5/8/2014: Of Coming Russian Debt Showdown...

September and December 2014 are going to be crunch time for redemptions of Russian bonds, followed by 3rd and 4th quarters of 2015... All data below is in billions USD.

To the above: red bars = government debt issuance, pink = banks and blue = corporates.

And here is how Russian economy's dependence on external funding markets has grown over time:

Per above: red bars are state-owned banks external debt, pink bars are state-owned non-financial corporates, darker blue private banks, lighter blue private non-financial corporates.

All data sourced from RBKDaily which cites as sources Central Bank and Morgan Stanley Research.

The big question is how these maturities will be met, as EU and US are prohibiting issuance of any new debt in excess of 90-days duration...

5/8/2014: BRIC PMIs Signal Some Improvements in Economic Growth in July

Markit released all BRIC PMIs for July, so here is the summary of top-of-the-line changes:

As the above shows, Manufacturing PMIs improved m/m in all BRIC countries, although Brazil remained at levels below 50.0. For Services, PMIs deteriorated in all BRIC countries, and in Russia these remained at the levels below 50.0.

Year on year, Manufacturing PMIs are stronger in all BRIC countries, with Russia reaching into above 50.0 territory in July 2014. Russia PMIs are covered in detail here: http://trueeconomics.blogspot.ie/2014/08/582014-russia-manufacturing-services.html while BRIC Manufacturing PMIs are covered in detail here: http://trueeconomics.blogspot.ie/2014/08/282014-bric-manufacturing-rebound-july.html

Now, Services PMIs. Y/y these deteriorated in Brazil and China, improved in Russia, but remained below 50.0 line, and strongly improved in India.

Combined PMIs-signalled activity:

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.