3/8/15: IMF on Russian Economy: GDP Growth Upgrade for 2015-2016

IMF has just realised its assessment of the Russian economy. Several interesting aspects of this report are worth highlighting.

First up: economic growth projections. IMF actually upgraded, marginally, Russian forecasts for 2015-2016 across the key macroeconomic parameters. Here are three charts comparing GDP growth, Inflation and Current Account balance projections from the Fund across two separate reports: April 2015 WEO and today's Article IV.

And a summary of latest forecasts

Overall, small upgrade on GDP side compared to April release, for both 2015 and 2016. Expected return to positive growth in 2016 remains extremely weak and subject to huge uncertainty. Worse, when one looks into components of GDP, the picture that emerges is less 'positive'.

Domestic demand will likely remain a negative drag on growth though 2016, with expected improvement - albeit marginal - on investment side in 2017. Consumption, however, will remain a small contributor to the overall growth in 2018-2019. Investment is also to remain weak.

Structural nature of the slowdown is reflected in exceptionally weak productivity performance. This traces back to post-crisis period in its entirety. Russian economy did not experience a significant recovery on productivity growth rates post-2009 crisis and since 2010 there has ben a pronounced downward trend in productivity growth:

While relatively low unemployment is supported by decline in labour force participation rate (accelerating due to twin demographic problem of rising older and younger population shares, plus poor health performance amongst older adults):

Overall, however, declining labour force trend should have translated into increased productivity of the labour force. In Russian case, this is not happening.

Slight uptick in unemployment recently is likely to continue through 2015, but will not be enough to induce labour productivity growth acceleration:

The IMF forecasts come on foot of ruble posting woefully poor performance, falling to a 5-months low (http://www.bloomberg.com/news/articles/2015-08-03/ruble-drops-most-in-emerging-markets-with-crude-at-six-month-low) and with Manufacturing PMI showing acceleration in economic decline in July (http://trueeconomics.blogspot.ie/2015/08/3815-russia-manufacturing-pmi-july-2015.html).

All of this is hardly a pleasant reading. However, not all is as gloomy as the above headline figures imply. In particular, in several key areas, macroeconomic position is relatively strong. I will blog on these in subsequent posts.

3/8/15: Russia Manufacturing PMI: July 2015

Russia Manufacturing PMI posted slight acceleration in downward momentum in July compared to June.

Per Markit release:

• Operating conditions deterioration was "reflective of soft demand which undermined production and new order intakes. Jobs continued to be lost, while firms reduced their inventories at a marked and accelerated pace."
• Profit margins were continuing to fall under pressure: "On the price front, competitive pressures and lower demand encouraged firms to cut their charges marginally during July. That was in spite of a marked and accelerated increase in input costs."
• July data, however, shows that "the rate of decline was fractional and remained centred on the investment goods sector as consumer and intermediate goods both recorded growth of production compared to the previous survey period."
• Forward looking indicators: "Similar trends were seen for new orders, with a fall in orders for investment goods leading to a decline at the aggregate level. …Levels of new business from abroad also continued to decline during July, with the rate of contraction accelerating since the previous survey period to the sharpest recorded since April."

In numbers terms:

• Manufacturing PMI is now down at 48.3 compared to 48.7 in June 2015 and 51.0 in July 2014. 
• 3mo average through July is at low 48.2 against 3mo average through April at 48.9 and against 49.7 3mo average through July 2014.
• Russian Manufacturing PMIs have been below 50.0 mark for 8 consecutive months now.

Overall, the picture is consistent with two key trends that have developed over recent months:

1. Manufacturing sector is not showing signs of stabilisation that are present elsewhere in the economy; and
2. Within the broad sector, imports substitution is presenting some upside opportunities in consumer goods and intermediate goods, while investment-driven capital goods are showing sharp contractions.

