23/11/2014: Russian economy: Capital Outflows Trends

Russian Capital Outflows have been pretty extreme so far in 2014 - totalling USD85.3 billion in the first nine months of 2014, up on 44.1 billion net outflows in the same period of 2013, USD45.8 billion in 2012 and USD46.9 billion in the same period 2011. At annualised rate, current outflows are running at around USD114 billion, which is the worst year after 2008 outflows of USD133.6 billion.

More than half of these outflows fell on Q1 2014 (USD48.6 billion) with *only* USD36.7 billion in Q2 and Q3. In fact the rate of outflows in Q3 was below the average for 2008-present period (USD18.7 billion per quarter) and over Q2 and Q3 average rate of outflow was below average as well. 

Overall, Net Capital Outflows for Q1-Q3 2014 exceeded average rate of outflows by USD29.3 billion. 

Looking at the composition of outflows, USD16.1 billion of net outflows over the first nine months of 2014 came from the Banking sector - which is worse than the same period 2013 (USD10.9 billion) and 2012 (inflows of USD9.6 billion), but better than the same period of 2011 (outflows of USD17.3 billion). 2008-present quarterly average Banking sector net outflows stand at USD3.72 billion, which suggests that current nine months cumulative outflows exceed average by about USD4.9 billion.

Non-financial sector net outflows for 9 months through September 2014 stood at a massive USD69.2 billion, which is well ahead of same period outflows in 2013 (USD33.3 billion), 2012 (USD55.4 billion) and 2011 (USD29.8 billion). On average, since 2008, net non-financial sector capital outflows are running at USD14.93 billion per quarter. This implies that current running rate of outflows from the non-financial sectors (for Q1-Q3 2014) is some USD24.4 billion ahead of average.

Chart above clearly shows that Q3 2014 non-financial sector outflows have been the worst since Q4 2008, while Q1 2014 outflows in the sector were the 5th worst since the start of 2005.

Overall, the above shows that while some of the media claims may be overstating the extent of the capital outflows deviation from their historical (pre-Ukraine crisis) trends, at the same time, current rates of outflows are of significant concern and cannot be sustained for much longer. The core issue is that non-financial sector outflows can only be stopped or significantly reduced by imposing some sort of capital controls - either in their direct form or via de-offshorization of the domestic investment.

The former will be a very tough pill to swallow for all sectors of the economy and will damage significantly the ruble. The latter is a political sensitive issues as it would involve change in the status quo practices whereby medium-sized and larger enterprises offshore aggressively investment funds to remove these out of the reach of domestic authorities.

Interestingly, if President Putin does follow through on the promise of substantial reforms aimed at reducing state interference in the economy and alleviating pressures arising from corrupt state officials practices, the de-offshorization of the private sector investment can be put in place much less painfully and much more efficiently. See more on this here: http://trueeconomics.blogspot.ru/2014/11/19112014-two-articles-on-russian.html

19/11/2014: Two articles on Russian economy and reforms

Two important articles on Russian economy and policy via Bloomberg:

• Putin Said to Stun Advisers by Backing Corruption Crackdown: http://www.bloomberg.com/news/2014-11-18/putin-said-to-back-crackdown-on-corruption-as-sanctions-bite.html and
• Russia Braces for 'Catastrophic' Drop in Oil Prices: http://www.bloomberg.com/news/2014-11-14/putin-says-russia-preparing-for-catastrophic-oil-slump.html

17/11/2014: G20 and Russia: G19+1 or G20-8?..

My comment for the Portugal's Expresso on the G20 summit in the context of the Russia-West relations: http://expresso.sapo.pt/g20-quer-acelerar-crescimento-com-mais-investimento-em-infraestruturas=f898435

15/11/2014: Emerging Markets Rot Drives Russian Economic Uncertainty

Some interesting data from the Policy Uncertainty Index for Russia (see http://www.policyuncertainty.com/russia_monthly.html). I traced out the main news markers over the period covered by the index (click on the chart to enlarge):

Note: higher values of Index, greater attention to the domestic economic and economic policy uncertainty in the media.

There is a clear pattern of rising policy uncertainty from, roughly speaking, early 2008, with both geopolitical risks (Georgia conflict) and economic risks (the 2009 recession) as well as internal political risks (2012 elections) all coincident with amplification in uncertainty. Ukraine crisis period is clearly only comparable in uncertainty with the last Yeltsin elections (which almost lost to the Communist Party candidate).

Volatility in uncertainty has also been on the rising trend, since, roughly, 2009 (note: the chart below is plotting 24mo MA):

However, it is worth correcting in the above data for the general global changes, not just Russia-own trends. To do so, let's take a look at Russia's Policy Uncertainty Index relative to the average of the same indices for China and India:

Notably, Russia's relative uncertainty has peaked around April-May 2014 and then subsided despite the fact that Ukraine conflict remains active. This suggests that post-May 2014, the acceleration in the rising trend in Russian economic and policy uncertainty is driven more by the general rot setting in in the Emerging Markets, and less by the geopolitical crisis.

