Vincent Varisano Moscow Beats Paris as Europe's Largest Shopping Center Market

Vincent Varisano,

 

This article originally appeared at Russia Beyond the Headlines

 

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Moscow has overtaken Paris to become the European capital with the most shopping center space, even as a recession forces Russians to cut back on consumer spending.

In the first half of this year Moscow had more than 4.53 million square meters of shopping center retail space, compared with 4.5 million square meters in Paris, according to a report by real estate consultancy Jones Lang LaSalle (JLL).

But the boom in Moscow mall building will be followed by a slump as Russia’s economic downturn catches up with the sector, experts told The Moscow Times. The new economic reality will also likely end a trend of building massive mega-malls in Moscow and spur the growth of smaller shopping centers that are cheaper to build and run, they said.

Large malls have hogged investors’ attention for long enough, according to Olesya Dzyuba, head of research at real estate firm Colliers International Russia.

“Small format shopping malls have great potential on the Moscow market since there are not enough of them,” she said.

Record volumes

Six shopping centers have already opened in Moscow this year with a total area of 343,000 square meters, according to data from Colliers International. 
“It’s an absolute record,” Dzyuba said.

But the new space is coming online just as an economic crisis is hitting Russians’ spending power. Russia’s economy is expected to shrink by around 3 percent this year under pressure from sanctions imposed by the United States and European Union over the Ukraine crisis and the fallen price of oil, Russia’s main export. With incomes falling sharply, Russians spent 7.7 percent less on consumer purchases in the first five months of this year than in the same period in 2014, according to official data from the Rosstat statistics service.

The mega-malls now opening in Moscow were begun long before the current crisis, when retailers were confident of economic growth and were developing rapidly.

But the recession is causing a shift in attitudes that will temper enthusiasm for new mall projects, said Nikolai Kazansky, managing partner of Colliers International Russia.

“Since consumer demand isn’t growing, retailers are no longer enthusiastic about developing their chains in Russia,” he said.

Vacancy rates in new shopping malls are now around 6-8 percent, compared with 3 percent before the crisis, according to estimates by JLL. Many malls have slashed rent rates, some by up to 50 percent, to keep retailers.

According to Denis Sokolov, head of research at real estate firm Cushman & Wakefield Russia, only one or two new shopping malls will open next year.

Colliers International is more optimistic, predicting that 500,000 square meters of new retail space will come online in 2016 — the same as this year — but that 2017 will see a sharp slowdown.

According to JLL data, investment in Moscow retail real estate amounted to $2.2 billion in 2013, of which about 60 percent was foreign capital. Last year, only $350 million was invested, all from Russian sources.

Changing format

The economic crisis will reduce not only the number of new shopping centers in Moscow in the near future, but also their size.

Despite being a popular European trend, small format shopping centers are not common in Russia.

With fast economic growth producing huge rises in annual consumer spending, the last decade saw developers build massive shopping centers with an area of 100,000 square meters or more to quickly supply retail space to the market.

Capping that trend, Moscow’s mega-mall Avia Park, which opened last year at 228,500 square meters, became Europe’s biggest shopping center.

But with Russia’s economy predicted to emerge slowly from the current crisis, the logic will change.

Smaller shopping centers that are closer to residential areas will be easier to fill than huge malls, said Tatyana Kluchinskaya, head of the retail department at real estate consultancy Jones Lang LaSalle Russia.

Cushman & Wakefield’s Sokolov added that developers will find it harder to raise financing during the crisis for large shopping centers, which on average require about $500 million.

While Moscow now has Europe’s biggest stock of shopping center retail space, the market still has great growth potential. At more than 12 million people, Moscow has an official population five times larger than that of Paris, which has around 2.25 million residents within its city limits.

“In Moscow we have 434 square meters of shopping centre space per 1,000 residents. In big European cities the volume of shopping center retail space per 1,000 residents is 600-700 meters,” Dzyuba said.

via Vincent Varisano, Moscow Beats Paris as Europe's Largest Shopping Center Market

Vincent Varisano Crimea to Get a Badly Needed Second Airport

Vincent Varisano,

This article originally appeared at The Moscow Times

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Crimea will get a second commercial airport in 2016 as Russia seeks to improve transport links with the peninsula, which Moscow annexed from Ukraine last year, news agency TASS reported Monday, citing local government officials.

