2/4/2014: Irish Manufacturing PMI: March 2014

We now have Manufacturing PMI for Ireland for Q1 2014, so here are couple updated charts:

Few notable things in the above:

1. PMI now solidly above the 'statistical significance' range for the first time since October 2013. Also, March 2014 marks eighth consecutive month of PMI ahead of its post-crisis average (from January 2011).
2. The post-crisis average is still lower than pre-crisis average.
3. PMI continues to trend up with new short-term trend running from around June 2013.
4. 12mo average is at solid 52.1 and 3mo average through March (Q1 2014) is at 53.7 which is basically identical to 3mo average through December 2013 (Q4 2013) which is 53.6. 
5. Q1 2014 average is above same period reading for 2011 (49.8) and 2012 (50.1), but it is below same period 2010 average (56.1).

Key takeaway: solid PMI reading for Irish manufacturing - a good thing. As I noted before, Manufacturing PMI has stronger link to our GDP and actual industry output than Services PMI, so this is a net positive for the economy.

1/4/2014: An ECB challenge...

A quick chart plotting euro area's challenge on deflationary side. Taking annual average HICP indices rebased back to 100=1996 for a number of countries and positing the data against the same for the US:

You can clearly see downward divergence in the euro area starting from 2010 on...

29/3/2014: WLASze: Soul v Science in a Corporeal Juxtaposition

This is WLASze: Weekend Links on Arts, Sciences and zero economics.


Nothing can be as inspirational as real artistry and craftsmanship. And few examples of both stand head tall over the endless horizon of time than the works of Antonio Stradivari.

This week, Sotheby's announced that it is selling "what is regarded as the finest viola in existence – the "Macdonald" made by Antonio Stradivari in 1719." The 295-years old instrument is expected to go for more than £27m, "a figure that would easily surpass currently standing auction record for an instrument – the Lady Blunt Stradivari, which sold for £9.8m. It would (if achieved) also be higher than any known private sale." Per Sotheby's VC: "The instruments of the Stradivari are in a class of their own among the pinnacles of human craftsmanship and the Macdonald viola stands at the unquestioned summit."

Source: http://www.theguardian.com/uk-news/2014/mar/26/stradivarius-sothebys-macdonald?CMP=twt_fd Announcement: http://www.sothebys.com/content/sothebys/en/news-video/videos/2014/03/the-macdonald-viola-by-stradivari.html and you can read about the sale of Lady Blunt instrument here: http://www.newser.com/story/121578/stradivarius-violin-sells-for-16m.html

There is little doubt Antonio Stradivari (1644-1737) was the greatest maker of violins and violas of all times, having authored at least 1,116 instruments, although only around half still survive today.

There is a host of arguments attempting to capture the Stradivari's unique character. Here is an example:

"A Stradivarius in a good condition emits high-frequency sounds in a range where human hearing is the most sensitive. These frequencies become more audible in larger rooms. That makes the Stradivarius ideal for concerts in spacious concert halls and for performances together with big philharmonic orchestras.

The sound of these sublime instruments is so very characteristic that an observant listener can distinguish their superior tone when hearing the same artist playing on different instruments.

The sound of the old master instruments is not only superior in the vivacity of the tone; it is also insistent and captivatingly beautiful. The lustre and beauty of the instrument’s tone is as close you can come to the immaculate voice of a great opera diva." (Source: http://stradivariinvest.com/instruments/luthiers/)


But the magic, the allure, the raw emotional connection to Stradivari instruments - wether by public, critics or performers - also raises questions. The most pressing and the longest running one is: What makes Stradivari unique? And the less pressing, but probably more important one is: Is Stradivari unique?

Here is a note about one attempt to answer the first questions - a paper using the x-ray imagery to study the instruments: http://www.telegraph.co.uk/news/worldnews/europe/netherlands/2230123/Secret-of-Stradivarius-violins-superiority-uncovered.html

In contrast to physical qualities, some researchers have argued that chemical qualities to the wood used by Stradivari grant his instruments the power of uniqueness. Here is the paper looking into that aspect: http://www.scientificamerican.com/article/secrets-of-the-stradivari/ and http://www.sciencedaily.com/releases/2009/01/090122141228.htm

But there are doubts about both the existence and the source of Stradivari's violins performance compared to other outstanding works by contemporary and later craftsmen.

