Oil price crisis: a solution in Frankfurt?

Oil prices are falling, and are now into the region of 65-70 dollars per barrel. It is difficult to predict whether the prices will stabilise or further drop, yet this decline, coupled with the fall of the rouble exchange rate, is jeopardising Russia’s economic growth and stability. What international solutions can be found – in the medium and long term? We claim that one could be a bigger stock market, and an answer could be found in Frankfurt.

Oil prices are falling because of a complex combination of causes: the USA has propped up its supply of shale; the global economy has again slowed down; Saudi Arabia, the biggest producer and the political heavyweight within the OPEC, has chosen not to slash production and thus to do a favour to the USA. Such choice is in fact having a negative impact on Russia, and even more on Iran and Venezuela, two opponents of the USA. Russia is heavily reliant on oil, gas, and other commodities, and a decline in their prices can bring serious problems. How can Russia re-align in the global economy and find new sources of capital?

One solution could be a big financial market. Russia needs capital and a large stock exchange can help. To the East, China has recently laid the ground for a ‘Superbourse’, with the so-called ‘Connect’ between the Exchanges of Shanghai and Hong Kong; even Shenzhen might join in the near future. To the West, Wall Street and London still have an edge over their competitors. Other exchanges are rising (Toronto, Sydney, the two based in Mumbai), while those in the Eurozone are still poorly developed. This year there has been a lot of talk about a merger between the stock exchanges of Vienna (whose group also includes Budapest, Ljubljana, and Prague) and Warsaw, but their combined market capitalisation would be no more than 350 billion euros; that is, slightly more than a third of São Paolo’s Bovespa. Later in 2014 the Warsaw Stock Exchange has announced its intention to suspend any merger talk, but nevertheless it will remain a small and mainly local bourse.

The Frankfurt Stock Exchange, for its part, finds itself in only slightly better waters. Its market capitalisation of approx. 1.7 billion dollars puts it in the same league as Mumbai and behind Shenzhen; this is clearly disappointing for an institution which is located at the heart of the Eurozone and in its putative financial core. In the past decade, Frankfurt’s Deutsche Börse attempted to merge with Paris’s Euronext, London’s LSE, and eventually New York (in 2012), but no single attempt was successful. Is it then time to look east? Would a merger (or alliance) between Frankfurt and Moscow make sense? We reckon it would.

At the moment such alliance looks politically problematic, but there already is a history behind it. A Memorandum of Understanding between the German bourse and Moscow’s MICEX was signed as early as 2006. In December 2010 there were new talks about an alliance. On 19 November 2012, the German bourse and the Moscow Exchange signed a Letter of Intent in the presence of president Putin and chancellor Merkel (see http://www.finextra.com/news/announcement.aspx?pressreleaseid=47418). After all, this took place only two years ago. Moscow intended to develop its own financial market, boost its economy, and improve its international standing by partnering with Frankfurt, which, although bigger, is arguably not yet a truly global stock exchange. What looked desirable two years ago is still desirable now. An alliance – or a merger – between the two exchanges could lead to better economic conditions in both the Eurozone and Russia; other bourses might then follow; among them, there might be Vienna, Budapest, perhaps Almaty? Central and Eastern Europe need to develop a financial arm comparable to those of the Atlantic and Pacific regions; co-operation between Europe and Eurasia is thus particularly important as well.

Good relations between Germany and Russia are then important for the whole of Europe and Eurasia. The two countries have complementary economies and strong historical and political ties. Several important German politicians and former leaders have recently made the case for better political links between Berlin and Moscow. Early in March, former German chancellor, Helmut Schmidt, referred to Moscow’s actions in Crimea as ‘understandable’ and dubbed the sanctions ‘a stupid idea’. Amongst those who have called for an opening of the dialogue between Germany and Russia, we find another ex-chancellor, Gerhard Schroeder, film director, Wim Wenders, and the former leader of the Social Democrats (SPD), Matthias Platzeck. Many of them claim the sanctions will impact on both Russia and Germany (with the rest of the EU), and the Western attitude towards Moscow shows little understanding of Russian history and politics. Such claims have clearly not reached Angela Merkel’s ears.

Co-operation and dialogue between Russia, Germany, and the Eurozone as a whole are fundamental. Russia is currently considering a diversification of its economy away from reliance on oil and gas; enlarging its financial markets could be a relief and an investment in the future. Economically, Russia could build on a larger basket of goods and services; politically, it would come closer to the EU. From a European viewpoint, the key issue is to become more autonomous from the USA. Improving relations with Russia (and starting with capital markets, a traditionally American stronghold) would be a right step in this direction.

Photo: wikipedia.org
Bull and bear in front of the Frankfurt Stock Exchange