Wednesday, December 17, 2014

17/12/2014: Russia: Running Out of Euros and Ikea Kitchens?

While Russians are converting dollars into rubles to buy Ikea furniture to store cabbage, shortages of which are imminent... or maybe converting Ikea kitchens into dollars to buy spare parts for Ladas door handles... there's a panic... allegedly.

In one city, some banks have run out of dollar kitchens and euro handles... even at the rate of 110 RUB/1EUR, though the main banks remained fully stocked with hard currency:

Funny enough, the reporter spotted a queue for currency only in one branch of one bank, where EUR was selling for 92 Rubles instead of 110... There is a rich behavioural economics paper sitting somewhere between the Russian retail currency exchanges margins...

Another behavioural adjustment was made today - by the Central Bank of Russia which suspended mark-to-market valuations of its own portfolio: The CBR also suspended mark-to-market valuations of credit institutions and banks. To offset asset base volatility, or in plain terms, to reduce impact of volatile exchange rates on assets and liabilities valuations.

And more households' behavioural 'antics': despite rapid rise in interest rates, demand for credit has sky-rocketed: Households seem to be stocking up on short term credit while interest rates are still creeping up.

17/12/2014: Winners and Losers in Russian Crisis

My effort at explaining some of my thinking on Russian crisis in an interview with Expresso (in Portuguese and paywalled) here:
and in English here:

17/12/2014: Russian Industrial Production & Investment

Russia's industrial output fell 0.4% in November after two months of relatively strong growth, expanding 2.9% and 2.8% in October and September. Core drivers were:

  • Manufacturing sector contracted at 3% in November, having expanded 3.6% in October. The latest change, if confirmed over the next few months, might signal wearing off of the imports substitution effects from Russian counter-sanctions.
  • Natural resources exploration sector expanded output by 2.5% in November
  • Production of heat and electricity rose 7% in November
  • Pipeline production grew by 30% in October, gas turbines manufacturing rose 91%. The $400 billion gas contract with China, signed in May was the reason, as Russia started construction of the 4,000 km Power of Siberia pipeline in September.

Note: November Manufacturing PMIs were up signalling that things might improve in December data.

On a no-surprise side, fixed capital investment was down in the first nine months of 2014 and in Q3 2014 - declining by around 2% or well below expectations. SMEs investments declined, while investment by larger companies rose. Oil refining investments remain the largest contributor to manufacturing sector investments, per BOFIT. Food sector investments also were robust. Q3 also saw reversal of negative growth in total investments in machinery & equipment by large and medium-sized firms.

BOFIT: "Growth in investments of large firms reflects the government’s goal, reinforced at the start of this year, of getting large state-owned enterprises to increase investments
despite the hard times. The economy ministry indicated in November that investments of so-called natural monopolies, which represent some of the biggest state-owned enterprises, will grow even more notably next year."

Another handy chart via BOFIT:

17/12/2014: Some Ruble-Heavy Reading: Contagion, Reserves & Fundamentals

Some interesting set of articles on the topic I mentioned earlier on Irish radio and in the post here:  - the topic of contagion from the run on Russian ruble to the global economy:

As an aside to the menu of options available to Russian Government, here is one of a 'limited capital control': aka de-dollarisation of the retail deposits. Surely, that would just amplify pain for ordinary savers.

And another aside: in-depth analysis of the reserves position and demand for debt redemptions for Russia here: Key quote from the article:

"We notice that the strong depreciation of the Rouble corresponds to a peak in repayments, but that the situation will loosen up in early 2015. It is sure therefore that the exchange rate will reverse its tendency in the first semester of 2015. The question is, up to what point? If the Rouble stabilizes around 50 roubles for 1 USD, inflation will be strong next year and could reach 12%. If we witness a rise in oil prices and the Rouble stabilizes around 40-42 roubles for 1 USD, the inflation rate could amount to merely 10%. Still, this implies that the Central Bank of Russia keep an eye on such establishments which could be tempted to speculate on the exchange rate, dragging it farther down than it should normally be. Explicit threats were made by President Putin at the occasion of his declaration of general policies before the chambers of parliament on December 4th. However spectacular it has been, the depreciation of the Rouble by no means puts into question the financial stability of Russia. The trade balance remains in excess, with an amount outstanding of 10 billion dollars a month. This is largely sufficient to face up to coming payments. The budget is actually profiting from this depreciation, which should allow the government to spend a little bit more in 2015. Russia will therefore remain one of the least indebted countries in the world, which is not necessarily an advantage and goes to show that, provided it takes up debts internally, the country wields over a strong potential for investment and development."

Another update: a must-read from Bloomberg's @Bershidsky on why sanctions are at best secondary when it comes to the run on the Ruble:

Tuesday, December 16, 2014

16/12/2014: Russian Inflation: Hot, but Hardly a Meltdown, yet...

While everyone is chasing tails of Ruble (or Rouble / Rubel / Roubel and any other toungue-twisting permutation), here is one fact on the Russian economy:

Russian 12-month inflation was running above 9% at the end of November. 

Sounds a lot. In fact, as I am typing this, one UK news report is referencing Russian inflation and telling us that if the UK were to experience such, there would have been panic. Right...

Truth is, Russia is accustomed to inflation at 7% - whether it is a positive marker or not, it is simply a fact - so 9% is a bit less of a drama than one might expect. However, end-November food price inflation is 12.6% y/y and non-food inflation is at 6%. The latter is benign, but likely to rise more. The former is a bit of concern, as Russian crops hit nearly historical records this year. Admittedly, it takes time for field-to-table route to be completed, but… According to the economy minister Alexei Ulyukayev, roughly 4% of the above inflation is down to Ruble depreciation (so expect more pressure here when December CPI is out), but 2.5% is down to imports bans under Russian counter-sanctions. Slightly confusing the message, Ulyukayev's deputy estimated that around 2.4% of full year inflation will come courtesy of Ruble devaluations (again, this will have to be revised up now). 

Expectations forward are not rosy. I expect inflation to hit 10% before year-end and roll over that number in Q1 2015. CBR, meanwhile, expects it to be close to, but below 10% mark in Q1 2015. Many analysts and the CBR expect inflation to moderate in Q2 2015. I doubt that. It will be sticky to the upside, likely North of 12%. 

And the crucial marker for the entire 2015 will be the 2015 crop, not estimates, but actual output, which - judging by cyclicality - is not going to be as good as this year's one.

Here's a neat chart plotting Russian CPI from 2005 on, courtesy of BOFIT. 

Source: BOFIT

Do tell me again that the current inflation rates are a 'meltdown'… though one still has to recognise they are a concern.

Meanwhile, last week revised economic forecasts by Russian Economy Ministry were factoring in USD80 bbl Ural's price of oil for 2015. Sounds outrageously high? Not really: Brent consensus forecast by IEA-polled economists produces the expectation slightly above that. With this price assumed, Russian economy is forecast to shrink by 0.8% in 2015. Again, you might think that the world is collapsing, if you are to read current headlines related to the run on the Ruble, but let me remind you that euro area economy shrunk by 1.08% in 2012-2013 and last time I checked, Frankfurt is still around.

Russia desperately needs some breathing space on the funding markets side. And it needs to stop capital flight. If it finds solutions to these twin problems, it can weather the storm.

Note: I was asked today on Irish radio to comment on the effects of the Russian crisis on Europe and Ireland. Here is a summary of my view:

Continued currency crisis in Russia presents risks to the European economy hard to estimate.

Russian imports of goods and services are likely to contract by between 12 and 15 percent in 2015, with much of this effect being driven by decline in capital goods and consumer goods imported traditionally from Europe. Second order effect is ongoing substitution of Russian imports away from Europe and in favour of Asia Pacific as a source of goods. This means that the impact on Russian demand for exports from Europe is likely to be even stronger.