Here is an example of the scientific work performed by Colin Gough over the years that attempts to identify unique properties of Stradivari sound and fails to find them:
http://www.fritz-reuter.com/articles/physicsorg/Science%20and%20the%20Stradivarius%20(April%202000)%20-%20Physics%20World%20-%20PhysicsWeb.htm

And a more recent, brilliantly structured (albeit small sample and restricted spatial dimension) double-blind test study attempting to assess the ability of top violinists to discern the instrument they play: http://blogs.discovermagazine.com/notrocketscience/2012/01/02/violinists-cant-tell-the-difference-between-stradivarius-violins-and-new-ones/#.UzRD3a1_uzg

But may be the science of all of this is simply missing one core point: an artist is more than just a collection of physical properties - be they of her/his instrument or her/his own making. May be art is an intimate expression or at least a reflection of the soul (let me be old-fashioned here and surmise that soul exists without having to resort to attempting to explain what it might be). If so, then who cares if technically Stradivari's greatest achievement might have been in his instruments ability to trigger a (scientifically) placebo effect. The core result is the effect itself, as far as we are concerned with art. And that effect is undeniable. Virtuoso violinist Anne-Sophie Mutter likened playing her Strad for the first time to meeting her soul mate: "It sounded the way I (had) always been hoping," she said. "It's the oldest part of my body and my soul. The moment I am on stage, we are one, musically."

You might smile and say 'But studies show…' or you might marvel at her music and remember that is some intangible, non-scientific, quasi-religious way, it is a product of the Strad and thus a product of some guy who lived 300 years ago in a town called Cremona and had no computers, no state-granted labs, no complicated supply chains to procure and deliver rare varieties of wood, no precision equipment to mix his glues, lacquers, dyes and so on… and yet was able to give us something that no scientist to-date was able to explain...

Not bad. 300 years old… yet to be surpassed by anyone or anything, short of Stradivari's younger contemporary: Bartolomeo Giuseppe Guarneri del Gesù…  yet to be explained by anything or anyone... yet to be definitively established as anything beyond being sublime...

29/3/2014: Almost Armageddon? WorldBank Forecasts for Russian Economy

This week World Bank published their outlook for Russian economy. Here are two core forecast scenarios:

High-risk:

Low-risk:

And a summary of the Government fiscal policy framework, covering adopted budgetary targets:

Key takeaways:

1. Ugly 2014 one way or the other (high and low risk scenarios)
2. Ugly non-oil balances on Government side
3. More conservative budgetary basis (oil price) than media allows
4. Highly conservative deficit targets despite economic growth slowdown (should EU want to find a fiscally responsible neighbour to match own 'austerian' ethos - Russia is a good candidate)
5. Gross capital formation is ugly and showing no sign of uplift on investment side which offers policy room for supporting some growth momentum
6. Capital account is assumed to be really, really ugly in high risk scenario (USD133 billion outflows) which is likely to trigger capital controls should things deteriorate this much

Russia comparative to the rest of the world:

It does look like 2014-2015 are being set (in World Bank view) as trend-breaking years for Russia

Note: Capital outflows tracing back few years:

29/3/2014: Russia's Competitiveness Challenge & What Needs to be Done...

In Russia, state sectors (non-market services) are the main drag on competitiveness. The chart below shows the gap between real wages & productivity growth by sectors, y-o-y growth. Higher values imply that wages are growing faster than productivity.

So three things to note:

1. Non-market) services drive decline in competitiveness (wages growth in education health, public services, civil service etc outstripping productivity growth in every year since 2008 and by a huge margin compared to other sectors in H2 2011-present. 
2. Trade sectors (agriculture, mining and manufacturing) are facing up to competitive pressures and are showing improvements in competitiveness since the start of 2011 despite general labour markets tightness.
3. Non-tradable sectors (market services, construction, transport, etc) are showing increasing rate of decline in competitiveness in line with the rest of economy. However, the deterioration rates are shallower than those recorded in 2009-2010.

The most urgent policy objective for Russia, is to find a reforms mix to drive up productivity growth in non-market sectors. Cutting bureaucracy and introducing professional management in education, health and public services would be a natural step forward. Upskilling and creating performance-linked pay systems will help as well. Reforming health and education to 'money follows user' system of costs recovery can also work, especially in urban areas, where there is meaningful choice of providers. Centralising and making paperless (digitalising) social welfare, pensions and core public services payments systems is another 'must' (although this is partially on its way)

28/3/2014: 'Recovery' in Mortgages Lending... Back to 1995...