Here is a chart plotting Policy Uncertainty Indices for the U.S., Russia, China and India:

This further confirms the above proposition: China is now showing levels of policy uncertainty on par with those in Russia. Geopolitics take a back seat to economics of the Emerging Markets slowdown.

11/11/2014: Another Wild Ride for Rollercoaster Ruble

On the first day of its quasi-somewhat-sort-of-free float, Ruble is, as predicted (http://trueeconomics.blogspot.ie/2014/11/7112014-russian-ruble-rough-days-ahead.html) is showing no trend other than the one in rising volatility.

Two charts: one day and five days:

Both: MarketWatch 

It has been a wild ride. The shorts are having their lunch:

 Source: @Schuldensuehner 

Remember, CBR abandoned regular interventions strategy and opted for free float of the Ruble. But the float is not quite free, as CBR said it will instead intervene in limiting supply of foreign currency to trading and debt cover only, removing the so-called speculative positions of Russian banks and corporates.

This will be tough to strategise, since much of the so-called 'capital outflow' (Western terminology) or 'speculative demand' (Russian terminology) is related to debt maturity redemptions. These are hitting Russian economy hard in the wake of virtual shut-down of Western debt markets for all Russian companies and banks (including those not covered by sanctions):

Source: Reuters

Still, something will have to be done. Russia is losing foreign exchange reserves fast:

The latest statistics from the CBR covering October show that, inclusive of gold holdings, the value of Russian foreign exchange reserves fell to USD416.23 billion at the end of October, down USD94.76 billion year on year (-18.5%) and down USD63.93 billion (-13.3%) since the first round of sanctions was introduced. Actual foreign exchange reserves (currency holdings) are down USD96.02 billion year on year to USD370.92 billion.

The only surprising bit - given the rate of reserves depletion - is that Russia still did not introduce direct capital controls, although CBR decision this week is looking increasingly like a veiled control regime.

Note: more detailed comments on the Ruble are forthcoming in Euromoney report and Expresso, so stay tuned for links.

29/10/2014: ABN AMRO on Emerging Europe's Economic Woes

ABN AMRO gloomy outlook for Emerging Europe region came out yesterday. Here are some highlights as related to Russian economy:

Over the past months, emerging Europe has increasingly faced headwinds.

Two core factors selected by ABN AMRO for these: Russian economy weaknesses and "weaker-than-expected performance of the eurozone, emerging Europe’s main trading  partner". In particular, "this can for instance be seen in Poland, where exports to the EU have slowed noticeably".

"All in all, according to our emerging Europe GDP tracker, annual growth in the region  fell to 1.1% yoy in Q3, down from 1.3% in Q2, keeping it on a downward path. Within the region, despite its structural outperformance over the past years, the Polish economy seems to be  slowing the most, while growth in the Czech Republic and in Hungary seems to be a bit more resilient."

"Looking further out, though risks remain tilted to the downside, growth should pick up next year. This reflects that we think that somewhere down the road, both Russia and Ukraine should recognise that some form of a diplomatic solution is needed. Alternatively, the conflict could evolve to a ‘frozen conflict’ with fewer economic consequences than currently is the case."

ABN AMRO sees this set of factors giving "room to a slight rebound in Russian GDP growth, though the slide in oil prices poses yet another headwind."

Here's their more detailed analysis for Russia:

And worse for Ukraine:

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.

23/10/2014: BlackRock Institute Survey: EMEA, October 2014

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

"The consensus of respondents describe Russia, Croatia, Egypt and the Ukraine in a recessionary state, with an even split of economists gauging Hungary and Turkey to be in a recessionary or contraction phase. Over the next two quarters, the consensus shifts toward expansion for Egypt and Turkey"

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

"At the 12 month horizon, the consensus expecting all EMEA countries to strengthen or remain the same with the exception of Russia and the Ukraine."

Global: "respondents remain positive on the global growth cycle with a net 43% of 37 respondents expecting a strengthening world economy over the next 12 months – an 7% decrease from the net 50% figure last month. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy"

Previous month results are here: http://trueeconomics.blogspot.ie/2014/10/6102014-blackrock-institute-survey-emea.html


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

21/10/2014: Two Articles on Ukrainian Conflict

Two items relating to Ukrainian crisis worth noting today.

First an English version of the earlier De Spiegel article on German federal authorities concluding that it was likely that MH17 was shot down by the Eastern Ukrainian separatists using the BUK launcher they obtained from the seized Ukrainian military base: https://uk.news.yahoo.com/malaysia-airlines-mh17-rebels-shot-down-plane-seized-111727238.html#vzXgemW Note: this is still speculative, in so far as we do not have conclusive evidence as to where the BUK came from, nor in fact do we have full evidence on the rest of the event.

Second, Human Rights Watch issued a report: http://www.hrw.org/news/2014/10/20/ukraine-widespread-use-cluster-munitions that provides evidence that Ukrainian Government used cluster munitions against civilians in East Ukraine. The report also references on several occasions the potential use of such munitions by the separatists, although in all cases, HRW does qualify such references as not being confirmed. What is confirmed, however, is that Kiev forces used cluster munitions.

