2/4/15: Russia Business Outlook: Q1 2015

While we are waiting for Markit to publish the latest Services PMIs for BRIC economies and the last remaining Manufacturing PMI of the group for India, here are some interesting stats on longer-term outlook in the Russian economy.

Via Markit Russia Business Outlook survey for Q1 2015, covering business expectations 12 months forward:

• Overall private sector outlook forward has improved at the mid-point of Q1 2015 compared to the start of Q4 2014 as headline % of companies expecting an increase in next 12 months minus % expecting a decline has risen to +20% from Q4 2014 record low of +10%. 
• Nonetheless, as Markit notes, "the latest figure is still the joint-second lowest since the series began in late-2009."
• "Moreover, among the countries surveyed globally, only Japan (+16%) and France (+19%) have weaker activity expectations than Russia."

Interesting point: per Markit, "The overall improvement in the business outlook has been driven by manufacturers. The net balance for expected goods production over the next 12 months has risen to +35%, the highest since October 2013." We are seeing effects of imports substitution.

Another point is that Services providers are much less optimistic: "...the services activity net balance has risen only slightly to +12%, the third lowest on record and the weakest figure among all

countries surveyed."

Core drivers for downside in expectations: "general weakness in the wider economy, a lack of working capital, high interest rates, inflation, currency fluctuations and a rising tax burden." Key risk, especially in the Services sector, is Capex: "... firms expect to cut capital expenditure over the next 12 months. The net balance for capex has trended lower since the start of 2013, and has fallen into negative territory in February for the first time, at -2%. This is also the lowest capex net balance of all countries surveyed. Service providers expect to cut capex (-3%) while the outlook at manufacturers is broadly neutral (+1%)."

Considering the above chart, the slowdown in the economic growth has become pronounced in Q4 2013, although structural weaknesses appear to set in around the ned of 2011. This is also consistent for the BRIC group overall as shown in the chart below:

Excluding Brazil (see my PMI analysis of the BRIC for more on this) all other BRIC economies have posted a sharp drop in expectations starting with Q1 2012. This trend remains persistent through Q1 2015, with Brazil joining the line up in full in Q1 2015.

Not a good sign for the global economic growth prospects...

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.

12/2/15: Ruble Crisis in a Historical Perspective

A neat comparative of the extent of the recent Ruble crisis in a historical context (note: this prices Ruble devaluation at ca 58%, presumably to the USD, is for the peak crisis, while current valuations imply y/y devaluation of 47%).

Source: @jamesrickards

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.

4/1/2015: Russian Economy Update

As I noted earlier, Russian economy posted an estimated decline in real GDP of 0.5% in November for the first time since 2009, while Russian inflation accelerated to 11.4% y/y in December, up from 9.1% in November. Latest guesses for economic growth in 2015: -4.0% at average crude prices of USD60 bbl via Finance Minister, Siluanov. Previous estimate by CBR consistent with this oil price level was 4.5-4.7% contraction.

To reduce inflationary pressures and to alleviate 'precautionary demand' (stockpiling) of some core goods, the Government is considering imposing a freeze on some food prices, according to Andrei Tsiganov, deputy head of the Federal Anti-Monopoly Service.

Still, according to CBR First Deputy Governor Ksenia Yudaeva, long term inflation target remains in place at 4% by the end of 2017. Good luck to that…

Largest driver for inflation was mid-December Ruble crisis (December 16-17). While Ruble posted some recovery in subsequent days, it came at a hefty price tag for the Russian foreign exchange reserves and Ruble resumed slide last week as CBR refrained from intervening in the markets from December 22nd.

Key driver for the upside of the Ruble has been, in addition to aggressive interventions by the CBR, the decision on December 17th to mandate five largest Russian state-owned enterprises: Gazprom, Rosneft, Alrosa, Zarubezhneft, and Kristall to reduce their foreign exchange holdings to the levels of October 2014. The deadline for this is March 2015. The companies will report their forex levels on a weekly basis. Behind the scenes, President Putin started discussions with larger private enterprises to also reduce their forex deposits.

