Morningstar TV

Russia is Too Dependent on Oil says Former Minister

The Russian economy is not diversified enough to recover out of recession says former soviet Andrei Kozyrev - and it could face greater political unrest if the oil price doesn't rally

Emma Wall: Hello, and welcome to the Morningstar European Investment Conference. I am Emma wall and here with me today is Andrei Kozyrev, former Foreign Minister of the Russian Federation. Andrei is here to tell me how in his words: money and politics are too intimately linked in Russia.

Hello, Andrei.

Andrei Kozyrev: Hello.

Wall: So, we had news yesterday that Brent crude oil had fallen to $55 a barrel off the back of the Fed announcements about rates. You've talked about how reliant the Russian economy is on the oil price drawing parallels with sort of Soviet Union economic model of the late Eighties. How similar are the two? Will Russia be able to recover without a buoyant oil price?

Kozyrev: Yes, they are very similar. Unfortunately, what we did not succeed in my time, in my government and neither government after us was able to succeed to change the economic model from oil and other natural resource dependence to something like driven more by internal factors.

Though there is a segment of economy which is kind of different from oil, and some investment in that field proved to be very successful and due course, there will be always room for investment and for development in an oil business also in Russia, even with the oil price as low as it is.

But, of course, unfortunately, the large picture depends on the oil factor and the Russian budget was based on the assumption of about $100 [a barrel]. So it's almost half income and that, of course, creates considerable pressure on Russian fiscal and then financial situation and the exchange rate was hit also by sanctions, but not as much as by the oil.

So if oil stands at this low level, relatively low level as it us like $55-$60 for a long time, then Russian economy and Russian government would be under pressure to do something.

Wall: You mentioned the sanctions there. Russian inflation is running around 17% and the economy is officially in recession. How much of that is due to the oil price and how much of it is due to the geopolitical things going on that the sanctions, the things with Georgia and with the Ukraine?

Kozyrev: Well, that's very difficult actually to assess and the assessments vary. For instance, Moody's, the rating company in their recent research or rating, they actually put the oil – the sanctions on the third place. So I think it's more or less correct.

I would concur with that that oil price hits heavily because of the structure of economy. And sanctions, yes, the sanctions limit ability or almost nullified ability, for external sources of financing, which is, of course, heavy blow to big institutions.

But let us not forget that a large part of medium-sized business in Russia, including medium-sized banks, for instance, they never had much exposure to world financial market. So they might be outsourced and that they are now supported by central bank, but where the central bank takes the money, the liquidity to support the banking system, again from the old revenue, so if it goes on for long, then the financial reserves might dry out and they are drying out.

And there is also [the impact of] capital flight. So these factors in the long-run, it's very, very negative.

Wall: Obviously, all of this has an effect on the stock market and it's creating volatility. If you look back over three, five, 10 years, Russia's always had quite a volatile stock market. You mentioned in your talk earlier that the Russian people themselves consider themselves European and ideally would move towards a model much more similar to those of Western economies, which have growing, more stable stock markets.

Is that something you can see happening in the future for Russia for its economy and its stock market?

Kozyrev: The emerging economies, they are marked by a high volatility and if in the West like change of 3% is a headline news on the market; in the emerging economies, it's like…

Wall: A week.

Kozyrev: Yeah. 5%, 7%, they even supposed to be a more or less within daily range. So, its typical situation is till what happened in Ukraine, it was more or less within emerging markets model.

Now actually it's amazing that Russian stock market recovered considerably, despite the oil price and despite the sanctions. It's driven – it's much narrow today and the volumes are limited, but the market looks like improving. It's speculative. Of course, it means that there are a lot of speculative forces. You know Russian – the part of Russian, the character of the Russian mentality, you can see it in Russian literature, part of it is gambling.

Wall: So those two go hand in hand.

Kozyrev: Yes. And you know Dostoevsky himself was a gambler.

Wall: Well, Andrei, thank you very much.

Kozyrev: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

Latest

Russia is Too Dependent on Oil says Former Minister
The Russian economy is not diversified enough to recover out of recession says former soviet Andrei Kozyrev - and it could face greater political unrest if the oil price doesn't rally

PIMCO Investors: Time to Reassess, Not Panic
Gross' departure will have definite repercussions at PIMCO, but the depth of the firm's research capabilities means investors can take some time to assess how Gross' exit will impact the firm before making an investment decision, says Morningstar's Michael Herbst

Frontier Markets Offer Strongest Growth Over the Next Decade
With most emerging markets offering growth at a similar pace to developed markets, T. Rowe Price's Oliver Bell sees frontier markets as the most promising over the next decade

