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Review of 2010: Russia and commodities

Russian economy | 2010 - The Year in Retrospect: Russia and Commodities Ian Fraser and Anthony Harrington

On paper at least, the Russian Federation did rather better than alright through 2010. Although, as the latest Wikileaks revelations about “Russia as a Mafia State” show, poking around down at the detailed level, rather than staying in the realm of GDP gains, can swiftly uncover some pretty disturbing practices.

However, at the broad macro level, as the IMF found in a survey carried out in August 2010, things look fairly rosy. The Russian economy recovered from a vicious contraction of just under 8% in 2009 and though the IMF judges growth to be “still fragile” in Russia, there is growth there to make the UK and Europe’s levels look decidedly anaemic, with 4.5% being the expected GDP year on year growth number – not enough to make up for the contraction, but nicely on the way.

The country’s banking system is still “under strain” according to the IMF and financial markets remain vulnerable. Moreover, Russia still has the “Western” problem of finding the correct balance between normalizing monetary policy after its massive fiscal stimulus, without choking off growth. The key to Russia’s turnaround has been its ability to capitalize on the windfall it received from sharp increases in the price of oil through 2010, and the fact that it could use the massive surpluses built up in its oil stabilization fund when the crisis hit to generate a strong fiscal stimulus. In that sense, the policy of taxing and saving a good percentage of its oil export revenue gave the country the capital buffer it needed to negotiate the 2008 global crash.

However, 2010 is ending on a particularly sour note for Russia, with the verdict on the “Yukos Oil” two due to be give on December 27. For the details here, see our blog on Khordokovsky, but for readers unfamiliar with the case, here is former US Presidential candidate, John McCain’s summing up of the case in a recent speech, cited in the aforementioned blog:

“… then there is the sad, ongoing saga of Mikhail Khodorkovsky, whose company was stolen from him, and who has languished in jail for seven years. When his sentence expired recently, new charges were manufactured against him. He is not being tried by a jury, just a single judge, and the political fix has been in for a long time. He could now face up to 12 more years in prison. If ever there were a case of ‘legal nihilism' - of an affront to the very values of equal justice that we hold dear - the case of Khodorkovsky is it.”

Coming on top of the Wikileaks allegations by both senior US diplomats and a leading anti-Mafia Spanish prosecutor, and the high profile firing by Russian President Dmitri Medvedev’s firing of Moscow’s highly colourful mayor, Yuri Luzhkov, said to be deeply implicated in graft and corruption in Moscow, business folk could be forgiven for thinking that Russia has not exactly got to grips with the concept of good corporate governance. Which is fine if you like doing business in the modern equivalent of the Wild West, but not exactly comfortable for shareholders.

Finally, as we wave goodbye to 2010 it seems abundantly clear that commodities of all kinds, from precious metals to agricultural crops, are on a roll.

In fact Renee Haugerud, a commodities specialist and founder of Galtere Ltd., which has some $1 billion of assets under management argues that 2010 saw the start of a reversal in what has been the relative position of commodities and “paper assets” (stocks and bonds) for the last three decades.

In a soon-to-be-published Viewpoint in QFINANCE, Haugerud points out that in the few years leading up to 1983, commodities, everything from coffee to precious metals, crashed in value while stocks and bonds soared. One way of summarizing this is that you had deflation in commodities, or real assets, and inflation in stocks, or paper assets. Now, she says, through 2011 and beyond, we are moving into a period where that position is going to be reversed. We are going to see deflation in paper assets, with markets tumbling, and inflation in real assets, with the prices of everything from gold and silver, to oil and agri-crops, soaring.

Her message? Simple. If you are an investor, move from paper assets to real assets, if you are an economist, watch for markets to crash and commodities to soar…. Happy New Year.

Tags: Asia , corporate governance , economic recovery , financial crisis , Khordakovsky , Mafia , regulation , Russia , transparency
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