The Russian economy (catch all)

[Firn]

At the end of the week the FT run a good story about Russian companies bringing their capital back home:

Russian companies are pulling billions out of western banks, fearful that any US sanctions over the Crimean crisis could lead to an asset freeze, according to bankers in Moscow.

Sberbank and VTB, Russia’s giant partly state-owned banks, as well as industrial companies, such as energy group Lukoil, are among those repatriating cash from western lenders with operations in the US. VTB has also cancelled a planned US investor summit next month, according to bankers.

This mirrors the very likely pull of a $ 100bn by the Bank Rossii out of the US. The article rightly talks about the fear of asset freezes, but there is in my opion more to it and this refers to the balance sheet of the Bank Rossii, the state control/influence over big Russian companies and the fall of the Ruble.

A flow out of assets in the West to Russia does increase demand of the Ruble and help the Bank Rossii to get strenghten it's balance sheet with western currencies. So it is supported it's currency policy in two ways. Personally I think the key issue here is how much the Ruble did fall, despite the rate rise, despite the $ 21+ bn thrown into the market and despite that large capital pull by partly state-owned companies.

Traders and bankers said US banks had been particularly heavy sellers of Russian bonds. According to data from the Bank for International Settlements, US banks and asset managers between them have about $75bn of exposure to Russia.

Joseph Dayan, head of markets at BCS, one of Russia’s largest brokers said: “It’s been quite an ugly picture in Russian bonds the last few days and some of it has to do with international banks reducing exposure.”

Indeed it wasn't pretty:



I think there is still a lot of room left for bond yields to increase if the situation just stays the same. Generally the longer the crisis last the harder it will be for the Russian economy. There are of course some Western companies who already built plants and bought much property, but there is still a great deal of capital which can rather easily flow out.

It is interesting to take a look at the last 14 years:




@Outlaw 09: I asked the same poster twice for sources and arguments to make his case but he didn't deliver. So I wasn't surprised to see much of the same happening to you...

[Firn]

A bit more on the capital flight from Russia, which looks like to be considerably higher then the capital inflow. Keep in mind that due to the accounting logic of the Balance of Payment some capital will naturally flow out as long as Russia continues to run a trade surplus (the other factors canceling each other out).

LONDON — Capital flight from Russia has risen sharply since the start of this year to $45 billion to $50 billion, Goldman said, predicting full-year outflows could be as much as $130 billion, or double 2013 levels.

Goldman said its calculations show capital outflows have jumped 60 percent from year-ago levels as the economy slows and the threat of Western sanctions bites. It also slashed its forecast for Russian economic growth this year to 1 percent.

Interesting to note that roughly 2/3 of the overall sum of BR's interventions was spent in the last two weeks. BTW you can see the accounting logic at work:

Goldman based its capital flight calculations on estimates of a $25 billion current account surplus in the first three months of the year and around $30 billion in foreign exchange interventions by the central bank.

On the Russian macro front:

Regardless of whether the Kremlin is irrational or simply uninformed, its policy in Crimea sends an unmistakable signal to investors: Russia's political leaders are impossible to predict. This will further undermine Russian and foreign investors' confidence and increase capital flight, which could not come at a worse time. With credit-fueled consumer spending, the engine driving GDP growth since 2010, now running out of steam, the economy is stagnating.

It is very hard to see how the Russian government can avoid a (deep) recession if the crisis continues for (months) weeks. Lots of shocks hitting the economy at the same time just as the monetary policy is forced to move into the wrong direction and fiscal policy will very likely be quite costly to finance...

[mirhond]

It is very hard to see how the Russian government can avoid a (deep) recession if the crisis continues for (months) weeks. Lots of shocks hitting the economy at the same time just as the monetary policy is forced to move into the wrong direction and fiscal policy will very likely be quite costly to finance...