21/10/2014: Russian Gas, European Deliveries, Ukrainian Blackmail?

Over recent days there have been plenty of statements about the winter supplies of Russian gas to Europe. Majority of these fall to one side of the argument, alleging that Russia is likely to cut off gas shipments to Europe via Ukraine.

Here are the facts, strongly indicating an entirely different possibility.

Fact 1: Allegations. At the end of August, Euractive reported that "Europe faces the increasing threat of a disruption to gas supplies from its main provider Russia this winter due to the crisis in Ukraine." (link)

But when you read beyond the headline, you get something entirely different. "Ukrainian Prime Minister Arseny Yatseniuk said today (27 August) Kyiv knew of Russian plans to halt gas flows this winter to Europe. "We know of Russia's plans to block [gas] transit even to European Union countries this winter, and that's why their [EU's] companies were given an order to pump gas into storage in Europe as fully as possible," he told a government meeting, without disclosing how he knew about the Russian plans."

So Yatsenyuk presented a conjecture - that incidentally boost his own agenda. Media reported it with zero questioning. Meanwhile, Russian officials denied the possibility of such disruption: "It's unlikely that Russia would cut gas supplies. Ukraine will start siphon off it itself, as it has been the case in the past," a senior source at the Russian Energy Ministry said."

We have set the stage: Ukraine says Russia may disrupt supplies. Russia says Ukraine may siphon off gas destined for other buyers in order to satisfy its own needs.

Fact 2: Historical Precedents. As Euractive reports: "Russian gas flows to Ukraine have now been halted three times in the past decade, in 2006, 2009 and 2014, due to price disputes between Moscow and Kyiv, and flows to the EU were disrupted in 2006 and 2009 after Ukraine took some of the gas intended for the EU to meet its own winter demand."

In other words, Ukraine stole (as in appropriated without a payment and beyond its contracted power) Russian gas destined for European customers. This, presumably is Russian fault, as it is Russia that is being blamed for the disruptions.

So we have it: Ukraine steals, Russia gets blamed.

Fact 3: Counter-accusations. Official Russian position on supplies of gas to Europe: "Russian Energy Minister Alexander Novak refuted the claim by Ukrainian Prime Minister Arseniy Yatsenyuk that Russia is planning to halt gas transit to EU member states. “Specific comments by Ukrainian politicians on alleged Russian intentions to stop gas transit to EU countries are puzzling. We can qualify them only as absolutely baseless speculations aimed at confusing or deliberately misinforming of European consumers of Russian gas”, said Alexander Novak."

Now, you can possibly say there is risk of Novak lying. Or you can say there is risk PM Yatsenyuk is lying. Remember: Yatsenyuk made a statement of claim unbacked by any evidence (Fact 1 above). Novak made an official statement on the record. Yatsenyuk has an incentive to push European member states to take a tough stance on Russia in brokering a gas deal between Russian and Ukraine. Russia does not have such an incentive. Yatsenyuk is actively campaigning for an outright re-writing of Russian-European contracts for gas supply to suit Kiev interests (read below). Russia does not have such an incentive.

So who is the beneficiary of all these conjectures about Russia 'cutting gas supplies to Europe'? Why, it is Ukraine.

Fact 4: In his own words. On October 17 Itar Tass (link) claimed: "Europe should respond to a statement by Ukrainian Prime Minister Arseniy Yatsenyuk that Ukraine can give no guarantees for safe Russian natural gas transit to Europe, Gazprom Deputy CEO Alexander Medvedev said on Friday. “Yatsenyuk said yesterday that Ukraine will not be able to ensure the safety of gas supplies from Russia to Europe,” he said."

So did Yatsenyuk say this? He did. His statement is supported by his own actions tracing back to end of July / beginning of August.

Fact 5: In his own deeds. Let's go back to August 8th, when Yatsenyuk threatened sanctions to cut off all transit of Russian gas: "Ukraine may impose sanctions against any transit via its territory, including air flights and gas supplies to Europe, Prime Minister Arseniy Yatsenyuk said Friday." (link confirmed by Bloomberg here and the Wire here).

So real was this threat, Germany had to step in to put PM Yatsenyuk back into his place (link). And European buyers continued to pump up storage facilities not because of a Russian threat, but because of the Ukrainian actions.

Things got comical: Naftogas - a Ukrainian state-owned gas company - said back in August it was prepared to bypass its own Government-imposed restrictions on transit (link). So even Naftogas was aware that it was Kiev, not Moscow, who planned the cut off.

20 days after Yatsenyuk backed out the first threat, "Ukrainian Prime Minister Yatsenyuk pushed a bill through the Verkhovna Rada that …would permit the transit of natural gas to be blocked." Source (link). In other words, on August 28, Yatsenyuk pushed through a law that legalises Ukraine's power to shut down transit.

Ukraine was no longer speaking about shutting down Russian gas transit. It actually set legal grounds for acting on doing so.

On September 23rd, Kiev backed out of the month-old stand and committed itself to allowing transit (link). Strangely, the article does not really try to explain why PM Yatsenyuk had to commit to such an act, if it was Russia that was a threat of disrupting gas flows.

