The Russian stock market remains cheap by Western standards, with people applying a Russian discount for the political risks. The market is dominated by the large oil and gas enterprises including Rosneft, Lukoil, Gazprom and Surgutneftegas, and has done well since 2014. Much of the gain has come from the rise in energy prices increasing the value of the reserves and cashflows from energy sales. Whilst trading and doing business with the West, Russia has been slowed by sanctions imposed by the EU and the US. The West objected strongly to Russia’s annexation of Crimea and actions in the east of Ukraine, and more recently has protested about the Salisbury poisonings.
How to respond to Russia is a cause of some division within the Western community. The US establishment is very distrustful of Russia and wishes to take a strong line on any Russian violations of the international order. Their President seems more willing to develop a wider relationship with President Vladimir Putin, overlooking some of the problems in the interests of resolving issues such as Syria and maybe even Ukraine. The Europeans are even more divided. The new Italian government leads the campaign to ease sanctions against Russia and undertake a rapprochement with a well-armed neighbour of the EU, assisted by Austria. Germany sits in the middle, claiming to be unhappy about Russian actions in Ukraine yet pressing ahead with a second Baltic gas pipeline to import Russian gas which damages the commercial interests of Ukraine with its alternative route pipeline. The UK is at the hawkish end of the spectrum following the Salisbury murders.
Under Mr Putin, Russia has levered herself into a much stronger and influential position
Russia matters when assessing world risks. Under Mr Putin, Russia has levered herself into a much stronger and influential position in Syria by backing the Assad regime and playing an important role in defeating Islamic State forces. In alliance with Iran, Russia leads the alternative coalition to the US/Saudi one. As the world anxiously awaits the likely attacks on the remaining rebel forces to the Assad government in North Syria it seems likely the US will not herself intervene militarily in ways which could place her forces in conflict with Russian ones. This is nonetheless a risk to monitor.
Russia is also influential in Eastern Europe. There are some signs that the long-standing impasse over the recognition of Kosovo in the Balkans could soon be resolved by an agreement between Kosovo and Serbia. There would be a swap of territory, with Kosovo gaining the Presevo Valley and Serbia taking back the area north of Mitrovica. The US has said she could live with this if the two parties agree. Others have reservations about the principle of swapping territories based on the ethnicity of the settled populations, and worries that this could lead on to requests or disputes over doing something similar in Macedonia and Bosnia. Some in Serbia object strongly to idea that Kosovo should be permanently lost to their state. Russia will watch this carefully and may look to see if she can exploit any instability that emerges. Kosovo wants the prize of international recognition as a country, denied by Serbia and many others so far. Serbia wants EU endorsement for future EU membership and knows a settlement with Kosovo is part of that long process.
It seems likely that the EU will continue with its stance of condemning individual Russian actions it disagrees with, but will allow substantial trade beyond the sanctions. The EU is not happy about the new pipeline, recognising that it will encourage more dependence on Russian gas. It has substantial implications for the single energy market the EU is developing and for its policy of reducing dependence on fossil fuels. This dislike is unlikely to turn into a policy to stop Germany pressing ahead. All the time there are divisions on both sides of the Atlantic about how the West should respond to Russia. It seems likely they will continue with some official restrictions on trade and contacts that fall short of bans and blockades that could do decisive damage to the Russian economy. That leaves the Russian stock market as largely a play on the energy price, and leaves us likely to muddle through the various conflicts without any serious military exchanges between the West and Russia.
The above article was previously published by Charles Stanley on 6th September 2018