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OPINION: Russia’s crude awakening ?

Contributed by Peter Westin, Chief Economist, Aton Capital

MOSCOW, Oct 4 (Prime-Tass) -- The steady rise in the oil price over the last five years has resurrected Russia’s fortunes – and in the last 12 months observers have stood in awe as the price scaled heights not seen in 25 years and laid the ground for a resurgent Russia.

In our latest report we have modeled three oil price scenarios for Russia for 2006-2015: (1) A base case of an average long-term Urals Med oil price of $32/bbl (from 2007); (2) A $50/bbl average oil price in 2006-2015; and (3) A $10/bbl annual increase in the oil price until it reaches $100/bbl in 2010, remaining there through 2015. The results in the latter two cases were striking.

Under our $50/bbl scenario: President Vladimir Putin’s goal of doubling GDP by 2012 would not be met – it would only come in 2013, which is still a remarkable achievement given the derision with which the original target was greeted. Meanwhile, Russia’s average monthly income would rise five-fold to $1,386, providing strong support for the current consumption boom; the country’s nominal dollar-based GDP would be $2.8trn, overtaking Spain’s; and Russia’s per capita GDP would be $20,073, approaching Portugal’s $25,658. In relation to the budget, this would continue to see healthy surpluses through the period while the stabilization fund is projected to hold $557bn in 2015, up from an estimated $48bn at the end of this year. (The fund estimate incorporates a cut-off price of $30/bbl, up from $27/bbl in 2006.)

Under our $100/bbl scenario the picture borders on the surreal: Putin’s goal of doubling GDP by 2012 would be met in 2011 and his 2000 target of catching Portugal on a GDP per capita basis within 15 years would have been achieved in 2012. Russians would have morphed into some of the world’s great shoppers with disposable income to spend on new cars, mobile phones, computers and other goods, as their average monthly income rises nearly 10-fold from $273 in 2005F to $2,270 in 2015. Russia’s dollar-based per capita GDP would be $33,061 and its nominal dollar-denominated GDP greater than Germany’s (due to the negative impact of high prices on oil import-dependent economies). Meanwhile, the budget surplus is projected to average 7.4% of GDP through 2006-2015 and the stabilization fund, assuming a $50/bbl cut-off price, would hold a staggering $1.5trn (!!!).

Indeed, on a $100/bbl oil price Russia would be on the road to regaining the Soviet Union’s global status – but instead of wielding a nuclear arsenal it would use its vast oil and gas resources to regain its clout. While we concede that based on current global reserves and the potential to harness alternative fuel sources, a $100/bbl oil price is not on the immediate horizon, the fact that it could return Russia to the front ranks of the international order is a fascinating idea. We note that our $50/bbl long-term oil price scenario is also increasingly viewed by the market as a base case.

In relation to the diplomatic front, we believe that the EU’s increased dependence on Russian gas and the U.S.’ efforts to diversify its energy sources from OPEC suggest that Russia would have very strong international leverage in a long-term high oil price environment. Moscow is already poised to join the WTO, but we believe a high oil price would lubricate a free-trade agreement with the EU and ensure full G8 membership, as Western concern at the winding back of democracy in Russia and human rights issues would fall by the wayside. In short, in the scheme of power politics the West would simply not be able to afford to exclude the new Russian petro-superpower from the club of global leaders.

In terms of the implications for the stock market, under our two high-oil price scenarios Russia’s oil&gas universe would become even more appealing. The average upside for Gazprom common/ADS, Lukoil, BP-TNK, Surgutneftegaz, and Sibneft would be 38% under our $50/bbl scenario and a scorching 151% under our $100/bbl scenario.

Furthermore, consumer-related related stocks would benefit from significantly higher income levels that would see the population more able and willing to spend; having said that, domestic producers would need to undergo major efficiency improvements to continue to compete due to the stronger ruble forecast under our two high oil price scenarios

Finally, we note that there is a very well-observed relationship between money supply and equity values: although the relationship in Russia decoupled last year, the recent gains in the RTS Index seem to be restoring this link. If we extend the M2-RTS relationship at our different oil price scenarios the RTS Index would stand at the following levels in 2015: under our base case scenario ($32/bbl Urals Med) it would be 5,700 (average annual return of 17%); under our $50/bbl scenario 6,700 (average annual return of 20%); and under our $100/bbl scenario 8,650 (average annual return of 24%). In short, it would come a long way from the RTS’s current record 1,000 level

“Back in the USSR” is not an option for Russia, but under our two high-oil price scenarios the country would become an economic powerhouse and investors with exposure to it would have “you don’t know how lucky you are” ringing in their ears.

Key macroeconomic data under our three oil price scenarios through 2005-2015

Source: Aton estimates

Please note that opinions contributed to Prime-Tass are not edited. If you would like to contribute your opinion, please send an email toengeditor@prime-tass.com.

End

04.10.2005 20:53

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