The Russian economy (catch all)

[OUTLAW 09]

Stan---maybe this is something Firn will like---look at the bank that was hit with sanctions---Rossija Bank---held a large number of Gazprom accounts as well as the Rail company companies but I am assuming Gazprom fronted for a number of bank loans to the Rail company as that is a typical Russian mob move to scram money off of bank lines of credit.

On Interfax the initial Gazprom reaction to the bank being sanctioned indicated that nothing would effect their accounts.

If one understands that the US federal financial law now on the books literally dictates what US banks with federal sanctions notices have to do --they have honed their skills on Iranian banks. Anything or anyone tied to the bank and or the individuals named can be chased.

What the Russians initially assumed was that the sanctions would only affect one if the individual owned more the 30% of something---under US law that is not the case---thus the Fitch downgrading to negative which will hurt bank credit lines from foreign banks which is the center of gravity for Russian companies.

Rossija today made the announcement that recommended none of their clients should make or withdraw any foreign currency--think now they fully understand that the US banks will chase the money via the money trail.

Interfax: 12:44 Bank Rossiya asking clients to refrain from making foreign currency payments

[Firn]

@stan: I have no doubt that in Vladiromics great scheme the ratings of railway bonds count not that much. Still economic turmoil in Russia will get his attention.

Also, with all due respect to the Estonian port, it's economic impact pales with the numbers currently at stake.

@Outlaw09: We will have to see how deep and broad financial sanctions will become, but I'm sure that those are interesting days for wealth managers in Russia. Perhaps the Bank Rosija also wants to keep it's foreign reserves close at it doubt that it will be easy for it to get more.

This German interview with the vice CEO of the DHIK is in my opinion quite revealing about the mood of German investors in Russia. In the past it has almost always been 'business first', but now he talks rather resigned about the primacy of politics. I'm looks like that behind the scenes the German leaderhip has made it pretty clear to the business community that this time it is different. Investments have been delayed and some binned, partly because German banks see more risks. This means at best higher interests which will make some investments questionable and others less attractive. I'm pretty sure that most German investments are mostly financed by German not Russian banks.

An article with a handy graph about the companies with the highest percentage of their revenue coming from Russia.

The closer the ranks between the industrial powerhouses on sanctions are the more difficult it will to play, let us say Siemens against Bombardiers. Reducing the flow of knowhow and capital into the Russian economy will hurt a lot.

[Firn]

Capital controls feared in Russia.

Capital flight from Russia has spiked dramatically since President Vladimir Putin first sent troops into Crimea and may reach $70bn (£42bn) over the first quarter of the year, prompting fears that the country may soon have to impose capital controls to stem the loss.

...

“It is shocking,” said Bartosz Pawlowski from BNP Paribas. “Markets have been extremely complacent, fooling themselves that Russia is invulnerable because it has almost half a trillion in foreign reserves. But reserves can become almost irrelevant in this sort of crisis.”

Lars Christensen from Danske Bank said the authorities may resort to some form of financial coercion to lock down funds in Russia. “Capital controls are a serious risk, and should not be discounted. Whatever now happens, there has been permanent damage to the Russian economy because investors are not going to forget this lightly.”

Capital controls are one of the last lines of defense for your foreign currency reserves and for very good reasons as the slap considerable costs on your economy. The more open the economy is, the higher they become. There are of course some situations were capital controls are a must, like in Iceland in it's banking meltdown.

To get a grasp of the dimensions we are talking about it is important to remind us that Russia is a $ 2,000bn economy with a $ 200bn trade surplus in goods.



Keep the accounting logic in mind I explained before. I would not be surprised anyway that we will see a capital flight north of $ 150bn if the crisis continues.

The scale of capital outflows leaves the Russian government in a quandary. The central bank has already raised interest rates by 150 basis points to prevent a collapse of the rouble, but this is choking the economy.

“If rates stay this high for another two or three months, there will be serious trouble,” said Mr Pawlowski. “There is no free-lunch. You can defend your currency, but if you do that you wreck your economy,” said Mr Pawlowski.

I just quoted it because Mr Pawlowski repeats a key problem for Russia which I mentioned earlier. In normal times the central bank does it's monetary policy to help the economy. Now the economy has to suffer to help the central bank to defend it's reserves...

[Stan]

Rossija today made the announcement that recommended none of their clients should make or withdraw any foreign currency--think now they fully understand that the US banks will chase the money via the money trail.

Interfax: 12:44 Bank Rossiya asking clients to refrain from making foreign currency payments

Outlaw,

Imagine who would want all those Rubles

Furthermore, according to this Reuters article:

Kovalchuk said in a television interview on Sunday the sanctions had backfired by helping him win new clients among patriotic Russians. Russian President Vladimir Putin said last week that he would open an account at the bank.

