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

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


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

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

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

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

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

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


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

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

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

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


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

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

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


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

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

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

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


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

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

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

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

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


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

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

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

23/12/2014: A Simple Math: Russian Default or Not

A simple math:

• Russia's total external debt, stripping out cross-holdings of corporate entities and banks (debt owed by Russian subsidiaries to foreign parents, debt owed by Russian companies to Russian investment vehicles registered off-shore, debt owed by Russian JVs to foreign partners, etc) is around USD500 and USD600 billion, based on various estimates. Note: official estimates put gross external debt in foreign currency at USD540 billion at Q2 2014, of which we can net out around 15 percent for cross-holdings by (ultimately) Russian entities, implying gross external foreign currency-denominated debt net of cross holdings at ca USD460 billion.
• Of this, roughly USD101 billion matures in 2015
• Russian GDP is slightly over USD2 trillion
• Thus, total external debt of Russian companies, households and the Government net of cross-holdings amounts to 25-30% of its GDP.  By World Bank data referencing this runs at around USD23% of GDP.
• By the end of 2015, if the repayments take place, and factoring in dim sum new debt issuance, it will be around 22-27% of GDP or by World Bank methodology - around 20% of GDP.

By the above, Russian economy is nowhere near any significant risk of defaults, save for the risk of default induced solely by two forces (should they continue on the current trend):

1. Oil price collapse, now increasingly looking as being caused by the combination of shale output surge and Saudi Arabia's response to that, and
2. Western sanctions that effectively imposed external capital controls of extreme severity on Russian economy.

You can blame President Putin for many things, and rightly so. But for any, even nascent capital controls Russia imposes (I will post my thoughts on these in a couple of hours, once my comment to a journalist goes to print) you really should blame President Obama & the House of Saud.

23/12/2014: RTE Finance: Money Grows on NTMA Trees

Oh dear, dear... Irish State Broadcaster is clearly in the need of some cash for training... or else, they are geniuses of the unimaginable proportions. Either way, RTE has discovered nothing more, nor less than a genuine money creation principle of the Irish Government Promo Notes.

Don't believe it? Read here: http://www.rte.ie/news/business/2014/1223/668729-central-bank/

Let me summarise the logic:

• Anglo & INBS went bust (we know).
• Government created IBRC to 'close off' Anglo & INBS, funded by the Promissory Notes (government debt issued to government-owned agency)
• Government created a swap to 'close off' IBRC: NTMA issued a bunch of 'IBRC' bonds (government debt) that were swapped for IBRC Promissory Notes (government debt).
• The 'IBRC bonds' were given by NTMA to the Central Bank of Ireland which is obliged to sell them.
• NTMA, at the same time, on the sideline as a part of its normal business borrowed cash from the private markets. It stuffed this cash into Irish banks as deposits, getting paid nada on the euro and paid interest on this cash to the private markets, which amounted to a lot more than nada.
• NTMA then 'bought' back some of the IBRC bonds from the CBI, paying with cash it borrowed from the markets on which it paid interest and will continue paying interest.
• RTE described the above as a 'costless' transaction, cancelling the debt.
• In reality, debt is still there right were it was, except if before interest on IBRC bonds was payable to the Central Bank it is now payable to... drum roll... the private lenders who lent money to NTMA.

That last bit is something RTE just couldn't spot with the Hubble Telescope of Financial Wisdom they deployed in the above link.

Which brings us to the Nobel Prize-worthy breakthrough at the RTE: money grows on trees or locates itself at the end of a rainbow or something of the sorts... but in the end, money is free for the State Broadcaster that truly does get 'free' money (aka taxes)...

Oh dear...

Two twitter reactions:

23/12/2014: Eurocoin Growth Indicator: Q4 misery continues in December

Euro area lead growth indicator Eurocoin posted a rather predictable rise in December - from a miserable 0.06 in November (roughly translating into 0% growth) to a rather miserable 0.11 (roughly still translating into 0% growth).

The rise was driven by stock markets improvements and lower rate of contraction in Industrial Production, plus a gain in the European Commission-measured Business Sentiment (that roughly contrasted the deteriorating growth signalled by the PMIs). Consumer surveys continue to disappoint, but exports posted a pick up.

So where we are in growth forecast terms?

As the above shows, growth forecast is running at 0.1% real GDP expansion for Q4 2014.

With Q4 2014 average eurocoin reading at 0.083 and 6mo average at 0.14, we are well below 0.24 3mo average for Q4 2013 and well below the rather poorly 0.33 historical average.

