The Russian economy (catch all)

[davidbfpo]

This thread was requested to cover the position of the Russian economy and its international transactions. A large number of posts have been removed from the Ukraine thread.

As will be clear the Russian economy is fragile, largely due to the dependence on gas & oil and to a lesser extent gold exports.

There are a number of current, seperate threads on Russia covering politics, the military, terrorism, politics & power and more.

[Firn]

So far the blood has only run in the stock market, with the Russia RTS losing around 10%.




Of course the other European markets suffered also but 'only' around 2%. This actually means that more capital was 'burnt' in the West, but of course it is far easier to absorb those losses.

More important then the Russian Market Crash was the fate suffered by the ruble:







Perhaps the most telling aspect of the rumbling was that it happened despite two powerful actions by the Russian Central Bank. They used both major tools to support the own currency. Still it got rumbled pretty badly.

1. Russia’s central bank has announced an emergency interest rate hike this morning, raising its key borrowing rate from 5.5% to 7% after seeing the ruble crash to new record lows against the euro and dollar. (copy&past from the Guardian)

Paweł Morski @Pawelmorski
Follow

150bps rate hikes on an economy that was already as sick as a dog. Crimea not looking like an easy victory from here. #Russia
8:21 AM - 3 Mar 2014

2. They did also try to directly bolster the ruble at the tune of over $10Bn

Steve Collins ‏@TradeDesk_Steve 2 Std.

Russian C.Bank has sold over $10Bn to support

So far the war was not cheap and that after all that money thrown at Sotchi.

LukeReuters 24 Min.

What with the cost of the Sochi Olympics and efforts to prop up the rouble, #Russia has spent about 3 pct of its GDP ($61 bln)

The rise in interest rates may be the bigger problem for now for most people.

[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]

VTB Bank Chief Slams Law Penalizing Visa and MasterCard, for good reasons. There are quite a few indications that Putins military adventures were initiated and are still controlled within a narrow circle of mostly ex-KGB men. Economic considerations had very little impact on the decision making, which clearly surprised many in the Western world which believed in the 'change by trade' or at least stabilization by economic integration.

Andrei Kostin, head of Russia's second largest bank VTB, on Friday branded a recent law that could push Visa and MasterCard out of the Russian market "excessive," and said Russia could not risk losing the two U.S. payment systems.

Visa and MasterCard, which together process about 90 percent of payments in Russia, "must stay and work here. We shouldn't fall into 'Ura!' patriotism," Kostin was quoted by Interfax as saying in a panel session of the St. Petersburg International Economic Forum.

Keep in mind that this was at the very least partly addressed at the international business community. Personally I think that whatever the intention, there is more then some truth in his words, especially after the latest numbers bv VTB which were rather grim.

VTB's shares fell 3 percent in Moscow.

The bank said its provision charge for bad loans more than doubled in the first quarter to 47.6 billion roubles ($1.4 billion), hitting net profit which fell to 400 million roubles - far below analysts' forecasts of 12.9 billion.

"They charged a lot (for provisions) and the cost of risk was far above our estimates," said Gazprombank analyst Andrei Klapko.

VTB's non-performing loan ratio jumped to 5.8 percent of gross customer loans from 4.7 percent three months earlier. Its retail bank VTB 24 has "considerably reduced approval rates for the riskiest customer segments", the bank added.

Return on equity (RoE) - a measure of a bank's profitability - sank to 0.2 percent from 8.1 percent a year earlier, putting it far below European peers.

I have no doubt that the Kremlin will indeed prop up VTB, as Putin promised, to avoid a big shock to the Russian economy. However with VTB reducing lending overall the economy will indeed suffer from capital, especially for the smaller private sector.

Russian President Vladimir Putin promised at an investment forum on Friday the government would help systemically-important banks by allowing them to convert subordinated loans to shares. That would boost their capital positions and free them up to lend more in support of economic growth.

"We are currently working with the government in relation to a potential conversion of subordinated debt provided in 2008-2009," VTB Chief Financial Officer Herbert Moos said on Tuesday. This would be converted into preferred shares.

"We expect that this conversion would materially improve our Tier One (capital) ratio and we expect that this conversion would be completed by end 2014," he said.

The CFO's name sounded interestingso I googled him. Born in Russia, he graduated from Kviev university and worked for Lehman Brothers, getting a degree from the LBS. His quote from April 2013 looks a bit unfortunate now, for which I can't blame him:

Unlike European banks, which tend to raise capital to fill holes in their balance sheets or respond to regulatory requirements, we will use the new capital to fund growth.