In previous post I have shown that IBF mortgages approvals data is primarily driven by the excessive volatility recorded at the end of 2012 - beginning of 2013, thus skewing the entire result for February 2014. The details here: http://trueeconomics.blogspot.ie/2014/03/2832014-irish-mortgages-approvals.html

However, we can also look at quarterly data and extend the series to cover periods before IBF data became available. Based on CSO's heavily lagging (the latest we have is Q3 2013) series for House Loans Approved and Paid and extending it with IBF data for Q4 2013, we have data on the issue of number of loans approved and their value from Q1 1975 through Q4 2013. We can also use January-February 2014 data from IBF to estimate Q1 2014 with relative accuracy.

Here are the results:

The argument is that January-February data and indeed data for the later part of 2013 shows improvement in the markets, and even recovery in the markets.

In the last 2 quarters, based on IBF data, there were around 4,510-4,530 house loans approved. This represents 8th lowest quarterly result for the entire history. This also represents lower levels of lending than in Q2 and Q3 2013. Prior to the onset of the crisis, there is not a single quarter on record when there were fewer new loans issued by numbers.

In terms of volumes of lending, without adjusting for inflation, things are only marginally better. Volume of lending over Q4 2013-Q1 2014 averaged at EUR809 million per quarter. This is comparable (but slightly lower) than levels of lending attained in Q4 1995-Q1 1996.

As you can see from the chart, you need to have pretty vivid imagination to spot any recovery in the above series.

28/3/2014: Irish Mortgages Approvals: February 2014

There were some boisterous reports in the media today about the latest IBF data on mortgages approvals in Ireland, covering February 2014.

Here are the facts, some of uncomfortable nature for the 'property markets are back' crowd.

1. Year on year, mortgages approved for house purchases rose 49.5% which, on the surface, is a massive nearly 50% jump, suggesting huge improvement in the markets (see below on this).
2. However, 3mo average approvals through February 2014 are down 16.2% on 3mo average approvals through November 2013. Which suggests that things are still running slower in recent months than they did before.
3. Top-up mortgages approvals have declined: down 6.6% y/y and down 27.3% on 3mo average basis compared to previous 3mo period.
4. Average value of mortgage approved for house purchase is up 6.5% y/y, but it is down 5.4% for 3mo average through February, compared to 3mo average through November 2013. So mortgages being approved do not support price increases in recent months. Or put differently, mortgages being approved afford lesser LTVs on homes.

Chart to illustrate:

Key takeaways from the chart above:

• Number of new mortgages approved is running well below the trend, so improvement in February is driven by something other than market growth. Instead, it is driven (as argued below) by extraordinary volatility in approvals around the end of 2012 - beginning of 2013, which was down to expiration of tax breaks at the end of 2012. 
• Average mortgage approved is on-trend and the trend is down not up. So things are getting worse, not better.

Next, volume of lending:

1. Total volume of loans issued for house purchase went up 59.1% y/y in February 2014, but
2. 3mo average through February 2014 was down 20.9% on 3mo average through November 2013. In fact, February 2014 lending was the second lowest level over 10 months, with the worst recorded in January 2014. The start of this year is worse than any 2 months period since January-February 2013, which were distorted by end of tax break in 2012 and stripping these out, this years first two months are the worst since May 2012.

Key takeaways from the chart above:

• February 'improvement' puts us below trend and within the general trend direction, so the reading is weak, but consistent with upward trend.

Now on to the main bit: What happened to drive February figures so dramatically up in y/y terms? The next chart explains in full (click on the chart to enlarge):

Key takeaways from the chart above:

• Statistically-speaking, all of the massive increase y/y in lending for house purchases in Ireland recorded this February is down to huge distortion generated in the data by the end of tax breaks in December 2012. There is no other story to tell.

27/3/2014: 2012-2013 Trends in Toursim & Travel to Ireland

Here is the data for Overseas Tourism and Travel for Ireland for Q4 2013 and full year 2013. Please note: due to changes in data reporting, we only have 2012 and 2013 figures as comparatives. Note: key takeaways are summarised at the bottom of the post.