ECB is still caught in the zero-rates trap:

And longer term growth rates are, well, not impressive at all and slowing down:

All in, an ugly picture of euro area economic performance.

22/12/2014: Economic crisis in Russia is a lose-lose game for all

Here is an unedited version of my article for the Sunday Business Post December 21, 2014 on Russian Currency Crisis.

Less than a month ago, Russian economic data posted surprisingly positive results. Growth was running at 0.7 percent year on year in Q3 2014, more than doubling the consensus forecasts, and only a notch down from 0.8 percent expansion recorded in the second quarter. The exchange rate for the Ruble stood at 56.58 vis-a-vis the Euro and 45.58 vis-a-vis the dollar. Growth outlook for 2015 was a rosy 1.2 percent expansion in GDP.

Visiting Moscow in late November-early December, I was struck by the calm of the city that is known for its chaotic and fast moving business and social life. There were no queues at currency exchanges, no mad dashes for the banks and most certainly no signs of anyone stocking up on goods in fear of a runaway inflation. Business was hurting and economy was slowing down, but there was no panic about it.

Today, after a classic run on its currency experienced on Monday and Tuesday, Russia is amidst a full-blown crisis that is threatening to plunge the economy into a 4.5-4.7 percent contraction in 2015.

On Tuesday, Ruble reached the lows of 79.17 against the dollar and 99.56 against the euro. Two days of subsequent emergency interventions by the Central Bank of Russia and the Finance Ministry, the markets are calmer. Still, through Thursday, Russian currency was down 22.4 percent in value against the Euro and 24.0% against the Dollar compared to Monday open.

Scores of media and financial analysts are evoking the spectre of the 1998 default. This hype is a bit excessive. In 1998, the Russian economy was crippled by a host of problems not present today. Russia was running prolonged and sizeable fiscal deficits, eventually reaching 8 percent of GDP in 1998. So far this year, it is enjoying a fiscal surplus, although banks supports measures announced this week will likely push it into a deficit of 1 percent of GDP. Back in 1998, Government debt stood at just over 100 percent of the national output. This year, it is estimated to be around 15.7 percent. In the decade prior to 1998 default, Russian current account surpluses averaged just 1.13 percent of GDP. Since 2004 they have been running at around 5.6 percent.

This week’s crisis causes rest beyond macroeconomics – in a culmination of the geopolitical and financial risks.

First and foremost, the Russian economy is suffering the consequences of its strong connection to the global energy prices. Over the last 30 days, Brent oil price has declined by 33.4 percent - almost in line with the losses sustained by the Euro/Ruble currencies pair.

Compounding the above, capital outflows have accelerated once again in late November, pushing Central Bank forecast for full year 2014 capital flight to match 2009 crisis levels at USD 103 billion. The timing of the outflows acceleration is ominous. On Tuesday, at the peak of the currency crisis, markets were swelled with false rumors that Rosneft, the largest producer of oil in the country, was looking to offload USD30 billion worth of rubles.

Rosneft story is an indicator of the third real problem faced by Russia in this crisis. Courtesy of Western sanctions, Russian banks and companies have been effectively cut-off from the international funding markets since May this year. As the result, Russian companies and financial institutions have been forced to pay down foreign exchange-denominated debt instead of refinancing it. Rosneft is repaying USD7.6 billion today and the company will need to redeem USD19.5 billion more in 2015. All in, Russian companies and banks are facing some USD101 billion of foreign exchange-denominated debt maturing next year.

The plight of funding Russian economy’s external debt is a telling warning that the crisis for Ruble is not over yet. Excluding debts owed by companies to their off-shored investment vehicles, Russian private sector debt currently stands at a miserly 29 percent of the country GDP. In terms of corporate and banking leverage, Russia is about 7 times less leveraged than your average euro area country. Which puts into perspective the role sanctions are playing in driving down the Russian economy by starving it of credit.

In the longer run, the fallout from the Russian crisis is going to be unpleasant for all parties involved in this geopolitical standoff.

Ruble collapse is pushing misery onto the ordinary Russians, especially the elderly, those living below the poverty line, and those reliant on imported medicines. Meanwhile, power brokers and oligarchs, having stashed their wealth in euros and dollars and spread it across the globe, remain better insulated from the currency devaluations. Ruble collapse is also hurting predominantly smaller businesses which have no access to loans from the Central Bank and cannot raise credit in the dim sum markets of the East.

