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.
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
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.
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.
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