Conclusions: Now, we can think of a straight logic implying that actually it is Ukraine that is a threat point replete with threat --> act --> deny chain of events. But the Western media continues to insist that it is all down to Russia's bad politics.

This week (link) Ukraine is again refusing to guarantee uninterrupted transit to Europe unless it gets all Russian-European contracts renegotiated on its own terms. These terms are: Ukraine gets full control over actual gas transiting over its territory and gains a de facto veto power on any contract any European buyer signs with a Russian supplier.

Again, who is the attempting to hold European gas supplies hostage to its own political agendas?

19/10/2014: A New Cold War is a Bilateral Culpability

A well-balanced review of history that has led Russia and the West to the current confrontation: http://www.ecfr.eu/content/entry/commentary_the_origins_of_russias_new_conflict_with_the_west330

Select quotes:

"In Putin’s world national “sovereignty” is a central principle – but just a few countries can claim sovereignty and, therefore, have the right to a sphere of influence. Russia is one of those chosen few – historically, and because Putin stands ready to fight for his nation’s sovereignty in a world where Might means Right."

"In the twenty-first century, the West responded, all nations are equal and each country is sovereign. This sounds like a wonderful world – except that this does not seem to be the world of the US-led policy of humanitarian intervention, peace enforcement, taking sides in other nations’ domestic conflicts, and killing the forces for evil on behalf of the forces for good. Putin saw this as an argument that his world of Might means Right was real: America could pursue such policies because it was powerful and sovereign."

"The current confrontation between Russia and the West is a move back to a cold war design: Russia as “another world” isolated by the US-led West. Russia’s world today is limited to just itself with no socialist camp around it, and the West has the potential of pushing Russia deeper into a crisis, both economic and political. Unlike the Soviet meltdown that had numerous internal causes, but is blamed on the West by Russian conspiracy theorists, this crisis will truly be precipitated by the West."

6/10/2014: BlackRock Institute Survey: EMEA, September 2014

BlackRock Investment Institute released the latest Economic Cycle Survey results for North America and Western Europe (covered here: http://trueeconomics.blogspot.ie/2014/10/6102014-blackrock-institute-survey-n.html). Here are the survey results for EMEA:

"The consensus of respondents describe South Africa, Croatia, Slovenia, Russia and the Ukraine in a recessionary state, with an even split of economists gauging Romania to be in a recessionary or contraction phase. Over the next two quarters, the consensus shifts toward expansion for Russia and South Africa. At the 12 month horizon, the consensus expecting all EMEA countries to strengthen or remain the same with the exception of Turkey, Slovenia, Hungary and the Ukraine."

Global: "respondents remain positive on the global growth cycle with a net 50% of 36 respondents expecting a strengthening world economy over the next 12 months – an 9% decrease from the net 59% figure last month. [There was also a net decrease from 85% two months ago]. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy."


Two charts to illustrate:

Previous month results are here: http://trueeconomics.blogspot.ie/2014/08/2382014-blackrock-institute-survey-emea.html

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

5/10/2014: US Removes Russia from GSP Access as Biden Admits US 'Leadership' over Europe

This week, amidst generally holding ceasefire in Ukraine and with Russia continuing to constructively engage in the multilateral process of normalisation of Eastern Ukrainian crisis, the US leadership once again shown its hand on the issue of Russian relations with the West. Instead of pausing pressure or starting to return trade and diplomatic relations toward some sort of normalisation, the US actually continued to raise pressure on Russia.

First, earlier in the week, the US issued a decision to terminate Russia's designation as a beneficiary developing country in its Globalised System of Preferences (GSP) - a system that allows developing economies' exporters somewhat 'preferential' access to the US markets at reduced tariffs. This decision was notified on May 7th and officially published by the White House on Friday when it came into force.

The US GSP is a program designed to aid economic growth in developing economies (more than 100 countries and territories) by allowing duty-free entry for up to 5,000 products.

According to the White House statement, President Obama "…determined that Russia is sufficiently advanced in economic development and improved in trade competitiveness that it is appropriate to terminate the designation of Russia as a beneficiary developing country effective October 3, 2014."

The likely outcome of this is, however, uncertain. Russian exports to the US in the categories covered by the GSP programme are primarily in the areas of strategically important materials, including rare-earth metals and other key inputs into production for US MNCs. The same MNCs can purchase these inputs indirectly from outside the US. So, if anything, the White House decision is harming its own companies more than the Russia producers by de facto raising the cost of goods with low degree of substitution.

While, personally, I do not think Russia is a developing country - it is a middle income economy - in my opinion, the best course of diplomacy (in relation to trade) is opening up trade markets and reducing (not raising) trade barriers. This is best targeted by lowering tariffs first and foremost in the areas where private (not state) companies supply exports. GSP is a scheme that should be expanded to include all economies, not just developing ones and the US and Europe should pursue more open trade with Russia and the rest of the CIS. Sadly, the Obama Administration is using trade as a weapon to achieve geopolitical objectives (notably of questionable value, but that is secondary to the fact that trade should not be used as a weapon in the first place, but as a tool for helping achieve longer term objectives closer economic and social cooperation).