Ruble devaluation is punishing Ukraine and Moldova - two countries heavily dependent on remittances from migrants working in Russia. Ditto for Tajikistan, Uzbekistan, Armenia and a host of other countries where in recent days domestic currencies fell in line with the Ruble and consumers have started panic buying durable goods in an attempt to escape devaluations.

Beyond that, weaker Ruble is not good for European exporters. Europe exported some EUR120 billion worth of goods and services to Russia in 2013. This year the figure is likely to be around 10 percent lower. Next year, projected decline in Russian imports across the board is expected to hit 15 percent. For imports from Europe this number will be higher, since Russian importers have been aggressively switching in favour of cheaper alternatives from Turkey, China, and some of the former Soviet Union states. All in, Europe is looking at a loss of enough trade over 2014-2015 to put 50-60,000 jobs in exporting sectors into unemployment lines.

If the crisis reignites with the force witnessed this week, capital controls and debt repayment holidays will become inevitable. With them, redemptions of some USD 136 billion worth of private sector debt maturing over the next 18 months will be put into question. That is a lot of risk for Austrian, Dutch, Swedish, French and Italian banks which have an average exposure to Russia to the tune of almost 2.3 percent of their countries’ GDP.

So far, Ireland has been relatively insulated from such risks. In fact, our merchandise exports to Russia  have risen 19.3 percent year on year in the first ten months of 2014 - a truly impressive performance. The reason for this is that, for now, Irish exporters are seen as more neutral, more willing to engage with their Russian counterparts than our competitors in some other European countries. Another reason is that our sales to Russia, small as they might be, are heavily geared toward SME exporters.

No matter what London and Washington politicians say, economic crisis in Russia is a lose-lose game for all.

22/12/2014: Elvira Nabiullina, the Rouble’s last line of defence

Irish Independent on Elvira Nabiullina at the helm of the Central Bank of Russia (with comments from myself): http://www.independent.ie/business/world/elvira-nabiullina-the-roubles-last-line-of-defence-30854461.html 

22/12/2014: Sell-Side Research: Pressures and Changes

My post for LearnSignal blog on sell-side research: regulatory pressures and changing environment http://blog.learnsignal.com/?p=136

21/12/2014: Planning Permissions Q3 2014: Being Un-dead ≠ Being Alive

This week, there were some champagne-popping media headlines about planning permissions print for Q3 2014 released by the CSO. So what's the hype was about, folks?

Starting from the top, total number of new planning permissions granted in Q3 2014 stood at 4,238. This represents a rise of 9.37% y/y and follows a decline of 4.25% y/y in Q2 2014. Sounds pretty solid, except when you look at the levels of activity involved. Which is so abysmally low, that a 9.37% rise is hardly an uptick worth boasting about.

Take a look at the chart:

Firstly, the uptick is still within the range of activity between H2 2011 and present. Secondly, current level of activity is still below any quarter on record between Q1 1975 and Q3 2011. In summary, then, current print is worse than any quarter of the dreaded 1980s recession. And activity is still down 75.6% on pre-crisis peak. It is 29.4% above the current crisis trough, but Q3 2014 number of planning permissions is still 2.37% below the lowest point between Q1 1975 and Q3 2011.

Total area covered by planning permissions in Q3 2014 was up 18.35% y/y having posted a decline of 6.16% in Q2 2014. This sound great. But, again, levels of activity are too low to interpret these increases as much more than 'bouncing at the bottom'. Outside the current crisis, you'd have to go back to Q1 1989 to find comparable level of activity as measured by the square meters permitted.

Worse, as the chart above shows, there is no life in the house-building sector. Area covered by new permissions when it comes to Dwellings is basically flat at the bottom of what already constitutes extremely poor activity. Q3 2014 still reads less than any other quarter from mid 1988 through Q4 2011.

In line with the above, number of new planning permissions for dwellings is itself trending in a narrow range at the bottom of historical records chart:

What is truly amazing is that seven (!) years after the start of the crisis and with property prices surging, there is absolutely no signs of life in the construction sector, when it comes to new planning permissions. None. Nada. And yet, Irish media is going off the rails spinning the small percentage increases as signs of upcoming 'boom'.

21/12/2014: World Languages: Interactive Map

Almost Economics, but still more WLASze: Weekend Link on Arts, Sciences and zero economics: A fascinating mapping of world languages by weight and inter-connections: http://www.iflscience.com/brain/new-study-reveals-most-influential-languages.

Interactive version - way better than in the article - is here: http://language.media.mit.edu/visualizations/books

20/12/2014: Remembering that Debt Pile on Our Shoulders

Three charts to illustrate the extent of Ireland's debt problem... that's right, the one that has not gone away with all the recovery talk.

