5/8/2014: Russia: Manufacturing, Services & Composite PMIs: July 2014

Russia Services and Composite PMIs are out for July (released by Markit and HSBC). Here are the top-level numbers:

• Recall that Manufacturing PMI cam in at 51.0 in July, up on 49.1 in June and 49.2 in July 2013. This marks the first month of above 50.0 reading. Manufacturing went below 50.0 mark in July 2013, so this means we had 11 months of contracting output from July 2013 through June 2014 and one month of expansion at 51.8 back in October 2013. This is evidence of a structural slowdown in the economy, compounded by the Ukrainian crisis, although the effects of the crisis are not the only explanatory factor here.
• Services PMI came in at 49.7 - marginally below 50.0 and slightly lower than 49.8 reading in June 2014. In July 2013 the index stood at 48.7. All in, we now have 5 consecutive months of readings below 50.0 with marked slowdown in growth starting around July 2013 and accelerating from March 2014 through June 2014. 3mo MA is now at 48.5 which is nearly identical to 48.4 3mo MA through April 2014. 3mo MA for 3 months through July 2013 was at 49.6. Again, structural slowdown is evident in the series and again, the slowdown is being exacerbated by the Ukrainian crisis.
• Composite PMI came in at 51.3, marking second consecutive month of above 50.0 readings (although June reading of 50.1 was extremely weak). 3mo MA through July 2014 is at 49.5 and 3mo MA through April 2014 was 48.5, while 3mo MA through July 2013 was at 49.9. Exactly the same story as with the above sectoral indices: manifestation of a slowdown in July 2013, followed by continued weakness through February 2014 and deepening in slowdown from March 2014 through May-June 2014.

Chart to illustrate:

All PMIs remain in 'troubled waters' per trend - it will take at least 3 months to reestablish any upward trend and there is significant risk that fragile July improvements can be reversed in months ahead. The Ukrainian crisis is now starting to bite - gradually ramping up downward pressure on the economy.

3/8/2014: This Week in Corporate 'Not Tax Haven' News

Some links from recent press articles on Irish Corporate Tax regime:

• BloombergView on the U.S. politicians' logic concerning the issue of tax breaks: http://www.bloombergview.com/articles/2014-07-28/by-lew-s-logic-all-tax-breaks-are-unpatriotic With respect to Ireland, it no longer matters if there is any logic whatsoever to the U.S. Government and senior officials' statements on the matter. What does matter, however, is that we are now being increasingly / more frequently presented as an international tax arbitrage facilitators. That is the reputational cost of our decades-long policies. The real economic cost of our tax policies is that we no longer have any meaningful strategy or long-term outlook on manufacturing, productivity growth and/or investment. Instead, we have a strategy that relies, in part explicitly, but in full implicitly, on beggar-thy-neighbour tax arbitrage facilitation. 
• Vox provides its own musings on the matter in "Tax inversions: 9 questions about the hottest new trend in tax avoidance" article. It describes tax inversion with a direct reference to Ireland (and Switzerland) as: "So a company whose business is subject to relatively heavy taxation in one country (say, the United States) can buy a smaller company located in a country where its business is taxed at a lower rate (say, Ireland) and then declare the merged entity to be domiciled in the low-tax country for the purposes of taxation. Walgreens, for example, is in the process of buying a Swiss company called Alliance Boots and is considering re-labelling itself as a subsidiary of the Swiss company to pay lower Swiss tax rates." This is not a debate about Double-Irish scheme or other aggressive tax optimisation loopholes, but about the actual headline tax rate - the sacred Irish cow of 12.5%. And this is serious, real danger to Ireland, as we have no meaningful industrial / manufacturing / services etc growth pillars outside our reliance on tax-attracted FDI. The full article is here: http://www.vox.com/2014/7/28/5944263/corporate-tax-inversions-deserters-vs-economic-patriotism
• Reuters wades in with an excellent piece on the potential costs of Ireland losing the war on international tax regime. "Ireland has too much to lose to deter U.S. companies re-homing" (http://www.reuters.com/article/2014/07/30/us-usa-tax-ireland-analysis-idUSKBN0FZ1FA20140730?feedType=RSS&feedName=businessNews) also dives into the issue of our 12.5% rate. "It would be difficult to block inversions without jeopardizing the broader benefits," says the author. Which I agree with. We have lost the leadership momentum in the global debate on tax optimisation and now our headline rate is firmly in the crosshair. But our delirious tax advisory experts are still not getting the picture: ""It's a dangerous road to go down," said Kevin McLoughlin, who as head of tax at accounting firm Ernst & Young… I really struggle to see how they can legislate against companies choosing Ireland as a destination in a way that's confined only to these types of situations. I think it's extremely unlikely because I just don't know what they can do." Well, the problems of legislating outside of Ireland may be tough, but I'd love to see Kevin struggling to fill the potential void left in our economy if the legislators abroad do succeed in legislating on the matter. Somehow, I doubt EY will be that creative with coming up with economic development strategy ideas as they are with coming up with tax optimisation ideas.
• Robert Reich writes in Salon.com that “American” corporations are a farce (http://www.salon.com/2014/07/29/robert_reich_american_corporations_are_a_farce_partner/) and names a list of the Irish-based European operations of blue-chip corporates as the "American farce". Reich pushes the agenda of tax optimisation to R&D supports… which is… oh, surprise surprise, at the top of Irish Government agenda… Now, is there an area of tax arbitrage we haven't captured yet?..
• Last, but not least, remember the solemn, stern statements from Irish senior public figures arguing that Ireland does not promote itself as a tax arbitrage play, but rather focuses on 'human capital', 'regulatory environment' (aka - regulatory arbitrage) and 'headline rate of tax' (aka - inversions-enabling rate)? Well, they don't have to - instead of senior political and state leaders, we have a swarm of senior lawyers and accountants and corporate finance specialists and… to do the bidding, as reported by Reuters in "Irish, Dutch, UK law firms in tax inversion beauty contest in U.S." (http://www.reuters.com/article/2014/07/24/deals-taxinversions-lawfirms-idUSL2N0PK1L820140724).

Time to cut some FDI ribbons, Ministers…

Note: you can track previous links and discussions relating to Irish corporate tax policies and debates by using 'search' option for 'corporate tax' on this blog or by following blog-links from here: http://trueeconomics.blogspot.ie/2014/07/2672014-this-week-in-corporate-not-tax.html

3/8/2014: EUObserver on EU sanctions

EU Observer run a brief comment by myself on EU sanctions against Russia: http://euobserver.com/foreign/125168

2/8/2013: Sanctions v Russia: Some Fallout, Some Fizzle

One of possible fallouts from the latest round of sanctions against Russia is the effect of banking sector restrictions on funding of Russian banks.

I commented on this before, but left out some specifics. One area of concern is syndication markets - currently not covered by sanctions explicitly. Bloomberg reported yesterday that some banks might be scaling back their syndication operations with Russian banks. VTB is facing refinancing USD3.1 billion worth of syndicated loans - this has been put on ice since June. One factor is high risk of US fines should sanctions expand and the banks get caught in the middle of transacting with Russian counterparts.

In related news, UK RBS cut back funding for Russian clients. RBS has GBP2.1 billion exposure to Russia, with net exposure of GBP1.8 billion, down GBP100 million in the H1 2014. Some GBP900 million is exposure to Russian corporates and GBP600 mlm to Russian banks. Russia accounts for roughly 3% of RBS balance sheet and the bank is now aggressively cutting new operations in Russia, in line with sanctions.