In addition, financial exposures to Russia run high in Austria, Italy, France and the UK. While the European banks have strengthened of their balancesheets in recent months, another adverse shock to their assets base is not something they would like to contemplate. While it will not be a sector-defining event, continued deterioration in Russian assets valuations will not be helping.

The big unknown - Russian response to current pressures - is yet another risk factor no one in Europe needs. If Russia opts for capital controls and/or imposes a holiday on repayment of larger debt tranches coming due in H1 2015, European financial system will receive another shock as much of Russian banks and corporate funding was underwritten in Europe.

In simple economic terms, everyone around the world would benefit from Russia stepping off the financial precipice line as soon as possible.

16/12/2014: Next Stop... for Parabolic Ruble...

Ruble down below USD70 and EUR87.40, with 109.20 against Sterling. The CBR move last night ( is nothing more than a blip on the FX trading screen and a massive hit on the economy.

credit @TheStalwart

There is an emergency meeting scheduled by Medvedev and the next stop is either capital controls or EUR100 marker... or maybe both. The point is that no one is in control anymore, not because they are not trying, but because they are smile, as you prepare to ride the RUB/USD chart...

16/12/2014: The Surreal Takes Hold of Kiev and Moscow...

While all of us are watching the Ruble crash, there is an ongoing collapse in Ukraine:

I posted IMF 'note' on the emergency visit to Kiev last week which, in simple terms, amounted to nothing... as in nada... or no new lending.

And to note a simple fact: yesterday's Moscow dramas were nothing compared to Kiev dramas: and
Note: Russia's CDS rose, but didn't even make it into top under-performers group, while Ukraine did... and at an eye watering 77.36% probability of default (cumulative at 5 years). In other words, unless the IMF stamps out some USD15+ billion in new 'loans', Ukraine is done for.

The Russia/Ukrainian 'Arc':

It shows that Ukraine is getting worse faster than Russia is getting worse...

But back to Russia for now, as West's newest 'ally' East of Dniper is out of criticism or questioning... Ruble is tanking, still, as predicted in the first link above:

Credit to: @Schuldensuehner 

The reason is that when you have a 1am Governing Council meeting, you signal to the domestic economy that things are out of control (and they are), which prompts:

  • Companies facing upcoming debt redemptions or holding Ruble deposits to run for FX cover and demand dollars or euros or pounds or Mongolian tugriks; and
  • Households facing actual inflation (in PPP terms, not CPI) to run for FX deposits and demand same dollars or euros, less so unfashionable pounds and certainly not Mongolian tugriks...
The only way to stop this is... capital controls. All of which has little to do with the actual economy as a cause of the malaise, but all of which will cause actual economy to contract.

Oh, Happy Birthday, Wassily Kandinsky... your Composition VII aptly illustrates the whole mess:

Monday, December 15, 2014

15/12/2014: Don't Blink... or Russian Data Will Get You!

It seems you blink these days and Russian ruble slides: down 10%+ today alone against the USD and down massive 48.13% for the year so far:

Credit: @RobinWigg

Blink again: the Central Bank revises estimates for capital outflows: new estimates suggest Q4 outflows have accelerated again to the levels of Q1 2014, implying full year outflows of USD133.8 billion, basically on par with the disastrous 2008.

Credit: @Schuldensuehner 

You sneeze and... boom... new estimates for growth are coming out: down to -4.5% for 2015 or even 4.7% assuming oil prices staying at 'current' levels of USD60 per barrel (annual average).

Reach out for a cup of tea and as oil price plummets, so does the ruble. If we take RUB3500/barrel or RUB3720/ barrel estimates built into two revisions of the Budget, you have USD/RUB rate in 88-93 range.

Put kids to bed and 10.5% Central Bank rate goes up to 17% - on foot of an emergency:

Take a smoke break and Russian CDS are busting past the 30% CPD ceiling:

Analysts' nightmare, comedians' rich picking. And comedians are out, in force, pretending to be analysts - the host of geopolitical journalists are now all spotting 'economic analysis' on their webpages. It is going to get worse - Politburo 'Hats Readers' are now coming out with economics and finance analysis, so expect a massive crash...

