Russia and its economy are facing a grim 2015

The latter part of 2014 has seen a major change in the economic landscape. The oil price which was previously connected by a Star Trek style tractor beam to the US $108 level for a barrel of Brent Crude Oil turned south and has undergone quite a fall. This has been embarassing to say the least for those pundits who were signing along to this from Yazz.

The only way is up baby

So far this morning the price has fallen again and it is at US $63.42 as I type this piece. Which leaves the price some 42% lower than a year ago and in fact as the fall has taken place since late June the pace of the move has been astounding. I used to work with a colleague who used bowl theory for this sort of fall where the fall accelerates until the chart breaks the shape of a bowl which is then followed by a short-covering rally which is invariably sharp and short.

That style of forecast is for the future but for the present the economic world mostly benefits from this change via lower prices and a reflationary impact. This is of course not true for the oil producers and today I wish to look at the economic turmoil that is being inflicted on Russia by this.

The Rouble

It was only on the second of this month that I looked at the state of play and observed that it now took 51.7 Roubles to buy a single US Dollar. That was already quite a change on the 34 it took only last summer. This morning it has fallen to yet another new low of 57.7 Roubles to the US Dollar. So whilst its fall has coincided with the oil price fall the scale of the fall has been even faster. For people holding Roubles there has only been one song playing on the radio and it is from Aloe Blacc.

I need a dollar dollar, a dollar is what I need
hey hey
Well I need a dollar dollar, a dollar is what I need
Well I don’t know if I’m walking on solid ground
Cause everything around me is falling down

As a first move as the Rouble has fallen faster than the oil price it will appear that Russia is better off. In terms of Roubles per barrel of oil produced that is so but that is only a brief step one in the situation. The catch comes when Russians try to buy anything from abroad as in Rouble terms the prices will have shot higher and then as time passes more and more of this will feed into domestic prices in Russia. So the money illusion will fairly swiftly turn into a much grimmer reality.

What about inflation?

Here is something which is heading in the opposite direction to the disinflationary mantra of these times. From the Bank of Russia yesterday.

In November — early December, inflation continued to accelerate. According to the estimates as of the 8 of December, annual consumer prices growth rate was equal to 9.4%. Core inflation rose to 8.9% in November 2014.

Amid accelerated consumer prices growth, households’ and businesses’ inflation expectations continued to surge imposing additional pressure on prices. According to the Bank of Russia estimates, end of the year inflation will be around 10%.

The Bank of Russia believes that around half of the present rate of inflation is due to the current extraordinary situation including the Rouble fall and the restrictions on some imports. This compares to an inflation target of 4% although you will not be surprised to read that the date the Bank of Russia expects to achieve this is receeding fast into the distance.

Interest-Rates

Regular readers will be aware that the Bank of Russia has established a policy where the interest-rate needs to be above the consumer inflation rate. Accordingly it responded yesterday to the situation.

On 11 December 2014 the Bank of Russia Board of Directors decided to raise the Bank of Russia to 10.5 percent per annum.

So we see that it is not only inflation which is out of kilter with the economic world but interest-rates too. Of course the two situations do tend to arrive as a job lot and the interest-rate situation extends up the yield or maturity curve. The ten-year government bond yield has risen to 12.67% which does look really out of place in these times. That is reinforced by the fact that it is well above the 8.71% of Greece which is in a new crisis and quite how one compares it to the new price highs and yield lows of Germany today is something of an issue to say the least. More than 12% higher per year in terms of yield is quite a gap.

You can argue as to whether the real cause of the latest interest-rate hike was the inflation situation or the currency situation but of course it does not matter greatly right now as they are progressing hand in glove.

What about a credit crunch?

Well according to the Bank of Russia one is on its way.

According to the estimates as of the 1 of December 2014, annual money supply (M2) growth rate decreased to 4.8% from 14.6% a year earlier………. Given the decision made today and time lags of the influence of the interest rate decisions made by the Bank of Russia earlier, on the economy, this process will continue.

Looking at numbers such as those makes me think “and the rest” as I read this part of its statement.

During the next three-year period, economic growth will be lower than previously projected in the baseline scenario due to persistently lower oil prices.

Adding to the credit crunch will be the issue of the foreign currency denominated debt which I discussed on the second of this month.

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.

We wait to see what Russia will do to protect its banks from such dangers and of course how the west will decide to play this. After all bank losses are usually socialised and passed onto the taxpayer these days.

Comment

The last few weeks have seen various downgrades to expectations for economic growth in Russia in 2015. The official view is that we will see a mild recession but reality is looking a lot grimmer than that. With some much of Russia’s economic output being oil and gas based there are obvious issues in a much lower oil price. Added to this is the fact that any  positive response to the Rouble fall by Russia’s manufacturers and other businesses is restricted by their relative size in the economy and the impact of economic sanctions. Accordingly we can not expect much from them. In a way the current position here is symbolised by the news that Google plans to pull out of Russia although I am sure that it is not only economics that is behind this move.

