30/1/16: Russian Trade Balance in Goods: 2015

On foot of my note covering Russian preliminary estimates for external trade, some readers asked if the figures provided (see here: http://trueeconomics.blogspot.com/2016/01/23116-russian-external-balance-2015.html) were indeed in Rubles. The answer is no - these are US Dollar amounts at the exchange rate posted time of data release (so preliminary figures are subject to change due to exchange rates effects as well as data updates).

As with all national statistics everywhere, Russian data has better coverage of goods trade, than services trade. Services trade generally lags goods trade in terms of reporting for a range of reasons that are reflected in all countries accounts. While we have only estimates for services trade through November 2015, we have actual figures for goods trade through the same period. These are reported by the Central Bank of Russia and provided below.

For 11 months (January-November) of each year, Russian exports of goods (only) fell from USD459.381 billion in 2014 to USD311.934 billion in 2015 - a decline of 32.1% y/y and a drop of 34.9% on comparable figure in 2012. Meanwhile, imports of goods (only) fell from USD283.541 billion in 2014 to USD176.652 billion in 2015 -a decline of 37.7% y/y and a drop of 41.9% on 2012 levels.

As the result, Trade Balance (goods only) for 11 months of 2015 fell from USD175.84 billion to USD135.582 billion - down 23.1% y/y. The Trade Balance (for 11 months cumulative) was down 22.8% on 2012 levels.

We can, with some stretch of imagination, extrapolate 11 months figures to full year. To do this, we adjust the figures for seasonality (December imputed weighting in trade volumes across both exports and imports).

If we do so, full year exports of goods for Russia come in at around USD342.9 billion down 31.1% y/y, while imports come in at USD194.32 billion, down 36.9% y/y. Trade balance for the full year 2015 (goods only) comes in at around USD147.6 billion, down 22.2% y/y, making 2015 the lowest trade surplus year (goods only) since 2010 when trade balance stood at just under USD147.0 billion.

Charts to illustrate the dynamics based on imputed full year values (note: horizontal lines are period averages):

For what it is worth, it might be interesting to make a comparative between 2015 levels of external trade and pre-2000 era. Average exports of goods in 1994-1999 were USD79.4 billion and 2015 levels were 4.3 times higher. Average imports of goods in 1994-1999 were USD58.45 billion and these rose 3.3 times in 2015 figures. As the result, average 1994-1999 trade balance was USD20.95 billion. 2015 trade balance was 7 times larger than that.

Not too shabby numbers, event though 2015 was a tough year of trade for Russian exporters.

29/1/16: Murray Index of Top 20 Journalists on Twitter

I don't usually post this sort of things around here, but given my fond memories of working as the editor of Business & Finance and my deep respect for the profession of journalists, I am delighted to have made some sort of rankings in the field:

Respectable 14 for such an august company!

29/1/16: And the IBRC Interest Overcharging Ship Sails On...

Just after posting the Mick Wallace video link on Nama,  a knock on my blog door left this nice little letter at the doorstep.

Now, I obviously removed the names of people involved and other identifying information. Which leaves us with the substance of the said letter: IBRC are conducting an internal review into interest overcharging...

Why that's nice.

Let's recall, however, the following facts:

1. Anglo overcharging was notified to the authorities officially at least as far back as 2013 (see link here: http://trueeconomics.blogspot.ie/2015/06/12615-anglo-overcharging-saga-ganley.html)
2. It was known since at least 2010 in the public domain (per link above).
3. It was discovered in the court in October 2014 (see here: http://trueeconomics.blogspot.ie/2015/06/11615-full-letter-concerning-ibrc.html)

Add to the above a simple fact: IBRC Liquidators have at their disposal the entire details of all loans issued by Anglo, with their terms and conditions. They also have the entire history of the DIBOR and all other basis rates. In other words, the Liquidators have full access to all requisite information to determine if Anglo (and subsequent to its dissolution other entities holding Anglo loans, including Nama and IBRC Special Liquidators) have continued with the practice of overcharging established by the Anglo.

When you add the above, you get something to the tune of almost 6 years that Anglo, IBRC & Nama and IBRC Special Liquidators had on their hands to address the problem. And only now are they getting to an 'internal review', more than a year after the court has smacked their snouts with it? 

Meanwhile, as it says at the bottom of the letter, "Irish Bank Resolution Corporation Limited (in Special Liquidation), trading as IBRC (in Special Liquidation), is operating with a consent, and under the supervision, of the Central Bank of Ireland."