Let's start with spending by visitors:

• In 2013, overseas travellers to Ireland spent EUR3,262 million on their stay and fares, which is 11.9% higher than in 2012. In Q4 2013, the rise y/y was 6.9%.
• Air fares paid into Irish carriers rose only marginally in 2013 compared to 2012 - up by just 0.9% to EUR864 million.
• This means that bulk of increase came from non-transport spend. Total overseas tourism and travel earnings rose 9.4% y/y in 2013 to EUR4,126 million. It is worth noting that Q4 2013 y/y rise was 3.7%.
• Key takeaway: these are positive numbers, indicative of a recovery in the sector and supportive of the data on employment growth in the sector.

Chart to illustrate:

The above figures are gross and exclude trends for Irish travellers abroad. Including these:

• Tourism and Travel Balance - trade balance computed by netting out overseas tourism and travel expenditure by irish residents abroad - registered a deficit of EUR337 million in 2013, which is a significant improvement on deficit of EUR640 million in 2012.

In terms of visitors numbers, things are a bit more complex:

• Total number of overseas visitors to Ireland rose to 6,986,000 in 2013, up 7.2% y/y. Q4 2013 also registered a rise of 9.9%.
• However, increases in visits to friends/relatives - those including visits by return emigrants - rose 10.8% y/y to 2,014,000. In other words, 42% of the total rise in number of visitors was accounted for by potential visits by Irish emigrants. 
• Business visitors numbers posted a weak increase, despite big inflows of EU officials traveling to Dublin during the Presidency, rose only 5.1% from a low base. This increase accounted for only 12.8% of the total increase in overseas visitors. In fact in the last six months of 2013 (after the end of our presidency) the number of business visitors to the country fell 9.3% compared to the same period of 2012. The evidence clearly does not support claims of improved business activity.
• Visitors numbers for the purpose of holiday/leisure/recreation activities rose 8.0% y/y in 2013 to 3,059,000. This is good, but it is less robust than the aggregate numbers. 
• Thus, total visitors numbers excluding visits to family and friends reached 4,972,000 in 2013 which is up 5.8% y/y/.
• Key takeaway: Good news is that visitors numbers are growing. Less positive news is that growth in the numbers of visitors for leisure and business purposes is growing much slower than the headline 9.9% figure cited by everyone is concerned.

Next - onto average duration of stay:

• In 2013, average duration of stay by visitors for all reasons for journey averaged 7.125 days, which is down on 7.275 days for 2012. In Q4 2013, average duration stood at 6.8 days against 7.2 days in Q4 2012. Thus the decline in average length of stay is not due to shorter-term visits associated with official travel during the Presidency. In fact, business trips duration averaged 5.35 days in 2013 - up on 4.925 days in 2012.
• Holiday and recreation trips duration average remained static in 2013 at 2012 level of 6.25 days. So the entire decrease was down to visits to friends and relatives shrinking from 7.325 days on average to 7.2 days.
• Key takeaway: people are traveling more, and staying roughly the same amount of time.

Last, average spend per visitor:

• Overall average spend per visitor to Ireland stood at EUR581.07 in 2013, up 1.58% on 2012 levels - which is a weak increase. In Q4 2013 average spend actually fell 5.6% y/y.
• Excluding air fares, average spend rose 3.8% y/y to EUR420.89 in 2013 compared to 2012.
• Of all countries tracked, decrease in visitors was recorded only for Italy. 
• Largest increase (full year figures) was recorded for visitors from Great Britain (accounting for 33% of the total rise and 42% of all visitors to Ireland)a and the US (accounting for 30.1% of total rise in visitors numbers and 16.6% of all visitors to Ireland.
• Smallest increase (as opposed to drop) was recorded for visitors from Other countries (excluding GB, US, Australia & New Zealand, and Rest of Europe. 
• In terms of average spend, chart below summarises for Q4 2013 compared to Q4 2012.

Key takeaways from above:

• Overall: positive numbers, indicative of a recovery in the sector and supportive of the data on employment growth in the sector
• Trade balance on tourism sector is still in deficit, but improving
• Less positive news is that growth in the numbers of visitors for leisure and business purposes is much slower than the headline 9.9% figure cited in the media
• There are more people traveling to Ireland, and they staying roughly the same amount of time
• Overall average spend per visitor to Ireland stood at EUR581.07 in 2013, up 1.58% on 2012 levels - which is a weak increase. In Q4 2013 average spend actually fell 5.6% y/y
• In Q4 2013, spend fell for all groups of travellers excluding those from Germany and from 'Other countries'
• Visitors from 'Other countries' have now overtaken visitors from the US in terms of per-person spend on their trips to Ireland.