@stan: I have no doubt that in Vladiromics great scheme the ratings of railway bonds count not that much. Still economic turmoil in Russia will get his attention.

Also, with all due respect to the Estonian port, it's economic impact pales with the numbers currently at stake.

Firn,
Russia has been buying up Europe and Africa for years. I've been here for 20 years and in Africa for 12 years.

We are not talking big money. But very big money. None other than Putin’s Central Bank has estimated that two thirds of the $56 billion exiting Russia in 2012 might be traceable to illegal activities. Crimes like kickbacks, drug money or tax fraud. This is the money that posh English bankers are rolling out the red carpet for in London.

Estonia is but a minuscule means of showing what Vova can do to tiny little countries that get in the way. But, chocking off these so-called countries is a mess for their economic development and an even bigger mess for the EU when it comes to supporting them.

Regards, Stan

[Firn]

Stan

I agree with the article up to the final words. There is no doubt in my mind that this long experience and the 'business' interactions of all sorts helped to great a vision of the Western World which might at best bark a lot and do nothing which hampers it's monetary interests. Siemens CEO is a good example*. There is a lot of truth in that view but Putin might stepped a little too far with his annexion and the way he set it up. He might still think that he will get cheaply away with it, but I'm not that sure anymore. Time will tell.

Right now the Russians are almost all cheering for him and his noble deed. We will see how loud their voices will be in a couple of years and what they cry.

Regards, Firn

*I'm pretty sure it was never easier to get a meeting with Putin.

[Stan]

Firn,
Agree. In the end, perhaps painful for the Russian lower and middle class.

However, here most of the Russians are not affected and generally all transactions are under the table, regardless of the amounts.

Stan

I agree with the article up to the final words. There is no doubt in my mind that this long experience and the 'business' interactions of all sorts helped to great a vision of the Western World which might at best bark a lot and do nothing which hampers it's monetary interests. Siemens CEO is a good example*. There is a lot of truth in that view but Putin might stepped a little too far with his annexion and the way he set it up. He might still think that he will get cheaply away with it, but I'm not that sure anymore. Time will tell.

Right now the Russians are almost all cheering for him and his noble deed. We will see how loud their voices will be in a couple of years and what they cry.

Regards, Firn

*I'm pretty sure it was never easier to get a meeting with Putin.

[OUTLAW 09]

This Interfax PR is showing all of a sudden Russian fears---namely that the EU could in fact draw gas from alternative sources until US gas came online coupled with green technologies will at some point replace Russian gas.

As a two raw resource country that is a nightmare long term.

The Russians somehow have not registered that the US has gained the edge as the leading gas producer for awhile to come---maybe that is why they are getting into fracking themselves.

March 26, 2014 21:58


"Gas war" from West regarding Russia is political fantasy - Russia's rep to EU Chizhov

MOSCOW/BRUSSELS. March 26 (Interfax) - The talks about a "gas war" the West declared regarding Russia are a political fantasy, Russia's Permanent Representative to the European Union, Vladimir Chizhov said.

"This is not even political 'horror stories,' this does not even reach a political 'horror story.' I would say that these are political fantasies," Chizhov told Interfax on Wednesday when commenting on the information that the United States is ready to permit natural gas exports in the volumes Europe consumes per day.

[Firn]

Ilja Ponomarjow, the only member of Duma who voted against the annexation of the Crimea interviewed by the German Zeit.

ZEIT ONLINE: Herr Ponomarjow, warum haben Sie gegen die Annexion der Krim gestimmt?

Ilja Ponomarjow: Ich bin gegen Krieg. Mit dieser Abstimmung haben wir die Ukraine verloren. Die Ukrainer haben angefangen, ueber die Russen als ihre Feinde zu denken. Dabei sind wir Brueder, unsere Sprache ist fast dieselbe, wir haben eine gemeinsame Kultur. Wir haben Jahrzehnte in einem Staat zusammengelebt. Die Grenzen zwischen uns sind kuenstlich, so wie die damals zwischen Ost- und Westdeutschland.

Ilja: I'm against war. With this voting we have lost Ukraine. The Ukrainians have started to think of the Russians as their enemies. Despite being brothers ...

ZEIT ONLINE: Und wie soll der Westen reagieren? Sind Sanktionen ntig?