3 Bond Investing Tips
Rising interest rates, quantitative easing from Japan and implicit market support from the European Central Bank all make for interesting opportunities for bond investors

Which Bond Markets Offer Value?
Where are the professionals finding opportunities in the fixed income market? First State's bond manager Helene Williamson reveals her top three tips

3 Bond Investment Tips
Fixed income fund manager Fraser Lundie of Hermes explains how he mitigates interest rate risk in his portfolio and why he prioritises quality and long duration bonds

3 Unloved Investments
Contrarian investing buys unloved assets. We explain why now is the right time to invest in financial stocks, private equity funds and China

What Next for Emerging Market Debt?
Ask the Expert: For the first time in five years, emerging market debt lost cash in 2013. Does this mean a buying opportunity or has the asset got further to fall?

When To Choose Trackers and ETFs Over an Active Manager
Low-cost passive funds are great tools for investing in mainstream areas of the market such as the FTSE 100, but an active manager can add extra value in more exotic areas

What's Frustrating Financial Advisers?
Finding top-quality staff, attracting new advisers to the industry and frustration with the regulator are among issues hampering financial planners

Shutdown Could Take a Big Bite Out of the US Economy
A prolonged government closure could subtract half a percent from US GDP growth based on the impact from the 1990s shutdown and the number of furloughed government workers today

5 Top Tips from Warren Buffett
On the occasion of his 83rd birthday, we examine how the Berkshire Hathaway chairman's principles help investors succeed

Ask the Expert: What are Performance Fees?
The first in a new weekly series, we ask Morningstar analysts to decipher the more complicated aspects of investing

Fund in Focus: JP Morgan Japanese Investment Trust
The first in a new video series, where Morningstar asks a leading fund manager: "Why should I invest with you?"

Who's Really Managing Your Fund?
Morningstar is now asking fund companies to name all the managers of a fund, so investors know exactly who's calling the shots

When Professional Guidance Pays Off
Morningstar's director of personla finance says a financial adviser can earn his or her keep many times over, particularly in some of these specific examples

Watch Out for These Signs Of a Dividend in Danger
Morningstar's Todd Wenning tells us his list of important signs to watch out for if you own a stock for its dividend

High Fees and Poor Transparency Are Letting Down Investors
Morningstar's Global Fund Investor Experience report shows the British fund industry could do more to cater to investor needs

What Does the Future Hold for Investment Platforms?
Holly Mackay of Platforum expects to see the greatest growth in the workplace savings market, with platforms becoming ubiquitous over time

What to Do When Your Fund Manager Leaves
After a string of high-profile fund manager departures, Morningstar's Oli Kettlewell explains how to assess such news

Financial Advisers: How To Make a Great Website
Gareth Thompson of [codepotato] outlines the essential steps to building--and maintaining--a great financial adviser website.

Giving Independent vs. Restricted Financial Advice
Gill Cardy of IFA Centre discusses how the independent vs. restricted decision is playing out in the implementation stage of RDR

Don't Miss Out on Opportunities in Aspiring Growth Markets
Many savvy savers make a key mistake when buying their annuities and this can haunt them for the rest of their retired lives.

Fund Managers’ Favourites: Richard Buxton's Top Picks
Outgoing Schroders fund manager Richard Buxton discusses his three favourite UK equity ideas and says he's not shy about investing in British banks and the gambling industry

Shhh...The Global Economy Is Doing Just Fine
Investors have to wade through a quagmire of negative news on a daily basis but underneath it all, the world econonmy is actually doing quite well, says Justin Urquhart-Stewart

Investing in Equities with ETFs
Exchange-traded funds' instant diversification and low-cost benefits make them great tools for investing in equities

No Great Expectations (or Worries) for the Job Market
Recent revisions helped 2012's employment growth look better than initial forecasts, but we don't expect a sizable surge (or decline) for 2013.

Contrarian Approach to Growth Pays Off
Morningstar 2012 International Stock Fund Manager of the Year Rajiv Jain expects continued earnings growth for the less popular growth stories of tobacco and Indian consumer stocks.

Fund Managers’ Favourites: 3-Year Anniversary
Fund manager Stephen Message looks back at three years of managing the Old Mutual Equity Income fund, plus he reveals his top three stock picks

UK, European Stocks Remain Better Value than the US
The current environment means investing just isn't as fun as it used to be, but it's not the end of the world, says Morningstar OBSR's Peter Toogood

Reviewing 10 Years of Morningstar Equity Ratings
Morningstar's Heather Brilliant details our 10-year track record for stocks, particularly the strong outperformance of 5-star names with competitive advantages