Data & Intelligence

Assessing the Impact of Declining Oil Prices on EM PE – The View from Russia

Mike Calvey, Founder and Senior Partner, Baring Vostok Capital Partners

Today's crisis in Russia is not only about oil, but Russia is clearly one of the countries most impacted by the falling oil price, since crude oil exports represent approximately one-third of total exports, and taxes on oil represent almost half of Russia's government budget revenues. However, unlike many oil exporting countries, Russia has a flexible currency, and the Rouble has fallen over the last four months by roughly the same amount as the oil price (50%), so costs have also fallen sharply in U.S. dollar terms.

As a result, many exporters are now generating record profits in Roubles despite lower oil prices. Demand for local manufactured goods and food products are also rising because they are now much cheaper than imported products. The government has almost no foreign liabilities, and the population holds a lot of its savings in U.S. dollars rather than Roubles. The main negative impact of devaluation is on the banking sector, where the cost of funding has risen sharply, and the banks are drastically reducing new loans, putting pressure on businesses that require new debt financing for growth or working capital.

For private equity funds like Baring Vostok, the devaluation unfortunately and unavoidably had a substantial negative impact on the fair value of existing portfolio companies at year-end 2014. But after previous devaluations we experienced in 1998 and 2008, the best domestic-market oriented companies were able to raise Rouble prices significantly faster than inflation, and this resulted in substantial growth in value in U.S. dollar terms over two to three years afterwards.

Read More  Views from the Field on Assessing the Impact of Declining Oil Prices on Emerging Markets Private Equity, including:

The LP View
Richard Rincon, Investment Officer, EM PE, UTIMCO

The Global View
Erik Bethel, Managing Director, Darby Private Equity

The View from Russia
Mike Calvey, Founder and Senior Partner, Baring Vostok Capital Partners

The View from Southeast Asia
Andrew Affleck, Managing Partner, Armstrong Asset Management

The View from Nigeria
Cyril Odu, Executive Partner and Head of Energy, African Capital Alliance

Two Views from MENA
Amjad Ahmad, Chief Executive Officer, NBK Capital Partners, and Nabil Triki, Co-Head of Private Equity, Swicorp

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