[JMA]

VTB Bank Chief Slams Law Penalizing Visa and MasterCard, for good reasons. There are quite a few indications that Putins military adventures were initiated and are still controlled within a narrow circle of mostly ex-KGB men. Economic considerations had very little impact on the decision making, which clearly surprised many in the Western world which believed in the 'change by trade' or at least stabilization by economic integration.

Considering the billions spent on 'intelligence gathering' by the US and western countries the failure to foresee an aggressive response from Russia supports the need to reform and restructure intelligence agencies. Does anyone think shutting down the CIA would have a negative impact?

[Fuchs]

quoting myself:

It's long overdue to recommend Krugman's blog post "Globalization
and Macroeconomics". These days experience a high tide for remarks
about how very much connected certain counties are economically
and how this affects the risk of war.

The sad truth is, the European countries were trading very much
(despite tariffs) prior to 1914, and the Great War still happened.

[Firn]

@Fuchs: I have read it some time ago and it should be clear that trade interactions don't put an end to war.

Personally I feel that there might be a (strong) tendency that beneficial trade integrations does indeed lessen the dangers of war between two entities. Of course there is always the danger that the guy(s) in power care much more about their personal goals, which can work for some time.

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The Ukrainian thread is locked and Crimea is right now doubtlessy under control by Russia so I will post it here.

Faced with spiraling price inflation, Crimean Prime Minster Sergei Aksyonov threatened price-hiking retailers on the peninsula with "coercive measures" and canceled licenses.

Since Russia annexed Crimea from Ukraine in March, the price of many goods has doubled, the head of Crimea's Trade Union Federation, Vladimir Klychnikov, told Interfax.

Aksyonov said retailers of food and medicines would be first in line for authorities' attention.

In the other thread it became quickly obvious that Crimea with it's 2M people is difficult to supply if the trade routes to Ukraine are cut or disrupted. The harbours lack capacity. Inflation is inter alia the logical consequence. The loopsided nature of the brave new Crimean economy was also a pretty safe bet. Tourism has been hit even harder then I imagined due to Putins adventures in Eastern Ukraine. Some time ago the NCC water channel was said to have been cut, we will see how that develops....

[Firn]

Today it seems the KyivPost has a rather sad article on the impact the lack of irrigation water has on the Crimean agriculture. As we saw a long time ago Crimea depends on the rest of the Ukraine for it.

Saidablyayev’s potatoes, like everyone’s crops in Pervomaysk, rely on the North Crimea canal. This Soviet engineering project of the 1960s-70s delivers 1.8 billion cubic meters of water annually from the Dnipro River in Ukraine to Crimea, providing over 80 percent of the peninsula’s water. Usually the canal sluices are opened in March, in time for spring sowing. This year, following Russia’s occupation of Crimea in March, and a Russian law incorporating this Ukrainian territory into the Russian Federation, Ukraine instead reduced the flow to the lowest possible volume of just seven cubic meters per second. Crimea has few water sources of its own, particularly in the north and southeast. Farms throughout these regions are now completely deprived of water for irrigation.

It will hit the Crimean economy very hard, especially those in the North where mostly Ukrainians and Tartars live. The lack of tourism will be felt mostly Russian-speaking areas, although Russia-speakers have a far higher share of public workers and retirees.

[Firn]

After the specific look at Crimeas economy it is well worth to give a glance at Russia's economy as a whole.

Service and manufacturing are contracting

SBC's Russia Services purchasing managers' index, or PMI — under which values above 50 signify growth, and below 50, contraction — fell to 46.1 in May from 46.8 in April.

The PMI figures — based on monthly polls of executives at 300 private companies — also showed that manufacturing output in Russia contracted for the fifth month running, though less swiftly than in the services sector, pulling the composite output index to a five-year low of 47.1.

Pension funds targeted to offset failed bond issues

State pension funds in Russia — where the greater part of the country's 2.5 trillion ruble ($71 billion) pensions pot is stored — have long been stoppered by laws that severely restrict their investment activities. But over the past year the wheels of reform have been turning, the Finance Ministry said, and the floodgates may be opened on Jan. 1, 2015.

The influx could relieve an economy on the edge of recession and with restricted access to overseas sources of finance in the aftermath of Russia's annexation of the Crimean peninsula from Ukraine in March.

Overall almost all of the economic news leads to the conclusion that Russias economy is growing at best slightly above zero. Personally I think that it is more likely that has already started a recession.

The longer Putin promotes terrorism against a neighbour, the more likely deeper economic damage at home will be.