The economic feature of the latter part of 2014 has been the fall in the price of oil and indeed commodities in general. For the world economy as a whole this will provide an economic boost but there is also a transfer of income and indeed wealth taking place as well. This is from commodity and oil producers to consumers of these products. At the forefront of those suffering is the Russian Federation which lest we forget depends heavily on its oil and gas exports. According to the US Energy Information Authority the situation is as shown below and the emphasis is mine.
Russia is a major exporter of crude oil, petroleum products, and natural gas. Sales of these fuels accounted for 68% of Russia’s total export revenues in 2013, based on data from Russia’s Federal Customs Service. Russia received almost four times as much revenue from exports of crude oil and petroleum products as from natural gas.
If we start to calculate the mathematics of the impact on Russian trade then the word is ouch! In 2013 the (Brent Crude) oil price averaged US $108.64 which as an aside nicely fits Forbin’s rule back then that it was revolving around US $108. However the month of October saw the oil price average US $87 per barrel which already was showing a 20% drop. Now of course the oil price is more like US $72 per barrel meaning that Russian exports of oil have fallen in value by 34% currently. Should that persist for any length of time it will be like exploding a torpedo in Russia’s export performance especially as gas prices will be lower too.
Russian government finances will be hit too
According to the EIA it was not only exports which were dependent on oil revenues.
Oil and natural gas activities make up a large portion of Russia’s federal budget. According to the Ministry of Finance, 50% of Russia’s federal budget revenue in 2013 came from mineral extraction taxes and export customs duties on oil and natural gas.
Looking forwards those taxes will be applied to companies that have a lot less revenue and any percentage taxes will be on lower sums. Although there are two nuances to this. Firstly the fall in the value of the Rouble will boost government revenues but as the subsequent inflation ravages the system each Rouble will buy less. So things may look okay for a while but in a “surprise” will then turn much worse.
Russia’s government bond market seems to have got the message as the worldwide trend to lower bond yields has passed its borders by if a benchmark ten-year yield of 10.67% is any guide.
What about economic growth?
The European Union autumn economic forecast told us this just under a month ago.
Moreover, since the Russian economy remains
highly dependent on oil-related income, a stronger
decrease in oil or gas prices could further add to
I think we can safely say that has now happened, and of course it comes on the back of this which I discussed on the 3rd of November.
On 31 October 2014 the Bank of Russia Board of Directors decided to raise the Bank of Russia key rate to 9.5 percent per annum.
I thought that this alone would send the Russian economy spiralling into contraction territory. Actually the Russian government seems to have been catching up with this line of thought.
@jsblokland Breaking!>Russia’s government expects economy to shrink 0.8% in 2015!
It was only eighteen months ago that forecasters were predicting 4% annual economic growth in Russia in 2015 so there has been quite a turn-around. Frankly if oil prices stay at the current levels it could turn out to be -4%.
What about the Rouble?
It saw something of a collapse yesterday and of course this came on the back of previous falls. At such times exact prices are hard to find but the Financial Times has reported it thus.
At one point the rouble hit a record low of 53.86 per dollar – a move of 6.5 per cent, according to Reuters data – though it later pared some of its losses.
There has been a rally since which has pretty much tracked the oil price and it now takes 51.7 Roubles to buy a US Dollar. Back on the 3rd of November I reported it thus.
it is facing a currency which was at 34 to the US Dollar at the beginning of July and is now at 43.3 for a fall of 27%.
So since July it has dropped by more than 50% against the US Dollar. No wonder President Vladimir Putin has been on the news wires regularly to say that Russia will abandon the US Dollar! The catch is that others would have to accept Roubles.
The other side of the collapse in the value of the Rouble is a considerable upwards push to the rate of inflation. Russia can cushion itself with its fuel and energy prices should it so choose but anything that is required from abroad is getting more and more expensive. Thus Russia has decoupled itself from the world trend towards disinflation. According to its central bank the state of play is as follows.
given the inflation of 8.6% p.a.
On this subject Bank of Russia Governor Nabiullina is quite outspoken.
As a matter of fact, inflation is a tax on the poor. According to opinion polls, the rapid price growth remains the key problem for the population.
Also with inflation set to move into double-digits there has to be doubt about the feasibility of the inflation target.
The Bank of Russia acts step by step focusing on the smooth slowing of inflation down to 4% in the course of the next three years.
Oh and if you think that Russian inflation is going higher then get set for higher interest-rates too.
That is why the deposit rate and, therefore, lending rate cannot be lower than inflation.
There is a danger of a downwards spiral here as we note that one has already been in play.
What about foreign debt?
Russia itself only has a small amount of foreign debt but the situation according to the Financial Times is very different for its business sector.
According to the central bank, banks and other companies have $614bn in external debt, with $31bn of it due for redemption in December and another $98bn before the end of 2015.
It is not so easy paying that in depreciated Roubles is it?
This one is an intriguing conundrum as of course western banks would be hit hard by defaults in this area and we know that they are the “precious” which must not be harmed. So a change of tack would not be a complete surprise.
There are several factors to consider here. We firstly need to step back and look at the overall picture as financial markets are very volatile and both the price of oil and the value of the Rouble have dipped since I started writing this post! When we do so we see that even a central bank with considerable foreign currency reserves and a willingness to raise interest-rates considerably has found itself like King Canute and his failure to resist the tide or if you prefer King Lear railing against bad fortune on the blasted heath.
This leaves the Russian economy with several feet pressing on the brake pedal. Firstly we have the interest-rate rises, followed by rising inflation sending real wages negative, then falls in output and the trade balance driven by the energy sector and lastly weakening government finances. Against that we saw earlier in the trade numbers the small size of Russia’s manufacturing sector so even if it benefits from a lower Rouble the overall impact will be small. Let me hand you over to Britney Spears for a summary of all this.
Don’t you know that you’re toxic?
It’s getting late
To give you up
I took a sip
From my devil’s cup
It’s taking over me
Toxic for Bulgaria?
If the South Stream pipeline project is now abandoned as Russian President Putin stated yesterday there will be considerable economic costs for Bulgaria too.