Talking about deposits, to reduce pressure on retail banks, Duma passed the legislation to raise deposit insurance coverage from RUB700,000 to RUB1.4 million on December 19th. Russian Finance Ministry supported the bill, having previously resisted smaller increase. On corporate funding side, CBR announced, on December 23rd, new forex credit lines of 28-days and 365-days basis.

1/1/2015: Russian Reserves Down USD10.4bn in the Week of December 26th

CBR published data on Russia's foreign exchange reserves for last week (through December 26th), showing another drop in reserves to the tune of USD10.4 billion. So far, since the onset of the accelerated Ruble crisis, Russian FX reserves are down 26.1 billion. December total (excluding December 29-31) decline in reserves is now USD32 billion, which makes it the  worst month for FX losses since the January 2009 when Russia lost USD39.4 billion in reserves. December 2014 so far ranks as the third largest decline month for the entire period for which data is available (since January 1998).

Couple of charts to illustrate:

As of the end of last week, Russian External (Forex) Reserves stood at USD388.5 billion, down from USD420.5 billion in the last week of November. Since the beginning of the sanctions period (from the week of the Crimean Referendum) through the end of last week, Russian reserves are down substantial USD 98.1 billion, while from January 2014 through end of December 2014, the reserves are down approximately USD107 billion. At this rate, and accounting for varying degree of liquidity underlying the total reserves cited here, but omitting the reserves held by larger state-owned enterprises, by my estimates, Russia currently has roughly 18-20 months worth of liquid reserves available for cover of debt redemptions and unrelated forex demand.

31/12/2014: Falling Again: Russian PMIs for December

HSBC and Markit released Russian PMIs for December, showing deteriorating conditions in Russian economy, as expected, given the severe Ruble crisis that hit mid-December.

Manufacturing activity posted a reading of 48.9 which is down from 51.7 in November, signalling a switch from a rather average growth to a contraction. December reading was close to being statistically significant for a sharp decline. Q4 2014 average Manufacturing PMI was at 50.3 which is better than Q4 2013 reading of 50.0 and worse than Q4 2012 reading of 51.7. But December figure breaks three consecutive months of above 50.0 readings and Q4 2014 reading is now below Q3 2014 average of 50.8.

Services PMI continued sub-50 print for the third consecutive month, coming in at 45.8 in December. Q4 2014 showed sharp deterioration in Services compared to Q3 2014 (50.2), as well as compared to Q4 2013 (53.0) and Q4 2012 (56.8).

Composite PMI fell to 47.2 in December from already weak 47.6 in November, marking third consecutive month of sub-50 readings. Q4 2014 average is at 48.0, far worse than Q3 2014 average of 51.1 and well below Q4 2013 average (51.1) and Q4 2012 average (52.7).

Overall, as chart above clearly shows, the downward trend in Russian economic activity across all sectors, the trend that set in around November 2012 and started flashing signals of recessionary dynamics around Q4 2013, remains in place.

31/12/2014: Ruble Crisis: Banking System in a Shut-Down Mode

Something for Russia analysts to watch comes January 12: The CBR will be offering RUB 1.1 trillion in 3-mo repo auction with eligible collateral being lowered to allow non-marketable assets. That is roughly USD20 billion in one go.

Meanwhile, Russian CB has been bailing out banks in line with the announcement made two weeks ago and passed via an emergency legislation by the Duma. Trust Bank was the first one to get a bailout of RUB99 billion in a form of 10-year loan and additional RUB28 billion loan for "Otkrytie" - financial intermediary that will take over Trust Bank. But the bailout is a bit of a misnomer here. Instead, it is a backdoor QE. "Otkrytie" already announced that it will spend RUB99 billion it borrowed from the CBR at 0.51% pa, to buy Russian Federal bonds. On back of that, S&P downgraded "Otkrytie" confirming rating of BB-/B, but moving it to negative outlook.