4/7/15: Russia Services and Manufacturing PMIs: June 2015

Manufacturing: 

• "Operating conditions in Russia’s manufacturing sector continued to deteriorate modestly during June as output, new orders and employment all fell."
• "Price levels continued to rise, albeit at historically muted rates, while shortages of working capital and input inventories meant firms continued to meet their orders directly from stock wherever possible."
• Manufacturing PMI posted 48.7 in June, still in contracting mode, but a slight improvement on 47.6 in May. 
• June marked 7th consecutive month of Manufacturing PMIs below 50.0
• 3mo average through June was 48.4 against 3mo average through March at 48.5 and 3mo average through June 2014 at 48.8. In other words, the rate of contraction remained broadly the same in 3mo through June 2015 as in previous 3mo period.

Services:

• Slight fall in service sector business activity during June as activity declined in spite of ongoing growth in new work
• Extra capacity signalled in service sector as backlogs and employment both continue to fall
• Service providers retain some optimism of pickup in activity in coming year
• "Activity levels in Russia’s service sector were down marginally in June as ongoing growth in new business proved insufficiently strong relative to capacity levels. …Capacity was cut in response through to another marked fall in staffing levels."
• Services PMI fell to 49.5 in June from 52.8 in May, reversing two months of above 50.0 readings in April-May.
• 3mo MA through June 2015 was 51.0 against 3mo average through March 2015 at 43.8 - a marked improvement for the 2Q 2015. 3mo average through June 2014 was 47.6, which means that 2Q 2015 saw, on average, positive, but weak growth against sharp contraction in 1Q 2015 and moderate contraction in 2Q 2014.

Composite:

• Markit Russia Composite PMI Index recorded a level of 49.5 in June, down from 51.6 in May and a three-month low. 
• Composite PMI 3mo average through June 2015 was 50.6, well ahead of 45.7 average through 1Q 1015 and 48.3 average for 2Q 2014. Again, in quarterly terms, 2Q 2015 was stronger, signalling growth, compared to contractionary dynamics in 2Q 2014 and 1Q 2015.

Note: most recent trend (downward shift in overall activity across all two sectors) set in around October 2012 and run through February 2015. Since February 2015, we are seeing some improvements in the series, but no new trend, yet.

26/6/15: Russian Economy: Domestic Demand Still Weak in May

Some latest Russian stats to scare the pants off everyone:

• Investment is down 7.5% y/y in May and in January-May cumulative drop in Investment is 5% y/y. 
• Retail sales are down 9% y/y in May and down 7.5% y/y in January-May 2015. January-May seasonally-adjusted sales, however are down primarily due to January drop.
• Real disposable incomes are down 5% y/y in both April and May.
• Industrial production is down 8% y/y in May, January-May decline is 4%.
• Estimated GDP is down 3.2% y/y in January-May 2015 based on Economy Ministry estimates and 3.4% y/y based on Vnesheconombank estimates. This suggests acceleration in contraction compared to 1Q 2015 when the economy shrunk 2.2% based on first revision of the earlier estimate. Latest consensus forecast is for full year real GDP decline of 2.7-3.5% on 2014.  Which is an improvement on past forecasts. 

Problem is, fifth month into the year, and the signs of stabilisation are still quite contradictory and major parameters on domestic demand size are still volatile. 

18/6/15: Russian Central Bank Targets Rebuilding of Foreign Reserves

Recently, speaking at a banking conference in St Petersburg, Elvira Nabiullina, head of the Central Bank of Russia outlined the CBR position on foreign exchange reserves. Nabiullina note that Russian reserves are large - sufficient to cover almost 11 months of imports. However, Nabiullina's 'comfort zone' target for the reserves to cover 2-3 years of "substantial capital outflows", implying she would like to see Russian reserves rising back to USD500 billion mark. Nabiullina is now targeting purchases of forex over the next few years to drive up reserves and to that objective she has been buying on average USD200mln worth of forex per day since mid-May.