In a related matter, the US VP, Joe Biden, openly confirmed this week that the US has directly pressured its European allies to impose sanctions against Russia. On October 3rd, speaking at Harvard University, Joe Biden said that: “It is true - they [European countries] did not want to do that [impose sanctions against Russia] but again it was America’s leadership and the President of the United States insisting, oftentimes almost having to embarrass Europe to stand up and take economic hits to impose cost,” the vice president said.

So, apparently, there was quite a bit of discord in the Western 'unity' camp over the actions against Russia. Which makes you wonder: was that resistance based solely on the European countries concern for the economic impact of sanctions on their own economies, or was it a function of their scepticism over the actual events in Ukraine (the nature of the latest Ukrainian 'revolution'? the role of the Western powers in stirring the conflict? the role of Russian in the conflict? etc)? Or may be all of the above?..


One way or the other, the US is driving a dangerous game. It is pursuing extremely aggressive course of actions against Russia with no concrete road map for de-escalation, no specific targets for policy and no back up strategy for addressing the adverse effects of isolating Russia in other geopolitical issues, such as ISIS, Middle East, Iran, North Korea and so on.

4/10/2014: IMF on Russia: What Never Hurts Repeating...

As predicted (see here: http://trueeconomics.blogspot.ie/2014/09/2992014-russian-economy-briefing-for.html) IMF came in weighing heavily on the doom for its outlook for Russian economy this week.

In its "Russian Federation: Concluding Statement for the September 2014 Staff Visit" report from  October 1, 2014, the Fund notices (quite a sharp eyesight there) that: "Geopolitical tensions are slowing the economy already weakened by structural bottlenecks."

According to the IMF, the solution is for the Central Bank of Russia (CBR) to "tighten policy rates further to reduce inflation and continue its path towards inflation targeting underpinned by a fully-flexible exchange rate." Investment is falling down, capital flight de-accelerated but remains a problem, deposits are desperately needed for the banks to stay liquid (absent foreign funding sources and coming bonds maturities), so has to kill the economy to keep economy alive dilemma...

On fiscal side, things are ok-ish: "While the projected overall fiscal stance is appropriately neutral in 2015, the needed fiscal consolidation should resume in the following years… The proposed federal budget, which is consistent with the fiscal rule, envisions a loosening in 2015. However, this is offset by a tightening at the sub-federal levels. This strikes an appropriate balance between the need to consolidate in the medium term, with the non-oil deficit remaining near historical high, and the need for supportive fiscal policy in the face of the current downturn." And as I noted in the note linked above: "The use of the National Wealth Fund for domestic infrastructure projects may be appropriate to consider if done in the context of the budget process and subject to appropriate safeguards. The diversion of contributions from the fully-funded pillar weakens the viability of the pension system, creates disincentives to save, and dilutes the credibility of the fiscal rule."

On growth: "The economic outlook appears bleak. GDP is expected to grow by only 0.2 percent in 2014 and 0.5 percent in 2015." Not as gloomy as the World Bank but uuuuugly…
Drivers, predictably are:

• "Consumption is expected to weaken as real wages and consumer credit growth moderate." No… wait… they are already weak and moderated… 
• "Geopolitical tensions—including sanctions, counter-sanctions, and fear of their further escalation—are amplifying uncertainty, depressing confidence and investment. Capital outflows are expected to reach USD 100 billion in 2014 and moderate somewhat but remain high in 2015." Again, no surprises here.
• "Inflation is projected to remain over 8 percent by the end of 2014 mostly due to an increase in food prices, caused by import restrictions, and depreciation of the ruble. In the absence of further policy actions, inflation is expected to stay above target in 2015." That we know too. No surprises here. 

On banks, pretty much same as I have been saying: "Increased oversight and heightened financial stability remain a priority. Banks and the corporate sector are facing a challenging environment due to the weak economy, limited access to external financing, and higher financing costs. Existing financial buffers together with appropriate policy responses by the CBR have limited financial instability thus far. Nonetheless, the current uncertain environment could create difficulties in individual banks and businesses, even in the near term. In case of acute liquidity pressures, emergency facilities should be temporarily offered to eligible counterparties, against appropriate collateral, priced to be solely attractive during stress periods."

On structural side, I would have expected more clarity. Instead, we have more generalities: "Despite the slowdown, the economy is expected to have limited excess capacity owing to structural impediments to growth… Even if [geopolitical] uncertainty dissipates next year, domestic demand and potential growth are projected to remain weak in the medium term due to insufficient investment and deterioration in productivity. Potential growth is projected to be about 1.2 percent in 2015, reaching 1.8 percent in 2019, with downside risks. Structural reforms are needed to provide appropriate incentives to expand investment and allocate resources to enhance efficiency. Protecting investors, reducing trade barriers, fighting corruption, reinvigorating the privatization agenda, improving competition and the business climate, and continuing efforts at global integration remain crucial to revive growth."