So we have an entity, supervised and consented to by the Central Bank that is 'looking into' the little pesky tiny bitty problem of years of overcharging borrowers on a potentially systemic basis and with quite nasty implications of this having been already discovered in the courts more than a year ago... It is looking into these thing by itself. Regulators, of course, are looking at something else... while consenting to the IBRC operations all along...

Does that sound like we have a 'new era' of regulatory enforcement and oversight designed to prevent the next crisis?.. Or does it sound like everyone's happy to wait for the IBRC to find a quiet way to shove the problem under some proverbial rug, so the Ship of the Reformed Irish Banking System Sails On... unencumbered by the past and the present?

29/1/16: Events… and oil

Bloomberg recently posted a chart summing up some (although claimed all) of the key events in recent history of oil prices. A neat reminder of what has been happening in terms of oil-related factors for crude demand and supply:

29/1/16: Estonia - A Safer Bet than France?

Euromoney have a good summary article on Baltic states’ economies and sovereign risk ratings (all of which are improving).

My comment toward the end.

http://www.euromoney.com/Article/3524950/Estonia-offers-safer-ption-than-France-or-South-Korea.html

Here is my take on Baltics ratings in full:

Given macroeconomic and geopolitical environment, Estonia's credit rating by all three rating agencies clearly lags overall trends in risks evolution. The geopolitical and external macroeconomic risks these ratings reflect are consistent with early 2015 assessments and are well behind the more recent trends. In simple terms, Estonia is over-due a one notch upgrade across all agencies, as reflective of expected re-acceleration in growth from 1.9 percent estimated in 2015 to 2.6 percent forecast for 2016-2017, and improving labour markets performance and inflation outlook.

Another key driver for the upgrade is significant abatement in geopolitical risks faced by Estonia in the context of the Russian-Ukrainian conflict that has evolved into a localised and frozen conflict with no expected spillover to the broader region.

Estonia also enjoys significant improvements in its terms of trade, via Euro devaluation, which is reflected in its relatively strong current account dynamics.

As far as Latvia and Lithuania ratings go, both countries' present ratings are in line with generally weaker economic, political and social institutions and with long term structural problems at play in both economies. While geopolitical risks have abated for these two countries since the start of 2015, supportive monetary and euro devaluation-driven competitiveness tailwinds are yet to manifest themselves in terms of current account balances and gains in real  productivity.

Unlike Estonia, both Latvia and Lithuania run current account deficits in presence of significantly higher unemployment and continued outflows of human capital. Of the two countries, Latvia is probably closer to a rating upgrade, which can come later in the first half of 2016.

29/1/16: Nama and Value Destruction

There is a neat video circulating around that sums up Mick Wallace's questions about Nama, worth watching: https://vimeo.com/143933468?ref=tw-share.

For those who want to see a more extensive listing of Nama firesales or, as I put them, Value Destruction deals, read here:  http://trueeconomics.blogspot.com/2015/11/251115-nama-that-gift-horses-mouth.html and follow the link in my post to more.

Beyond this, on top of Wallace's questions, there is an outstanding issue of Nama involvement in continued legacy of Anglo interest overcharging http://trueeconomics.blogspot.com/2015/06/17615-mr-john-flynn-letter-to-tds-on.html (and see links at the bottom of that post).

28/1/16: Irish M&As: Not Too Irish & Mostly Inversions

Experian latest figures for *Irish* M&A activities for 2015 show some astronomical number: Per release: “The number of deals on the Irish mergers and acquisitions (M&A) market increased by 10 per cent last year, its strongest performance since 2008…” Which is not what is impressive. Although the overall number of actual transactions hit 458 in 2015, up from 416 the previous year, it is the value of transactions that is beyond any belief.

Again, per Experian: “The total value of transactions reached €312 billion – up from €154 billion in 2014 and by some way the most valuable year for corporate deal making in the country’s history. Activity continues to be driven by the pharmaceuticals and biotech sector.” This number is a third higher than the value of exports of good and services from Ireland over the period of 12 months through 3Q 2015 and it is almost 60 percent higher than Irish GDP. In other words, using normal valuations multiples, you should be able to buy anywhere between 1/4 and 2/5 of entire Ireland on this money. In one go, and forever… And that’s one year worth.

Per Experian: “Irish deals accounted for around 3.6% of the total volume of European transactions in 2015, but 20.5% of their total value. In 2014, the Republic of Ireland again featured in 3.6% of European deals but contributed just 12.7% to their overall value.”

