24/5/2015: Russian Economy: Weaker April Signals Renewed Risks

When I remarked recently on some less negative than expected developments in Russian economy over Q1 2015, I noted that these were fragile signs of potential stabilisation and that the risks remain to the downside. April industrial production appears to signal the same. April industrial production numbers are down 4.5% y/y and manufacturing is down 7% - the rates of decline that are significantly sharper than recovered over 1Q.

Remember that Russian GDP fell 1.9% in 1Q 2015 y/y, based on preliminary estimates - a decline that is shallower than what was expected by the analysts. Overall output (GDP at factor cost) fell slightly more sharply - by 2.3% over the same time, while domestic demand (Consumption + Investment) fell at just under 7%. The gap between output and domestic demand declines can be in part explained by imports substitution going on across a number of sectors, such as food, agriculture, industry and manufacturing, plus improved trade volumes also driven by ruble devaluation.

The decline in industrial production and manufacturing signals a feed through from collapsing investment to production sectors, as well as continued weakness in consumption and strengthening of the ruble. More significantly, ruble firming up is not helping imports substitution-driven demand. CBR has now returned to buying forex and selling ruble in order to, both, increase its reserves and also sustain lower ruble. Higher ruble valuations hurt fiscal balance and at the same time inducing weaker external balances. As the result, CBR is now regularly purchasing USD100-200 million daily and is raising cost on banks' access to repo facilities.

All in - just another reminder that the Russian economy is not out of the woods yet. For all the positive developments in recent months, the situation remains fragile and structural drivers for growth are still lacking, so any recovery, if sustained, will have to come from either external demand factors (oil prices, commodities prices, etc) and/or imports substitution effect supported by lower CBR rates.

15/4/15: Russian Foreign Exchange Reserves

Few weeks ago, based on the three weeks data from the Central Bank, I noted an improvement in Russian Forex reserves, while warning that this requires a number of weekly observations to the upside to confirm any reversal in the downward trend.

Now, with monthly data available for the full month of March, my concerns about temporary nature of improvements have been confirmed. Full month of March data shows a decline, not a rise, in forex reserves. Specifically, total reserves dipped from USD360.221 billion at the end of February to USD356.365 billion at the end of March - a m/m decline of USD3.856 billion.

Now, in monthly terms, March decline was the smallest since October 2014 and the second smallest (after September 2014) in 17 months. Nonetheless, forex reserves are now down to the levels of March-April 2007, having fallen USD129.766 billion y/y (-26.7%). Over the period of sanctions, total reserves are down USD136.961 billion (-27.8%). Over Q1 2015 the reserves are down USD29.095 billion.

Month on month, foreign exchange reserves (combining foreign exchange, SDRs and reserve position in the iMF) are down USD4.338 billion, with USD3.646 billion of this decline coming from foreign exchange alone. Gold holdings are up USD482 million month on month.

Gold, as percentage of total reserves, currently stands at 13.265%, the highest since November 2000. Gold holdings performed well for Russia over the period of this crisis, rising USD3.917 billion year on year through March 2015 (+9%) and up USD2.684 million since the start of the sanctions.

In terms of liquid cash reserves, foreign exchange holdings are down at USD298.665 billion at the end of March 2015, a level comparable to January-February 2007. end of March figure represents a decline of USD131.024 billion y/y (-30.5%) and the decline during the period of the sanctions is even steeper at USD136.9 billion (-31.4%).

Good news: Russian economy is past the 2015 peak of external debt redemptions (see: http://trueeconomics.blogspot.ie/2015/04/14415-russian-external-debt-redemptions.html).

Bad news: there is another USD54 billion worth of external debt that will need repaying (net of easy inter-company roll overs) in Q2-Q4 2015. Worse news: Q1 declines in foreign reserves comes with CBR not intervening in the Ruble markets.

Good news: capital flight is slowing down.

Bad news: capital flight is still at USD32.6 billion over Q1 2015 (http://www.themoscowtimes.com/business/article/russian-capital-flight-slows-sharply-in-first-quarter/518927.html) although much of that is down to debt redemptions.

Which means there is little room for manoeuvre anywhere in sight - should the macroeconomic conditions deteriorate or a run on the Ruble return, there is a very much diminishing amount of reserves available to deploy. Enough for now, but declining…

As I said before: watch incoming risks.

