On Manoeuvres
Some thoughts this week around Russia and energy as well as, for a change, financial matters, plus the differing approaches to the world being adopted by China and the US.
Russia already looking to a post-Ukraine future?
With the pendulum swinging back towards Russia, there are signs that Russia is already looking to the future – and perhaps a future in which Russia is not subject to heavy sanctions – or indeed any sanctions. Some of those close to Putin have been promoting a post-sanctions resumption of operations through the Nord Stream 2 gas pipeline running under the Baltic between Russia and Germany. There are suggestions that US investors could be part of the consortium, demonstrating the steadily growing relationship between Donald Trump and Russia as President Trump seeks to “make a deal” to bring the invasion of Ukraine by Russia to an end.
Influential Russians (and Americans) appear to be on the move
One of the key individuals involved in the potential Nord Stream reopening is reported to be the former spy Matthias Warnig, also known to be close to President Putin. We can only assume that another of the underlying objectives is to bring Russia and the US closer together while helping achieve Trump’s stated objective of ending the war which started in February 2022 when Russia invaded Ukraine.
Many obstacles to be overcome before Nord Stream and the like will be reinstated
Nevertheless, there remain obstacles to the relationship returning to the same level as in the period before 2022. While elements around the US and Russia may want the pipeline to resume operations, the project would need the US to lift sanctions on Nord Stream 2 and both Russia and Germany to agree to be involved in the resumption of operations. None of these are easy outcomes to achieve given the events of the last three years. Nevertheless, the fact that this is even being discussed suggests that there may be scope for some progress.
Interest on stranded Russian financial income, but not capital, targeted by the west so far
For a long period during the Russian invasion of Ukraine, western powers have focused on using the interest on the blocked €300 bn of deposits (€190 bn of it held at Euroclear in Belgium) to support Ukraine. The assets, which belonged to Russia’s Central Bank, were frozen in 2022 in response to the invasion but, while the interest has been targeted, the underlying assets themselves have not. Now, Germany, France and the UK are discussing how to potentially use the underlying reserves with one option under discussion being that the assets could be forfeited if Russia were to break any ceasefire deal agreed between Moscow and Kyiv.
Limited movement on blocked holdings of Russian assets
In a similar confidence-building vein, Vladimir Putin has apparently allowed a group of western fund managers to sell their holdings of Russian equities, which had been blocked under Russian legislation since the invasion of Ukraine, just as Putin and Trump sit down to discuss a ceasefire between Russia and Ukraine (we can only assume that the two events are related but also note that Ukraine, the subject of the ceasefire, is not permitted to take part in the negotiations).
When the invasion of Russia happened, transactions in Russian securities were suspended and any trading (usually disposals) needed government permission, which was rarely granted and came at a very high price.
Some holders of Russian financial instruments have been permitted to trade them – a long-forgotten skill – will that group expand?
It now seems as if some parties have managed to secure agreement with the Russian government to dispose of their holdings – presumably to improve the environment ahead of the ceasefire talks. While I think that a lot of ground has to be covered if the business environment is to improve to a level where non-state actors would feel comfortable being involved, it is the first sign that Russia is also seeking better ties with the west – within reason.
Unsurprisingly, both the rouble and the Russian stocks that still trade have increased in value – for those few that still own Russian equities and bonds this may be a good opportunity for them to exit the market without the kind of haircuts being asked in previous years. Overall I think we can say that, firstly, the mood music is improving and, secondly, that Vladimir Putin would not have relaxed the Russian restrictions if he did not think it would lead to his move being repaid through a similar relaxation of western actions against Russia. Perhaps Trump is not the only one wanting to “make a deal”.
I’m prepared to be surprised on the upside but I doubt that this will be resolved for most participants as swiftly as many people are suggesting. This is likely to be a special case involving much lobbying by well-connected individuals. If things go well, we may see some further liberalization of the financial markets and access to them for holders of Russian financial assets provided the broader geopolitical environment meets with Putin’s approval.