In line with forex reserves rebuilding objective, Nabiullina cautioned about markets expectations of further large scale cuts to interest rates as the CBR is trying to balance out inflation targeting (requiring tighter monetary policy), investment supports (requiring looser policy) and accumulation of reserves (implying looser policy).

Per Nabiullina: "Attempts to reduce the interest rates too fast or even acquire certain assets may simply lead to stronger inflation, to an outflow of capital or to dollarisation of the economy, and that would slow down the economic growth, other than promote it."

In its latest outlook, CBR forecast unemployment reaching 6.5% this year from the current rate of 5.6%, before falling to 5.6-5.8% by 2018. GDP is expected to shrink 3.2% in 2015, returning to trend growth of 1.7-2.4% around 2017-2018. Inflation is expected to hit 11% at the end of 2015 with rather optimistic outlook for a decline to "less than 7%" by June 2016, and "close to the target level" of 4% in 2017.

Net capital outflows are expected to decline from USD90 billion in 2015 to USD55-65 billion in 2018. "We are expecting the financial sanctions against Russia to remain in place. Payments on foreign debts during this period will constitute the bulk of the capital outflow. It will gradually reduce from $90 billion to about $55-65 billion during 2015-2018, depending on the scenario," according to Nabiullina.

Russian International Reserves reached USD360.6 billion at the end of last week, up on USD356 billion low registered in April 2015. Still, the reserves are down USD117.7 billion y/y (-24.6%) and down USD132.73 billion (-26.9%) on pre-sanctions period.

15/6/15: CBR Cuts Rates to 11.5% in Hope of Lifting Sagging Investment

Central Bank of Russia cut policy rate to 11.5% today from 12.5%, undershooting markets expectation for a 150bps cut to 11.0%. The move was expected and relatively modest cut this time around suggests more heavy cuts in 2H 2015. In part, this reflects relatively sharp decline in growth in April: having contracted modest 1.9% in 1Q 2015, Russian GDP fell at an annual rate of 4.2% in April. Another incentive for CBR to lower rates is the Ruble, which posted surprising comeback in early 2015, putting new pressure on the federal budget. CBR bough USD3.6 billion in May, in an attempt to keep Ruble lower.

Rate cut is a welcome move, but in current environment it also shows just how little room for manoeuvre the monetary policy has. Russian banks are deleveraging. Loans outstanding in the corporate and household sectors have fallen in 1Q 2015. The trend continued in April: SME loans share of total corporate loans fell from 22% in April 2014 to 18% in April 2015. In January-April 2015, corporate lending outstanding was up nominally 17% in ruble terms compared to the same period 2014. Inflation run at around 15.8%, which means that in real terms, corporate loans remained basically flat. Household loans grew by 4% y/y in ruble terms. Which means in real term, level of outstanding loans to households fell. As usual, roughly 1/3 of all corporate loans were denominated in foreign currency.

The rate cut will also help with non-performing loans. Stock of NPLs in the corporate sector rose by roughly 30% y/y in the first four months of 2015 to 6% of the total stock of corporate loans. Household credit NPLs stood at 7%. Both rates of NPLs are relatively benign, by Western standards, but the growth rate in NPLs is worrying. Lower cost of carrying these loans will help alleviate some of the pressures.

Overall, Russian investment remains a major bottleneck for the economy. Chart below shows Russian Investment as percentage of GDP, compared to both the Emerging Asia economies and Emerging Europe economies. This clearly highlights the dire state of Russian investment over 2000-2013, and a significant decline in investment from 2014 on, including the IMF forecasts for 2015-2020 period.

1/6/15: Russian GDP fell 2.4% in January-April 2015

When Russian statistics agency published the latest data on economic growth for 1Q, the numbers came in at -1.9%, of 0.3% higher than the previous forecast by the Ministry for Economic Development (MED).