Ponomarjow: Ich bin gegen Sanktionen, die versuchen, das ganze Land zu bestrafen. Sie unterstuetzen Putin. Auch ohne das, was in der Ukraine und auf der Krim passiert ist, finde ich, dass die korrupten Menschen, die ihr Geld in den Westen schaffen, verhaftet werden sollen. Wenn die Krim der Anlass ist, diese Leute, die Russland ausbeuten, zu verhaften und ihre Geschaefte zu bestrafen, dann ist es gut so. Wichtig aber ist, dass die Skalierung gro genug ist. Die Abgeordneten in der Duma verstehen nicht, dass auch sie Verantwortung tragen. Sie glauben, dass Putin die Entscheidung allein getroffen hat und nur er dafr verantwortlich ist, aber das ist nicht richtig. Die erfolgreichsten Sanktionen sind die von Visa und Mastercard gegen die Banken, die die russische Regierung untersttzen. Davor haben diese Leute wirklich viel Angst. Da geht es um Geld, und das ist sehr wichtig.

Interesting views on the scale and type of the sanctions. I'm pretty sure that this interview will not endear him to the wise Russian leadership, he is right now indeed a rather lonely man. It must have taken considerably moral strenght a lonely sort of courage, which is often the most difficult one to muster.

[Firn]

Outlaw

I would advise you to take a closer look at the article of Yegor Gaidar, the collapse of the SU. I think that the Russian leadership is right to be nervous, if , and this is a big if, the political willpower in the EU is strong enough. Their picture of the Europeans, which has lots of truth in it, might be the reason why we see such disbelief about a big economic fallout, perhaps over gas.

[Ulenspiegel]

Ah the gas issue.

Perhaps now we can return to the earlier defence of Germany's strategic decision to place reliance on energy from Russia.

A massive strategic error. Who was responsible and whose heads should roll?

JMA, you cherrypick some aspects and simply ignore the the real factors that shaped some decisions:

1) Around 1990-95 there was a real danger that the Russian economy collapsed. The highest priority for Germany was, to stabilize the situation, NG pipelines and deeper integration of the Russian economy were obvious ideas and -in contrast to the NG discussion, finacial and technical support for pipeline construction around 1980- not really fought by the opposition.

The last thing Germany needed/needs at her backyard is a failed state with thousands of nukes. To assume one gets stability (clear advantage for Germany) without paying a price is naive.

2) Pipelines tie a producer to certain customers, the Russian side lose strategic freedom too. Russias economic situation improved because of rising crude prices (20 USD to 100 USD, nothing people assumed in 1995.

3) The real problems are in countries outside Germany: high demand for NG (for heating) in combination with very inefficient heating systems and low insulation level of the buildings.

4) And not unimportant. There was some kind of agreement that there is no integration of Ukraine into Nato and EU, this agreement was broken by western politicians, IMHO a stupid move.

[Firn]

Dayuhan

It is good and important to point out in which context the decisions were taken, especially in the 1990-2000 timeframe. The trade was a generally a win-win scenario, and still is in economic terms. The negative impact of Putins primacy of geopolitics* was becoming clearer since 2009, much has been done in the last years but for some projects, say Nabucco, the political support wasn't strong enough.

Ulenspiegel

I agree on all points apart from number four, and there to some extent.

*The political use of trade was deeply rooted in the SU, arguably much more then in the West.

[Firn]

What the Russian papers say:

Nezavisimaya Gazeta

1. Mikhail Sergeiev article headlined "World Bank names price of Ukrainian crisis for Russia" says the Russian economy is likely to lose $38 billion this year due to the Ukrainian crisis and the overall economic slowdown. Moreover, the Russian Central Bank has already spent $39 billion on currency market interventions; pp 1, 4 (713 words).

Those $ 40bn in interventions have been somewhat less then 10% of the total reserves. Given the great capital flight it is just natural that they are having a hard and cash-draining time to defend the ruble.

----

Sanctions Can't Force Foreign Companies Out of Russia, Medvedev Says

This is quite interesting stuff. We initially heard all sorts of wild shouting and law-making about retaliating in kind against Western sanctions. A few here stated that this will cut far deeper into their own flesh. Now that:

"We have no restrictions [on business with foreigners], and we will continue all forms of cooperation with all the companies that are operating here," Medvedev said. "I'd like to reiterate — the choice is with those who are seeking to do business in our country."

One should not pay too much attention to the Kremlin's words but the rapid capital flight and potential economic damage might have caused it to backtrack. In economic terms there is no doubt that they are the far more vulnerable ones...

[Firn]

A new Oil and Gas Generation

Talking about Russias need for Western know-how and human capital:

The modernization of the Russian refining and petrochemicals industry is putting unprecedented strain on the country's resources of individuals with project management and engineering skills.

Specialists remain in short supply and employers are stepping up the search for recruits, especially in engineering, procurement and construction.

