sturgutneftegaz received a harsh lesson in exchange rate risk and inflation.

What is driving Russia’s current growth streak is its abundance of raw materials, and oil in particular. Russia is the world’s second largest exporter of oil, behind Saudi Arabia, and its economy fluctuates with the price of crude. When the price of oil is up, wages increase, living standards surge and foreign investments pick up. When the price of oil is down, the economy slides.

Slavneft, which is the last valuable energy asset owned by the state, has generated interest from all of Russia’s private oil companies as they are ready to bid. Many, like Russia’s largest oil company, Lukoil, have been actively looking for an overseas partner to share in the purchase of Slavneft. Even more important than interest in the sale of Slavneft, according to UBS Warburg’s analyst in Moscow, is that investors in Russia are putting up “real money” for the purchase of this asset.

Russia’s Banks are Prepared to Switch to International Accounting Standards, Beginning January 1, 2004, Pravda, 09-12-02

Russia’s $1.7 Billion Asking Price for Slavneft Signals new Policy, Wall Street Journal, by Jeanne Whalen, 11-19-02

Russian Revival, Wall Street Journal, by Guy Chazan, 10-14-02

Some topics in this essay:
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