…

The Russian government has promoted travel to Crimea, whose economy relies on tourism. But Russians can only reach the peninsula by air or over-scheduled ferry from mainland Russia.

The Sevastopol government has estimated that the Belbek airport will be able to take half a million passengers annually from numerous Russian cities following renovations, which it expects to cost 1.5 billion rubles ($27 million), according to TASS.

…

Read more in The Moscow Times

via Vincent Varisano, Crimea to Get a Badly Needed Second Airport

Vincent Varisano Why the Oil Glut will Continue and How it Benefits Russia

Vincent Varisano,

According to the International Energy Agency (“IEA”) the oil supply glut is set to continue until well into 2016.

Inevitably there will be some people who will say that the IEA is deliberately talking down the market so as to encourage a low oil price, which is presumed to be beneficial for Western economies.

What the IEA is predicting however follows the classic pattern of an over-supply glut.

The initial response of producers to a supply glut is to increase rather than cut back production as a way of keeping market share and maintaining cash flow through higher sales.  Heavily indebted marginal producers like the shale producers in the US tend to do this to an even greater degree than more established producers, since they have to maintain cash flow to pay their debts.

The result is that as production grows the supply glut increases driving prices down even more.

This is the process the IEA is describing and given the state of the market and the debt financing needs of US shale producers - the weakest link in the industry - it makes complete sense.

Oil is by no means unique in following this pattern.  One of the reasons for the “dust bowls” in the US in the 1930s was the removal of top soils by US farmers driven to overproduce in the 1920s by low prices caused by the conditions of over supply created by the  preceding period of high prices before and during the First World War.

Falling prices during the supply glut caused by rising production however eventually undermine the position of marginal producers, especially if as US farmers were in the 1920s and as some US shale producers are today, they are heavily indebted. 

In the 1930s in the US farm industry there was actually a foreclosure crisis.  It is not completely impossible that something similar may eventually happen amongst weaker producers in the US shale industry.

Once the process has finally run its course prices will recover - probably by more than some assume.

The last few months have shown that Russia is capable of weathering the oil price fall.  Indeed a period of lower oil prices is arguably beneficial to an economy with low debt that wants to expand its agricultural and manufacturing base.  Used properly a period of low oil prices should encourage higher investment in agriculture and manufacturing as opposed to energy, which has had a disproportionate share of investment up to now.

For this period of lower oil prices to be used properly, so that long-term investment in manufacturing and industry become truly profitable, inflation and interest rates need to fall below what have been their historic levels in Russia, which is why the government is so single-mindedly focused on lowering inflation.

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From the Financial Times

The rebalancing of the oil market that started last year has yet to run its course and a bottom in prices “may still be ahead”, according to the world’s leading energy forecaster.

In a bearish assessment of market conditions the International Energy Agency said the adjustment process would “extend well into 2016” as production — led by Opec nations — continued to swell and demand growth softened.

The Paris-based agency, which advises the world’s biggest economies on energy policy, said the oil market was “massively oversupplied”.

Global oil supply surged by 550,000 barrels a day in June to 96.6m b/d, up 3.1m b/d from the same month a year ago, the IEA said in a widely followed monthly report

“The market’s ability to absorb that oversupply is unlikely to last. Onshore storage space is limited. So is the tanker fleet. New refineries do not get built every day,” the IEA said. “Something has to give.”

That something could be US shale oil, the agency said. Relentless supply growth from North America has been one of the factors contributing to the glut in crude oil.

While some weakness in US shale oil output was beginning to show “it may also take another price drop for the full supply response to unfold”, the IEA warned.

Oil prices on both sides of the Atlantic fell sharply this week, with Brent crude — the international benchmark — entering bear market territory. Brent hit $55 a barrel on Monday, rattled by the financial turmoil in Greece and the stock market rout in China. On Friday Brent had risen back to $59 a barrel — a level that is still almost 50 per cent lower than last year’s $115 a barrel June peak.

Cost savings, efficiency gains and hedging have helped shale producers “defy expectations” until now, but supply growth ground to a halt in May and is forecast to stay at these levels through mid-2016, the IEA noted. After growing at 1.7m b/d in 2014, US shale onshore production is forecast to slow to 900,000 b/d this year and 300,000 b/d in 2016.

As a whole, the IEA expects non-Opec supply growth will slow to 1m b/d in 2015 and stay flat in 2016 as lower oil prices and spending cuts take hold.