China’s approach is different – although it’s not yet clear which country has adopted the most effective approach
Taking a slightly broader view for a few moments, and sitting here in Asia, the high-profile approach adopted by the US under Donald Trump contrasts starkly with the more low-key measures adopted by Chinese President Xi Jinping. President Trump has imposed tariffs on America’s main trading partners, stepped back from – and may ultimately abandon – long-standing military alliances, gave away key strategic bargaining chips about Ukraine’s future in his discussion about Ukraine – which actually excluded Ukraine, sided with Russia at the UN against NATO’s western allies, threatened to annex Canada and make it the US’s 51st state, seize Greenland by force from its NATO ally Denmark and, finally, threatened to invade and retake the Panama Canal because a Hong Kong company owned by the eminence grise of Hong Kong business Li Ka-Shing operated ports at either end of the Canal, a situation that Trump deemed unacceptable.
China has, instead, focused on continuing to build bridges with its neighbours – physically and metaphorically, using its Belt and Road Initiative among other approaches with suggestions being highlighted that China should aim for global climate leadership given that the US appears to have surrendered it. There may be some scepticism around the Belt and Road programme in the eyes of western donors to the region, but to the countries seeking aid it offers resources without the same degree of oversight and constraints that western aid can bring. At the same time the country has visibly maintained its hard power – for example by dispatching a PLA Navy flotilla to sail around the Australian coast as part of China’s move to develop its own blue water navy.
Only time will tell whether Trump or Xi is adopting the right approach for the long-term future of their countries. There is no doubt that these two approaches offer a perfect case-study in differentiated approaches.
This article has been approved by Tideway Investment Partners LLP; however, the views and opinions expressed in the article are not necessarily the views and opinions of Tideway.
The content of this document is for information purposes only and should not be construed as financial advice. We always recommend that you seek professional regulated financial advice before investing.
About the Author
Stephen O’Sullivan was an ‘anchor’ client at the founding of Tideway and has been a client of James Baxter since 1999.
Stephen studied economics at university and then joined the oil industry – working for BP in their refining and marketing business as an oil trader and then with Total in the corporate planning team for their upstream business. In 1989 he joined Coopers & Lybrand’s strategy practice for oil and gas and, with the end of the Cold War, he worked extensively as a consultant across the oil and gas industry in Eastern Europe, Russia and the other post-Soviet states as well as China, the Middle East and Southern Africa.
In 1995 he joined a start-up investment bank, MC Securities, specialising in Eastern Europe and Russia where he was the Head of Research and the Head of Oil & Gas Research. His team was ranked the #1 oil & gas research team across EMEA and the #1 overall research team for Emerging Europe and Russia for the next three years. They sold the bank to JP Morgan in 1998 and Stephen relocated to Moscow to become Head of Research and a partner in UFG, the leading independent investment bank in Russia. His team were ranked the number one oil & gas research team and the number one Russia country team for nine years in a row.
After the sale of UFG to Deutsche Bank in 2005, Stephen became Head of EMEA and Latin American research for DB where the team was ranked #1 across all industry sectors, in both strategy and in economics, in country research for Russia and South Africa and across the entire EMEA region in 2006 and 2007. In 2007 he left Moscow and moved to Hong Kong as Head of Asian Research for Australia’s Macquarie Bank. In 2009 he joined Barclays Capital in Hong Kong to lead the buildout of the bank’s Asia ex-Japan research business.
Since 2013 he has been an investor in a range of businesses in technology, real estate, retail and materials while living in Hong Kong. His major interests include China’s gas sector reform, China’s nuclear renaissance and the country’s global impact on energy markets. While based in Hong Kong he has also been a Senior Visiting Research Fellow at the Oxford Institute for Energy Studies, the world’s #1 ranked energy think-tank where he published several major studies of the Chinese energy sector. He is a contributing author to several international think tanks on global energy issues and has advised international law firms on the oil and gas sector globally.