Russia can respond by intervening to support its currency as it has done this morning but that only provides a short-term rally and often does not survive that day. More interesting is the way that it is trying to arrange non-western trade deals and arrangements. From Power Engineering.

Russia and India have agreed to jointly build at least 10 new Indian nuclear reactors by 2035.

At a press briefing on Thursday, Indian prime minister Narendra Modi and Russian president Vladimir Putin (pictured) announced that their nations aim to strengthen what Putin called a “privileged strategic partnership”.

Oh and as to the behaviour of the Rouble well these is this from Paul Simon.

I’m afraid that I will disappear
Slip slidin’ away
Slip slidin’ away
You know the nearer your destination
The more you’re slip slidin’ away

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23 thoughts on “Russia and its economy are facing a grim 2015

  1. Hi Shaun
    India also made a statement about Russia continuing to be its major arms supplier, something about ‘special relationship’. As India is cuddling closer to US these days, its interesting to see how wide its ‘3-legged stool’, non-aligned mantra will go before it falls over.
    New ‘cold war’ equalls economic warfare, stupid by both sides. Putin’s attempts to by-pass the USA in trade is doomed to failure , it will take far less time to collapse than the old USSR in our totally interconnected ‘financial’ world.
    More thoughts on oil price. You will recall postulation some 3/4 years ago as price moved up that it was mainly due to ‘black’ financial contracts in place. There was also talk that as these unwound there would be a precipitous fall in price. With far less bank trading in commodities these days there is little to stop the fall in what amounts to be financial indices. No-one really gets paid ‘Brent’ at the well head for oil extracted, its used as an index in contracts , as is WTI. For instance North Dakota well head prices are roughly $15 less than WTI because of transport costs, ditto Canadian heavy. However most operators have hedged their contracted output some time ago, it is said at about the $70 level for 18 months or so. I mention Canada and Dakota because N America consumes most oil so the actual price paid has most relevance.

      • Hi ExpatinBG
        Did I say WTI was more relevany than Brent? No, I said both were used as indices in financial contracts. My point was that actual prices paid for the actual commodity at well-head reflected a lot of factors , especially transportation problems with N American oil.
        My other main point was that the rise and fall of ‘Brent’ ( or WTI) has much more to do with financial contracts, futures, options and CFDs than the actual price paid for oil which is heavily hedged forward by operators. In particular there is a thesis that the rise and now fall is a lot more to do with the unravelling of huge financial positions entered into by the likes of BP several years ago, than actual physical supply and demand.

        • No, JW you didn’t say either was more relevant. My point related to the expansion of Brent futures volume and that I suggest WTI will lose relevance unless the USA repeals the crude export ban.

          I’d also thank you for your very well informed posts, which are always worth reading.

      • Why would the export ban on WTI distort its market?
        Unless the WTI was more than enough to supply ALL US’s requirements for that type of crude, or buyers were being compelled to buy, where would the distortion occur?

    • Hi JW

      We never get to do a test tube experiment in economics. However the ending of much of the commoditisation and collateralisation looks to be a major factor in the size of the oil price fall. It would appear that our finacial sector not only imploded but it drove up the cost of living via commodities prices. Oh what a mess…

  2. Whoever follows Putin will be much, much worse.
    The West’s current alienation of Russia seems to me to be extremely shortsighted, and to carry huge risks- and it won’t be the USA which suffers the consequences.

    • Hi Mick C. I’m with you. Russia is like a wounded bear and it matters not whether the oil price attack is an intentional financial assault or not, once combined with sanctions there is a likely perception through paranoia as much as anything and they could do some pretty stupid things. If you observe how out of kilter they are with “western values” for example: gays are also kiddy fiddlers, brute force is common in place of negotiation or diplomacy, racism is built in, personal health is very low on any agenda, population is falling rapidly and little prospect for immigration unless any of you readers wanna go there? Peoples lives are already significantly hard. You would not want USSR to go failed state, imagine ISIS taking it over as an expansion of Levant….

      • You do know that the USSR ended years ago?

        Russia is a beautiful country with many wonderful people, like most other countries in fact. Generally they openly discriminate against gays and black people, but not extravagantly so. You can see the nationalist tide rising in Russia, and it is in direct response to what is seen (probably correctly) as US hostility, expressed in many different ways in Syria, Ukraine and no doubt in the UK.

        If Putin is replaced then it will only be his relative moderation that undoes him, we could be in deep do-do if he goes.

  3. I wonder why vastly cheaper oil isn’t translating into cheaper gas prices? The gas suppliers were quick to use the oil excuse to increase prices when oil was on the way up but now there appears to be a deafening silence!