27/3/2014: Troika of Sorts for Ukraine: IMF's chip are on the table

IMF announced the agreement to provide USD14-18 billion in Stand-by Arrangement with Ukraine.

This is a 'troika'-like arrangement:

• 2 year stand-by line of credit
• Total package of USD27 billion
• IMF share of the package USD14-18 billion
• Main funding vis bi-lateral and multilateral agreements
• Presumably multi-lateral will envolve EU
• Bilateral packages are for US and possibly Russia

Macro analysis:

“Ukraine’s macroeconomic imbalances became unsustainable over the past year. The (until recently) pegged and overvalued exchange rate drove the current account deficit to over 9 percent of GDP, and a lack of competitiveness led to the stagnation of exports and GDP. With significant external payments and limited access to international debt markets, international reserves fell to a critically low level of two month of import in early 2014. The 2013 fiscal deficit was 4½ percent of GDP, and the government accumulated sizeable expenditure arrears. The 2013 deficit of the state-owned gas company Naftogaz reached nearly 2 percent of GDP, driven by the sharp increase in sales at below-cost prices. Without policy action, the combined budget/Naftogaz deficit would widen to over 10 percent of GDP in 2014."

So in other words, 2013 combined deficit was around 6.5% of GDP, but 2014 deficit - following 'some stabilisation' (see below) is to reach 10% of GDP. I wonder why?.. Is it down to expected price increases on gas and oil? Or is it down to the havoc wrecked by Maidan protesters? It is certainly not down to the Crimean crisis, since removal of Crimea off Kiev's books should save the Ukrainian Government money.


“Following the intense economic and political turbulence of recent months, Ukraine has achieved some stability, but faces difficult challenges. To safeguard reserves and address currency overvaluation, the National Bank of Ukraine (NBU) floated the exchange rate in February. Measures implemented in February and March helped stabilize financial markets and ensured that critical budget payments have been met. Nonetheless, the economic outlook remains difficult, with the economy falling back into recession. With no current market access, large foreign debt repayments loom in 2014-15."

Now, key question here is why is Government deficit rising if currency is being devalued? Especially as official debt levels in the Ukraine are relatively low? Is it because Ukraine running huge current account deficit (even with subsidised prices for Russian gas)?


"Monetary policy will target domestic price stability while maintaining a flexible exchange rate. This will help eliminate external imbalances, improve competitiveness, support exports and growth, and facilitate the gradual rebuilding of international reserves.  The NBU plans to introduce an inflation targeting framework over the next twelve months to firmly anchor inflation expectations."

This is pure nonsense. Devaluation is bound to drive inflation up. Rebuilding economy will require lower interest rates, which will further support high inflation. What on earth can NBU do to set price stability as its objective? Dollarise the economy? Tried and failed in the form of pegs, and given the role of Maidan (populist movement) how can vast amount of pain be inflicted on the economy to drive price inflation to reasonable bounds?


"Financial sector reforms will focus on: (i) ensuring that banks are sound, liquid, and well-capitalized; (ii)  upgrading the regulatory and supervisory framework of the NBU, including complying with international best practice and supervision on a consolidated basis,  and (iii) facilitating resolution of non-performing loans in the banking sector."

The above reads like a Cyprus-Greece scenario. Good luck finding Russian oligarchs to hit with a deposit tax.


"The initial stabilization in 2014 will be achieved through a mix of revenue and expenditure measures. For 2015-16, the program envisions a gradual expenditure-led fiscal adjustment—proceeding at a pace commensurate with the speed of economic recovery and protecting the vulnerable—aiming to reduce the fiscal deficit to around 2½ percent of GDP by 2016."

Yes, I know… it is… austerity. Higher taxes, lower spending, followed by lofty lower spending and lower spending. I think we shall recall that the current Government has been installed into place by the populist uprising.


"A key step is the commitment to step by step energy reform to move retail gas and heating tariffs to full cost recovery, along with early action towards that goal."

Read: 40% hike in domestic gas prices is only the beginning.