In truth, as noted earlier ( 100bps hike in CBR rate earlier this month was useless. Useless across the board. Tonight's hike to 17% is clearly a serious push for an attempt to stabilise the ruble and stem the capital outflows. But it won't do the trick either. Much of outflows is driven by bond redemptions. So is much of the demand for dollars. And in this scenario, all the interest rates are going to achieve is collapse investment.

In brief, we are now headed into the inevitable:

  • Step 1: capital controls with limited exemptions for individual sectors and firms; and
  • Step 2: debt redemptions break for companies directly impacted by the sanctions.
  • Step 3 (or maybe it will be step 1 or 2): revise growth estimates for 2015 to -7%, because there won't be any domestic investment at 17% rates and there won't be any foreign investment at 49% devaluation rate, and there will be no government investment at capital outflows into USD130 billion and bond redemptions mounting ( There won't be much of consumption as RUB heads toward RUB/EUR100 marker and banks are not lending.
Speed up your blinking, folks, and buckle your seat belts.

15/12/2014: Russia & Ukraine CDS Hitting Major Highs

Both Russian and Ukrainian CDS are going hyperbolic:

15/12/2014: BlackRock Institute Survey: North America & Western Europe, December 2014

BlackRock Investment Institute released the latest Economic Cycle Survey results for North America and Western Europe:

"This month’s North America and Western Europe Economic Cycle Survey presented a positive outlook on global growth, with a net of 52% of 84 economists expecting the world economy will get stronger over the next year, compared to net 47% figure in last month’s report." Back in October, the proportion was 43% and in September it was 55%. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy - same as in October and November.

"At the 12 month horizon, the positive theme continued with the consensus expecting all economies spanned by the survey to strengthen or stay the same except Finland, Sweden and Norway." Norway featured as an exception in October report and November. Back in October and November reports, expected deviation from stronger trend was also reported for Belgium.

"Eurozone is described to be in an expansionary phase of the cycle and expected to remain so over the next 2 quarters. Within the bloc, most respondents described Finland and Italy to be in a recessionary state, with the even split between contraction or recession for Greece, France and Portugal. Over the next 6 months, the consensus shifts toward expansion for both Finland and Italy." These results were broadly consistent with october and November reports.

"Over the Atlantic, the consensus view is firmly that North America as a whole is in mid-cycle expansion and is to remain so over the next 6 months." Again, this was in line with October and November reports.

 Note: Red dot denotes Austria, Canada, Denmark, Ireland, Spain and Switzerland.

For comparative purpose: October survey mapping 6 months out:

Previous report was covered here:

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

15/12/2014: BlackRock Institute Survey: EMEA, December 2014

BlackRock Investment Institute released the latest Economic Cycle Survey results for EMEA:

"With caveat on the depth of country-level responses, which can differ widely, this month’s EMEA Economic Cycle Survey presented a mixed outlook for the region. The consensus of respondents describe Russia, Croatia and the Ukraine in a recessionary state, the outlook changes to expansion for Croatia over next two quarters." In previous survey, the same three countries were described as likely to remain recessionary.

"At the 12 month horizon, the consensus expecting all EMEA countries to strengthen or remain the same with the exception of Russia and the Ukraine. Globally, respondents remain positive on the global growth cycle with a net 58% of 43 respondents expecting a strengthening world economy over the next 12 months – an 28% increase from the net 30% figure last month. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy."

Note: Red dot represents Czech Republic, Kazakhstan, Romania, Israel, Poland, Slovenia and Slovakia

Previous report was covered here:

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

15/12/2014: Ruble's Continued Woes

And Ruble starts the week on a downside trend...  Two charts via @Schuldensuehner

In USD terms at 58.77 and in EUR terms at 73.21.

Predictably, interest rate hikes of last week are not holding the line (