Meanwhile, MSCI is now offering a new EM index excluding Russian equities and is planning a new MSCI Russia index excluding VTB shares. All in the name of giving investors comfort that they comply with the US sanctions. VTB is being excluded because it is the only listed Russian bank that faces restrictions on credit issuance and equity trading in the US (other banks - Bank Rossiyi and Rosselkhozbank are not listed), European sanctions cover same operations for the above three, plus Gazprombank and Sberbank. Sanctions are set with duration of 12 months from issuance and are subject review every 3 months. S&P and DJ are expected to follow MSCI indices revisions. More on this : http://www.bloomberg.com/news/2014-08-01/msci-creates-indexes-excluding-russia-reviews-vtb-on-sanctions.html?cmpid=yhoo

On liquidity effects of the sanctions, Moody's issued a note yesterday saying that Russian markets are facing no liquidity risk as corporate balance sheets are enjoying significant cash buffers, sufficient to cover bonds redemptions over 18 months period. More: http://www.vestifinance.ru/articles/45479

And Bloomberg View agrees, on the aggregate: http://www.bloombergview.com/articles/2014-07-30/mr-putin-can-ignore-mr-market "Russia owes its bond creditors about $153 billion, according to data compiled by Bloomberg. Some $126 billion of the nation's debt, though, is denominated in rubles. A further $26 billion is dollar debt, with just $1 billion owed in euros. That makes Russia relatively immune to the need to raise foreign capital to refinance its debts… Russia has raised about $3.5 billion through domestic bond sales this year, and has also tapped the state pension fund for a further $2.9 billion. Raising rubles won't be a problem; the finance ministry can always strong-arm domestic institutions into showing up at the auctions and accepting lower yields. So, just in case anyone was expecting Mr. Market to do any work for them in punishing Russia for its Ukrainian adventures, think again."

2/8/2014: Irish Manufacturing PMI: July 2014

Markit and Investec released Irish Manufacturing PMI this week. The numbers are pretty good:

• Headline PMI stood at 55.4 in July 2014, against 55.3 in June.
• 12mo average is at 54.0 and 3mo average is at 55.2. Readings above 54.3 are strong, so that's good news. Previous 3mo period average was 54.8 and both current 3mo average and previous are strongly above same period averages for 200-2013.
• No comment from me on the rest of the index components as Investec no longer publishes any actual readings. Press release is here: http://www.markiteconomics.com/Survey/PressRelease.mvc/28b6c4cab7b94cef8d7f0b557c894220

Couple of charts: Index deviations from 50.0 and snapshot to current period, highlighting two periods of growth gains:

Dynamically, the data is showing significant reductions in volatility in recent months, with standard deviations trending around pre-crisis averages.

Top takeaways: improved trading conditions in the sector seem to be linked to overall gains in the external outlook in key exporting markets, which means Irish manufacturing remains locked into exogenous demand (subject to possible shocks) and remains anchored to the fortunes of the MNCs (subject to longer term risks to production relocations). Good news on short-term dynamics, but Ireland still lacks over-arching strategy for the sector.

2/8/2014: BRIC Manufacturing Rebound: July 2014

Summary of BRIC Manufacturing PMIs released yesterday:

Not that you'd notice from the mainstream media, but Russia's manufacturing is back above 50.0 in July after 8 consecutive months of below-50 readings.

A comfortable growth range for Russian Manufacturing PMIs should be around 53-55, so the economy is still miles away from a robust recovery. Further concern is that July 2014 reading might be similar to a spike in October 2013 that was followed by renewed contraction.

2/8/2014: WLASze: Weekend Links to Arts, Sciences and zero economics

A brief WLASze: Weekend Links to Arts, Sciences and zero economics to start a long weekend with. Today's note focuses on a handful of links connected by the single subject: our brains.