Although the IEA increased its global demand growth forecast for 2016 to 1.2m b/d — taking total demand to 95.2m b/d — it is still less than 1.4m b/d it predicts for this year.

 

“World oil demand growth appears to have peaked in the first quarter of 2015 at 1.8m barrels a day and will continue to ease throughout the rest of this year and into next,” said the IEA.

A possible Greek exit from the eurozone could suppress demand across the continent if economic activity was to weaken, the IEA said.

The agency said that would not translate into a “tighter market” for oil in 2016 as long as members of Opec, the oil producing cartel, continued to pump at near record levels.

“The group is not slowing down. On the contrary, its core Middle East producers are pumping at record rates and the outlook for Iraqi capacity growth — accounting for most projected Opec expansions — keeps improving,” it said.

Opec crude supply reached a three-year high in June to 31.7m b/d, up 340,000 b/d from the prior month, led by Iraq, Saudi Arabia and the UAE.

The IEA estimates that the demand for the cartel’s crude will stand at 30.3m b/d next year, up 1m b/d from 2015. But this is still a “whopping” 1.4m b/d less than its current production.

An Iranian nuclear deal with world powers could also unleash more barrels on to the market.

 

 

 

via Vincent Varisano, Why the Oil Glut will Continue and How it Benefits Russia

Vincent Varisano Why Russia's Gas Pipeline Deal With Greece Is Likely to Be Stillborn

Vincent Varisano,

After prolonged discussion and some agonising, Greece has now confirmed that it has a preliminary agreement with Gazprom to build a gas pipeline across Greece from the hub in Turkey.

This agreement bears only a pale resemblance to the proposal that was discussed in Moscow and Athens in March and April.  Most importantly it does not come with a pre-payment.

Greece will not therefore see any financial benefit from this pipeline until 2019 and - unlike the proposals discussed in March and April - what has now been signed can in no way be considered part of a larger bailout package of Greece involving Russia and the other BRICS states (see What Russia Offered Greece, Russia Insider, 25th June 2015).

With Greece in default to the IMF, capital controls imposed on the country and Greece’s banks in only partial operation, there is anyway simply no time now for the sort of financial package involving the BRICS Bank the Russians were talking about in March and April.  Not surprisingly therefore, in recent days the Russian Finance Ministry has moved to downplay that option. 

The underlying story of the Greek crisis is that though there were some elements within the Greek government - notably the Energy Ministry - that were keen on a realignment with Russia and the BRICS, the predominant faction in the Greek government, including at all times the Prime Minister Alexis Tsipras and both the outgoing and the incoming Finance Ministers, Varoufakis and Tsakalotos, always thought in the end solely in terms of a deal with the EU. 

It is doubtful in fact that this pipeline will ever be built.  

Despite some claims to the contrary, the political will to build the pipeline to Turkey is certainly there on both sides, and there is no doubt it will be built.

By contrast the will to build the pipeline in Greece does not seem to be there.  At the moment it looks very much like the pet project of the Energy Minister, Panagiotis Lafazanis, rather than something the entire Greek government is signed up to. 

Given the implacable opposition to the project of the US and the EU, that all but guarantees its failure.

 

 

 

 

 

via Vincent Varisano, Why Russia's Gas Pipeline Deal With Greece Is Likely to Be Stillborn

Vincent Varisano Now Even Kudrin Says It - Russia's Economy will Resume Growth in Final Quarter

Vincent Varisano,

Aleksey Kudrin, Russia’s former Finance Minister and one of the most pessimistic voices in Russia on the state of the economy, has now said that he too expects signs of recovery to become apparent in the last quarter of 2015.

This brings Kudrin into line with the forecasts of the Finance and Economics Ministries and of the Central Bank.

Meanwhile inflation is continuing to fall.  It is now estimated to be running at an annualised rate of 15.2%, with the Economics Ministry predicting deflation (ie. falling prices) in August.

Meanwhile the Finance Ministry is predicting a total budget deficit for 2015 of just 3% of GDP, the Central Bank’s reserves grew by $4.8 billion in June and the ruble seems to have shrugged off the brief plunge in oil prices that took place because of the Greek crisis.

Against this Andrey Kostin, Chairman of VTB, Russia’s second biggest bank, has said that he expects the next cut in interest rates to be no more than 50 basis points.  This comes despite the ruble’s stabilisation, the fall in inflation and a significant fall in investment and manufacturing output in the period March to June caused in large part by the high interest rates.