11/4/15: BOFIT on Ruble Rise Debate

Yesterday I posted some thoughts on Ruble appreciation over recent months http://trueeconomics.blogspot.ie/2015/04/10415rubles-mysterious-rise-some.html. Here is last night's BOFIT note on the same, highlighting CBR repo arrangements as the policy tool also contributing to changes in the trend:

4/4/15: A Sign of Ruble Stabilisation? Russian Forex Reserves Rise

The latest data (through last week) published two days ago by the Central Bank of Russia shows that Russian Forex reserves have risen for the second week in a row. In the week of 27/03/2015 Forex reserves rose USD7.9 billion to USD360.8 billion and in the week prior they were up USD1.2 billion. Thus, relative to the crisis period low of USD351.7 billion set in the week of 13/03/2015, Russian Forex reserves are up USD9.1 billion. This puts weekly reserves at USD2.2 billion below end of February reading.

This is a very uncertain development at this point in time. Russian Forex reserves were down 15 consecutive weeks prior to the last two weeks of increases, so it is too early to read the latest upticks as reversal of the trend, but it is pretty clear that, for now, things have stabilised somewhat.

Monthly data, not yet fully available, but reflective of the last week results, suggests that the aggregate reserves are slightly up m/m. At the end of March, Forex reserves at USD360.8 billion appear to be up USD579 million on the end of February.

In the year through the end of March 2015, the reserves are down USD125.33 billion (-25.8%) and on the start of the sanctions, these are down USD132.53 billion (-26.9%). Q1 2015 (end of quarter) reserves are down USD24.66 billion on end of Q4 2014. In other words, we need to see several more weeks of improved reserves before we can call a new trend.

26/3/15: De-dollarisation of Russian accounts: media catching up, but risks remain

As I highlighted a week ago here: http://trueeconomics.blogspot.ie/2015/03/18315-russian-deposits-dollarisation.html, Russian households are starting de-dolarising their accounts in the wake of some regained confidence in the Ruble and the banking sector:

• See here on Ruble relative performance, recently: http://trueeconomics.blogspot.ie/2015/03/23315-em-currencies-on-rise.html
• See here on latest Russian banking sector stats: http://trueeconomics.blogspot.ie/2015/03/1732015-russian-banks-latest-stats.html

Now, the Moscow Times (h/t to +Russia Insider ) is covering same trend: http://www.themoscowtimes.com/business/article/ruble-panic-recedes-as-russians-start-selling-dollars/518053.html

However, not all is well, still and risks remain. Here is BOFIT analysis of the forward risks relating to oil prices and the banking sector (more on the latest forecasts later on the blog): "If the oil price remains, as assumed, at around USD 55 a barrel, and despite savings decisions, the federal budget deficit is set to grow so large in 2015 (to about 3.5% of GDP) that the government Reserve Fund may be eroded by as much as a half. It is possible that support measures will be implemented using government bonds (as in the bank support operations in December 2014, which amounted to 1.4% of GDP). The support operations can also draw on debtors’ bonds (as in the funding of the state-owned oil giant Rosneft, which was just under 1% of GDP). Where necessary, banks can use both instruments as collateral against even relatively long-term central bank funding. Recourse to the central bank has already become more substantial than ever before."

And more: in the face of oil price risks, "Bank panic situations where households and enterprises withdraw their funds from banks are possible, even though the authorities have intensified banking supervision. On the other hand, the Bank of Russia is ready to take immediate support measures."

All of which means that from the macroeconomic perspective, the current reprieve in dollarisation trends can be temporary. Over the next six months, I still expect continued decline in investment, with private sector capex depressed by a number of factors that are still at play: the Ukrainian crisis, the looming threat of deeper sanctions and oil price risks. State enterprises and larger state banks are likely to continue cutting back on large debt-funded investments and more resources will continue to outflow on redemption of maturing corporate and banking debt. 

So keep that seat belt fastened: the bumpy ride ain't over, yet.

21/315: Russia Forex Reserves: Down Another Week

Based on weekly data for the week of March 13, 2015, Russian Central Bank forex reserves fell to USD351.7 billion, down USD5 billion on previous week. The reserves are now down 28.7% (USD141.5 billion) y/y. Compared to the same week a month ago, the reserves are down 4.5% (USD16.6 billion).

The rate of weekly changes in reserves (USD5 billion) is slower than in the week of March 6th (USD6.3 billion) but well ahead the 3mo average weekly decline (USD4.61 billion) and 6mo average (USD3.57 billion).

Two charts to provide some historical comparatives in terms of period averages relative to both levels and rates of change.