Based on the latest data from the MED, we have:

• GDP growth at -1.4% in January (y/y figures), -1.3% in February, -2.7% in March, and -4.2% in April. 
• April decline, therefore was faster than in 1Q 2014, resulting in GDP contraction of 2.4% y/y in the first four months of 2015.

This deflates all hopes for economic stabilisation thesis as both March and April posted accelerating rates of economic contraction, with figure for April simply impossible to ignore, even though, in part, it was driven by faster growth in April 2014.

Seasonally-adjusted data is a little more encouraging: January 2015 real GDP decline was 1% m/m, followed by 0.9% m/m drop in February, March at -0.9%, and April at -0.8%. So we do have some moderation in monthly contraction, although

• This is seasonally-adjusted preliminary data, subject to potentially hefty revisions and seasonality impacts; and
• Latest PMIs are not encouraging (see manufacturing for May here: http://trueeconomics.blogspot.ie/2015/06/1615-russian-manufacturing-pmi-may-2015.html posting worsening conditions in May, and April data for services and composite here: http://trueeconomics.blogspot.ie/2015/05/7515-russian-services-and-composite.html).

In March, industrial production generally stagnated, with April posting a contraction of 1.2% m/m. In mining, March turned up positive output growth, with April again falling into contraction at -0.4%. Production and distribution of electricity, gas and water contributed positively to GDP growth in April, up 0.9%. Manufacturing posted -1.8% contraction in April. Agriculture posted zero growth in April, having expanded in 1Q 2015.

Fixed investment fell 0.7% in April, compared to -0.2% in March, construction was flat in April, after posting declines in January-March.

Retail sales were down 0.9% in April for goods trade and 0.6% in household services. Real disposable household income grew in April by 0.2%, while real wages shrunk 2%.

Meanwhile, official unemployment remained at 5.6% in April, although this figure is heavily skewed to the downside by several factors:

1. Significant decline in the numbers of migrant workers (see http://trueeconomics.blogspot.ie/2015/05/31515-remittances-from-russia-sharply.html);
2. Large shifts in employment from official enterprises to grey and black economy;
3. Demographic trends of shrinking working age population (note: Russia did return to actual population growth in 2013 and 2014, but working age population has been declining since 2006).

Total exports of good stood at USD32.7 billion or 31.3% lower than in April 2014, having rise 0.9% m/m relative March.. Imports of goods amounted to USD16.2 billion, 41.8% lower than in April 2014 and down 7.2% on March 2015. So trade balance was down 16.6% y/y to USD16.5 billion.

The good news came from a slowdown in inflation in April. In January, monthly inflation was 3.2%, falling in February to 2.2% and 1.2% in March. April inflation was 0.5% on a monthly basis and in January-April consumer prices rose 7.9%.


Full details of the latest releases in Russian are here.

1/6/15: Russian Manufacturing PMI: May 2015

Russia Manufacturing PMI came in at disappointing 47.6 in May 2015, compared to 48.9 in April. This reverses slight improvement in April compared to March and puts PMI at the level matching the lowest reading since June 2009, achieved back in January 2015.

Weak conditions signal reversal of the slightly improving trends in the economy over 1Q 2015 (see following post on this).  We are now in 6th consecutive month of sub-50 PMI readings for the sector, and 24 months average PMI for Russian Manufacturing stands at 49.4.

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.

16/4/15: Newsweek on Russian Economic Recovery

An interesting piece on not-so-tanking Russian economy: http://www.newsweek.com/2015/04/24/putin-was-right-be-confident-about-russias-economy-321934.html

The key point is the same I have been repeating throughout my earlier notes: imports substitution.

The only problem is that absent investment, imports substitution is reversible. To make it sustainable, Russia needs reforms and investment. And the two are in short supply, still.

11/4/15: Inflation, Wages Controls and Ruble: Welcome to Q2 Start in Russia

Russian inflation reached 16.9% in March, year-on-year, highest since 2002, despite slowing month-on-month inflation. March inflation came in at 1.2% m/m, lower than 2.2% m/m in February.