NY Times - in a brilliant attempt to review the new Hollywood movie, that brilliantly falls out of the article script. Who cares! There are bigger things to write about and Professor Hickok of UC Irvine delivers. http://www.nytimes.com/2014/08/03/opinion/sunday/three-myths-about-the-brain.html?smid=tw-nytimes&_r=0 lists and briefly squares the main myths about our brains. Do we use just 10% of the brain? Surely the logic would suggest that nothing in our body is being used 10% or 80%, save for a small number of atavistic leftovers from the evolutionary process of attrition. So, no, we use all of our brains. Is brain asymmetric? Well, no - it is rather interconnected. Are mirror neurone really 'mirrored'? No, but sort of. And so on… What emerges is a confirmation of something that we have probably all suspected before upon hearing the factoids about our brains narrated to us by popular snapshots: our brains are complex, interconnected and non-linear. Next, we shall discover that logic is similar… to finally do away with the sheer stupidity of separating it from creativity…

On a more 'lingo-loaded' front, phys.org has a neat feature on how brain retrieves memories: http://phys.org/news/2014-07-brain-memories.html. While the mere idea of implants that record brain activity is fascinating in itself, it is the spectre of technology that can enhance and partially substitute for brain sub-functions, merging tech and living neurones to alter the mind that is fascinating. And here's more on this: http://phys.org/news/2014-03-silicon-based-probe-microstructure-underpin-safer.html#inlRlv. We are moving, rapidly, toward an era where that which we cannot yet understand will be available to technological manipulation. I'll leave it with you to think up all the plausible scenarios of what this may entail.

But while tech does now have a capacity (albeit highly unknown) to affect brain and thus mind, art has been doing the same for millennia. ArtnetNews has this review of a recent study that links act of artistic creation to brain function facilitation: http://news.artnet.com/in-brief/creating-art-improves-brain-function-57197. Which, of course, neatly circles back to where I started from: on the myths, that of separateness of logic and creativity in our brain function.

So just for the visuals - and to formally combine science and figurative art, Can Brain Scans Really Tell Us What Makes Something Beautiful? via the Smithsonian: http://www.smithsonianmag.com/innovation/can-brain-scans-really-tell-us-what-makes-something-beautiful-64840556/?no-ist

Never mind: have you ever seen the similarities between arts profs and maths profs? The two sub-species are virtually identical in outward expressions of their selves, especially judged from an external point of view and based on purely aesthetic semiotics of their dress codes and appearances… Logic is art and art is logic whenever you see them wondering the University compounds…

Here you have it - debunking stereotypes / cliches above, concluding with one below… Enjoy!

31/7/2014: Deflationary Trap: Eurocoin Signals Slowing Euro Area Growth in July

July Eurocoin - higher frequency gauge of economic activity in the euro area published by CEPR and Banca d'Italia - is out. Headline number posted a decline from 0.31 in June to 0.27 in July, consistent with slower growth in the first month of Q3 2014.

As chart above shows, July reading is barely above the statistical significance line, suggesting that the slowdown is quite pronounced. As Eurocoin release indicates: "The negative impact of the fall in industrial production in May and of the weak performance of the stock market in July was partially offset by the flattening of the yield curve." In other words, save for the excessive exuberance in the bonds markets, the economy is showing substantial weaknesses going into Q3.

This means that while Q2 2014 projection is now for stronger growth at around 0.31-0.34% q/q, up on officially estimated Q1 2014 growth of 0.2%, Q3 2014 took off with a growth outlook of around 0.26-0.28%.

Current economic activity is sitting at around the rates compatible with November-December 2013. Barring any significant changes in HICP (although indications are, HICP will fall to 0.65% for July data), the ECB remain in the proverbial 'deflationary risks' corner:

UPDATED

To-date, while growth moved into positive territory over the last 12 months, inflationary dynamics have pretty much collapsed.

UPDATED

If July trend (falling activity) remains into August and September, we are looking at further worsening in the overall activity in the euro area and more pressure on inflation to the downside.

29/7/2014: Pause that hype about Russian reserves draining... for now

There is a lot of media 'noise' around Russia's foreign exchange reserves and the alleged links to sanctions as a causative driver for, what some report as dramatic, declines in Russian reserves.

Here is analysis of the official data.