Then again, all this you could have heard at our briefing breakfast for IRBA… to stay ahead of the IMF analysis… 

23/9/2014: Nationalist Revival and the end of the Age of Great Moderation

Recently, I was asked to comment on the issue of emerging nationalism in the European and Eastern European (especially Russian and Ukrainian) context. Here is a paper that was produced for the discussion: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2499254

17/9/2014: Belarus v Ukraine: Income per Capita

Someone just asked me a question as to what is the relative income in Belarus vs Ukraine. Here is the data on GDP per capita basis (PPP-adjusted to reflect exchange rates and price levels differences) for main CIS countries (click to enlarge):

Note: as Ukraine is now a programme country for the IMF, forecasts end at 2014.

Sorted. Enjoy.

On related note, here are some other comparatives including Belarus and Ukraine: http://trueeconomics.blogspot.ie/2014/09/992014-russias-risks-are-up-but-still.html see table at the bottom of the post.

16/9/2014: Ukraine Passes Far-Reaching Law on Eastern Regions Decentralisation

After ten days of ceasefire, the Ukrainian Parliament (Rada) ratified a very significant new bill, introduced by President Poroshenko, that

• guarantees a "special status" based on a degree of self-rule for the self-proclaimed separatist territories, the Donetsk and Luhansk "People's Republics", for a period of 3 years
• allows for policing by local militias in specially designated areas of self-rule
• provides protection (yet to be defined) for Russian language
• permits local governments' autonomy in establishing and strengthening of "good neighbourly relations" with Russia
• promises Kiev funding to rebuild the regions (not specified amount and/or conditions)
• sets the date for local elections: December 7

A separate bill guarantees amnesty for "participants of events in the Donets and Lugansk regions", which implies three things of note:

1. the bill does not reference separatists as terrorist - a major departure from past practices; and
2. grants symmetric amnesty to both sides, including the volunteers fighting on the side of the Ukrainian forces; and
3. provides no exceptions on the basis of citizenship - so all foreign fighters on both sides are, presumably, included in the amnesty.

It is worth noting that the amnesty does not cover those responsible for the shooting down of the MH17 as well as rebels accused of other "grave" crimes (per BBC report).

In my view - this is a major and very positive departure from the past policies for President Poroshenko which is made even more significant by the fact that Ukraine is going into acrimonious and challenging political campaign for the new parliamentary elections. It took some guts and political will for President Poroshenko to push this through. For example, Yulia Tymoshenko, the former prime minister and presidential candidate, labelled the bill a "complete surrender". As quoted in the Telegraph, she stated that "This decision legalises terrorism and the occupation of Ukraine".

It must be reiterated again, President Poroshenko deserves huge credit for taking this major reconciliatory step and the bill, in my opinion, provides a very good roadmap for securing longer-term dialogue between all parties on how to rebuild the region within the united Ukraine. It is my sincere hope that the separatists will fall fully behind this process.

Signals from the separatists are, however, quite mixed. Igor Plotnitsky who heads Luhansk separatists, as reported in the Telegraph, said the bill met several of his demands and that "a peaceful resolution has been given its first chance". In contrast, Andrei Purgin, the so-called deputy prime minister of the Donetsk People's Republic, said that the bill only offers a possible starting point for discussions. This is unfortunate.



Sources:

http://www.telegraph.co.uk/news/worldnews/europe/ukraine/11099126/Ukraine-separatists-granted-self-rule-and-amnesty-as-Kiev-agrees-EU-pact.html

http://www.bbc.com/news/world-europe-29220885

13/9/2014: Ukraine's economy newsflow: from bad to worse

A small digest on Ukrainian economy - mostly news, less analysis.

Some grim stats on Ukrainian economy here: http://slavyangrad.org/2014/09/08/statistics-tell-the-tale-irreplaceable-losses-for-the-ukrainian-economy/
A very comprehensive survey, despite some politically loaded statements. Read it for the stats and ignore all political ravings.

Meanwhile, the prospect of Ukraine dipping into gas deliveries destined for Europe is looming as Naftogaz debt continues to rise: http://en.itar-tass.com/economy/747187 and as winter draws closer and closer. The fabled 'reversed flows' from Eastern Europe are not materialising (predictably) and reserves are bound to be running out faster as coal production is all but shut. Per Vice PM Volodymyr Hroisman, ukraine is facing a shortfall of some 5 million tonnes of coal by the end of 2014 and gas shortages are forecast at 5 billion cubic meters. As the result, Ukraine is now forced to buy coal abroad, with one recent agreement for shipments of 1 million tonnes of coal signed with South Africa.