Poor us.
You are still deliberately ignoring the fact that we have lived with ####ed-up economy for 15 years. Almost everyone out there understand that all this burgeous pleasantries are temporary, almost everyone either have Plan B if things become hairy, or just don't care about future. We are tempered with endless economic fails, inferior governance and suffocating aura of lies. Even the food, water and electricity rationing won't destroy this system.

[OUTLAW 09]

Firn---in comments yesterday by a former Russian Finance Minister the Russian budget this year was targeting a growth rate of 3.5% and if sanctions are imposed he is saying the growth rate may in fact be 0% and the Crimea costs were not factored in and approved for this year.

Average Russian taxpayer will be carrying the Crimea burden for years to come.

He indicated that there is talk of 80-90M USD per month in just support to keep the Crimea running and the Crimean's felt that with joining Russia their individual salaries would be going to Russian levels (was posted on placards around the cities) which is also not in the budget that was approved so he is estimating an annual cost of 20B USD per year just to do a steady state.

Reference an economic embargo---he feels it will not happen but worse for Russia is they the EU knows exactly where to place "specific targeted sanctions" against specific business types and products that will in a relatively short period hurt the economy baldy and they will do it as they feel the entire world community condemns what Russia has done and Russia is in effective politically isolated and has to take the hits.

His comment was interesting---the EU understands our economy better than we do.

[OUTLAW 09]

Firn---check the outflow of Russian capital to western banks for repayment of debt---in Jan it was some say over 17B and for this quarter they are talking about well over 50B---outstanding bank debt to be repaid seems to be in the 608B range.

[Firn]

Financial Times
‏@FT: 2% of London's luxury house buyers are Russian. So UK will find imposing sanctions tough: http://on.ft.com/1nFLV9e pic.twitter.com/infrAjTBwP

Is this 'tough' ironic or are you kidding me? 2%? Of the luxury market, of London? Make it 20% and it still at most 0,1%something of the UK housing market alone...

[OUTLAW 09]

Interesting Russian news take on the latest round of US sanctions from Interfax.com.



20:32

KREMLIN SAYS CAN'T ACCEPT SANCTIONS LIST PRACTICE IN PRINCIPLE

20:30

KREMLIN SAYS RUSSIA WON'T TAKE LONG TO REACT TO U.S. SANCTIONS

20:29

MOSCOW STUDYING U.S. SANCTIONS LISTS, BEWILDERED BY SEVERAL NAMES - PESKOV

20:26

NATION CLAIMING TO BE DEMOCRATIC IMPOSES SANCTIONS FOR HONEST POSITION, HONEST STATEMENTS - RZD CHIEF YAKUNIN

[OUTLAW 09]

Firn---something that came out of the EU meeting yesterday night and I must thank Putin for it---the EU is starting the analysis on reducing Russian gas and oil purchases starting already in 2014.

They made that public enough for Russia to understand.

Putin got the EU to wake up and realize that if they shared their own gas/oil abilities across their individual borders which they can as they have built a massive distribution system since 2009 they could 1) reduce Russia purchases/dependency, and 2) actually reduce gas and oil prices for EU citizens across the board making it a win win thing.

Great that Putin is going to lower my yearly gas bill----

[kaur]

Can Europe survive without Russian gas?
- replacing 130 bcm of natural gas imports from Russia within a year would be a significant challenge, but not impossible

by Georg Zachmann on 21st March 2014

http://www.bruegel.org/nc/blog/detai...t-russian-gas/

[OUTLAW 09]

Firn---here is an indication that the sanctions are slowly winding it's way through the Russian economy when just one bank is initially hit.

Interfax:

21:27 Fitch revises Gazprom's, Russian Railways' issuer default rating to "negative"

[Stan]

Just a quick thought herein.

Vova doesn't give a Sierra about his own and anyone that has been to Moscow will immediately see that.

If we think he feels some remorse with Russian Railway ratings, then think again.

In 2007 he decided to show Estonia just how far he would go by shutting down rail transit to the Muuga Harbor. He can cut off 97% of all rail which will effectively slam shut business here and trash his profits.

Western mindset will not get the West anywhere.

[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.

[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