Can Russia Import Productivity From China?

The worst of the oil collapse is over. Oil prices could be volatile in the next six months but new lows are unlikely. Is it time to turn bullish on Russian assets for absolute return investors?

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The answer for now is "No." Russia's economic structure is weak and will require significant changes to lift productivity (and, thereby, potential GDP growth), which has fallen below the EM and EM ex-China averages despite the current negative dynamics for the emerging world (Chart 1).

Given that the Russia-West relationship has suffered greatly from the Ukraine and Syria conflicts, and will remain fraught for some time, we see only one feasible option for Russia to improve its productivity quickly: doubling down on its "Far East strategy." Russian President Vladimir Putin signaled as much with his trip to Beijing on June 25. The catch is that this will require moderating its geopolitical ambitions and eventually accepting Chinese dominance. Will Russia agree to play second fiddle to China if it means getting wealthier?


Chart 1

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