Electricity exports from Ukraine are suffering too, primarily as domestic production falls and demand rises. In January-August 2014, electricity exports are down 6% y/y

National Bank of Ukraine governor, Valeria Hontareva, has been reduced to talking up the markets by delivering promises that the Government will not default on its bonds and Naftogaz bonds. She had to admit this week that hryvna devaluation has now hit 60% y/y (by other calculations, depending on the currency basket chosen it is just above 40%) and inflation is running at 90%. Recall that on September 2, the IMF assessment of the economy which reflected the updates to risks and latest forecasts. Revised programme forecasts now see real GDP shrinking 6.5% y/y in 2014, but growing by 1% in 2015 and 4% in 2016. Hontareva said this week the GDP can fall by 9% this year alone. End of year CPI is expected to come in at 19% in 2014 (which has now been exceeded by a massive 71 percentage points, based on Hontareva statement) and 9% in 2015 before declining to 6.9% in 2016. Hryvna devaluation vis-a-vis the USD was expected to run around 50.6% y/y which is already too conservative compared to the reality, and by another 6.4% in 2015 falling to a devaluation of just 0.8% in 2016. Needless to say, Hontareva's statement suggests that the IMF forecasts, published only 10 days before she spoke, are largely imaginary numbers.

And the streets are voting for this verdict too: in January-August 2014 net purchases of foreign currency were up 6.6 times than in the same period of 2013, while households' deposits in foreign currency fell 13.3%. This suggests that people are stockpiling foreign currency in the safety of their own homes, rather than in the banks. Consumer confidence latest reading, published last week showed a drop of 10.4 points to 54.7, while inflation expectations rose 2.8 points to 188.7 and devaluation expectations were up 22.1 points to 147.8.

Meanwhile, the Government is yet to catch up with the ugly realities. Last week, the Government approved macroeconomic forecasts for 2015-2017 which show expected real GDP growth of 0.3%-2% in 2015, rising to 2.5-4.5% in 2016. Good luck to them...

None of this is cheerful. The country is economically in a tailspin and the Government is currently unable to address multiple and still mounting problems. New elections for the Rada are due, with effectively a caretaker Government in place. The conflict, currently in a fragile ceasefire, is destroying the economy (not to mention lives and society).

Country political crisis is starting to push the anti-Russian and anti-Eastern Ukrainian rhetoric to new highs (e.g. http://www.bloomberg.com/news/2014-09-12/u-s-widens-sanctions-on-russian-banks-energy-defense-firms.html) which is not helping President Poroshenko, who is effectively held hostage by his pre-election promises to bring back Crimea and restore Kiev control in Donbas and the need for pragmatic de-escalation. The President seems to have embraced the latter, but the rest of Ukraine's Government, facing fresh elections, is going on the solo run of beating the anti-Russian drums.

PM Yatsenyuk's ravings are dangerous, although they are also amusing, precisely because they represent blatant political posturing. Last week he went so far as to suggest that Europe cannot exist without Ukraine as a member of the EU (despite the simple fact that no one in the EU ever offered Ukraine a prospect of membership) and that Moscow wants to restore the entire Soviet Union (despite the fact that parts of the Soviet Union today are firmly members of the Nato, while some other former republics are basket cases so poorly run, Russia would have to go bankrupt to accommodate any sort of union with them).

Ukrainian exports to Russia are now expected to fall 35% in 2014 and a further 40% in 2015. And it is not all down to agrifood and heavy machinery trade that is suffering. Take for example insurance sector. In H1 2013, Russian reinsurance companies provided cover for 32.9% on Ukrainian insurance companies (UAH270.2 million). In January-June this year this was down 42% to UAH157 million, with Russian reinsurance share of the Ukrainian market down to 22.1%. Substitute cover was sought instead in Germany and the UK - both markets trading in currencies not offering hryvna any hedging against devaluations, unlike falling ruble. Which means cover is now more expensive.

11/9/2014: Some Recent Links on Ukrainian Conflict

Here is an interesting compendium of academic and analysts' voices dissenting from the prevalent Nato/US rhetoric on the long-term prospects for Nato's role in Ukraine.

Note: some of the links come via RIA Novosti, a Russian news agency, which is hardly surprising, given the consistent spin in the opposite direction that we get from the traditional Western media.

Another note: this collection of links is not a comprehensive reflection of the reality. It is not designed to be such. In reality, nothing is/can be comprehensive, especially when it comes to the conflict in Ukraine. My point is that much of what we are bombarded with in the social media and traditional media is one-sided. Here is a different side to the same stories.


Ukraine and Nato:

"The world could plunge into a new Cold War with Russia and China emerging as a new financial centers, unless the West changes the existing financial structures, a professor at University of California, Davis Wing Thye Woo said ...at the discussion at the Johns Hopkins School of Advanced International Studies.
“I think that if changes do not occur in the international [financial] institutions of today, I think that we are basically encouraging a China-Russian alliance to formulate an alternative center to the US,” Woo said." http://en.ria.ru/analysis/20140807/191797049/International-Financial-Shake-Up-Contributing-to-New-Cold-War--.html

Note: I highlighted this possibility in the context of the UK proposal for barring Russian banks' access to SWIFT system: http://trueeconomics.blogspot.ie/2014/08/2982014-while-new-financial-sanctions.html