It is worth noting that there have been virtually no Forex interventions (Ruble rate defence: http://www.cbr.ru/Eng/hd_base/Default.aspx?Prtid=valint_day and http://trueeconomics.blogspot.ie/2015/03/20315-central-bank-interventions-in.html) from CBR in February and March and there have been ongoing de-dollarisation of the household funds in February (http://trueeconomics.blogspot.ie/2015/03/18315-russian-deposits-dollarisation.html) that is likely continued in March (reducing forex deposits and cash holdings), which implies that declines in reserves are down to the following drivers:

1. changes in euro and other currencies, as well as gold and non-dollar denominated assets, valuations for assets held by the CBR - in other words the potential adverse effects of dollar exchange rates against other currencies, and changes in asset values due to changes in US bonds markets;
2. demand for Forex from corporates and banks (all of which would be in the form of loans from the CBR to these entities) all of which is associated with deleveraging the external debt; and
3. potential fiscal demand for forex.

17/3/2015: Russian Banks Latest Stats: January-February 2015

Some interesting banking sector stats were reported this week by the deputy head of the Central Bank of Russia, Mikhail Suhov during the Russian Economic Forum in Geneva.  Here is a compendium of the latest banking stats reported by the CBR and in the Russian media.


Non-Financial Sector Credit

Russian retail banking lending to households fell 1.5% in February, down RUB165.4 billion with CBR expecting the trend to continue, stabilising at around 4-5% decline in household credit for the full year 2015. As of March 1, household credit outstanding stood at RUB11,060 billion.

According to Sukhov, household credit arrears rose 0.8 percentage points in the first two months of 2015 from 5.8% at the start of January to 6.6% by the end of February.

In January-February 2015, household credit declined by 2.1%, down RUB243.8 billion with RUB-denominated credit standing at RUB10,756 trillion against forex denominated credit of RUB304.4 billion.

Non-financial corporate sector credit fell 4.7% in dollar terms and 1.1% in Ruble terms. The figures do not reflect the latest CBR that lowered benchmark rate to 14% on March 13 from 15% previous. The CBR expects effects of the latest rate reduction to show in the aggregate data around May 2015.

Overall lending to the real sectors (excluding Government and financial sectors) fell 1.5% in February. Much of credit contraction is concentrated in a small number of banks, acceding to CBR deputy head.

Based on data from Finmarket, total real sector arrears stood at RUB730.4 billion, up RUB24.7 billion or 3.5% m/m. In January-February 2015, arrears rose RUB64.2 billion or +9.6%. As percentage of total banking assets, as of March 1st, real sector credit arrears were 6.6%, up 0.3 percentage points in February compared to January.

Sukhov also noted that current rate of increases in non-financial sector credit arrears is likely to continue, resulting in total arrears stabilising at around 7.5% for outstanding credit and 7% taking into the account new credit. CBR estimated 2015 total arrears increases of roughly RUB900 billion.


Bail-in Mechanism

Meanwhile, under the Financial Stability Board arrangement (FSB, set up in 2009 by the G20 group), the CBR is currently looking into establishing formal bail-in rules for the Russian banking sector and the system of bridging banks (licensed entities that act as bridging institutions temporarily holding banking assets in the case of bank shutdown). Bridge banks are supposed to take over assets of insolvent mankind institutions and hold these assets during the period of liquidation, allowing to extend the process of assets disposals to minimise the risk of fire sales. The bail-in mechanism proposed by the FSB includes automatic conversion of unsecured creditors (into equity and subordinated loans) to allow direct bail-in. However, the CBR has already stated that the automatic bail-in mechanism is not necessary for the Russian banking system at this point in time.


Forex Mortgages

Another interesting point raised by Sukhov in Geneva relates to the much-discussed in the recent past risk of forex-denominated mortgages held by the Russian banks. As a reminder, in December 2014, the CBR started a consultation with the banks on creating a mechanism for converting existent forex-denominated mortgages into RUB-denominated loans based on the exchange rate as of October 1, 2014. At the time, some analysts predicted that such a move would trigger significant write downs of banking sector assets. According to Sukhov, CBR currently sees no risk to the banking sector from forex mortgages conversions, with the number of banks exposed to such a risk being very small. The vast majority of such mortgages were issued prior to the Global Financial Crisis of 2008 with issuance of these loans slowing down very significantly after 2008.