So conservatively, let’s say 1/3 of Ireland bought last year and, say 1/5 in 2014… that’s half the country economy in two years.

But how on Earth can a little country like Ireland attract such a level of financial activity? Why, remember that magic word… ‘inversions’ - yes, that same word that out Government denies applies to Ireland.

Well, Experian provides a small insight (they wouldn’t tell us the full story, but they can’t quite escape from telling us some. Enjoy the following: per Experian, Top 5 “Irish” deals announced in 2015 includedd:

• Pfizer-Allergan at EUR143.564 billion
• Teva Pharma - Generic drug business of Allergan at EUR35.454 billion
• Shire - Baxalta at EUR29.533 billion
• Willis Group Holdings - Towers Watson deal at EUR15.566 billion, and
• CRH - Holcim & Lafarge deal at EUR7.671 billion

So, yep: tax inversion at the top, related to tax inversion at No.2, tax inversion at No.3… and none (repeat - none, including CRH deal) related in any way to Ireland, except for tax domicile of the companies involved.

Repeat with me… “There are no tax inversions into Ireland”… now, with zombie like intonation, please… “There are no…”

27/1/16: Russian Capital Outflows 2015: Abating, but Still High

In two recent posts, I covered Russian External Debt dynamics and drawdowns on Russian Sovereign Wealth Funds. Last, but not least, I am yet to cover capital inflows/outflows for 2015. So, as promised, here is a post covering these.

Based on data that includes preliminary reporting for 4Q 2015, full year 2015 net capital outflows from Russia amounted to USD56.9 billion, composed of USD33.4 billion outflows in the Banking Sector and USD23.5 billion outflows in ‘Other Sectors’. In the banking sector there were simultaneous disposals of some USD28.2 billion of assets and reduction of USD61.6 in liabilities (repayment of maturing debts and deposits).

Thus, 2015 marked the second lowest year in the last 5 in terms of net capital outflows. In comparison, 2014 net capital outflows stood at a whooping USD153 billion and 2013 saw outflows of USD61.6 billion. Net banks’ position improved from outflows of USD86.0 billion in 2014 to outflows of USD33.4 billion in 2015. Other Sectors outflows also improved in 2015. In 2015, this category of outflows amounted to USD23.5 billion, against USD67 billion in 2014. 2015 marked the slowest outflows year in this sector in 8 years.

Chart to illustrate dynamics:

On a quarterly basis, net capital outflows from Russia in 4Q 2015 are estimated at USD9.2 billion, down from USD76.2 billion in 4Q 2014. Capital outflows were lower in every quarter of 2015 compared to corresponding quarter of 2014 and in 3Q 2015 there was a net capital inflow of USD3.4 billion - the first net inflow in any quarter since 2Q 2010.

So on balance, Russian capital outflows remain strong, but are abating rapidly. Most of the outflows is accounted for by the deleveraging of the Banks followed by shallower deleveraging of the ‘Other Sectors’.

26/1/16: Chances of Repairing Greece?..

When someone says that Europe (or anyone else) "has missed a chance to" stabilise or repair or make sustainable or return to growth Greece, whilst referencing any time horizon spanning the last 8 years - be it today or 6 months ago, or at any recent iteration of the Greek crisis, I have two charts to counter their claims:

You can't really be serious when talking about stabilising Greece. Greece has not been stable or sustainable or functioning by its Government deficit metrics ever since 1980, and by Current Account balance in any year over the same time horizon, save for the last 3 years.

Yes, there probably are means and ways to significantly improve sustainability of the Greek economy. But such means and ways would have to be radical enough to undo three and a half decades of systemic mismanagement.

26/1/16: 'More than 1,000 jobs per week' Government Claims v Reality

One senior TD and a Junior Minister with position relating, indirectly, to employment and the labour market has just posted an interesting statement. A part of the statement goes thus: “we used the Action Plans for Jobs process to drive job creation, creating more than a 1000 jobs a week”.

Now, let’s raise two points. One philosophical, another purely arithmetic.

Philosophically, I am not aware of any Government that claims creation of jobs. Technically, public jobs are either created by the Civil Service or another Public body, as opposed to the Government itself. Practically, any jobs creation, in public or private sector is enabled by the economy (people working in, investing in, paying taxes in and interacting with public and private sectors) and not by the Government. Thus, Government may facilitate jobs creation by enacting supportive legislation or providing legislative and/or regulatory strategy, or not impede one, but it cannot create jobs. Minister can act as PR middle(wo)men and announce jobs created, but that is about as close to jobs creation as they ever get.