This was followed by the recapitalisation for VTB. The Government approved RUB250 billion funding for VTB which will be paid into two tranches. The first one of RUB100 billion was already deposited with the bank and the second one is forthcoming in Q1 2015. With both tranches in place, VTB CT1 capital ratio will be expected to rise to 12% from current 10.2%. VTB got the first tranche on the following terms: 30 years deposit at inflation+1% margin per annum, calculated every 6 months and payable every 6 months.

In reality, here's what's happening on the ground. 2014 has been marked by freezing of external funding sources (due to sanctions), rising corporate demand for credit (due to sanctions) and delletion of deposits. Deposits inflows were predominantly forex, demand for credit was predominantly in Rubles. The crisis is made worse (worse probably than 2008-2009 one) because capital buffers of the banks are weaker, relative to regulatory benchmarks and funding sources were more reliant on external funding and were shorter term. The CBR drive to reduce number of banks competing for dwindling deposits base has been not aggressive enough, so market fragmentation is still a problem: too many banks with

The banking crisis is now being compounded by the breakdown in payments systems. In September 2014, the CBR facilitated setting up of the new National Platform for Payments Cards (NPSK) that is supposed to become operational by march 1, 2015. Interestingly, this week the CBR published a list of 50 major or significant payments providers operating in Russia - a list that excludes both Mastercard and Visa.

The recaps will continue on. National Wealth Fund is set to inject ca RUB394 billion (10% of the fund value) into the systemically important banks, namely banks with own capital in excess of RUB100 billion, the list of which includes only Sberbank, VTB, Gazprombank, Rosselkhozbank, Alfa-bank, VTB-24, Bank of Moscow, Unicredit Bank and Rosbank. The injection is supposed to be used for infrastructure investments by the banks. Funds will be disbursed in the form of deposits and in debt paper issued to fund infrastructure investments.Cost of funding will be set at the rate at which the NWF will provide deposits to the banks. Banks will report quarterly on funds use.

Basically, we are witnessing a system that is heading into a major crisis - the hatches are being welded shut, not just battened. Whether that takes place before the flaring up of the next bout of Ruble crisis or not will determine how 2015-2016 are going to play out.

29/12/2014: Some Tough Data from Moscow: Growth & Ruble

Couple of reminders that the Russian crisis is not over, yet.

November GDP figures show GDP down 0.5% y/y - the first month of decline since October 2009. In October 2014, growth was +0.5% and 0.1% m/m. November m/m posted a decline of 0.2%. All figures hereinafter are seasonally adjusted and working day adjusted.

Decline in November was driven by a broad range of sectors: industry, construction, private services, taxes on goods and import duties. Extraction sectors, electricity, water & gas, and retail sales posted positive growth.

Investment fell 1.9% m/m in November. This is before the December currency crisis and two massive interest rates hikes. So expect more red ink here when December figures come out.

January-November overall GDP growth is now down to 0.6%. Seasonally-adjusted construction sector activity was also revised - Q1 2014 posted a revised decline of 2.5% y/y against previous estimate of 2.3%, Q2 2014 posted a decline of 1.6% from an estimated decline of 0.7%, Q3 2014 decline was 0.4% from previously estimated rise of +0.1%. In October, construction sector posted revised m/m growth of 3.5% and in November the sector activity fell 1.5% m/m.

Industrial production posted another month of poor results. In September, industrial activity grew at 1.4% m/m, following by slower 0.2% growth in October, and a decline of -0.9% m/m in November.

Real personal disposable incomes fell 4.6% in Q1 2014, rose 3.3% in Q2 2014 and 1.7% in Q3 2014. In November, real disposable income fell 2.9% m/m, having posted growth of 2.4% m/m in October. We can certainly expect further and deeper declines in December on foot of massive increases in interest rates and a drop in Ruble valuations.

Retail sales rose 0.2% in November, after posting 0% growth in October.

Unemployment remains unchanged at 5.2% - the rate that has been steady for the last 6 months.

Exports of goods in November reached USD37.6 billion representing a decline of 19.7% y/y and 7.1% drop m/m. Imports of goods in November stood at USD23.2 billion, down 22.1% y/y and a decline of 13.5% m/m. So despite sharper decline in imports in percentage terms, trade balance deteriorated from USD17.0 billion in November 2013 to USD14.4 billion in November 2014.