    • Hi Pavlaki

      We are now getting falls in petrol and diesel prices at the pump in the UK as the supermarkets cuts prices again yesterday by 2 pence for petrol and 1 pence for diesel. However I have not seen any price cuts from domestic energy suppliers in terms of electricity and gas prices as you say. Are they asleep?

    • Hi JohnM and welcome to my part of the blogosphere

      Thanks for the link about which I would like to highlight 3 issues.

      1. “Russia has only about $678 billion in foreign debt, which it’s been vigorously paying down from the high of $732 billion” Only? Also if US $52 billion is vigorous what is the US $678 billion left. In Roubles the burden and interest costs have risen considerably.

      2.”Although GDP growth has slowed from 2012’s torrid 4.25% pace, it’s still projected to come in at 1%, no worse than 2013.” By whom? As even the Bank of Russia does not think that.

      3. “Russian oil companies earn dollars abroad for their exports, but spend rubles domestically. That means that their extraction budgets remain unaffected and, additionally, it ensures that government tax receipts won’t drop precipitously.” Initially there will be a type of money illusion but inflation is over 9% and rising so the illusion is already beginning to disappear.

  4. Hello Shaun,

    The current oil over supply is the reason for the drop in price ?

    or is it lack of buyers ?

    Have you seen the traded index , theres an awful lot of activity going on , me thinks this not fundamentals here but computer trading ? like when it went to 147$ ?

    If the Russians can hold out I think they will be ok , but theres a lot of capital to burn through to support the Ruble . Maybe this is just another ploy to hurt them by the West ? If so how much this is costing us ?

    Killing the LTO in America.

    Alternative markets sought by Russia has to be a long term plan , so what should we do to stop them ?

    Cause some short term pain , we;re the big boys yer know ……… ah maybe I see now ….

    Forbin

    • Hi Forbin

      There is a game of “last man standing” going on here I agree. Although the moves may not be as intentional as it may appear if as JW and I have discussed earlier in the comments that it is the withdrawal of the banking/financial commoditisation of oil which has contributed to the drop. The other side of the coin is much less friendly as they helped drive the price of oil up.

      As to the demand issue then the more this is a factor the grimmer the current outlook becomes as the lower prices will take time to have a reflationary impact.

      Our establishment are probably wondering, whats a long-term plan?

      • dunno Shaun

        if the price wasn’t driven up – would we have had the LTO shale boom , theres about 3 million more BoE put on the market because of the high price

        That price is evaporating

        given the rapid drop of these wells production and the fact they are unprofitable to start new wells now ( current ones I’d suspect will be re-fracked as they usually are ) would suggest a tight market around , well , May give or take a month……..

        Shame petrol doesnt store well , eh ?

        Forbin

  5. How many other pro-Russian (in terms of trade) will the EU and the US seek to destabilise in this war, seeing how their activities backfired in Ukraine?

    • Hi therrawbuzzin

      This of course follows activities backfiring in Iraq and Afghanistan. I often think of this when British generals are paraded on television speak as if they are experts on military activities. The reality is that they let ridiculous military strategies be imposed on them by politicians and a mess has resulted. I doubt that history will be very kind to them.

      • … and Syria.

        According to the Russian press the US is lining up Belarus after lukashenko goes. If true then that’s entirely gratuitous, as the US certainly doesn’t have any legitimate interest there.

  6. Russia has needed reforms, especially to it’s legal system for many years. Company ownership can be altered via trumped up charges for the benefit of political insiders. Questionable property rights is extremely toxic for business investment.

    Transparency Intl records that Russia slipped back to a score of 27 in 2014, giving it position 135/175. A rich, educated country should do much better.

    As for conspiracy theories about the West “economically lowering the oil price to attack Russia”, sorry but I debunk them with
    1) Western governments cannot even accurately predict their own inflation rates, so it’s hard to believe they can suddenly and competently manipulate the oil price.
    2) Ditto for Western Banks, after their subprime incompetence (etc) it’s hard to believe they could competently manipulate the oil price. (Though they have had lots of practice manipulating LIBOR)
    3) Writing has been on the wall for years – http://www.economist.com/news/europe/21589455-will-stagnating-economy-bring-about-much-needed-structural-reform-s-word

    • Hi ExpatInBG

      The theme of reform in Russia takes me back to my schooldays. Back then I studied the period of Peter the Great (1682-1725) and it all seems rather familiar. As the History Learning Site puts it.

      “He centralised government, modernised the army, created a navy and increased the subjugation and subjection of the peasants. His domestic policy allowed him to execute an aggressive foreign policy.”

  7. Interesting to see the lack of effect sanctions appear to have had, the oligarchs have still got their money safely tucked away overseas and have no problem going to an Apple store wherever else they have a nice home – it is the rest of Russia that wil suffer for this, and Putin loves to see himself as the man who will lead out of misery

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