The Russian economy (catch all)

[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.

[Firn]

Now to the more certain grounds of economics:

Playing Russian Roulette With Sanctions and Oil Prices

Enacting sanctions against a country supplying 12% of the world's oil sounds like a one-way ticket to a price spike. But that ignores Russia's other role as an oil consumer.

Over the past five years, Russia has accounted for 11% of the world's growth in oil consumption. And sanctions look more likely to affect that than the supply side.

...

Meanwhile, Russia sustaining an oil embargo of its own looks untenable. Excluding oil revenue, its current-account and fiscal deficits would have both exceeded 10% of gross domestic product last year, according to the World Bank.

A short look at the Russian papers for interesting economic bits:

3. Alexei Shapovalov article headlined "They are united in consumption" says that Russians have begun spending their savings given the weakening ruble rate and a price hike; pp 1, 6 (754 words).

Higher inflation is of course on it's way so it sounds plausible that consumers try to consume now rather then later. This should give the economy a short-term demand boost, although it's size depends on how much of it is spent of goods from evil Western foreigners.

[Dayuhan]

Russia does export significant volumes of oil and gas to Asia, though much less than it sends to Europe. Asian buyers are much less likely to participate in sanctions imposed over Russian actions in the Ukraine.

Russia can significantly increase sales to Asia, though there are serious infrastructure constraints and the shift will take time... just as it will take time for any prospective US exports to have any impact on European supply issues.

Some discussion of the question of the US supplying gas to Europe here:

http://www.platts.com/latest-news/na...ssian-21392003

http://www.miamiherald.com/2014/03/2...s-natural.html

From second citation above:

Europe relies on Russia for nearly a third of its natural gas, a fact that Russian President Vladimir Putin uses to his political advantage. But it is questionable how much increased American exports could hurt Putin, since most are destined for Asia, not Europe, and are years from reality.

The global consulting firm IHS Energy said in a new report that U.S. exports of liquefied natural gas, known as LNG, “can have no real” impact on the Ukrainian crisis, a conclusion that echoes other analysts.

“Much attention has been focused in recent weeks on the potential for U.S. exports of LNG to help Europe offset its dependence on Russian gas,” the report said. “Although the United States is currently on track to become one of the world’s three major LNG exporters by 2020–22, IHS Energy expects the ultimate impact on European gas supply to be limited.”

Natural gas prices are far higher in Asia than Europe, so companies are more interested in exporting to the hungry Asian market. The European countries most dependent on Russian energy don’t even have terminals for receiving U.S. liquefied natural gas and receive their energy by pipeline.

I get the feeling that much of the talk of US gas addressing Europe's dependence is intended less to influence the situation in the Ukraine than to influence domestic debate on fracking and on the Keystone pipeline.

It is worth noting that right now the US has no LNG export capacity at all, something the Lituanians at least don't seem to realize:

http://www.bbc.co.uk/news/business-26724081

The terminal under construction at Sabine Pass, TX could export in 2015 or 2016, Freeport TX by 2017. Much of their output is already committed to Asian buyers. Most other proposed terminals are in the approval or early construction phases. US gas is not going to come rushing to Europe's rescue. There will be a displacement effect, as US imports are eliminated and eventually as US and Australian exports to Asia leave Middle Eastern gas looking for buyers... but that's not even close to being a short term solution.

http://online.wsj.com/news/articles/...89130300876450

Another fairly clear assessment:

http://www.forbes.com/sites/kensilve...gainst-russia/

Good summary quote from the BBC link above:

"So, who is more reliant on whom? This has more to do with the exercise of political will rather than of economic leverage."

[Firn]

Gazprom raises gas prices for Ukraine by almost 50%.

The government of ousted president Viktor Yanukovych had negotiated a discounted price last year as he grappled with protests after he dropped an association agreement with the European Union.

It “follows from Ukraine’s non-performance of obligations to repay the debt for gas supplies in 2013 and the lack of 100 percent payment for the current supplies,” Gazprom Chief Executive Officer Alexey Miller said. “The gas discount can no longer be used.”

This comes as no surprise. In any case the Ukrainian government might be well advised to declare with Western help the Russian loans 'odious' and just not pay a dime. Some informations about the legal aspects, although it depends of course much on the Western political will and the take by the financial markets. The latter would likely go wild if this was done in a 'normal' situation, but I doubt that such a special case will have significant consequences.

The issue about Gazproms credit is of course more difficult from a legal point of view, as I understand it. Not paying them would make a great deal of sense but this has to be looked at in greater detail.

[wm]

Gazprom raises gas prices for Ukraine by almost 50%.



This comes as no surprise. In any case the Ukrainian government might be well advised to declare with Western help the Russian loans 'odious' and just not pay a dime. Some informations about the legal aspects, although it depends of course much on the Western political will and the take by the financial markets. The latter would likely go wild if this was done in a 'normal' situation, but I doubt that such a special case will have significant consequences.

The issue about Gazproms credit is of course more difficult from a legal point of view, as I understand it. Not paying them would make a great deal of sense but this has to be looked at in greater detail.

Over and above the debt issue, one wonders about future loss of revenue to Gazprom. Econ 101 and price theory-- as price goes up demand goes down unless the demand is inelastic. Particularly with warmer weather coming to the region, how inelastic is Ukrainian natural gas demand?

