11/1/2015: Ending 2014 with a Bang: Russian Inflation & Ruble Crisis

Couple footnotes to 2014, covering Russian economic situation. Much is already known, but worth repeating and tallying up for the full year stats.

Ruble crisis with its most recent up and down swings took its toll on both currency valuations and inflation. Over 2014, based on the rate tracked by the Central Bank of Russia, the ruble was down 34% against the euro and 42% against the USD. The gap reflects depreciation of the euro against the USD.

Virtually all of this relates to one core driver: oil prices. In 2014, Brent prices lost 48% of their values and Urals grade lost 52% of its value. Urals is generally slightly cheaper than Brent, but current gap suggest relatively oversold Urals. It is a bit of a 'miracle' of sorts that Ruble failed to completely trace Urals down, but overall, you can see the effect oil price has - overriding all other considerations, including capital flight and sanctions.

Ruble valuations took their toll on Moscow Stock Exchange - RTS index, expressed in USD, lost 43% of its value, reaching levels comparable to Q1 2009 (791 at the end of 2014, from 1,388 at the start of January 2014).

And ruble crisis pushed inflation well ahead of 5% short term target from CBR set for 2014. Preliminary estimates for December put inflation at 11.4%, with food inflation at 15% (7.3% in 2013), goods (ex-food) at 8% (4.5% in 2013) and services at 10% (8% in 2013). M/m inflation hit 2.6% in December 2014 - the highest since January 2005). Overall inflation was 6.5% in 2013, 6.6% in 2012, 6.1% in 2011 and 2010 and 8.8% in 2009. Last time Russian inflation hit double digit figures was in 2008 - at 13.3%.

Comment via BOFIT: "The pick-up in inflation at the end of the year reflected the ruble’s sharp depreciation and the ensuing frenzy of household spending. Following the ban on certain categories of food imports last autumn, food prices have risen even if no food shortage has actually emerged." Most of this is pretty much as reported. One point worth highlighting - lack of shortages, which is contrary to some of the hype paraded in the media about Russians suffering greatly from diminished supplies and stores running out of goods.

Again per BOFIT: "Representatives of food producers and retail chains committed in September to a government initiative that their members would not raise prices without good reason or create artificial shortages in the market. There has been no move by the government as yet to impose price controls as in 2010. The agreement could have limited price increases somewhat."

And a chart from the same source illustrating pick up in inflation:

Update: Some more numbers on inflation: Meat prices were up 20.1% in 2014, having posted deflation of 3% in 2013; fish prices were up 19.1% in 2014, a big jump on 7.6% inflation in 2013. Cereals are up 34.6% against 3.2% in 2013.

11/9/2014: Russian Equities and the Crisis: Update

An update of the event study on the impact of the Ukrainian crisis on Russian equities - through yesterday's close.

A chart for two main indices: MICEX (Ruble denominated) and RTS (USD denominated):

And a summary table of % changes in the indices (reed cells mark cumulative declines, green mark increases). Two indices impacts and changes are diverging due to Ruble devaluations vis-a-vis USD:

You can see very clearly that MH17 and subsequent third round of sanctions had the most dramatic impact effect (short-term shock), with most of the impact and longer-term effect accruing to the MH17 event, rather than sanctions. However, in terms of the long-term impact, Yanukovich's flight and replacement by interim Government in Kiev had the most dramatic effect on Russian markets.

Overall crisis impact is fully captured by two factors:

1. Russian markets effectively saw downgrading of the pre-crisis (pre-January 1, 2014) trends (so there is a loss of potential growth that would have happened if there was no crisis, assuming pre-crisis trend would have been sustained - a tall assumption, given the economy slowdown was well underway before the crisis hit); and
2. Devaluations of the Ruble since January 1 (not all of these devaluations were driven by the crisis, as I explained in numerous notes before, as the Central Bank was already moving toward a free float for the Ruble for some years now and set a target for the free flow back in the mid-2013).