In conclusion, IMF release focuses on real issues - institutional deficits in terms of governance, corruption, procurement, transparency. All are laudable and much needed.

The key takeaways:

1. The entire package is still up in the air as to bilateral and multilateral funding - sources, costs, etc;
2. The package still needs engagement from Russia - majority of the above fiscal measures will require serious pain to be imposed and this pain can be ameliorated by Russia restructuring Ukraine's debts and providing some transitioning assistance on energy front, as well as continuing to give Ukrainian firms access to its markets;
3. The package is cheap from IMF's point of view (small outlays over short term) but is heavy on Ukrainian reforms side (needed, but how feasible in the current political environment?);
4. This is not a Marshall Plan I called for - it lacks clarity on the final cost of funding (which should be close to zero) and it lacks maturity span (which should be 20 years or so);
5. Overall, the reforms sketched out above are likely to lead to another Orange/Maidan Revolution in few years time and the funding that backs them is unlikely to provide support for political stabilisation.

Let's wait for more details on the above points.




Details here (click on individual image to enlarge):

26/3/2014: 13 months on, the Promo Notes deal stinger is still in...

Back in September 2013 I wrote in Sunday Times that ECB might want to consider accelerated disposal of the Government bonds held by the Central Bank post-restructuring of the IBRC Promissory Notes: http://trueeconomics.blogspot.ie/2013/10/8102013-german-voters-go-for-status-quo.html

And now, guess what... http://www.irishtimes.com/business/economy/pressure-to-offload-long-term-bonds-in-promissory-note-deal-over-ecb-unease-1.1737924#.UzJ8fqxmKCE.twitter

Per Irish Times article linked above:

"Ireland is facing pressure to offload the long-term government bonds it issued as part of last year’s promissory note deal and at a faster pace than the timetable originally outlined, amid continuing concerns from the European Central Bank about the deal.

The ECB is reviewing the controversial promissory note deal as it prepares to publish its annual report for 2013.

… A crucial aspect of the promissory note deal agreed last year after months of negotiations was the length of time the Central Bank would hold the long-term bonds that replaced the promissory notes."

I have consistently argued that promo notes restructuring represented the perfect target for debt relief for the state. One example is here: http://trueeconomics.blogspot.ie/2012/03/2132012-anglos-promo-notes-perfect.html. And I highlighted our 'deal's' sensitivity to earlier disposal of bonds here: http://trueeconomics.blogspot.ie/2013/03/2332013-sunday-times-10032013.html (see bottom of the article for box-out).

26/3/2014: Comment on Russia: Expresso, March 22

My comment to Portugal's Expresso on Russian economy:

24/3/2014: Russian Roulette or a Wheel of (Risky) Fortune?

What to expect this week on the Russia v the Western World stage:

1) More theatrics or threatatrics: so far the sanctions delivered amount to not much more than a buzz of a mosquito in the June midnight - weakly threatening, largely painless. In fact, current state of sanctions-for-Ukraine play is causing no impact on the real economy of Russia, although financial markets are showing their usual propensity to panic. The problem, however is that the current sanctions pretty much exhaust the list of political sanctions possible: selective travel bans and individual restrictions on two banks and a handful of banks accounts can be expanded in size, but to shift sanctions to the next level of pain will require disrupting trade flows. Thus, the EU/US are now holding their mild trump card of more broadly-based sanctions and this is weighing on the Russian markets through heightened uncertainty channel.

Given the unaltered status quo in Ukraine-Russia relations, compounded by the fact that President Obama and G7 are about to start series of week-long deliberations in Europe, as well as physically in Kiev, we can expect more sabre rattling this week. I expect the threats of further sanctions, isolation and financial ostracising against Kremlin to  intensify in the next 3-4 days, but die out thereafter. The key to this timing is that the US and EU have already explicitly drew the line in the sand - status quo of weak sanctions will remain in place, assuming Russia stays out of Eastern Ukraine. The only two unknowns here are:

• Will Russia stay out of Eastern Ukraine? My view here is that it will. We are more likely at the end of the game, than in the opening rounds.
• Will Eastern Ukraine stay calm with no acceleration of currently rather subdued protests by pro-Russian groups? My view is that this is the key threat and that despite the West's firm belief to the contrary, the Kremlin has little control over the situation on the ground when it comes to the pro-Russian protesters. Thus, the real uncertainty here is whether or not Eastern Ukrainian opposition and Kiev Government will be able to refrain from forcing Moscow's hand.

