REVIVING U.S.- RUSSIA RELATIONS

The Trump presidency may present an opportunity to revive the U.S.-Russia relationship. During their recent conversation Mr. Putin and Mr. Trump not only agreed on the absolutely unsatisfactory state of bilateral relations but also expressed support for active joint efforts to normalize relations and pursue constructive cooperation on the broadest possible range of issues. The two leaders spoke about the need to “return to pragmatic, mutually beneficial cooperation in the interests of both countries, as well as global stability and security” and promised “to work together in the struggle against the number one common enemy international terrorism and extremism.”

Tthe two countries obviously share a great number of mutual interests that could underpin a successful partnership.The next steps will be to move from words to action in order to rebuild the climate of trust. Common interests must be determined, the most obvious of which is eradicating ISIS. Other avenues of cooperation include nuclear non-proliferation and a common position towards North Korea. More contentious issues that need to be addressed are NATO’s future role in Eastern Europe, and the Iranian nuclear deal, which Russia helped broker.

The path to normalization of the relationship will be difficult, and there is no determining which political crises may derail the process. However, this juncture in history presents the perfect opportunity for Russia and the U.S. to restart a potentially rewarding partnership.

If the U.S eliminates certain sanctions or allows sanctions to lapse, Russia will most certainly respond by lifting its sanctions. Just as a President Trump can repeal the U.S. sanctions by an administrative order or allow them to lapse, President Putin can remove or relax the Russian embargo by a presidential decree, or he can simply wait for the embargo to lapse after December 31, 2017.

If the sanctions are relaxed between Russia and the U.S., this could lead to increased investment opportunities for U.S. companies. Russian companies are heavily undervalued due to both the economic and political crises that have affected Russia over the past several years. Indeed, the market has never fully recovered from the 2008 global economic collapse and the low oil prices have further fueled the economic downturn. These multiple economic downward pressures on Russia have resulted in lower costs for investors given the devaluation of the ruble, which has declined by nearly twofold since 2014. Previously, the cost of doing business was relatively high for an emerging market discouraging investment due to the combination of high cost and high risk, but developments over the last few years have significantly changed market conditions. In addition to the lower cost of doing business, Russia has also sought to attract business by making certain legislative and regulatory changes that have improved the business climate overall. This has led to Russia climbing higher on the World Bank’s “Ease of Doing Business” rankings where it recently rose to number 40 overall, up from 92 in 2014. Russia is also steadily improving in the World Bank’s “frontier” benchmark of all economic indicators worldwide, up nearly 20 points since 2010.

The possible shift in relations also comes at a time when Russia is set to launch the next stage of its privatization program. The Russian government recently approved a federal budget for 2017-2019 that includes significant revenue from the partial privatization of certain state-owned enterprises, including a sale of 19.5% in Rosneft, Russia’s largest oil company, and possible sales of shares in the Novorossiysk Commercial Sea Port, the shipping firm Sovcomflot, and VTB Bank, Russia’s second largest state bank. Other companies to be partially privatized include Russian Railways (or RZD), Russia’s largest aircraft lessor State Transport Leasing Company (or GTLK), Rostelecom, Transneft, and Zarubezhneft.

In summary, Russia has a great deal to gain if U.S.-Russia relations improve. Investors and companies operating in Russia, as well as Russian banks and energy companies, in particular, would stand to reap the greatest benefits from improved relations. However, all of this rides on how Mr. Trump decides to proceed with Russia and how motivated President Putin is to make certain concessions in order to improve relations.