Full year trade figures estimates are charted below:

As suggested on this blog, imports declines are expected to run deep: 8.4% y/y in 2014 against expected exports decline of 3.0%. The result is the forecast increase in trade surplus of USD11.5 billion or 7.0% y/y.

Largely unrelated to the above news, Ruble seems to have reversed some of the gains made last week and is down some 9.4% against USD and Euro on lower oil prices:

Credit: @Schuldensuehner:

Euro chart:

The point is - last week's measures are temporary in their nature:

• 17% interest rates cannot be sustained without completely demolishing banks balancesheets, companies and households;
• Convincing larger corporates to cut their forex deposits will have at most short-run effect, as demand for forex is likely to ramp up due to debt maturity in Q1 2015.
• Threats of investigations and pursuit of 'speculative transactions' will do preciously nothing as most of trade will be coming via ex-Russia intermediaries.
• Massive spike in interventions from the CBR are not sustainable, given the pressures on reserves from the banks, debt redemptions and corporates/investment.

Meanwhile, core weaknesses in the economy and oil price dynamics will remain. And with them, there will be continuous pressure on the Ruble.

25/12/2014: Ruble Crisis: Stage 1 Capital Controls

In a recent post on Ruble Crisis (http://trueeconomics.blogspot.ie/2014/12/23122014-simple-math-russian-default-or.html), I have promised to post my comments that were forthcoming in Portuguese Express. Here they are, in English:

Q: Did Russian Government impose capital controls last week?

Yes. Both de facto and de jure, the new requirement on state-owned companies and a softer request for larger private companies to reduce their foreign exchange holdings constitute capital controls. However, the reduction is relatively benign and will not present a material risk to these companies' operations. 

The reason for this is that the benchmark holdings set at October 1, 2014 levels of reserves mean that the new restrictions cover primarily build up in foreign exchange reserves accumulated during the acceleration of the currency crisis. In a sense, these were precautionary accumulations of foreign exchange that have little to do with operational demands of the companies involved. A more material restriction could have been limiting reserves to a fixed proportion of revenues. In the 1998 crisis, Russian authorities forced exporters to convert all foreign exchange earnings in rubles. This time around, an intermediate measure, in severity ranking between the 1998 case and this week's announcement, would have been requiring exporter to convert, say 50 percent of their earnings into rubles. However, Moscow held back such a measure and opted for a weaker version, benchmarking reserves to October 1 positions. 

As is, the measure will likely increase supply of US dollars into the market by about USD50 billion - roughly the amount that has been accumulated in precautionary reserves. And this comes on foot of the new currency swap agreement with China that can inject up to USD24 billion into the markets.

The new restriction is voluntary in nature, in so far as companies can continue to accumulate reserves, but in reality, only those companies facing significant bond redemptions in 2015 will be allowed to do so. Barring the latter exemption, we would have seen moratorium on debt redemptions for larger Russian companies by mid-Q1 2015.

Overall, the new measure introduced by the Russian Government is, effectively, a bid to avoid introducing full scale capital controls and to enhance the Central Bank of Russia's firepower in the forex markets. This has already been reflected in the markets via a dramatic rebound in the Ruble valuations and an equally significant decline in the volumes of short ruble contracts which fell from this week's high of just under 70,000 to below 50,000.

Updated: here is the link to the article http://expresso.sapo.pt/rublo-valoriza-gracas-ao-controlo-suave-de-capitais=f903997

24/12/2014: House of Rubles: Bulgaria's Capital on Ruble Crisis

Here is an article in Bulgarian Capital on the subject of the Russian currency crisis, with comments from myself: http://www.capital.bg/politika_i_ikonomika/sviat/2014/12/19/2442567_kushta_ot_rubli/. My original comments in English:


1. What triggered the acceleration of the rouble crisis and why the drastic raise of the interest rates didn't help?

In a currency crisis, raising interest rates usually has little effect on currency valuations because the motives for dollarisation or a switch away from the domestic currency rest outside the scope of deposits and savings.