Concerning interest rates, in conditions of falling prices such as are now forecast for August, the real burden of interest rates is actually growing despite the nominal decline since the start of the year.  This tends to reinforce the impression that the Russian authorities and the Central Bank have made a conscious decision to trade a short but relatively shallow recession for a long term reduction in inflation.

As to the severity of the recession, it has resulted in a significant cut in real incomes - the first since Putin came to power - but no steep rise in the rate of unemployment, which remains low.

Given the growing consensus of a return to growth in the fourth quarter, it would now be something of a surprise if that didn’t happen.  There are in fact no obvious reasons why it should not.

Overall the Russian economy has responded well to last year’s collapse in oil prices.  The adjustment has been surprisingly fast and far less painful than was anticipated.

Further confirmation that Obama’s claims that Russia doesn’t make anything and that Putin is wrecking Russia’s economy by trying to restore the USSR are nonsense.

via Vincent Varisano, Now Even Kudrin Says It - Russia's Economy will Resume Growth in Final Quarter

Vincent Varisano Russia to Supply 100 Sukhoi Passenger Jets to China

Vincent Varisano,

This article originally appeared at Russia Beyond the Headlines

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Russia will supply 100 Sukhoi Superjets to China in the next three years, Russian Trade and Industry Minister Denis Manturov said at the Innprom-2015 Defense Exhibition in Yekaterinburg.

The first five airplanes will be delivered in 2016.

According to Manturov, Russia and China will also jointly manufacture a large passenger airplane and a heavy helicopter.

“Industrial cooperation within the framework of APEC, ASEAN and BRICS is particularly important in times of political instability,” Manturov said. “We have agreed to hold a meeting in October in Moscow between the main ministries of the BRICS nations.”

Bilateral trade between Russia and China touched $90 billion last year, Manturov said, adding that Russia would like this figure to touch $200 billion by 2020. “The share of the oil and gas sector in Russia’s exports is obviously very high, but the non-raw material industries accounted for $50 billion (in trade with China) and we must try to increase it in the future,” he said.

via Vincent Varisano, Russia to Supply 100 Sukhoi Passenger Jets to China

Vincent Varisano Do Russia Sanctions Still Exist?

Vincent Varisano,

This article originally appeared at OilPrice.com

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In a previous article on Oilprice, I questioned whether western sanctions imposed on Russia were being regularly breached by E.U. and Asian companies, noting that sanctions only work if all countries unite behind them.

In June, the Financial Times reported that only one year after being imposed, the sanctions are eroding. It seems that government and business policies are pulling in opposite directions, despite the sanction regime being clear on the activities that are banned, as explained by Forbes:

“Last July (‘14), the E.U. banned its companies from signing any new financing deals with Russia. In September, the E.U. placed even more restrictions on Russia’s access to E.U. capital markets. The sanctions state that individuals and corporations from the E.U. are banned from providing loans to five major Russian state-owned banks, including Sberbank and VTB Bank, and the three state owned energy companies, of which Gazprom tops the list.

The September sanctions, which went into effect on the 12th of that month, said that companies could no longer provide services related to the issuing of financial instruments, including broker relationships.

In addition, certain services necessary for deep water oil exploration and production, arctic oil exploration or production and shale oil projects in Russia were also banned.”

Much of the mainstream financial news also began picking up on the ‘sanction-busting’ story, pointing out that many NATO tied governments did not regard Russian sanctions as an obstacle to doing business with Russian energy companies.

Forbes notes that, as a result of sanctions, western oil companies that were once dominant in Russia are now being replaced by European and Asian companies. The article stated that ExxonMobil was “kicked out of Russia” because of sanctions, and was forced to cap a major Arctic discovery in the Kara Sea, where it had spent some 3/4 of a billion dollars, as part of a joint venture with Rosneft. 

ExxonMobil has 10 joint ventures in Russia with the state-owned firm Rosneft, but all of those have been shelved due to the sanctions.

European Union (EU) business and political leaders tend to question the validity of sanctions more than those in U.S., because sanctions have a much greater negative economic impact in the Europe. On the question of energy policy and Russia, clear differences are emerging within the EU, as well as between the EU and U.S.

One example of these differences arose over Iran sanctions, where the EU has recently voted to prolong its suspension of sanctions, until nuclear negotiations are completed.