Let's start in the happy days of 2007, when Irish Government's sustainable debt per capita was running at EUR10,775 and we ranked 11th most indebted nation (on per capita basis) in the today's EA18.

And fast-forward to 2014, when, based on the IMF projections, our Government debt per capita will amount to an eye-watering 'sustainable' EUR42,469 ranking us a run-away 1st in the debt load:

Needless to say, this record should have propelled us to the top of the league of EA18 nations in terms of debt increases during the crisis. And it did:

In Census 2011 (see here:  http://www.cso.ie/en/media/csoie/census/documents/census2011profile5/Profile,5,Households,and,Families,full,doc,sig,amended.pdf) the average household size in Ireland was 2.7 persons, implying that Government debt alone amounts today to EUR114,666, before the mortgage and other debts kick in. And when I say before, I mean it : the Government has priority over all other claims on income, including food and shelter.

So how do you feel now when you think of the Budget 2015 measure to ease the burden of DIRT on families saving for the downpayment on house purchase? Lavished by the warmth of a caring Government, undoubtedly...

20/12/2014: Russia's Black Monday: The Debate is On

It is a hazardous task to attempt to explain fast spikes in Forex markets pressures during the ongoing currency crises. And hence few attempt. One very interesting - and I suspect rather correct - try is by Sergei Guriev http://www.project-syndicate.org/commentary/ruble-collapse-corporate-debt-by-sergei-guriev-2014-12.

Guriev directly links the Russian Ruble's Black Monday (and I would add Black Tuesday too) on Rosneft debt redemption that takes place this weekend.

He is right on all points, including, probably, the suspicion that CBR delayed rate hike to allow Rosneft debt deal to go through, with a caveat.

The hike of November 11th (see my note on this here: http://trueeconomics.blogspot.ie/2014/12/11122014-central-bank-of-russia-good.html) was weak. Weak by all fundamentals metrics, save one and a very important one: CBR knew at the hike time that the industrial activity was tanking and investment was starting to lose steam (if anaemic growth in investment to-date can be called that). So CBR delayed hike most likely for two reasons:

1. Rosneft deal; and
2. The fact that raising rates are hammering the economy (Governor Nabiullina clearly stated as much on several previous occasions and Professor Guriev might be reading too much into the statement by the Minister of Economy, Alexey Ulyukaev - Ulyukaev is locked into a long-term battle with CBR - see here: http://trueeconomics.blogspot.ie/2014/09/1292014-bank-of-russia-leaves-rates.html In fact, earlier this year, the Ministry was openly critical of CBR for the Bank lifting rates without 'coordination' with the Ministry).

Another point ignored by Guriev (predictably for an economist) is the dynamics-driven algos and shorts rebalancing that most likely came quickly into the market late Monday and continued to hammer Ruble on Tuesday.

But, on the net, the point that Rosneft debt is costing Russia dearly is on the money. And it will continue doing so into 2015 when the company debt redemptions are likely to hit 1/5th of the total corporate and banks' redemptions.

Do note, more granular analysis of the redemptions, putting to challenge some of Guriev's statements, is here: http://trueeconomics.blogspot.ie/2014/12/19122014-plight-of-russian-banks.html

20/12/2014: Russian Crisis: Longer-Term Issues and Short-Term Risks

Earlier this week I was asked by Portuguese Expresso (http://expresso.sapo.pt/rublo-valoriza-12-e-bolsa-de-moscovo-ganha-14=f903111) to comment on Russian crisis developments. Here is the full transcript of my comments in English:


1) Why this recent crisis in the FX market? What are the main drivers?

The main drivers of the Russian Ruble crisis are, in order of declining importance:

1) Rapid decline in oil prices since August 2014,
2) Accelerating capital outflows in Q4 2014, relative to Q2 and Q3,
3) Sanctions restricting Russian banks and companies access to the international funding markets, thus precipitating a significant rise in demand for foreign currency needed to repay hard currency debt maturing in Q4 2014 and Q1 2015, and
4) The effect of Ruble switching from a tightly managed rate to free float, triggering both speculative and algorithmic trading re-adjustments.

2) Which of the drivers of the crisis is more important: sanctions or oil?