Slower m/m trend is down to Ruble re-valuation, so assuming no renewed speculative attacks on the currency, annual rate of inflation should be down at year end, around 10-12 percent range, or broadly in line with 11.4% annual inflation registered in 2014.

One key policy instrument to contain inflation (and also to correct for the adverse effect of ruble strengthening on budget balance - see below) is the decision by President Putin to suspend the legal requirement for automatic cost-of-living (COLI) adjustments to public sector wages. The decision, signed on April 6th will allow the Government to avoid hiking wages for 9 months through December 2015. President Putin's amendment also covers some of the COLI requirements on social payments adjustments. Overall, public wages and social benefits will increase in 2015 only to reflect the Budget 2015 assumed medium-term inflation target - 5.5%, well short of the actual inflation that is projected to range between 11 and 13 percent this year.

On the subject of Ruble valuations and budgetary pressures: Russian Federal Budget is set in Rubles. As Ruble strengthens against the USD and EUR, exports revenues-related taxes fall, imports declines are moderated and external surplus on trade account declines. This means potential pressure on Government deficits. Last year dramatic devaluation of the Ruble, while causing hysterical reactions abroad, actually helped the Government to achieve near balanced budget (with a deficit of just around 1 percent of GDP). This time around, the pressure is reversing.

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:

10/4/15:Ruble's Mysterious Rise: Some Thoughts

There is an interesting debate starting up around the Ruble: in recent weeks, Ruble appreciation against the USD has pushed it out of its traditional long term alignment with oil prices, as noted in the chart below:

Source: @Schuldensuehner 

There are several possible factor that can account for this.

1. Oil price expectations - if the markets expect oil prices to rise further, Ruble buyers can bid the currency up ahead of the oil price changes. This is unlikely in my view, as we are not seeing oil price firming significantly in both spot and futures markets.
2. Oil price revelation - if the markets priced in severe forecasts uncertainty linked to oil price dynamics to the Russian economy back in October-December 2014, then the new information about Russian economy's performance in Q1 2015 should lead to re-pricing of risks. In my opinion, Ruble was heavily oversold in December (not in october-November) and there is some upside potential, given that the Q1 2015 data coming out of the Russian economy is not as apocalyptic as some currency markets analysts expected. Notably, there has been a significant cut in USD long positions vis-a-vis Ruble in recent days, which signals speculative re-alignment toward long-Ruble.
3. Demand Factor 1 - March is the end of Q1, so it is the month of rising demand for Ruble to cover corporate tax liabilities (Russian corporates pay taxes in Rubles). VAT receipts are also coming due. And estimated forward taxes and charges. In my opinion, this helps to temporarily boost Ruble valuations.
4. Demand Factor 2 - March is the last month before major companies in Russia are due to reverse their forex holdings to October 2014 levels (per December agreement hammered out by President Putin). This means increased supply of USD and other currencies, and increased demand for Rubles. Again, a temporary factor, in my opinion.
5. Supply Factor - March and April are also large months for corporates to book in energy-related exports earnings. Note that Russian Central Bank is recording a small rise in reserves in late March, followed by a decline in April.
6. Demand Factor 3 - March also was the month of largest (for 2015) external debt redemptions by Russian banks and corporates. Repayment of these debts involves buying dollars and selling Rubles, but timing-wise, companies have been pre-building their forex reserves for some time, so it is most likely that in recent 3 weeks there has been less demand for dollars (and other forex) than in previous 2 months. Note, I covered this here: http://trueeconomics.blogspot.ie/2015/04/8415-rubles-gains-are-convincing-but.html
7. Demand factor 4 - since the start of 2014, Russia actively pursued reduction of the degree of dollarisation in its economy. The first stage of this process involved increasing trade settlements in other currencies (most recent one - announced this week - with Indonesia). This, alongside with imports collapse, reduced external trade-linked demand for dollars. The second phase of de-dollarisation started in February, when Russian retail deposits started exiting dollars and shifting back into Ruble on improved confidence in the banks and high deposit rates. Again - a temporary support for the Ruble.
8. Demand factor 5 - as Russian CDS show, probability of default declines for Russia sustained in recent weeks implies improved demand for Russian Government (and local) bonds, issued in Ruble markets. The result is improved demand for OFZs and, thus, for Ruble. 
9. Real vs Nominal exchange Rates - inflation dynamics in Russia are most likely drawing a gap between real and nominal exchange rates, so nominal rate firming up is not imposing equivalent increase in the real rates. 