Russian crisis has been driven by rapid collapse of oil prices and by the growing demand for dollar and euro liquidity from banks and companies forced to repay foreign borrowings due to lack of access to the foreign credit markets.

Several larger Russian firms, facing billions of dollars of debt redemptions in Q4 2014 have moved into the market in the last 10 days, buying up dollars and using ruble loans from the Central Bank to fund these purchases. In addition, new estimates that came out last week showed Central Bank of Russia witnessing accelerated rate of capital outflows suggesting that Q4 outflows will match those in Q1 and that the total volume of outflows will total $134 billion, matching 2008-2009 crisis peak. This triggered a run on the Ruble that started on Monday and continued through Tuesday. Tuesda run was further exacerbated by the dollarisation of the household deposits, with many Russian households rushing to convert Ruble savings into dollars and euros.

In a way, 10.5 percentage points hike in interest rates enacted by the Central Bank added fuel to the fire. Firstly, it signalled to the markets that capital outflows are reaching crisis proportions. Secondly, it increased the demand for loans from the households trying to secure credit before rates rise even higher, and also drove more companies and households toward conversion of their deposits into dollars.

In the short run, the interest rate hike also led to a more aggressive shorting of the ruble, especially by algorithmic trading programmes, by acting to suppress supply of dollars out of Russian deposits into ruble trades, while leaving external supply of dollars available for backing shorts unaffected. The short-term nature of such strategy was evident in the abrupt reduction in net short positions in the market.


2. What options do Russian authorities have now to deal with the situation? Will Russia need to use capital controls?

So far, Russian Central Bank spent around USD10 billion on foreign currency interventions (through the first two weeks of December). The ministry for finance further openly committed to injecting additional USD7 billion. Simultaneously, the CBR adopted measures to ease balance sheet pain for the banks. The CBR also dramatically expanded its repo operations. All of this had an effect of calming the markets down - the effect witnessed on Wednesday.

However, the underlying causes of the crisis remain unaddressed and the current reprieve can be temporary, unless the CBR and the Russian Government adopt more drastic measures. One measure that will be effective in dealing with the underlying drivers of the crisis is limited capital controls. These can reduce dollarisation of the domestic household and corporate deposits and also restrict, in part, outflows of funds abroad. However, the second problem - mounting weight of debt redemptions by sanctions-impacted banks and companies - requires a different solution. One possible solution could be freezing redemptions for entities directly covered by sanctions, allowing ill up of interest to avoid outright default. Both measures are what we can term the 'nuclear' solutions and to-date the Russian Government has balked at adopting them. However, the Government is already applying pressure on Russian companies to stop hoarding foreign currency. The Government is also diverting 10% of the Russian National Pension Fund receipts toward supporting domestic banks.

Should the crisis regain momentum, even the 'nuclear' - in economic terms - options are going to be on the table.


3. How close is Russia to a repeat of the 1998 crisis?

The 1998 crisis was very different in nature and causes, so the parallels to it are tenuous at best. In the 1998 crisis, Russian Government was carrying unsustainable levels of external debt and it was running huge deficits. The country external balance of payments was in a persistent deficit. None of these factors are present today. Russian Government fiscal surplus is in excess of 2 percent and devaluation actually improves the Federal Government position in the short term. Current account is in a surplus and even with oil going to USD50/bbl, current account position is well-supported in the short run by collapsing imports. The entirety of Russian Government debt redemptions for 2015 is just over USD2.8 billion.

On the other hand, Russian economy today is in the same structural cul de sac as in 1998. Core driver for growth - high energy and commodities prices - is gone and it is unlikely to return any time soon. Consensus forecasts suggest oil price averaging around USD80/bbl in 2015, so at the very best, Moscow can expect moderate improvement in pressures compared to current situation.


4. Is now a deep recession a certainty for Russia in 2015? And how much worse can things get?

It is most likely that the Russian economy will slip into the recession over Q4 2014 - Q2 2015. The only question is - how deep the recession can be. Based on USD60/bbl assumption for the price of oil, the Central Bank estimates that Russian economy will contract 4.5-4.7% in 2015. At USD80/bbl, the contraction is likely to be closer to 0.8-1%.