Sector Consolidations

In 2014, CBR forced absorption of 7 Russian banks into bigger entities and the CBR is now expecting 2015 to be a much more active year for banking sector consolidation. Meanwhile, average T1 capital ratios for Russian banks remained above 12% in the first two months of 2015. As the result of organic changes in balance sheets, as opposed to sector players' consolidations via mergers and shutdowns, market share of 5 largest banks in Russia rose to around 52% in 2014 from roughly 49.5% in 2013. In 2015, the CBR expects market share concentration to increase to above 55%, potentially reaching 60% by the end of 2016.


Banks Profitability

This is consistent with the CBR view on the overall profitability across the banking sector. In February, banks' losses rose to RUB36 billion from RUB24 billion in January. However, Sukhov noted that the CBR does not expect banking sector losses to rise significantly over 2015, noting that some estimates of up to RUB1 trillion losses for 2015 across the Russian banking sector carry "very low probability" of materialising. Instead, Sukhov expects more polarisation across the banking sector, with greater concentration of losses. Sukhov's estimates for losses across the system of "one-two hundred billion rubles" is roughly half the estimate produced by CBR back in February (CBR forecast is for RUB300-400 billion in cumulative losses for 2015, against cumulative profit of RUB589 billion in 2014 and RUB990 billion profits recorded in 2013).

16/3/2015: Some new 2015-2018 forecasts for the Russian Economy

Amidst much of the (occasionally informed) speculation as to the whereabouts of Russian President Putin (see for example this rather informative piece: http://uk.businessinsider.com/what-is-putin-doing-2015-3?r=US#ixzz3UWqOOHLc), President Putin has finally reappeared from wherever he might have been over the last how-many days... Of course, his reappearance promptly led to some 'highly informed' Western analysts seeing President Putin's double...

The matters of conspiracy aside (for their endless supply makes their value trend toward absolute zero pretty fast), the Economy Ministry has been busy preparing new forecasts for Russia for 2016, trailing behind the recent forecasts from the Central Bank.

Minister Ulyukaev today said that the economic outlook for Russia is based on the view that Western sanctions will remain in place "at least over the period of 2015-2016" and "most likely, in the following years". Beyond this, the Minister said that 2016-2018 will likely see 2.5%-3% average rate of growth in real GDP and that 2016 growth is likely to be in the same range. New forecasts, according to Mr. Ukyukaev - currently in preparation stages - see economic recovery starting in 2016. This, if confirmed in the official forecasts, would represent a dose of optimism not matched by many independent analysts, and well in excess of the cautious gloom of the Central Bank (see below).

Meanwhile, as The Moscow Times (not a paper known for expressing pro-Kremlin sentiments) noted: foreign investors are heading back into Russian markets http://www.themoscowtimes.com/article/517481.html. I wish them well - they are in for a rough ride, but should enjoy some upside, on average. Do note some of the risks and concerns voiced at the end of the article.

Of course, amidst all this positivity, the real signs are pointing to growing concerns about the state of the economy.

Central Bank published forecasts show "at risk scenario" forecast of -5.8% contraction in GDP in 2015. This assumes average oil prices in the range of USD40-45pb.

Under the base scenario, oil prices are expected to average USD50-55pb in 2015, rising to USD60-65pb in 2016 and USD70-75pb in 2017. These assumptions support GDP growth forecast of -3.4% to -4.0% in 2015, followed by a contraction of -1.0% to -1.6% in 2016, and growth of 5.5% to 6.3% in 2017. In effect, these forecasts imply 2015-2017 growth of between 0.4% and 0.9%, cumulative. Under the base scenario, growth of 4.6% in 2017 would be required to get Russian economy back to the end-2014 levels.

The CBR forecasts decline of USD50 billion in its forex reserves to around USD307 billion in 2015 and no change in reserves in 2016. The balancing out of reserves is based on current account surplus forecast of USD90 billion in 2016 up on USD64 billion in 2015. CBR projects current account surplus of USD119 billion in 2017.

My view is that the above figures err on optimistic side. I expect Russian economy to shrink by around 4-5% in 2015, post GDP growth of between -1.5% to +0.5% in 2016 and grow by around 3% in 2017. I also expect CBR forex reserves to drop by around USD80 billion in 2015 and closer to USD40-50 billion in 2016 to USD225-230 billion at the end of 2017.



Note: a fascinating and exhaustingly detailed account of the short history of Russian Government and business struggles for who will be building the bridge to Crimea: http://www.forbes.ru/print/node/282637 (in Russian).