In other words, we have many, many moving parts to one equation. One can't tell the dominant one, or which are likely to last longer, but my sense is that majority of these forces are temporary and the long-run link between Ruble and oil price will be regained.

Now, assuming oil price dynamics remain where they are today (weak upside), Ruble is likely to devalue again, back to USD/RUB 55-57 range. If inflation does not fall toward 10% in Q2 2015 (and I do not think it will), we are likely to see Ruble move into USD/RUB 60-65 range over this quarter. On the other hand, improved outlook for the economy (signalling, say annual contraction closer to 3.5-4 percent) can see Ruble staying within the USD/RUB 50-53 range.

One thing is for sure: so far, the Central Bank of Russia has managed damn well its dance in a very tight monetary policy corner between runaway inflation, prohibitively high interest rates and a massive squeeze on forex valuations. How long this 'smart game' in multidimensional and highly dynamic chess can go on is everyone's guess.

6/4/15: BRIC Services PMIs & Overall Activity in Q1 2015

BRIC Services PMIs (published by Markit) are finally out, with the last two countries instalments today, so time to look at the Q1 2015 data. And from the top level view, things are not encouraging:

• Brazil Services PMI slipped from 52.3 in February (a 14-months high that was a huge upside surprise) to a 70-months low of 47.9 in March - a massive fall. On a quarterly basis, things are not as bad, but that is all down to February reading. 3mo average for Q1 is at 49.5 - still contractionary/zero growth, compared to 49.3 Q4 1024 average and against weak growth recorded in Q1 2014 (50.5 average). In last 8 months, Brazil managed to post only two months of Services PMIs above 50, with only one month reading being statistically significantly above 50.0. In short, we now have a sign of deepening slowdown in the economy, based on both Manufacturing and Services surveys.
• Russia Services PMI was predictably weak at 46.1 in March, although a gain on totally abysmal 41.3 reading in February. 3mo average through Q1 2015 is at 43.8 and this is well below already contractionary 47.1 average through Q4 2-14. Q1 2014 registered a weak contraction/static growth of 49.6. March reading was the strongest in 5 months, but overall Services side of the Russian economy has posted below 50 survey readings continuously over 6 months now. This, coupled with another (4th monthly) below 50 reading in Manufacturing suggests that there is an ongoing significant recession in the economy and that this has accelerated in Q1 2015 compared to Q4 2014.
• China Services PMI remained in relatively moderate growth territory in March (at 52.3 against 52.0 in February) and 3mo average for Q1 2015 is at 52.0, weaker than Q4 2014 average of 53.2, but up on Q1 2014 average of 51.2. China never posted below 50 PMI in Services before , so we are left tracking relative weaknesses in positive growth signals here. Weak improvement in Services survey is offset, in China's case, by strong deterioration in Manufacturing index which fell below 50 in March.
• India Services PMI was somewhat weaker in March 2015 at 53.0 compared to February 53.9 reading. Still, this marks the second highest reading in 9 months. India's Services PMI average for Q1 2015 is at 53.1 - a major improvement on 51.3 average through Q4 2014 and a big gain y/y - in Q1 2014, Services PMI was averaging only 48.2. March marked 11th month of above 50 readings for Indian Services surveys. India is the only BRIC country that managed to post m/m growth (above 50 readings) across both sectors: Manufacturing and Services.

