The Russian economy (catch all)

[Firn]

@jmm99: Thanks, I will try to understand a bit more the Russian economy and the damage it may take from a longer conflict with the West. I will leave the legal side to you

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First of all it is important to quote Rumsfeld:

Reports that say that something hasn't happened are always interesting to me, because as we know, there are known knowns; there are things we know that we know. There are known unknowns; that is to say, there are things that we now know we don't know. But there are also unknown unknowns – there are things we do not know we don't know.

I will first try to to get some basic facts about the economy. Keep in mind that it is harder to find the right linkable thing then the right thing alone...


1. The Federal budget of Russia

It depends mostly on oil and gas revenues. As much of service sector is obviously strongly linked to the commodity sector the 52% number underestimates this dependence. Think Gulf states.





The Finnish Central Bank has an interesting study about Russia's revenue problem which is highly likely to become worse in the long run.

[Firn]

2. Russias trade


a) Balance of trade




b) Exports

The only surprise is just how much of the export comes from commodities...




c) Partners

The EU and the Urkaine hardly worth to mention, I guess...



Russia on the other hand is the most important one for the EU, surely:

[Firn]

A snapshot:


Let us combine those four basic points:

1. Russias federal budgets depends over 50% on commodity revenues

2. Most of it's commodities get exported, making up the vast majority of the exports

3. The Western World + Ukraine import roughly 80% or those

4. Russia trade share of the the EU+USA is closer to 5 then 10%


Clearly Russia is economically absolutely impervious to any trade actions of the G7 or discouting Japan, the US + EU while the latter have to shudder in fear of the Russian economic might.

This sounds pretty simplistic but is an excellent anchor from which to look at some of the interesting details...

[Firn]

@Fuchs: A good entry. So far:

1) Putin should not forgot that turning the valves will stop a large part of the revenues financing his budget and his invasion.

2) In the long run such threads incentives the substitution from other geographical and energy sources.

3) Russia needs Europe a lot more then the other side around.

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P.S: I'm actually no longer sure if freezing the assets of specific Russians around the warmonger is the smartest way for now after looking at the desperate attempts of the Russian Central Bank to reduced the rumbling of the rouble. As written before the already 10 billions, 2-3% of their reserves to dampen the fall and increased the interest rates by 150 points in a weak economy.

Operators of privately run exchange booths in Russia said they were not prepared for the higher demand for the US dollar.

An employee at a small exchange said that her booth, which is open 24 hours a day, ran out of dollars by Sunday morning.

"We were not ready for this, we have not stocked up," she said.

So what are the best ways to help the Russian Central Bank to burn through it's reserves? Promoting capital flight into the € and the $ away from the rouble is certainly one of it.

[AmericanPride]

Firn,

Thanks for the economic data. However, I think we should consider that (1) short-term economic losses in the financial market can be quickly restored once stability is perceived to return and (2) economies as systems tend to be far more resilient during conflict than generally assumed. Interestingly, the combination of falling ruble value and increased prices for oil and natural gas can work to Moscow's advantage as far as cash balance is concerned.

From oilprice.com:

Stocks are taking a beating, but investors are pouring money into commodities on the expectation that supplies could be cut off. Russia rounds out the top three oil producers in the world (along with the United States and Saudi Arabia), so the prospect of a Russian ground war in Ukraine is causing some serious jitters in oil markets. Crude oil (Brent) was up more than 2.2% to $111 per barrel in morning trading on March 3.

As you highlighted, the Russian economy is largely centered on commodity exports.

From the same article:

Europe imports 34% of its natural gas imports from Russia via Ukraine. Supply fundamentals appear to be normal, and thus far there are no reports of disruptions. Citigroup says it does not believe supplies will be “materially affected,” as reported by Bloomberg. But the markets are not so convinced.

Again, the key unknown here is how Kiev will resolve it's own cash problems, the deadline for which is approaching in several weeks. IMF loans conditioned on austerity measures, which will no doubt cut the natural gas subsidies in Ukraine, could escalate the domestic political crisis in the country. What then?