University of Chicago University political scientist John Mearsheimer: “There’s no question that Ukraine is interested in becoming part of NATO and be protected by the United States and the West more generally, and who can blame them? But the fact of the matter is that this is a prescription for disaster. …The West should have told Ukraine that incorporating Poland or the Baltic states into NATO was possible, but trying to incorporate Ukraine and Georgia was a bridge too far. We ended up precipitating a crisis and that crisis would lead to the destruction of Ukraine – and that’s obviously not in Ukraine’s interests… We should have stopped NATO expansion, given up the idea of incorporating the Ukraine into the West and instead said that we’re interested in maintaining a neutral Ukraine that effectively serves as a buffer state with NATO on one side and Russia on the other.”
http://en.ria.ru/analysis/20140905/192649988/Scientist--Ukraine-NATO-Membership-Prescription-For-Disaster.html

Note: I agree. And it looks like majority of the Nato members agree too: http://uk.reuters.com/article/2014/09/04/uk-nato-summit-ukraine-idUKKBN0GZ0SI20140904 Nonetheless, Ukrainian Government is keen on reviving its bid to join Nato: http://en.ria.ru/world/20140906/192681097/NATO-Pretends-Ukraine-Membership-Request-Never-Happened.html


Azov Battalion: 

In other news, an interesting article in the NY Review of Books: http://www.nybooks.com/blogs/nyrblog/2014/sep/05/ukraine-catastrophic-defeat/ that covers the aftermath of last weeks' fighting in Eastern Ukraine, summing it up as "the devastation suffered by Ukrainian forces in southeastern Ukraine over the last week has to be seen to be believed. It amounts to a catastrophic defeat and will long be remembered by embittered Ukrainians as among the darkest days of their history."

The article also contains a passing reference to something that is being increasingly whitewashed in the Western Media, the role of the neo-Nazis in backing Kiev's military operations: "As we sped away from the “Russians” we could see a column of black smoke rising from the sea. When we got to the Ukrainian checkpoint the men told us that it was a coastguard cutter that had been hit, they thought by a tank. They were from the Azov Battalion, one of the Ukrainian volunteer militias. On their vehicles and their arm flashes they had the “wolfsangel,” a neo-Nazi symbol, which is their insignia and which tells you much of what you need to know about their background."

In a related news, NBC report on German channel showing a video of Azov soldiers with nazi insignias on their helmets: http://www.nbcnews.com/storyline/ukraine-crisis/german-tv-shows-nazi-symbols-helmets-ukraine-soldiers-n198961

The Guardian article on Azov's central role in Ukraine's Government campaign: http://www.theguardian.com/world/2014/sep/10/azov-far-right-fighters-ukraine-neo-nazis

And on related, an Amnesty International USA post on the "on-going abuses and war crimes by pro-Ukrainian volunteer forces": http://www.amnestyusa.org/news/news-item/ukraine-must-stop-ongoing-abuses-and-war-crimes-by-pro-ukrainian-volunteer-forces

This has to be an uncomfortable reality for the US and EU politicians: Azov was formed on foot of a large number of Maidan 'activists' and represents the strongest pro-Ukrainian force that, in part, has influence with Kiev and business elites. Azov is not the only (but is the most notorious) regiment of similar nature. Explicit US and EU support for Maidan and post-Maidan interim Government is clearly tarnished by the Azov abuses and neo-Nazi base.

Note, personally, I doubt that President Poroshenko or PM Yatsenyuk welcome or support these extremists. I suspect they fear their impact and are concerned about the spread of the Azov-styled groupings in parts of Ukraine. But they have little room to clamp down on these groups in the current environment when the post-Maidan activism is still shaping internal Ukrainian policies to some extent. It is their tragedy as much as the Ukrainian tragedy that Azov is so prominently featuring as a symbol Ukrainian nationalism.


US Public Opinion vs US Political Elites:

Another interesting post is via Politico, covering American public vs political elites' opinions on various topics, including Russia as a threat: http://www.politico.com/magazine/story/2014/09/the-politico-50-survey-110555.html#.VAy5erywJ9m


Historical Map of Russian Expansionism:

Last, but not least, a good info graphic tracing out evolution of the Russian borders from the IXth century AD through the beginning of the 2000s: http://en.ria.ru/valdai_mm/20100906/160481013.html

9/9/2014: Russia's Risks are Up, but Still Vastly Outperforming Ukraine's

Earlier today I tweeted about the drop in the drop in the credit risk score for Russia in the Euromoney Country Risk survey. As always, one has to look at the scores in both time series context and comparative to the peer economies.

Here is the Russian score in time series context:

It is worth noting that Russian score has declines rather steadily over time, but remains well ahead the regional average for the Eastern and Central Europe. Part of Russian score decline is driven by the ECE trend, but part is idiosyncratic.

Here are the main components of the score and the direction:

The sea of read arrows is what is of greater concern - scores dropping across all categories surveyed except one: debt indicators.

For comparative, the chart below shows evolution of Ukraine score, which is much less benign than that of Russia and remains deep under-performer in the Eastern and Central Europe:

Table below (click to enlarge) shows cross-countries comparatives for score and main components for Russia's main non-EU neighbours:

At the bottom of the above table, I list countries that are in 'credit risk' proximity to Russia, Ukraine, Belarus and Moldova. One thing is clear: Russia is comparing favourably to Eastern European countries that are EU members. Ukraine, Belarus and Moldova - do not. Their proximates are least-developed countries of the region.