Two charts first:

Total reserves:

As of the week of July 18, 2014, these stand at 472,500 million USD, down 4.2% on March 1, 2014 (20 days before the first round of sanctions announcements) and down 7.3% on January 1, 2014 (time around which the crisis in Ukraine started to take on sinister character, threatening directly the previous regime and drawing Moscow into it). Year on year the reserves are down 8%, which means that:

1. Only around 1/2 of the entire decline in reserves can be linked to sanctions; and
2. The declines down to sanctions were hardly dramatic.

The above (and below) does not deal with changes in foreign exchange valuations or gold price valuations, which can be significantly more than 4-8% swings in the recorded reserves.

Now, onto composition of reserves:

Table below summarises movements in all reserves (we only have official data through July 1, 2014 so far):

Note that while Russian reserves declined on foreign exchange side, they rose on gold side, so the net (combined) effect is shown in the last column of the table. At very worst, sanctions can account for roughly 3% decline in reserves. Again, hardly 'dramatic'.

I will update the above once August 1 data is out.

Update: Here is a chart plotting evolution of Russia's gold reserves:

29/7/2014: Vera Graziadei Interview: Ukraine, Russia, Maidan...

This is a very insightful, personal-level interview with Vera Graziadei, who is a British TV presenter with Russian and Ukrainian roots, born in Donetsk, raised first in Eastern Ukraine, then in the UK, educated in LSE and so on...

http://www.bne.eu/content/interview-graziadei-anger-towards-euromaidan-passionate-%E2%80%93-no-act

Many personal feeling she narrates in the interview are shared by other people who have personal and familial ties to Ukraine and Russia. I would count numerous instances where reading her interview led me to think: "Me too! I felt the same." As an analyst, I too often hide behind the numbers, stats, expert opinions. But to all of us, there is also a personal connection that Graziadei develops strongly in her interview.

30/7/2014: Some Simple Maths Around Live Register Numbers

There are some positive news on Live Register front today, which you can read about here: http://www.cso.ie/en/releasesandpublications/er/lr/liveregisterjuly2014/#.U9jKTIBdWEI

My friend, Marc Coleman noted in his commentary that:

Progress of sorts, I agree. However, several caveats apply:

1. The above figures quoted by Marc omit outflows from LR due to expiration of benefits (e.g. two-earners household where one earner becomes unemployed, draws unemployment supports, but then runs out of benefits due to high income of the other earner, etc);
2. The above reductions also reflect outflows of working age population out of Ireland;
3. The above reductions reflect exits from LR due to entry into Activation Programmes (e.g. JobBridge) and general tightening of LR access (e.g. people made self-employed before they lost jobs etc).

Let's take a look at the numbers we do know:

• July 2011: Live Reg total = 470,284;  Unem. rate = 14.3% (estimated at the time, not 14.5% - adjusted later); and State Training Programmes Participants = 54,287 (June - these numbers are reported with a lag of one month, so to make them comparable to currently available data, I took June numbers for 2011).
• July 2014: Live Reg total = 404,515; Unem. rate = 11.5%; and STPs = 65,709 (June).
• So STPs difference = 11,422
• Net emigration 2011-2013 (25-64 years old only, so I exclude 15-24 year olds - the largest category - this gives me some comfort on relating these emigrants to unemployment or underemployment) = 28,900

And we have:

• Net emigration 2011-2013 and net change in STPs = 40,322
• Add 2013-2014 emigration at 1/2 rate of 2012-2013 rate for 25-64 year olds = 6,900
• Live Reg total July 2011 relative to July 2014 change: -65,769
• Net emigration and STPs change 2011-2013 (estimated): - 47,222
• Not in the above: exits from LR due to expiration of benefits.

So even without exits from LR, potential improvement in LR for June-July 2014 compared to June-July 2011 is at maximum 18,547, over 3 years or roughly 6,180 per annum.

Reminder, Live Register supported numbers are at 404,515 (LR) +65,709 (STPs) = 470,224. Do the maths as to whether this rate of improvement is really significant enough…

My view is that it is great to see reductions in LR and (not in the current release) there are some good news from the QNHS side that covers new employment. But we need much, much more rapid reductions in unemployment and increases in jobs creation (especially jobs creation at domestic economy levels, not just in MNCs- dominated sectors) to even start talking about any significant 'progress' here.