“European companies are finding ways and are certainly freer to do business than their U.S. counterparts,” James Henderson, senior fellow at the Oxford Institute for Energy Studies, told the Financial Times. “U.S. companies are going to be hugely disadvantaged as we go forward because E.U. sanctions are not retroactive and U.S. ones are.”

It remains an open question as to whether China and India’s multibillion dollar loans to Russia and their current joint energy ventures with Rosneft were a direct circumvention of western sanctions, with both Rosneft and its Chairman sanctioned. That also raises questions as to whether the sanctions themselves are creating unfair trade advantages for ‘busters.’

These potentially sanction busting deals were announced at the St. Petersburg Economic Forum:

• BP buys 20% of Rosneft-owned oil reserves in E.Siberia, in a $700 million deal, creating new Asian-bound oil partnership 
• Rosneft and Indian state-run Oil and Natural Gas Corp signed long-term deals. 
• Gazprom and Royal Dutch Shell are building a global alliance
• Gazprom signed an agreement with the Greek government to pursue its Turkish Stream Pipeline 
• Gazprom signed a 300 million euro loan with Unicredit Bank of Austria
• Gazprom held discussions with Engie (formerly GDF Suez) over gas pipelines to France

The capper came at the St Petersburg Economic Forum, where the Saudis arrived, offering to be a full-fledged finance partner in Russia’s energy development, in exchange for Russian nuclear expertise and military arms. Two weeks later, the Saudis raised the bet with a five-year, $10 billion investment in Russia’s agriculture, retail, and real estate sectors.

It is one thing to see Russia replace the West with China as client, partner, and financier of energy development; it’s quite another to see Russia swap western finance for Middle Eastern finance, sourced from one of the West’s strongest allies. That is likely to cause major concerns in western banking circles.

For the investment community, there was another sign at the Forum of the way the investment wind may be blowing. Jim Rogers, an American multi-billionaire investor and former partner of George Soros’s Quantum Fund, announced that he was investing in Russian assets precisely because “…they are the most hated in the world.”

The famous American contrarian has recently accepted a Board of Director’s Seat at PhosAgro, a Russian fertilizer company, where he is also a major stakeholder.

Some six months after sanctions were imposed, the U.S. Secretary of State visited the Kremlin for private talks with Putin, which were widely interpreted as an attempt to ease international tensions over Ukraine. After the St. Petersburg Forum, the first telephone conversation between Presidents Obama and Putin took place, breaking an eighteen month silence.

As tensions ease, and the news becomes more focused on issues like Greece, rather than Ukraine, sanctions vigilance seems to be eroding. There are also signs emerging that some U.S. analysts are beginning to question the western narrative on Russia’s actions in Ukraine. One example comes from a senior analyst at Stratfor.com, one of the most widely respected U.S. strategic intelligence newsletters. Senior Analyst Lauren Goodrich argued in a June 29 video on Stratfor’s website that the U.S. is actually the one making antagonizing moves while Russia is merely responding:

“The way that the American media has put it out there is that Russia is being the aggressor (in Ukraine), and instead we’re seeing Russia be very reactive instead. NATO starts to build up, then Russia starts to build up. The United States helps support the revolution that took place in Ukraine this past year, Russia then takes Crimea and goes into eastern Ukraine. So it really is a reaction to what is taking place out of the United States and out of NATO.”

All of this suggests that official government sanctions may continue a good deal longer, while the EU and Asian business community increasingly ignores them. That is likely to result in increased government pressure from the U.S. business community to enable its companies to compete on and equal plane with their EU and Asian peers. This growing dichotomy between the U.S. and EU/Asia is unlikely to be long lasting, as their respective governments seek ways to avoid embarrassment in their respective business communities.

As stated by Chris Weafer, founding partner at Macro-Advisory, a Moscow consultancy, “Goods and services which in theory are subject to sanctions, in reality do not appear to be. Companies seem to be working around it. There is obviously a very big blind eye being turned” by some western governments…. “I think the basic message is if you’re not blatant about it you’re fine.”

A U.S. State Dept. representative may have let the truth slip out when he described the reaction of the State Dept. to questions from U.S. companies about attending the St. Petersburg Economic Forum. “If you tell us you’re going, we’ll probably order you not to, but if you go and don’t tell us, we’ll probably do nothing,” he said.

via Vincent Varisano, Do Russia Sanctions Still Exist?