7/3/15: Fitch on Russian Banks: January data

Earlier this week, Fitch Ratings published 'Russian Banks Datawatch', covering banks' balance sheet data as of 1 February 2015. Fitch Ratings noted the following key developments in January:

• "Corporate loans increased by RUB2.2trn (6.5%) in nominal terms in January", down -0.9% "after adjusting for 23% rouble depreciation against the US dollar"
• "Retail lending dropped by a moderate RUB46bn (-0.4%) in nominal terms", but fell -1.1% in USD terms. Majority of banks are deleveraging at a rate of 1-4%
• "Customer funding grew by RUB3.5trn (8.2%) in nominal terms", down only -0.1% "net of currency valuation effects as RUB328bn outflow from retail accounts was only partially compensated by RUB264bn inflow of corporate (excluding government entities) funding"
• CBR funding: "Banks repaid about RUB1trn of state funding in January, which had become expensive after the Central Bank of Russia (CBR) increased the key interest rate to 17% from 11.5% in December 2014 (before cutting it slightly to 15% in February 2015)". Note: these repayments offset official forex outflows recorded in the months when banks borrowed funds. As a reminder, when a bank borrows in forex from the CBR, the borrowing is recorded as forex outflow. When the bank subsequently repays the funds in forex, the repayment is entered as forex inflow. But if the bank repays borrowings in RUB, the repayment is registered as an inflow in RUB.
• Actual CBR funding deleveraging by the banks was even steeper: Banks repayment of RUB1trn is broken down into (1) "RUB1.6trn decrease of CBR funding" offset by (2) "RUB0.6trn increase in deposits from the Ministry of Finance, regional and federal budgets". Note: as deposits are liabilities, higher holdings of official deposits within the CBR account counts against the CBR balance sheet.
• Fitch notes that going forward, "This trend [of net repayment of CBR loans] is likely to continue unless the CBR lowers the key rate further ...CBR funding of the sector in foreign currency has become significant, totalling USD21bn (of which USD9.5bn was provided to Otkrytie) at 1 February 2015".
• Banks' profitability: "The sector reported a RUB34bn net loss in January (-6.2% annualised ROE). Alfa-bank significantly outperformed the sector with a net income of RUB30bn mainly due to FX-revaluation gains. Among state banks only Sberbank reported net income, at RUB3.7bn, while others were loss-making: VTB group had a loss of RUB21bn, Gazprombank RUB8bn and Russian Agricultural Bank RUB4bn. Retail banks performed poorly, and most were loss-making..."
• Banks capital ratios: "The average total capital ratio (10% required minimum) of the 100 sample banks decreased by 54bps in January. As at end-1M15, seven banks in the sample (of those publishing capital ratios) had a total capital ratio below 11% [one of them] Fondservisbank (10.4%), was put under CBR temporary administration in February."
• Capitalisation forward: "The announced state recapitalisation measures of over RUB2trn should moderately support banks' capitalisation, although these will be available primarily for larger banks" In other words, expect push for more banks consolidations from Q2 2015.

Summary: corporate lending is up in RUB terms but down in USD terms, retail lending is down both in RUB and USD terms. Deposits up in RUB terms and flat in USD terms, Profitability down significantly and the sector is generating net losses. Capitalisation down with a number of smaller banks heading closer to regulatory minimum, implying that recapitalisation funds will have to be used pretty soon and sector conslidation is likely to accelerate.

3/3/15: Those 'tanked' Russian Forex reserves

So, according to some Western media, Russian forex reserves have tanked in February 2015. What happened, folks?

At the end of January 2015, Russian forex reserves stood at USD376.208 billion. Of which USD327 was in currency and liquid assets form. The latest data, given to us is for February 20, 2015 when, according to the Russian Central Bank, the reserves dropped to USD364.6 billion - a drop of 3.11% or USD11.6 billion. That's a lot of cash. But is not qualifying it as 'tanked'. Here's a chart plotting all reserves changes m/m

So (incomplete still) data for February puts drawdowns from the Forex reserves at USD11.61 billion against 12 mo running average monthly drawdown of USD10.73 billion. February marks the fourth biggest drawdown in 12 months. Again - large, significant, but 'tanking'?!

What is more critical is the source of drawdowns: how much of this is due to repayment of corporate and sovereign debt? How much is down to changing dollar value of other assets held? How much taken in form of loans to companies and banks (at least in theory or in part - repayable)? and so on.