Chart below shows Services surveys dynamics:

Table below summarises changes in Manufacturing and Services PMIs:

Pooling together Services and Manufacturing surveys data, chart below shows the overall BRIC trend in growth. March came in with a slowdown of overall economic activity across the block of the largest emerging markets economies and this slowdown took place in the already weak growth environment. While the series remain on an upward trend established from the local low attained in July 2013, this trend is no longer convincing and since June 2014, there has been a pronounced downward sub-trend. This does not bode well for the global economy.

3/4/15: Russian Services & Composite PMIs: Signal of Slower Contraction in Q1 15

Russian Services PMI (Markit and HSBC) came in with a slight improvement in March, rising to 46.1 from 41.3 in February and signalling slower rate of contraction. Services PMI is now reading sub-50 for the 6th month in a row, with 3mo average for Q1 2015 at abysmal 43.8 against Q4 2014 average of 45.9 and Q1 2014 reading of 49.6.

Per Markit release: "Russian service providers signalled some confidence that the recent downturn will prove transitory, with over a third of panellists forecasting some growth of activity from present levels over the next 12 months." Nonetheless, forward expectations are not translating in an improvement in operating conditions today, so "…service sector firms continued to shed staff during March. Latest data showed employment falling for a thirteenth successive month, and again at a marked pace. Despite a reduction in capacity, service providers had sufficient spare resources… Manufacturers also signalled spare capacity during March, with both employment and outstanding business being cut, albeit at slower rates."

As the result of improved (slower) rate of decline in Services activity, Russian Composite PMI also moderated the rate of decline, rising from 44.7 in February to 46.8 in March. As with Services sector, Composite PMI is now running below 50.0 for the sixth month in a row. 3mo average through Q1 2015 is at 45.7, which is much worse than already poor 48.0 average for Q4 2014 and 49.2 average for Q1 2014.

As chart above confirms, Russian economy is in a state of 'getting worse  more slowly' rather than in a state of 'getting better'. Positive outlook over the next 12 months (see details here: http://trueeconomics.blogspot.ie/2015/04/2415-russia-business-outlook-q1-2015.html remains subdued, with Q1 2015 improvement on Q4 2014 failing to restore expectations to 2012-2013 average, let alone to the recovery-consistent 2010-2011 averages.

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: BOFIT Latest Forecasts for Russian Economy 2015-2017

BOFIT published their new forecasts for the Russian economy. Here is the summary with my comments:

Pre-conditions: "Russian economic growth has slowed for three years in a row, due to e.g. waning growth in the available labour force, capital and productivity. In addition, a slight decline in export prices, the Ukraine crisis, sanctions, Russia’s counter-sanctions and other negative measures, with the accompanying increase in uncertainty, slowed Russian GDP growth to just over 0.5% in 2014. ...The impact [of oil price drop in H2 2014] began to show in the early months of 2015, with a slight contraction in GDP. Without transient factors, the economy would already have contracted in 2014."

What transient factors supported growth in 2014?

• "As in 2013, industrial production was partly supported by strong growth in defence spending."
• "The depreciation in the real exchange rate of the rouble since the early months of 2013 has [created room for some industrial imports substitution], and may also have slightly boosted exports of certain non-energy basic commodities."
• "The rouble’s strong depreciation led to consumer spending rushes, which kept private consumption growth at some 2%. However, wage growth slowed, as did pension growth. Inflation rocketed (to almost 17% in February) on the back of rouble depreciation and Russia’s counter-sanctions in the form of restrictions on food imports. Consequently, real household incomes contracted in annual terms for the first time since 1999. Aggregate income was underpinned by employment, which remained buoyant for the time being. Household borrowing decreased further."
• "Steered by the government, investment by most large state enterprises was relatively high. This was, however, insufficient to prevent total investment from falling by some 2%. The net capital outflows of the corporate sector increased, due partly to repayment of foreign debt and considerable constraints in access to foreign funding as a result of domestic uncertainties and external financial sanctions."