With oil prices above USD90 per barrel, Russian companies and banks would have little difficulty funding debt redemptions coming due in Q4 and Q1 2015. However, at oil prices around USD60 per barrel, foreign exchange inflows are severely constrained, triggering a spike in demand for dollars due to restricted cash flows. This demand had to be funded by borrowing rubbles and converting these into dollars, which, in effect represents a double squeeze on the Ruble: not only demand for Rubles falls relative to Dollars, but simultaneously the supply of Rubles rises due to borrowing.

Sanctions play an important role only in so far as they underpin the demand for dollars required for redemption of maturing debt. In a sense, President Putin was correct in estimating the effect of sanctions amounting roughly to 25-30 percent of the overall crisis re-pricing of the Ruble.

3) Who are the losers and the winners of this recent crisis? Especially, in terms of the crisis impact on Russian people?

There are no winners in this crisis when it comes to either Russian citizens or the residents. Turkey and China, as well as a number of other countries, including Kazakhstan, Armenia, Belarus, Uzbekistan, Tajikistan and others are gaining through increased flows of trade and investment via-s-vis Russia. China is gaining geopolitically and economically.

In terms of losers, countries heavily reliant on remittances from the migrants residing in Russia, including some of the above mentioned CIS countries, plus Ukraine and Moldova, are feeling the pain from collapsed Ruble valuations. Ordinary people in Russia, especially those who tend to hold Ruble deposits (such as retirees), as well as people reliant on foreign (imported) medicines and those living below the poverty line, are seeing large-scale destruction of their purchasing power and savings. A small number of Russian residents have purchased homes in recent years using mortgages denominated in foreign currencies. While before the crisis these mortgages carried lower interest rates, since the devaluation, the real cost of servicing these loans rose. Many businesses lease commercial real estate based on rents expressed in foreign currency. They too will face steep increases in the cost of servicing their offices and stores. Roughly one half of Moscow's retail properties are leased using contracts in dollars.

One category of Russian population is unlikely to lose signifcantly as the result of devaluations - the super rich. While their income-generating assets are based in Russia, much of their wealth resides outside Ruble zone.

This explains why the vast majority of Russians see sanctions as a Western attack on their own well-being, rather than a pressure on oligarchs or the Government.

4) Can we talk of a syncronization between the ruble and the oil prices?  

There is a very strong correlation between Russian GDP (in levels, not growth terms) and oil prices, so it is natural to think of a strong positive correlation between Ruble and oil prices. This correlation has been reinforced by the crisis, as economic growth in Russia shows considerable structural slowdown, thus only increasing the economy's dependence on oil.
   
5) Does the Dutch Disease represent the main structural problem with the Russian economy?

Yes, Russian economy is a classic example of the Dutch Disease or the Curse of Oil, with major and structural over-emphasis on energy and extraction sectors as generators of exports and foreign exchange earnings. However, Russia still retains a large and relatively diversified domestic economy. In effect, imports substitution under the current sanctions and counter-sanctions regimes is driving this diversification up, while low oil prices are reducing the link between oil and economic activity in terms of investment and output.

6) What can we expect in 2015: stagflation or outright recession? 

My forecast is for a significant recession in 2015 for the Russian economy, in the region of -3 percent, with positive scenario implying a recession of roughly 1% and the downside scenario predicting a recession of ca 4.5 percent. This is based on the following considerations. Firstly, the core drivers of this week's run on the Ruble are still present and cannot be addressed in the short run. Secondly, structural slowdown in growth that started manifesting itself in 2012 and came into full view in 2013 is still present. Thirdly, absent robust recovery in Europe and facing a slowdown in growth in China, Russia is poorly positioned on the exporting side and investment side.

On inflationary side, I expect Russian CPI to run above 10 percent in Q1 2015, rising in Q2 2015 before moderating in the second half of the year. Much will depend on the quality of 2015 crop, as well as on geopolitical developments.

7) Is there a risk of a new 1998 triple crisis, coupling the FX, debt, internal default and banking?

From fundamentals point of view, there is no risk of the repeat of 1998. 1998 crisis was triggered by a combination of large debt overhang from the 1980s and 1990s, funded at ever-escalating borrowing rates, a wide fiscal and current account deficits running over a number of years, the economy undergoing huge disruptions relating to transition, and the political crisis within the ruling classes. None of the above conditions are present today. However, one cannot rule out the risk of default due to a set of reasons very distinct from the driers of the 1998 crisis. Chiefly, the risk of default arises today from the possibility of a repeated and more prolonged run on the Ruble. Added uncertainty comes courtesy of the oil prices, which are currently simply unpredictable in the medium term. If oil prices do average over 2015 around USD80/bbl as consensus forecasts in the markets suggest, then the risk of default becomes negligible for the sovereign and the majority of larger banks and companies.