No, the numbers are not catastrophic. Although they are unpleasant. Just as the gloating in the media is unpleasant: if the U.S. were to cut its external deficit by 2/3rds - what would be the headlines in Western media? And now note: February drawdowns from the forex reserves marked:

• 2/3rds reduction in drawdowns compared to December (real disaster of a month); and
• Large chunk of these drawdowns probably (we will know later for sure) went to fund debt reductions of Russian banks, companies and sovereign.

8/2/15: Carry Trades Returns: More Pressure for Ruble & CBR

Carry trades involve borrowing in one currency at lower interest rates (say in Euro or Japanese Yen) and 'carrying' borrowed funds into investment or lending in another currency, bearing higher interest rates (e.g. into Australia or New Zealand, or Russia or Brazil). The risk involved in such trades is that while you hold carry asset (loan to, say, an Australian company), the currency underlying this asset (in this case AUD) devalues against the currency you borrowed in (e.g. Yen). In this case, your returns in AUD converted into Yen (funds available for the repayment of the loan) become smaller.

With this in mind, carry trades represent significant risks for the recipient economies: if exchange rates move in the direction of devaluing host economy currency, there can be fast unwinding of the carry trades and capital outflow from the host economy.

Now, let's define, per BIS, the Carry-to-Risk Ratio as "the attractiveness of carry trades" measured by "the ...risk-adjusted profitability of a carry trade position [e.g. the one-month interest rate differential]... divided by the implied volatility of one-month at-the-money exchange rate options".  In simple terms, this ratio measures risk-adjusted returns to carry trades - the higher the ratio, the higher the implied risk-adjusted returns.

Here is a BIS chart mapping the risk-adjusted ratios for carry trades for six major carry trade targets:

Massive devaluation of the Russian Ruble means that carry trades into Russia (borrowing, say in low interest rate euros and buying Russian assets) have fallen off the cliff in terms of expected risk-adjusted returns. There are couple of things this chart suggests:

1. Dramatically higher interest rates in Russia under the CBR policy are not enough to compensate for the decline in Ruble valuations;
2. Forward expectations are consistent with two things: Ruble devaluing further and Russian interest rates declining from their current levels.

Still, three countries with massive asset bubbles: New Zealand, Australia and Mexico are all suffering from far worse risk-adjusted carry trade performance expectations than Russia.

The Russian performance above pretty much confirms my expectations for continued weakness in Ruble and more accommodative gradual re-positioning of the CBR.

24/1/2015: CB of Russia Recent Interventions

In 2014, Central Bank of Russia spent USD83 billion on currency interventions, against total draw down of USD124 billion in foreign reserves held. At the end of 2014, CBR’s foreign currency reserves, including gold, were USD386 billion, down from USD510 billion at the beginning of 2014. As of December figures, Russian foreign exchange reserves rank 6th largest in the world, providing a cover for more than 15 months of imports at current running rate.

In first half of January, CBR spend some USD2.2 billion on currency markets interventions, issued foreign exchange repos for the amount of USD8.3 billion, with most of this (USD5.4 billion) in 28- and 365-day maturities.

22/12/2014: Elvira Nabiullina, the Rouble’s last line of defence

Irish Independent on Elvira Nabiullina at the helm of the Central Bank of Russia (with comments from myself): http://www.independent.ie/business/world/elvira-nabiullina-the-roubles-last-line-of-defence-30854461.html 

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: http://www.bloomberg.com/news/2014-12-15/russia-increases-key-interest-rate-to-17-to-stem-ruble-decline.html

Take a smoke break and Russian CDS are busting past the 30% CPD ceiling: http://trueeconomics.blogspot.ie/2014/12/15122014-russia-ukraine-cds-hitting.html

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 (http://trueeconomics.blogspot.ie/2014/12/11122014-central-bank-of-russia-good.html) 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 (http://trueeconomics.blogspot.ie/2014/11/24112014-external-debt-maturity-profile.html). 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: 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 (http://trueeconomics.blogspot.ie/2014/12/11122014-central-bank-of-russia-good.html)

11/12/2014: Central Bank of Russia: The Bad & The Ugly...

In recent weeks, Russian Central Bank has issued a number of statements relating to interest rates policy. These included 

- Repeated concerns with inflation that hit 9.1% in latest data readings

- Concerns with effects of higher interest rates on investment

- Concerns with Ruble valuations (although much more muted compared to previous months); and

- Concerns with capital outflows.

Today, CBR hiked rates by 100 bps to 10.5%. Which is a contradictory move because:

1) 100 bps is clearly not going to be enough to arrest Ruble decline and slow down capital outflows

2) 100 bps will not be enough to dent inflation in the short run; and

3) 100 bps is strong enough to put even more breaks on investment.