Aside from this, there is a simple matter of arithmetic.

Recall that the current Government came into power at the end of 1Q 2011. Let us suppose the Government really got down to ‘creating jobs’ by 1Q 2012. Which means the Government has been at its jobs game for roughly 14-15 quarters through 3Q 2015 or, at the lower end 3 years and a half. That means that the Government should have created “over” 182,000 jobs in that period. This benign to the Minister claim, because if we are to look at the record of the entire duration of the Government, his claim would have equated to roughly 221,000 jobs created.

Let us note that 1Q 20912 was the lowest point in employment levels during the crisis, so comparatives to that base should improve Government position: prior to 2Q 2012 jobs were being destroyed in the economy, past the end of 1Q 2012 they were being added.

Keep the two numbers in your mind: we are told that the Government has ‘created’ either more than 182,000 or more than 221,000 jobs over its tenure, depending on where one starts to count.

Now, consult CSO QNHS database - the source of official counts for numbers in employment. Between the end of 1Q 2012 and 3Q 2015 (the latest for which we have data), total employment rose 158,000. But wait, these are not all jobs. 4,500 of that increase is in the category of Assisting Relative. And 121,200 of these additions are employees, including schemes. Beyond this, the above increase also includes 30,100 new (added) self-employed with no employees.

It is hard to assume that the Government can claim it 'created' self-employment jobs where there is not enough activity to hire staff, or that it increased the need to help relatives.

So put things together in a handy table:

Numbers speak for themselves. By the very best metric, Government is more than 1/2 year shy of the lowest end of the claim of 'more than 1,000 jobs created per week'. It is more than 1/2 year shy of the claim that there were '1,000 jobs created per week'.

This Government deserves credit for helping sustain conditions for the recovery. Some of these conditions trace to the policies put in place by its predecessor and continued by the present Government, some are down to Troika and implemented by this Government, some are undoubtedly facilitated by the efforts of the current Government. The economy is recovering and, by some metrics, very robustly. And jobs are being created by the economy (yes, by entrepreneurs, enterprises, their employees and their clients and investors, but not by the Government).

This is not to take away from the positives the Government should rightly claim. But it is to point out that some of the outlandishly bombastic claims are not quite warranted.

26/1/16: Russian External Debt: Deleveraging Goes On

In previous post, I covered the drawdowns on Russian SWFs over 2015. As promised, here is the capital outflows / debt redemptions part of the equation.

The latest data for changes in the composition of External Debt of the Russian Federation that we have dates back to the end of 2Q 2015. We also have projections of maturities of debt forward, allowing us to estimate - based on schedule - debt redemptions through 4Q 2015. Chart below illustrates the trend.

As shown in the chart above, based on estimated schedule of repayments, by the end of 2015, Russia total external debt has declined by some USD177.1 billion or 24 percent. Some of this was converted into equity and domestic debt, and some (3Q-4Q maturities) would have been rolled over. Still, that is a sizeable chunk of external debt gone - a very rapid rate of economy’s deleveraging.

Compositionally, a bulk of this came from the ‘Other Sectors’, but in percentage terms, the largest decline has been in the General Government category, where the decline y/y was 36 percent.

Looking at forward schedule of maturities, the following chart highlights the overall trend decline in debt redemptions coming forward in 2016 and into 2Q 2017.

Again, the largest burden of debt redemptions falls onto ‘Other Sectors’ - excluding Government, Central Bank and Banks.

The total quantum of debt due to mature in 2016 is USD76.58 billion, of which Government debt maturing amounts to just 1.7 billion, banks debts maturing account for USD19.27 billion and the balance is due to mature for ‘Other Sectors’.

These are aggregates, so they include debt owed to parent entities, debt owed to direct investors, debt convertible into equity, debt written by banks affiliated with corporates, etc. In other words, a large chunk of this debt is not really under any pressure of repayment. General estimates put such debt at around 20-25 percent of the total debt due in the Banking and Other sectors. If we take a partial adjustment for this, netting out ‘Other Sectors’ external debt held by Investment enterprises and in form of Trade Credit and Financial Leases, etc, then total debt maturing in 2016 per schedule falls to, roughly, USD 59.5 billion - well shy of the aggregate total officially reported as USD 76.58 billion.