[Firn]

1. About the Russian gas weapon

I wrote earlier:

1) Putin should not forgot that turning the valves will stop a large part of the revenues financing his budget and his invasion.

2) In the long run such threads incentives the substitution from other geographical and energy sources.

3) Russia needs Europe a lot more then the other side around.

I can not look into the mind of the governments of the Central Europe and don't know what they know and think. Maybe some truly ignore that in the short and the long run Russia needs Europe money far more then Europe needs Russias gas. See the Federal Clay Budget of Russia, the reliance on European demand to finance their state, the full NG reserves in Europe, the time of year, etc.

Re sanctions:

In the medium (10 years) or long term (>20 years) timeframe the Russian position is not strong when we consider decreasing demand for NG and oil in Europe, the increasing global LNG capacities, lack of Russian LNG capacity, and the structure of the Russian (export) economy. Most of the NG is used in central Europe for heating of buildings. Fortunately, these buildings have an poor insulation level. :-)

The best answer is to build one or two more LNG facilities in the Netherlands, UK and Germany, to ramp-up refitting programs for buildings (KfW) and simply wait. The goal is to compensate for decline of UK and Norwegian NG production with more non-Russian LNG imports, at the same time, efficiency gains will reduce demand for Russian NG.

As the economy of Ukraine is a mess - it is even worse than the Russian economy - an occupation of more territory than the Crim does not improve the Russian strategic position IMHO.

This article supports that take on the gas front. Lower demand through mostly higher efficiency and some alternative energy will hit the Russian state revenues hard in the long run.

For starters, we are not now in early January but in March, considered the final month of the continental European heating season, when demand is likely to be highest. Moreover, this has been a particularly mild winter – the mildest since 2008 – and higher than normal temperatures are forecast to continue for several weeks yet, significantly reducing demand for gas and leaving prices at their lowest for two years. Energy market analysts at the French bank Société Générale said in a briefing note last month that European gas demand in 2013 was at its lowest level since 1999. In the UK, gas consumption is currently approaching a 12-year low.

Partly as a result of weaker demand, but also because since the first "gas war" of 2006, many European countries have made huge efforts to increase their gas storage capacity and stocks are high. Some countries, such as Bulgaria, Slovakia and Moldova, which lack large storage capacity and depend heavily on gas supplies via Ukraine, would certainly suffer from any disruption in supplies. But Gas Infrastructure Europe (GIE), which represents the gas infrastucture industry, estimated that in late February European gas storage was 10 percentage points higher than this time last year and about half full; the National Grid puts Britain's stocks at about 25 percentage points above the average for the time of year.

"The conflict won't have any impact at all" on prices, a Frankfurt-based analyst told Bloomberg News. "The gas price is currently influenced by temperatures and storage levels, and both don't favour demand right now." Prices of gas for delivery next month have risen around 10%, but that reflects insecurities in the market about a possible military confrontation between Russia and Ukraine rather than worries about fundamental shortages of supply were Gazprom to turn off the taps, the analyst told the agency.

[Firn]

2. About the financial markets

The Russian market rallied today, gaining back half of what he lost earlier. More importantly the Rouble recovered a similar amount. I would love if and then how Russian financial entities acted. One should keep in mind Ben Graham: “In the short run, the market is a voting machine but in the long run it is a weighing machine.”

In any case the sharp increase in interest rates, which are now arguably far too high for the weak Russian economy will work against it for the time being.

What I thought highly interesting that Putin decided to act today in a 'calming manner'. While most of the market gains happened earlier panic in the Russian financial markets is obviously no good.

Vladimir Putin has described the turmoil in the financial markets as a tactical and temporary state of affairs, during his ongoing press conference on Ukraine (live on Sky News channels now, and streamed here).

He also tried to pin some of the blame on America, saying that there was already a degree of nervousness due to certain US policies (ie, the slowing of the Federal Reserve’s huge stimulus programme).

I wonder when the last time was that he commented about the financial markets. That he tried to blame some of the crash somehow on the America was however not unexpected...