"Russian oil companies need staff who are able to coordinate and interact with Western engineering companies," said Maxim Kaurov, executive director, head of oil & gas, energy, and industrial sectors, Staffwell. "The inability of the Russian market to manage its own resources is a serious problem for the oil industry.".

[Firn]

Russia wants to give the economy a stimulus package, it seems. It is not described as such but reads like one. An interesting comment at the end:

Former Finance Minister Alexei Kudrin said at the forum that the further economic slowdown was the price for the country's independent foreign policy, and that people were so far willing to accept the cost.

"We are paying hundreds of billions of dollars for this, hundreds of billions, and we will see lower gross domestic product growth, investment and revenues," Kudrin said.

[Firn]

The Soviet Union broke because it went broken. Yegor Gaidars book, Collapse of an Empire: Lessons for Modern Russia published in 2007 offers a brilliant account from the inside with excellent documentation. The Kremlin back then was also not interested in businessmen and had an especially deep disdain for the dull accounting and finance stuff.

I'm not fully through, but it is a great read. He also warned of the nationalistic tendencies in Russia partly rooted in the 'tragedy' of the lost empire. Interestingly the commodity exports back then were also increasingly used to fund imperial ambitions and to keep the inefficient system going. Time will tell what will happen to Putin's Russia.

[Firn]

The IMF announcement. It is worth to point out the focus on avoiding too high social costs, especially for the vulnerable. The current Ukrainians leadership has been dealt a terrible hand and has to play it's cards as least worst as possible.

”Fiscal policy will secure priority spending during the coming months and implement deeper fiscal adjustment over the medium-term. The initial stabilization in 2014 will be achieved through a mix of revenue and expenditure measures. For 2015-16, the program envisions a gradual expenditure-led fiscal adjustment—proceeding at a pace commensurate with the speed of economic recovery and protecting the vulnerable—aiming to reduce the fiscal deficit to around 2½ percent of GDP by 2016.

“Energy sector reforms will focus on reducing this sector’s fiscal drag, while attracting new investment and enhancing efficiency. A key step is the commitment to step by step energy reform to move retail gas and heating tariffs to full cost recovery, along with early action towards that goal. Importantly, this will be accompanied by scaled up social protection to mitigate the impact on the most vulnerable. Over time, the program will focus also on improving the transparency of Naftogaz’s accounts and restructuring of the company to reduce its costs and raise efficiency.

It is also not surprising that the IMF tends to get the blame as it usually comes in when the economy is in crisis, a thankless job indeed. There are still people in Italy praising Berlusconi for all the good he did. Sadly they forget that he was the funny guy at the bar inviting everyone to a drink only to disappear before the bill was due. A wallet or two also went missing...

[Firn]

Just a snippet from the paper roundup of the Moscow Times:

Darya Borisyak article headlined "State banks to save on dividends" says the Russian government is ready to support state banks that have been hit by U.S.-imposed sanctions; p 10 (400 words).

Liquidity has become increasingly important with all that captial flowing out of the country and Russias costly interventions on the currency markets.

[Fuchs]

I note with some interest that where you have been a loud and vocal champion of International Law when it came to US / NATO involvement on Libya, Syria etc you are quiet on the Russian invasion of Crimea.

Also of course what comes to mind is your earlier defence of the German strategic decision to accept energy reliance on Russian oil/gas.

Have you changed your position on these issues?

I've been rather quiet on SWC for months actually.

There was a recent text on my blog equating the Western and Russian violations of IL and pointing out the recent hypocrisy. Legally the Russians have a pretty good case when they compare Western behaviour against Yugoslavia with their behaviour against Ukraine, except the violated guarantees. But treaties were violated by Western countries as well, so they can construct equivalent Western evilness by adding a few violations.
The West clearly was lacking self-discipline, and now it sees what happens when other great powers lose respect for rules, too.

The gas supply thing is still the same; Russians are even more dependent than Germans on the pipeline, and we've had natural gas trade with them since well into the Cold War. It's largely a non-issue. Even a complete cut-off would merely be a nuisance when compared to historical embargoes.
The "energy reliance" on natural gas makes up only 22.5% Germany's energy 'consumption' and the minority of its natural gas consumption is from Russia: 38%

8.5%: Anybody who thinks Germany - the people whose parents and grandparents waged two world wars under total naval blockade - couldn't cope with a loss of this is a fool.
It would be painful, but more like a paper cut pain than like the pain of a submission technique.