So in a summary: Russian deleveraging continued strongly in 2015 and will be ongoing still in 2016. 2016 levels of debt redemptions across all sectors of the economy are shallower than in 2015. Although this rate of deleveraging does present significant challenges to the economy from the point of view of funds available for investment and to support operations, overall deleveraging process is, in effect, itself an investment into future capacity of companies and banks to raise funding. The main impediment to the re-starting of this process, however, is the geopolitical environment of sanctions against Russian banks that de facto closed access to external funding for the vast majority of sanctioned and non-sanctioned enterprises and banks.


Next, I will be covering Russian capital outflows, so stay tuned of that.

25/1/16: Russian Sovereign Funds: Down, but Not Out, Yet…

In the context of 2016 Budget, Russian sovereign reserves dynamics are clearly an important consideration. For example, in his recent statement, former Russian Finance Minister, Kudrin, has suggested that if Budget deficit reaches above 5% of GDP in 2016, the entire cushion of liquid foreign reserves held by the Government will be exhausted by the end of the year, leaving Russia exposed to big cuts in the budget for 2017. This is similar to the positions of Russia's Economy Minister Alexei Ulyukayev and the current Finance Minister Anton Siluanov.

The expectations are based on three considerations:
1) 2015 dynamics of Russian sovereign wealth funds;
2) Funds outflows expected under the external debt repayment schedules; and
3) A potentially massive call on Russian reserves from the VEB capital requirements.

I covered the last point earlier here. So let’s take a look at the first point.

Russia’s main and more liquid Reserve Fund shrank substantially last year as it carried out its explicit mandate to provide support for fiscal balance. Set up in 2008, the fund holds only liquid foreign assets and 2015 became the first year since the Great Recession and the Global Financial Crisis (2009-2010 in Russia’s case) when it experienced net withdrawals. The value of the fund fell from roughly USD90 billion to ca USD50 billion by the end of December 2015.

However, the key to these holdings is their Ruble equivalent, as Russian budgetary expenditures are in domestic currency. By this metric, the Fund has been doing somewhat better. By end of December 2015, the Reserve Fund held assets valued at RUB3.6 trillion, amounting to almost 5 percent of Russian GDP or roughly 1.7 times Budget 2016 requirement for deficit coverage. Budget 2016 is based on expectation that the Reserve Fund will supply some RUB2.1 trillion to cover the deficit.

The sticking point is that Budget 2016 - in its current reincarnation - is based on oil price of USD50pb. The Ministry of Finance is currently preparing amended Budget based on USD30-35pb price of Brent, but we are yet to see the resulting deficits projections. What we do know is that the Government has requested up to 10 percent cuts across public expenditure for 2016. Absent such cuts, and if oil prices remain around USD30pb mark, the deficit is likely to balloon to the levels where 2016 deficit will end up fully depleting the Reserve Fund.

Added safety cushion, of course, will be provided by devaluation of the Ruble. This worked pretty well in 2015, but the problem going into 2016 is that required further devaluations will likely bring Ruble into USDRUB 90+ range, inducing severe redistribution of losses onto the shoulders of consumers and cutting hard into companies investment in new equipment and technologies.

Bofit provided a handy chart showing the dynamics of Fund resources and a breakdown of these dynamics by key factors

Aside from the Reserve Fund, Russia also has the National Welfare Fund which was set up to underwrite public pensions. The Fund has been used to provide capital and funding to Russian banks shut out of the international borrowing in form of bonds purchases and deposits with the banks, as well as to some Russian companies, in form of debt purchases. These deposits and loans, however, are not liquid and, therefore, not available for fiscal supports. About only hope for some liquidity extraction from these allocations is via Russian corporates using cash flows from exports to repay the Fund - something that is unlikely to create significant buffers for the Budget.

At the end of 2015, the National Welfare Fund held assets valued at USD72 billion, of which USD48 billion (or RUB3.5 trillion) was held in relatively liquid foreign-currency assets and the balance held in assets written against domestic systemically important banks and companies. Even assuming - optimistically - that 10 percent of the residual assets can be cashed in over 2016, the liquidity available from the Fund runs to around USD50 billion.

Thus, total liquidity cushion held by two Russian SWFs currently amounts to USD100 billion without adjusting for liquidity risks and costs, and if we are to take nominal adjustments for these two factors, liquidity cushion probably falls to USD75-80 billion total.

It is worth noting, however, that Russia has other international reserves at its disposal. Per official data, as of the ned of December 2015, total International Reserves stood at USD368.4 billion, down USD17.06 billion on December 2014 and down USD222.17 billion on all time peak. In accessible reserves, Russia has International funds (excluding SDRs and IMF reserves) of USD363.07 billion.

I will be covering funds outflows schedule for 2016 in a separate post, so stay tuned.