The month of June has seen the return of a trend that was very prevalent in the latter part of 2014 and early part of this year. That is the return of commodity and particularly oil price disinflation. As I type this the price of a barrel of Brent Crude Oil is below US $53 meaning that it has fallen some 16% in July so far and is some 51% lower than a year ago. For many this is welcome as they hope for lower fuel and domestic energy costs but there is another side to this coin for the commodity producers. Towards the front of that particular pack we find the economy of Russia which is being hit by the turbulence from this one more time. Also thrown into the mix are worries and concerns about what the US Federal Reserve may do next which are apposite today as it meets.
One way of tracking commodity price moves is simply to watch the value of the Rouble especially against the US Dollar. I note that the value set by the Bank of Russia this morning is 60.22 Roubles to the US Dollar whereas it we go back to the middle of May the level was around 50. So whilst we are not back to the crisis levels of 70+ which were seen in mid-January the heat is on again.
This morning the Bank of Russia has confirmed the pressure it has been under.
On suspending operations to replenish international reserves
On 28 July 2015, the Bank of Russia suspended operations to replenish international reserves due to increased volatility in the domestic FX market.
They are being a little bit economical with the truth here with “increased volatility” when in fact they mean lower value for the Rouble. They had been topping up their foreign exchange reserves taking advantage of the previous bounce in the Euro and Dow Jones provides the detail.
It has been buying up to $200 million a day since mid-May to prop up reserves that shrank in the past year as the result of massive capital flight and economic headwinds, prompted by a plunge in oil prices and Western sanctions.
So we learn that 60 Roubles to the US Dollar is a step too far for the Bank of Russia as we wonder what level will make it intervene the other way? It does still have a substantial ammunition locker.
As of July 17, the reserves stood at $358.2 billion.
However there is a nuance here which is that we learned last time around that markets focused as much on the size of the interventions and the rate of depletion as much as they did on how much remained. This will return again if Rouble currency traders continue to sing along with 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
Bank of Russia
Another feature of monetary policy in Russia is shown below.
On 15 June 2015, the Bank of Russia Board of Directors decided to reduce the key rate from 12.50 to 11.50 percent per annum, taking account of lower inflation risks and persistent risks of considerable economy cooling.
Immediately noticeable is the a level of interest-rates which really stands out compared to the -0.2% of the Euro area on one side and the 0% of Japan on the other. No wonder they are trying to reduce it! However there are two constraints on this, firstly is the level of inflation caused by the original Rouble drop and secondly there is the new Rouble drop.
Even the Bank of England would struggle to overlook this. From StatBureau.
At the same time, 2015 year to date inflation rate is 8.52% and year over year inflation rate is 15.29%.
Ironically the monthly rise in inflation was a relatively modest 0.19% in June as the bounce back in the Rouble took effect. In essence though the 15% or so annual inflation rate has been the story of 2015 for Russian workers and consumers. I recall the Governor of the Bank of Russia telling us that she would keep interest-rates above the rate of inflation to reduce it. But as you can see that strategy found itself abandoned rather quickly and we wonder if a call came in from one Vladimir Putin with some advice.
Back on the 12th of December last year I pointed out that trouble was on the horizon.
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.
If we bring things up to date then here it is from Reuters yesterday.
While gross domestic product continued to decline in year-on-year terms in June – down 4.2 percent compared with 4.8 percent in May – seasonally-adjusted output fell just 0.1 percent month-on-month.
As you can see there has been a lot more than a mild recession in 2015 so far and like the inflation numbers there was a hint of some improvement but of course that predates the latest decline in the Rouble. Back then the Markit business survey (PMI) was optimistic too.
The Russian economy continues to show signs of improvement, with business confidence maintaining a steady strengthening from the record low seen last October.
The return of the price of oil to a bear market has had pretty much the same impact and effect on the Russian Rouble. This brings back the fears of early 2015 for the Russian economy as we see inflation persisting and economic activity unable to fully respond. This is highlighted by what on its own is an optimistic view of oil production.
Platts Oil. Russia’s economy ministry sees 2015 crude oil exports up 6.2% on year at 4.766 mil b/d on growing crude production, current tax regime.
Revenue will still be down heavily if the oil price remains around 50% lower than it was last year. Also life remains very tough for the ordinary worker and consumer in Russia if we note this from Reuters.
Nominal wage growth – 7 percent in June – has been running at less than half the headline inflation rate of 15.3 percent.
Thus consumption is likely to be under further pressure too as that real wage fall is sharp and of course gives us yet another glimpse of what is one of the major themes of the credit crunch era.
Also Russia’s finances will be under more and more pressure.
Before last year’s oil price collapse, Russia based its long-term budget plans on an oil price of $100 per barrel – almost double the present price of just over $50 per barrel.
Thus we see that the current phase of oil price weakness means that an economic winter will be on its way for Russia again. I tend to think that it is coincidence that this is happening just as some hints of stabilisation were showing but there will be no shortage of conspiracy theories too. Still over to you Bank of Russia.