The former is a heavy toll on the economy, while the latter is relatively mild and consistent with Euro area experience in 2012-2013. And beyond that, 2016 is also promising to be a tough year. Russian economy desperately needs two things: investment for developing non-extraction sectors, modernising the capital and technological bases; and structural reforms, reducing red tape, corruption, arbitrary enforcement of laws, reducing bureaucracy and altering labour markets. It will be extremely hard to deliver investment boost in current financial conditions and in the presence of sanctions. It will be virtually impossible to deliver reforms with current power brokers' so heavily dependent on continuation of the status quo of power and wealth distribution. But, at least reforms are a function of internal will.

There are added risks to the downside of the above forecasts, however. If capital outflows remain at peak levels consistent with Q1 and Q4 2014, interest rates will have to rise even further. Meanwhile, devaluation of the ruble will require offsetting nominal increases in spending on pensions, social supports, as well as investment in imports substitution. The result will likely be even more severe recession than forecasted above.


5. Could the rouble crisis shake Putin's grip on power?

At this stage, it is very hard to imagine any significant shift in the power balance in Moscow. The reason for this is two-fold. There is no momentum for such a change in the electorate and amongst the elites. Most recent public opinion surveys show steady 80% and higher support for President Putin and similar broad approval ratings for the Government.

Economic hardship is something the Russian society endures when it is faced with geopolitical adversity. Sanctions, in a way, are reinforcing current balance of power in favour of President Putin. The Crimean Euphoria effect is now almost gone. Eastern Ukraine offers much lower support base within the Russian society, with roughly 60% of population approving Russian Government providing support for the separatists there. But the juxtaposition of Russia vis-a-vis the West is now forming the main basis for President Putin's popularity. Whether we, in the West, like it or not, Russians do feel that their interests are not being served by cooperative engagement with Nato and the West. And much of the fault for this antagonism is based in both sides actions and rhetoric.

In addition, Russia lacks viable alternative to the current power balance. Existent opposition is even more vested into nationalist rhetoric and represents more extreme positions both in economic policies terms and geopolitical outlook. Opposition currently visible outside Russia has no support base within Russia. It is a power vacuum, absent the current Presidency. And, frankly, I cannot convincingly say that external opposition offers anything other than Putinism 2.0. The head of state change is not equivalent to structural reforms and so far, democratisation rhetoric from the Western-based Russian opposition is shallow, unbacked by any serious proposals for reforms and offering no alternatives to the 'power vertical' systems put in place from ca 1995 on, from the late Yeltsin era through today.

That said, if the crisis persists beyond 2015, we are likely to see growing pressure on the President and the emergence of potential challengers. Whether they will offer any serious prospect of reforms, while providing pragmatic road map for stability and governability is another question altogether.


6. What is more likely now - the economic agony to make the wounded Russian bear even more belligerent, or to force Putin to soften his position and to seek lifting of the sanctions?

In my view, the current situation is very volatile and highly unpredictable. We can certainly hope that the crisis is going to move both Russia and the West toward reconciliation of their respective positions. We need a constructive dialogue across a range of geopolitical issues. And we need Russia to be a strong, but cooperative participant in this process. The core point here is that it takes two to tango. The West needs to moderate its position on sanctions and Nato, Russia needs to be offered a way out of the Ukrainian crisis, while Ukraine's independence and territorial integrity must be preserved. Russia, in return, must step away from brinksmanship in both Ukraine and vis-a-vis Nato. The former is a disastrous strategy that will not deliver on Russian longer-term objectives and will continue to antagonise the Ukrainian population, moving the country away from any future good will-based cooperation with Russia. The latter is a tragedy waiting to happen - close calls in fly-bys between Russian military aircraft and civilian airlines in the Baltic Sea region are the proof of this.

Can 2015 be the year when we see some positive changes in these directions? I certainly hope so. But the indications are, we will see escalation of the crisis, before we see resolution being put forward.