Good thing, Marc agrees, somewhat:

29/7/2014: Latest Round of EU Sanctions: Mirroring the U.S. and upping the ante...

EU finally agreed on the new round of sanctions against Russia - the full document is available here: http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/EN/foraff/144159.pdf

"In order to restrict Russia's access to EU capital markets, EU nationals and companies may no more buy or sell new bonds, equity or similar financial instruments with a maturity exceeding 90 days, issued by state-owned Russian banks, development banks, their subsidiaries and those acting on their behalf. Services related to the issuing of such financial instruments, e.g. brokering, are also prohibited." This is basically symmetric to the previous US sanctions (see: http://trueeconomics.blogspot.ie/2014/07/1772014-more-russia-sanctions-same.html note: updated link to US sanctions here: http://www.treasury.gov/press-center/press-releases/pages/jl2572.aspx) though EU sanctions are covering all "state-owned Russian banks, development banks, their subsidiaries" not just those covered in the US sanctions.

"In addition, an embargo on the import and export of arms and related material from/to Russia was agreed. It covers all items on the EU common military list." These involve military equipment and equipment modified for military use, albeit some Mercedes G-Wagon retrofits, favoured by Russian vintage mafiosi, might qualify as well. Maybachs with protective plating will probably escape, unless someone orders an all-wheel-drive one...

"…prohibition on exports of dual use goods and technology for military use in Russia or to Russian military end-users." These are problematic as the lists are more ambiguous and broader. I am not an expert on this subject, but overall, such blanket prohibitions under what often amounts to relatiist testing procedures can have a much broader impact than intended.

"Finally, exports of certain energy-related equipment and technology to Russia will be subject to prior authorisation by competent authorities of Member States. Export licenses will be denied if products are destined for deep water oil exploration and production, arctic oil exploration or production and shale oil projects in Russia." This is symmetric to the US sanctions. It is interesting to note that the sanctions are designed specifically to hurt Russian energy sector in areas where the sector competes head-on with US and Canada: shale oil and arctic oil. On-shore traditional oil is not impacted.

Materially, and speaking strictly personally, I do not expect the new round of sanctions to have a direct impact on Irish bilateral trade with Russia, relating to goods, but we can see significant impact on transactions via IFSC (http://trueeconomics.blogspot.ie/2014/07/2172014-sources-of-fdi-into-russia-2007.html). You can see breakdown of goods flows with Russia here: http://trueeconomics.blogspot.ie/2014/07/1772014-irish-bilateral-trade-in-goods.html. The impact is intended, as in the case of the US sanctions, to be longer-term, restricting funding opportunities for major Russian companies and reducing their free cash flows (by forcing them to use cash flow to close off maturing debt). Ironically, also in the longer term, this can lead to Russian companies issuing more equity and debt domestically, deepening domestic financial markets, and carrying less debt overall, making their balancesheets stronger. The short-term impact is likely to be reputational and risk-related as some exporters and investors will opt to stay out of the Russian market in fear of future additional sanctions and faced with a prospect of dealing with EU and US bureaucracy (not to mention the prospect of dealing with their Russian counterparts).

On a geopolitical note, the sanctions are now starting to ramp up pressure on Russian leadership. What the reaction might be is anyone's guess, but I suspect we are not likely to see major and rapid de-escalation soon (http://trueeconomics.blogspot.ie/2014/07/2872014-double-up-or-stay-course-in.html). Which is not a good outcome for all parties concerned and especially for the Ukrainian people.

Updated: the US has now matched the broader EU sanctions: http://www.reuters.com/article/2014/07/29/us-ukraine-crisis-sanctions-obama-idUSKBN0FY27Q20140729?utm_source=twitter U.S. sanctions on banks remain in the area of funding, but not in the area of transactions.