8) More hikes of key interest rates ahead for the CBR? Or 'nuclear options', like capital controls, moratorium in the FX reserves outflows? Other measures from the CBR?

Over the last couple of days, Ruble enjoyed significant rebound, thus reducing the risk of Russian authorities deploying capital controls or other drastic policy measures.

However, if the crisis returns with the intensity of December 15-16th, capital controls in conjunction with a holiday on debt redemptions for sanctioned entities cannot be ruled out.

Over the medium term, the prospect of capital controls also depends on the rate of foreign exchange reserves depletions in supporting Ruble and the speed of capital outflows. In 2015, Russia is facing foreign currency debt redemptions of some USD101 billion. All but USD2 billion of this relate to banks and corporates. We need to see oil rising toward USD80 mark and Ruble stabilising at around USD50 mark for the risk of capital controls to recede significantly.

The above debt maturity is a serious challenge. If recessionary dynamics place a substantial cap on corporate revenues and banks balance sheets, we can see some isolated, but larger scale corporate defaults. Otherwise, some less significant localised defaults can take place, especially in the weaker, lower tier of Russian banks. The latter will be benign and the CBR can facilitate orderly sector restructuring.

9) With a break-even price of oil at an annual average USD107, as set in Budget 2015, is the Kremlin facing a risk of fiscal collapse?

Not in the short run.

Russian budget is expressed in Rubles-denominated price of oil. Hence, as long as Russian Ruble moves in line with the price of dollar, the budgetary pressures remain minor. For example, currently, Russian federal budget is in surplus despite the massive decline in Dollars-denominated revenues. And Russian Current Account is posting strong surpluses on foot of collapsed imports. However, over the longer term, Russian budgetary spending will have to rise to offset the effects of inflation and devaluation. When the pressure to do forces the Government to adopt some inflation-related adjustments in the budget, fiscal position will deteriorate. I do not expect this pressure to be insurmountable, however, over the next 12-24 months.

In addition, President Putin mandated the government to amend November Budget, cutting federal expenditures in real terms by 5% a year in 2015–2017. Three sectors are excluded from the cuts: defense, national security and social welfare. New targets will re-balance public sector wages from slight growth planned in previous Budget to a cut in real terms.

The longer-term issue is the ruble-oil price link up. As ruble devalues, short-term, federal budget remains balanced. But in the longer run, devaluation triggers inflationary pressures. So the challenge in the second half of 2015 will be balancing the books while inflation is expected to be running at above 10 percent mark. This is more critical than the shorter-term issues.

10) Do you expect Russia to push for an agreement on oil production cuts or a full “war” with OPEC?

OPEC is a non-homogeneous entity. Some members of OPEC are currently suffering similar fate to the Russian economy and some oil exporters outside the OPEC are feeling severe pressures as well.

It is clear that the immediate strategy for Saudi Arabia is to push for lower oil prices and higher output. This strategy is based on two considerations.

First, and foremost, Said Arabia is attempting to protect its market share in the face of the rising output of shale oil. Although shale is more expensive to extract, once production is put into place, there is significant margin that can be traded down in terms of oil prices before, over time, shale output declines. Saudi Arabia wants to weather this period and force, using lower prices, some shale production declines in the medium term.

The second, far less important consideration from the Saudi's persecutive is the effect of low oil prices on its key geopolitical challenger - Iran. The flash point here is Syria and Iran's (and Russian, to lesser extent) support for the regime there that is being opposed by the Saudis.

This leaves Russia in a weak position to bargain change vis-a-vis the OPEC. Instead of a 'war' with OPEC, Russia is adopting a response of shifting markets for its oil and gas East, toward Asia Pacific. This strategy is about the only one that is feasible in current circumstances and Russia has been pursuing it very pro-actively.

11) China is the “saviour” economy for Russia to avoid crisis?

As Russian exports and investment flows re-orient East, China is becoming a major trading and investment partner for Russia with huge play in Eastern and Southern Siberia. Geopolitically, closer links between Moscow and Beijing are of benefit to both sides, but economically, Russia is making a bet that growth slowdown in China will not reduce the space of the bilateral cooperation in trade and investment that has been developing between them.

This bet is, probably, short-term risky. China is going to run slower growth in years to come, and thus lower growth in demand for oil and gas. On the other hand, China will have to switch away from much less efficient coal in energy generation mix toward less polluting gas. The former is net negative for Russia, the latter is net positive.