2) Over the next few months, assuming no escalation in the conflict, we can expect gradual reduction in political risks and a swing in markets pricing of risks. Currently, markets price risks asymmetrically, to the upside. This means that any adverse newsflow will trigger a broad sell-off in Russian indices. If there are any signs of political normalisation, especially tied to bilateral risk declines on both Ukrainian and Russian sides, the markets will start pricing risk to the downside and indices can rally even on weaker news. The next two points discuss the catalysts for such switch in risk pricing.

3) Ukraine is about to start dealing with the problems of state and economic collapse. This will involve, first and foremost, the discussions with the IMF, EU and US on the financial bailout. Given the role Russia plays in this (Ukraine owes Russia significant amounts against Government borrowings and gas arrears, Ukraine is hugely dependent on Russian markets for supply of energy and major inputs into industrial production, and demand for its exports) this process is bound to start drawing Ukraine into more cooperative mood vis-a-vis Russia. Russia also holds a major trump card against Ukraine in the form of gas prices. Comes April 1, Ukraine will lose its gas discounts from Gasprom and will be facing a tariff of some USD480-500 per mcm of gas from current pricing around USD268 per mcm charged since January 1. Kiev has already warned that Ukraine's domestic retail prices for gas will have to rise some 40% in order to fulfil conditions for the IMF bailout. All of this means that any bailout talks will have to involve Kremlin. And this, in turn, means that bailout talks can act as a catalyst for enhanced cooperation and de-escalation of both the conflict and the sanctions rhetoric.

4) Second stage is longer duration - as it involves political normalisation in the Ukraine. The core catalysts here will be presidential (May 25th) which may drag out into the second round (less likely) and possible late 2014-early 2015 Parliamentary elections. Given the size of the political risks discount on Russian markets, May elections should be a catalyst for the upside, although volatility will remain through the summer as new Presidential administration in Kiev starts re-asserting its role over the current Government and as the discussion on the future of presidential powers will start building up.

All above considered, my view is that we are nearing the bottom-fishing grounds for Russian equities, subject to two caveats:

• No further crisis escalation, and
• Strong investor stomach to weather incoming volatility. 

Am I alone in this call? Not exactly. Current valuations multiples on Russian stocks are at the levels last seen at the height of the 2008 crisis. By CAPE (price to 10 year average of earnings ratio), Russian equities are currently second lowest valued, after Greece. Russian core indices currently trading at around 4.8 times earnings, just over 1/3 of Indian markets valuations and just over 1/2 the P/E ratios for Brazil’s Ibovespa.

Weaker ruble favours stronger current account surplus and higher domestic earnings for companies, meanwhile high oil prices alongside the said weaker ruble favours stronger fiscal performance, giving upside to the probability of the federal government stepping in with a stimulus. Of course, ruble is probably set to lose some more ground on the USD and Euro, but it is hard to see it moving much more down.

On the economy side: growth is slowing, with 2013 coming in at lowly 1.3% GDP expansion delivered by shocks to inventories and weak fixed investments. This year, pricing in the risks to-date and a good portion of potential risks forward, the economy should generate GDP growth of just 1.0%. A rapid rebound in H2 might push that to 1.5%. Both still shy of the late 2013 projections of 2.5-2.7% expansion. January 2014 fixed investment growth was negative 7% y/y against +0.3% in December 2013.

When you look at Russian ETFs, they too support the case for going long Russian equities. RSX, iShares MSCI Russia Capped ETF and SPDR S&P Russia ETF have been supported recently on foot of insiders buying oversold Russian equities.  Per reports in the media, Vagit Alekperov, CEO of OAO Lukoil has been buying Lukoil shares, and OAO Novatek purchased 2.5 million shares between March 11 and March 14. OAO Rosneft insiders have also been buying shares in the company. These three companies account for 18% of the RSX holdings and 21.3% of the iShares MSCI Russia Capped ETF

All you need for some of the above to start rising fast is: political risks abatement and dividends uplift. Political risks are talked-through above. So to dividends: in 2013, Russian equities were the fastest growing dividend generating market in the Emerging Markets and Putin has been actively pushing Russian listed companies to up their dividend payouts to 35% of their net income.

Buckle your seat belts (they should have been bucked already, folks)...