External position forward: "Export volumes declined by 2%. Exports of crude oil and gas dwindled markedly, while exports of petroleum products continued to grow at a robust pace. As the fall in ex-port prices steepened, export income in the last months of 2014 was already well over 10% lower (in euro terms) than a year earlier. Import volumes declined by 7% in 2014 and have now been in decline for 1½ years. The decline steepened considerably towards the end of the year."

BOFIT forecasts for 2015 assume oil price at USD55 pb and above and sanctions and counter-sanctions to remain in place "unchanged for a relatively long period".

"The impact of [oil price] change will be profound, since energy exports ac-count for almost a fifth of Russia’s GDP."

Do note: energy exports include not just crude petroleum and natural gas, but also refined products and electricity (including nuclear). This puts the Russian economy into perspective not usually considered in the Western media - the economy is much more diversified than many believe and claim. Further note, energy (total energy, not just oil and gas) accounts for just over 60% of total exports income.

Outlook summary: "...Russian GDP will contract by over 4% in 2015. The high degree of uncertainty will cause a shrinkage in private investment, while private consumption will be cut particularly by rapid inflation. Even though Russian imports have already edged down, they are estimated to fall further, by one fifth, in response to the sharp depreciation of the rouble during the last months of 2014. In 2016–2017, global economic growth and world trade will pick up, and it is assumed the oil price will rise to around USD 65 a barrel. The Russian economy is expected to continue slightly downward, before a slow recovery in 2017. The drop in investment is expected to flatten out towards the end of the forecast period. With real household income remaining low, it will also take time for private consumption to recover. Export volumes will grow at a very subdued pace. Imports will recover after 2016."

All in-line with my own outlook.

Private consumption "…will decrease substantially in 2015, and slightly further in 2016" driven primarily by inflation eroding household incomes and weak prospects for growth in private sector wages in nominal terms and public sector wages expansion below the rate of inflation. Notably, "the government is also seeking to cut the number of public sector employees." BOFIT expects pensions to "barely keep pace with inflation, at best".

Household credit will remain subdued, "even though the debt-servicing burdens stemming from payback of short-term loans will ease gradually. As during the crisis of 2009, savings may be rather substantial."

Public consumption "will decline amid pressures on the central government finances."

Investment "…will dwindle substantially this year and next. Private investment, in particular, will be depressed by a number of uncertainties relating to the ongoing tensions in East Ukraine, uncertain prospects for sanctions and the unpredictability of Russian economic and trade-related measures stemming from possible additional sanctions and recession countermeasures." So no surprises, then.

Fiscal side: "…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)."

The longer-term outlook is deteriorating: "The foundations of growth are being eroded by the contraction in private investment. Government spending is focused increasingly on defence and pensions, while public investment is subject to the largest cuts."

Chart below summarises forecasts:

Sources: Rosstat, BOFIT Forecast for Russia 2015–2017

23/3/15: EM Currencies on the rise

Today's week-on-week changes in emerging markets currencies vis-a-vis the USD:

Source: @komileva

And for the Ruble, this with zero CBR interventions.

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.

20/3/15: Central Bank Interventions in Ruble Markets down to Zero in February

Don't hear much of "Panic at the Central Bank of Russia" reports as of late in the Western media - the ones that whipped into frenzy Russia 'analysts' back in November-December? Why, no surprise:

Per latest data, CBR interventions in forex markets defending the Ruble have shrunk in February 2015 to zero for USD and zero for EUR. Yep, zero.

Oh, and the table above shows, the panic of November-December 2014 Ruble crisis - real as it was - was not as bad as CBR supporting Ruble prior to the free float and during the peak of Crimean crisis.

So was the decision to let Ruble float wise? You decide. On the trend, it saved CBR some USD8.5 billion and EUR1.2 billion, even counting in December 2014 crisis.