Following the announcement, Ruble weakened against the USD and CBR upped its warnings on Q1 2015 inflation saying it might hit above 10%. Economic growth slowdown warning followed with CBR saying 2015-2016 growth outlook now risks 0% GDP expansion.

 Charts courtesy of @Schuldensuehner and @guardian 

We now have both the Bad and the Ugly, with the Good nowhere to be seen.

24/10/2014: Weekly Russian Economy Update

Bofit released some latest data on Russian economy, so here is the summary, with some of additional points by myself.

September economic activity acceleration came as a bit of a surprise.

• Manufacturing output was up 4% y/y, driven in part by devaluation of the ruble and in part by increased oil refining activity.
• Defense spending is up 33% y/y in January-September, which also is helping manufacturing orders.
• Agricultural output is sharply up as harvest hits near-record levels.
• Consumption is up as retail sales rose 1.7% y/y with non-food sales up 3.5%. Some observers suggest that households are taking out savings to prepare for higher inflation (inflation hit 8.3% in September, sharply up on 8% in August). Since incomes declined in real terms (down to devaluation and inflation), we can assume that this is to some extent true, although banks are not reporting declines in deposits.
• New car sales shrank 20% y/y in September from 0% y/y in Q1 2014. 
• But consumption is most likely showing lags relative to the rest of the economy, so we can expect continued deterioration in retail sales into Q1 2015.
• Decline in fixed capital investment shallowed out by about 2 percentage points, as Bofit notes "thanks to distinctly better development in investment of large energy and transport enterprises than other investment".
• Meanwhile, construction activity is slowing down from the H1 2014 boom.

Net outcome: the Economy Ministry estimates GDP growth at +0.7 % y-o-y in January–September 2014, with only slight deceleration in the July-September.

This is strong reading, considering some forecasts (e.g. World Bank at 0.5% for 2014). That said, as I noted earlier today, with Central Bank heading into October 31 decision on rates with expected 50-100 bps hike, we might see a sharp decline in the economy in Q4 2014. It would take 0.2% drop in Q4 to get us to WB outlook.

On the other front, everyone who grew tired of focusing on ruble collapse have switched into prognosticating federal budget meltdown on foot of falling oil prices. Yes, Brent fell by a quarter compared to 2014 highs. And Urals followed the trend with prices around USD85/barrel. The chart below (via Bofit) illustrates.

But no, this is not a letdown yet on fiscal side. Here's Bofit analysis: "If the price of crude oil holds at the $85–95 level for a longer time, Russian growth will be much slower than current consensus forecasts predict… Russia’s 2015 federal budget also assumes an average oil price of $100 next year, producing a budget deficit of 0.5 % of GDP. The impact of a lower oil price on Russia’s fiscal balance will still be manageable; the nominal increase in budget revenues from ruble depreciation will in part off-set losses. Prof. Sergei Guriyev estimates public sector finances could withstand an oil price of $80–90 for a couple of years thanks to reserve funds and the weak ruble. Sberbank’s research department has calculated that the current account will remain in surplus next year even if the oil price holds at $85. Export revenues will fall, but also imports will decline substantially on e.g. the weak ruble and impacts from economic sanctions."

How fast Russian imports fall relative to exports? Tough guess, but here's IMF data showing 2009 crisis period:

One thing is clear: the above forecasts by the IMF for 2015 show pretty small reaction in imports. If Russian demand for imports goes negative, it will be down to a number of factors:

1. Lower ruble leading to imports substitution - which is GDP-enhancing;
2. Russian sanctions leading to imports substitution - which is GDP-enhancing;
3. Government contracts shifting to imports substitution (including those with Ukraine, relating to military equipment) - which is GDP-enhancing.

And as 2009 shows, the room for contracting imports is massive: 28.7% y/y in one shot. And IMF is forecasting 2015 decline to be just 0.3% y/y.