[Firn]

Putin Pushes Untradeable Notes as Bond Sales Fail: Russia Credit

Axing Auctions

Russia has scrapped seven bond auctions this year, citing “unfavorable” market conditions. Investors fled emerging-market assets in January as the Federal Reserve reduced its bond-buying program. They continued their exodus from Russian markets as the crisis in Ukraine deepened, leading Standard & Poor’s and Fitch Ratings to cut the country’s credit outlook to negative this month.

Outflows were probably near $70 billion in the first three months, Deputy Economy Minister Andrey Klepach told reporters on March 24. That compares with $63 billion in all of 2013.

The government may refrain from selling $7 billion in Eurobonds and pare its 825 billion-ruble domestic-bond target, Finance Minister Anton Siluanov said March 21. The ministry has borrowed 37 billion rubles since the start of the year, data on its website show.

Of course it is not the first time, they did a similar thing to finance themselves less the two years ago. Russia is not shut out of the international financial market but it has to pay more to get access to it.

The longer the conflict goes the more damage it will inflict on the Russian economy, especially long-term. In the short run the balance sheet and revenue streams looks strong enough to weather some storms with little damage.


On the other side is no surprise that the IMF deal pushed down yields. Still I would not have expected a fall of 20%, which is quite amazing. Big news in not very liquid and relative small market, make it of course easier to get such wild swings compared to treasuries. As I said earlier if there is enough political willpower in the West, it easily has the financial firepower to make a big splash.

The IMF deal “unlocked the highly desired support of the EU and the U.S. to develop the Ukrainian economy and prevent default,” Alexander Valchyshen and Taras Kotovych, analysts at Investment Capital Ukraine in Kiev, said in an e-mailed note today. “If the Ukrainian parliament adopts other drafts of the law to improve the Ukrainian economic situation, yields should continue to decline further.”

The government signed a political pact with the European Union on March 21, after the ouster of President Viktor Yanukovych prompted Russia to stop lending to its former Soviet vassal state and annex the Crimea region.

The weakness of the Hryvnia is mostly a combination of a country in turmoil and the overvaluation achieved by the monetary interventions in the last year which was money thrown out to get lower inflation and maybe better personal deals abroad...

[Firn]

A bi tmore about the Russian economy and it's interactions with Germany in particular:

In Russland herrscht Alarmstimmung. Nicht zuletzt bei den deutschen Unternehmern, die dort in den vergangenen Jahren meist gute Geschfte gemacht haben. Russland, das Land der groen Chancen, gilt ploetzlich als ganz unsicheres Gelaende. Viele deutsche Firmen, die noch im vergangenen Jahr in Russland investieren oder eigene Produktionssttten errichten wollten, haben diese Plaene jetzt aufgegeben oder zurckgestellt, sagt Bernd Hones, der in Moskau fr Germany Trade and Invest, die Gesellschaft fr Auenwirtschaft und Standortmarketing, arbeitet. Mancher Manager, der mhsam ein Millionenprojekt in Russland im deutschen Betrieb durchgesetzt hat, gert nun ins Schwitzen. Wenn das mal gutgeht, heit es. Vorsicht gilt im Russland-Geschft als das Gebot der Stunde, sagt Hones.

Dabei waren gerade die Deutschen die Musterknaben im Russland-Geschft. Kein anderes Land hat so viel in Russland investiert. Wenn es um direkte Investitionen geht, also um Fabriken, Betriebe und Anlagen, so rechnet sich der Anteil der Deutschen nach russischen Zahlen auf zwoelf Milliarden Dollar. Das ist mehr, als die Vereinigten Staaten, China, Japan, Grossbritannien, Frankreich und Italien zusammengenommen investiert haben. Und vor den Deutschen, ihrer Technik und ihren Marken hatten die Russen immer Hochachtung. Doch nun dreht sich der Wind. Die Praedikatspartner werden auf einmal skeptisch angeschaut. Deutsche Unternehmer, so berichtet Hones, htten heute den Eindruck, dass russische Industriekonzerne es gegenwaertig fuer politisch angebracht halten, nicht mit deutschen Firmen Geschaefte zu machen. Mit den Unterstuetzern des Umsturzes in der Ukraine will man lieber nicht zu eng verbunden sein.

This hurst of course German companies but is more disruptive for Russia. If the biggest investor, like others, does pushes or bins important projects like those plants it will harm the long term potential. The Russians have tried quite hard to get plants and other investments by various incentives and entry barriers for imports. The big Italian jump is mostly explained by the big $ 1bn win and a far smaller base.

The currrent trend to buy 'Russian' cuts both ways. On one hand it might be needed to give the generally uncompetitive Russian companies some breathing room on the other hand it will have a long term negative impact on the Russian economic surplus and it's federal budget.