MACRO ADVISOR: August in Russia – what could possibly go wrong?

MACRO ADVISOR: August in Russia – what could possibly go wrong?
Smoke from the wildfires over Moscow's Sheremetyevo airport in 2002.
By Chris Weafer of Macro-Advisory July 26, 2016

There are few informal traditions followed diligently each year in Russia. Perhaps the best known is the routine of watching the movie “Irony of Fate” on New Year’s Eve every year since it was first broadcast in 1976. Many Russians can recite every line verbatim, but still they will watch it again and again. Another is to approach August with a public display of both happiness and trepidation. The former because this is the month when most people take vacation or retreat to the dachas outside of the big cities, and the latter because it is also the month when major accidents, acts of nature or major legacy political events occur more often than in any other month. Of course, there isn’t any mathematical evidence to support that, but it doesn’t matter; the perception is that if something big is going to happen, it will more often be in August. History is certainly on the side of the Doomsayers.

This year we already know that the rhetoric will be lively in August, as the Duma elections have been brought forward from the usual early December to early September. It means that the most intense part of the election campaign will take place in August, albeit against a backdrop of little interest from people more distracted with vacation pursuits. And that clearly is a major reason for bringing the date forward.

This year the rhetoric will be very nationalistic and, most likely, very anti-western. The ban on a large number of Russian athletes from the Rio Olympics will provide a particular focus for the conspiracy theorists and a target for anger venting. At least it should mean less interest in criticizing poor economic management. It was never likely that there would have been much of an official reaction even if the ban was more extensive in terms of some counter-sanctions, as Brazil is one of the countries with which Moscow is keen to improve relations and, in any event, the Kremlin will avoid any actions that might endanger the 2018 World Cup.

But while the politicians will provide predictable noise, which may safely be ignored by investors and businesses, the more serious threat is again emerging in eastern Ukraine. The risk of an escalation of fighting there has been growing in recent weeks and there are plenty of vested interest groups on both sides who would not be unhappy to see the situation worsen.

Historically, major political events, both domestic and geopolitical, are not uncommon in August. The Molotov-Ribbentrop Pact was signed in August 1939, and the start of the construction of the Berlin Wall was in August 1961. Soviet troops entered Prague in August 1968, and in August 1991 there was an attempted coup against Mikhail Gorbachev by those looking to prevent the break-up of the Soviet Union. The Russia-Georgia war provided the backdrop to August 2008. August 1999 was when Boris Yeltsin promoted a still relatively unknown Vladimir Putin to the post of prime minister.

In terms of economics, no significant events are expected over the coming months. The macro trend is improving slowly and that should continue with a steady drift back to headline growth, possibly in the fourth quarter. The only uncertainty, as always, is the oil price and the impact on the ruble.

Of course, a quiet economy has not always been the case in August, with arguably the two biggest events in the history of the state initiated in August 1998 and in August 2014. The former was the default on domestic debt and the collapse of both the ruble and a big portion of the banking system. In 2014 the US and EU imposed sectoral sanctions against Russia as a consequence of the downing of the Malaysian airline, while Moscow retaliated with the ban on imported food from most Western nations. August 2014 also saw the start of the collapse of the oil price, which directly pushed the economy into recession in 2015 and, in combination with sanctions, led to 25% food inflation and some shortages the following winter. On a more positive note, Russia ended almost 19 years of stop-start negotiations and was finally admitted into the World Trade Organization in August 2012.

Forces of nature

Nature can also be very unkind to Russia in August. In August 2002 widespread fires raged in the peatlands around Moscow and blanketed the city in a nasty and health-damaging haze. August 2013 brought very destructive flooding to much of Russia’s Far East, which led to both expensive economic disruption and loss of life. The worst weather-related disruption came in August 2010 when large swathes of the country were hit with high temperatures and forest fires. That combination contributed to drought conditions across much of the farming belt and led to a big drop in the year’s harvest. In fact, it was this combination that persuaded Putin the country’s reliance on imported food (55% of consumption that year) and medicines was not only bad economics but a national security issue. The origin of what we now refer to as the ‘localization’ policy was in August 2010.

August can also be an accident-prone month, such as in August 2000 when there were a number of serious accidents including the sinking of the Kursk submarine and a fatal fire in Moscow’s landmark Ostankino TV tower. In August 2006, 170 people died in an airplane crash on a flight from the Black Sea resort of Anapa to St Petersburg. In August 2005 the first case of bird (avian) flu was reported and while thankfully that did not develop as had been feared, it did lead to a sense of heightened concern for the month. In August 2009 one of the country’s largest hydro-power stations suffered a catastrophic explosion in which 75 people died.

August is also associated with various acts of terrorism. In August 2004 the country was rocked by a series of terrorist actions including a car bombing in Moscow and the destruction of two passenger aircraft. A thoroughly miserable and fear-filled month was rounded off with one of the biggest tragedies to hit post-war Russia when terrorists took over the school in Beslan in southern Russia with such tragic consequences.

Even in relatively quiet Augusts, of which there have been very few over the past 15 years, there is always something noteworthy or just odd. In August 2001 the North Korean leader, Kim Jong-il, visited Moscow. But because of his fear of flying he rode his private train across Russia and caused havoc to passenger services. Such was the frustration of the inconvenienced people that when the train arrived at a Moscow station there were multiple bullet holes clearly visible on the side of the train. In August 2007 a group of nationalist politicians paid for a mini-sub to take them to the floor of the Arctic where they planted a Russian flag in support of the country’s claim to sovereignty over the Lomonosov Ridge.

One of my friends and ex-colleagues, Bernie Sucher, who is also responsible for bringing me to Russia over 18 years ago (June rather than August thankfully), routinely rounds off conversations with “Be Lucky”. After my first couple of Augusts in Russia I knew exactly what he meant.

Chris Weafer is a founding partner of Macro-Advisory, which helps investors cut though the noise & focus on underlying trends, real political risks, & opportunities in Russia/CIS, Eurasia Union, & Mongolia. Follow him on @ChrisWeafer