14/9/2014: Update: Sanctions Round 4: Russian Banks, Stocks & RUB

Updating my chart on Russian stock market performance:

A very interesting set of statements from Sberbank Chairman, German Gref on the impact of sanctions on Russia's largest bank. Two source articles for this are: http://www.vedomosti.ru/finance/news/33360751/sberbank-ne-isklyuchil-rosta-stavok and http://www.vedomosti.ru/finance/news/33332871/sberbank-doveli-do-singapura?utm_source=vedomosti&utm_medium=widget&utm_campaign=vedomosti&utm_content=link

Some quotes from the above:

1. External funding markets are already de facto closed [for Sberbank] - including markets for debt under 90 days (recall, debt over 90 days is directly restricted under the sanctions). De facto, per Gref, sanctions are much tighter than de jure. Hard currency liquidity position of the banks is severely disrupted. 
2. Impact is significant: Sberbank has 28 outstanding euro debt issues in the markets: 22 of these are denominated in USD, 3 in CHF, 1 in Euro, 1 in Turkish lira and 1 in rubles. Prior to the EU sanctions (round 3), Sberbank placed USD1 billion in 10 year 5.5% coupon euro-debt in February 2014.
3. Russian banks are seeking new avenues for raising debt and equity. Per Gref, Sberbank is looking to re-list some of the existing equity, currently trading in US and European markets in other markets. Singapore is one potential platform, with Sberbank considering following in the footsteps of Gasprom which re-listed some shares in Singapore in June 2014. Sberbank is looking at Singapore as a new platform for both equity and debt. Currently, Sberbank shares are traded in London (LSE: September 10 daily volume traded is USD64.1 million), Frankfurt (Xetra: daily volume is insignificant at USD77,453 million), over the counter in the NY (volume is also small at USD0.95 million) and in Moscow (volume RUB6.8 billion or USD181.3 million). Moving into Singapore can provide significant access to new markets for Sberbank and open, simultaneously, access to new debt issuance.
4. Gref expects that the CBR will raise deposit rates on foreign currency deposits to increase funding pool.
5. There are no serious issues with ruble-denominated liquidity, although share of ruble funding coming via the Central Bank is relatively high and rising. State funding is now the main source for growth in credit supply since July as CBR funding rose by RUB223 billion to RUB5.6 trillion, Federal and regional budgets funding is up RUB87 billion to RUB624 billion, and funding via Finance Ministry is up RUB36 billion to RUB656 billion. Share of state funding in the banking system is now at a record of RUB7.1 trillion (13.7% of total banking sector liabilities).

In a related statement, another sanctioned bank, Rosselkhozbank also noted that new sanctions have zero material impact on its access to foreign liquidity, as debt markets de facto froze on foot of the third round of sanctions.

As a reminder, Sberbank, VTB, Gazprombank, VEB and Rosselkhozbank were hit by the fourth round of sanctions announced this Friday. The new round extends July 2014 3rd round of sanctions and prohibits EU investors from trading in new equity and debt instruments issued by these banks with maturity in excess of 30 days (previous round banned trading in instruments with maturity over 90 days).

Note: As covered on this blog, the CBR has de facto allowed free float of the RUB in advance of its pre-commitment to do so starting from January 2015. The CBR stopped interventions in the FX markets back in June 2014 and non-intervention continued through August and into the first two weeks of September. Prior to June, the CBR actively intervened in the FX market to support RUB. Over the last 6 years, the longest period of non-intervention in the FX markets was just 3 days.

28/8/2014: The State of Russian Economy

I published a lengthy note summarising my view of the state of Russian economy on the LongRun Economics Blog: http://trueeconomicslr.blogspot.ie/2014/08/2782014-russian-economy-outlook.html

The post looks at:

• Russian GDP growth
• State of Russian foreign reserves
• Central Bank policy interventions
• Capital outflows
• Funding situation for Russian banks and corporates
• Russia's external balance
• Federal Government finances
• Problems with imports substitution 

The summary is:

Russian economy is showing signs of stress, both in structural terms and in terms of the fallout from the Ukraine crisis.

In structural terms, reforms of 2004-2007 period now appear to be firmly shelved and are unlikely to be revived until the sanctions are lifted and some sort of trade and investment normalization takes place. Structural weaknesses will, therefore, remain in place.

In dealing with the crisis fallout, even if Russia were to switch to self-sufficiency in food production and tech supplies for defense sector and oil & gas sector, as well as re-gear its corporate borrowings toward Asia-Pacific markets, the reduced efficiencies due to curtailed trade and specialisation are likely to weigh on the economy. There is absolutely no gain to be had from switching the economy toward an autarky.

Politics aside, it is imperative from economic point of view that Russia starts to make active steps to disentangle itself from Ukrainian crisis. Rebuilding trade and investment relations with the West and Ukraine – both very important objectives for the medium term for Russia – will take a long, long time. It’s best to hit the road sooner than later.

Please note: this is not a note designed to deal with geopolitical crisis unfolding in Ukraine or Russia's role in the crisis. Here, I deal with economics.