[Firn]

Over and above the debt issue, one wonders about future loss of revenue to Gazprom. Econ 101 and price theory-- as price goes up demand goes down unless the demand is inelastic. Particularly with warmer weather coming to the region, how inelastic is Ukrainian natural gas demand?

That's a good question. We already a nice graph of the Ukrainian energy consumption:



Now I found a stunning graph showing the increasing spread between the gas import price and the price payed by private costumers. Needless to say that the subventions became an increasingly heavy burden for the Ukrainian budget...



A good short-term comparision with West European and US prices:



Not much Russian favour for it's little brother under 'friendly' leadership...

Market prices for private costumers should more then double if you take into account the subvention cuts and the new Gazprom prices. Under such conditions demand will fall a lot. In the long run it is of course considerably more elastic then in the short term. The sommer months should help of course to tackle some issues. So far the industry seems responsible for most of the fall in demand since the fall of the SU, especially after 2005. A drastic case in point is the 2009 crash, prior to that the steel industry in the East did actually pretty well.

Gas contracts are an interesting topic of which I don't know much. In the past it seemed that Gazprom tried to protect it's long term revenue, cutting for example prices for E.ON IIRC from a higher contract one because it had it's margins squeezed there badly. This doesn't seem to be the case when the primancy of politics calls from Russia with love...

[Firn]

Outlaw, there is no doubt that Russia needs high commodity prices to finance it's budget. From it's production costs, especially in the future and it's budget position Russia is in a dangerous spot in the oil market.



The big technical challenges force high investments with human capital, financial capital and technology for good reasons coming almost only from Western companies. So any disruption there will lower the future Russian output. Personally I think that an engineered negative (higher prices) supply shock is less likely because the many oil-rich countries have much higher budget expenditure due to (much) higher populations and higher standard of living. See a bit of the Saudi one.

Of course oil is just a part of the commodity picture. In the important natural gas market only lots of CAPEX will allow it to switch in the long run to other costumers.

[Firn]

The 'energy weapon' is rather unwieldy as far as I can see. We discussed the postive changes which can be achieved on the own playing field. Driving down demand by increased energy efficieny, broader energy mix with more renewables and possibly some nuclear, LNG portals, more integrated piplines and grids, more strategic storage and 'battery' capacity. So the Western world can do a great deal with sound investments at home.

If you hear tough talk from guys like Maduro you should laugh at him or weep for the common folk. Oil at ~$ 75 per barrel for some years will be terrible hit in an already aweful economy...

The Russian budget is calculated using $ 95 as a baseline prediction IIRC. The Norwegians do so with $ 65.

[OUTLAW 09]

Firn---More information concerning the recent SPR sell of 5M barrels of sour crude---the same quality as sold by the Russians from the Urals.

SPR oil put up for sale on the day Ukraine’s new chief is in town

By John Kingston | March 12, 2014 04:27 PM Comments (3)

One trader speaking to a Platts reporter had this to say about the decision by the Department of Energy today to sell 5 million barrels of oil from the Strategic Petroleum Reserve.

“The Gulf Coast market has plenty of barrels,” he said. “They should have done it a few weeks ago when the Gulf Coast was tight due to all the weather delays.”

A few weeks ago, however, Arseniy P. Yatsenyuk wasn’t in Washington. He’s the interim President of Ukraine, and he’s in DC today.

It almost defies logic to think there isn’t a link. (And White House press secretary Jay Carney said there isn’t one, when asked about it at the daily White House press briefing.)

But there is no reason to sell oil now. The reason given by the Department of Energy — a test sale to evaluate its ability to distribute oil in the event of an emergency — sounds very formal and entirely believable. But such a test hasn’t been done since 1990. Why now?

The “energy weapon” that has been discussed so vehemently since the Ukraine crisis began — using US LNG and crude oil exports to weaken world prices and steal Russia’s energy customers — always had a few flaws in it. First of all, even for the terminals where LNG exports have been approved, they aren’t ready to go. Second, US crude exports are still banned, despite lots of talk of changing that.

But selling oil out of the SPR, and specifying that it’s sour crude that’s for sale — the same type as Urals, Russia’s crude grade — can be done now. Next month, in fact, 5 million barrels of oil over 30 days, for an average of just over 165,000 b/d.

[Firn]

Some news about the Russian budget

The government’s use of the sovereign funds would be separate from the 130 billion rubles allocated from the budget this year to raise state pensions and salaries in Crimea.

“Failing to observe the budget rules during stagnation is a strategic mistake,” Alexei Kudrin, a member of Putin’s economic council and a former finance minister, said by phone. “The government is tapping reserve funds instead of pursuing reforms. Augmenting the budget deficit at a time when we cannot borrow on the market is wrong.”

Russia was recently unable to sell it's bonds at it's conditions, as written earlier in this thread, the market is demanding a higher yield to compensate for the greatly increased risk. With considerably better offers it should be able to borrow on the market.

It is interesting to note that quite a few advocate against stimulating the weakening Russian economy, which seems to be heading towards a recession. The RCB is fighting a delaying action against the fall of the ruble with market interventions and the big interest raise and can hardly use the printing press to finance a defict if Putin wants one. With both the fiscal policy and the monetary seemingly tied up there is little support indeed available for the Russian economy.