Russia faces another round of its economic crisis

The last few days have given us an old-fashioned indication of an economy in distress which is that regimes often look to cast a smokescreen over economic problems at home and potential unrest by indulging in military action and wars. An example of this has been kindly provided this morning by Russia Today.

Russian airstrikes have torched more than 1,000 tankers taking stolen crude oil to Islamic State refineries. This blow against the jihadists comes as the Russian Air Force has hit 472 terrorist targets in two days in Syria, making 141 sorties.

The Russian bear has a sore head and is flexing its muscles in response. Along the way it is sending hints elsewhere as for example by the way that its Backfire bombers have skirted UK airspace on their way to Syria and made the RAF’s day by giving them the opportunity to scramble in response. Indeed if the rumours prove true that today’s defence review will give the RAF 2 extra fighter squadrons then its messes tonight may echo to Vladimir Putin’s name. Of course in terms of economic consequences such a situation is only likely to cause further issues for the UK’s troubled public finances which continue to underperform.

Oil and commodity Prices

Another way of looking at the economic crisis for Russia is provided by the oil price. This morning the price of a barrel of Brent Crude Oil has fallen by 2% to below US $44. Now lets us add in how much oil Russia produces which Bloomberg has provided.

Output from January to October averaged about 10.7 million barrels a day, a 1.3 percent increase over the same period in 2014, the data show. That’s in line with the Russian Energy Ministry’s full-year forecast for production of 533 million tons, or 10.7 million barrels a day.

If we look back to 2011,12,13 and the first half of 2014 the oil price acted as if a tractor beam was keeping it at around US $108 per barrel as we have discussed on here in the past. So if we take these numbers forwards we see a loss to the Russian economy of the order of US $680 million per day. Now I doubt it gets the full oil price and some prices will be different to Brent Crude but this is clearly in broad terms a quantum shift for a commodity producer.

From the domestic point of view this will be insulated for a while by the fall in the Ruble which provides a short-term period of “money illusion” but as the consequent inflation washes through the system the effects will then spread. Also as Otkritie Capital point out the public finances take a large hit.

Through the tax framework, the government took the brunt of the blow, just as it used to take most of the windfall profits.

If we move to the other commodities that Russia mines and produces we see a similar story. This morning’s news on Bloomberg is like a list of things produced by Russia.

Copper fell through $4,500 a metric ton for the first time since 2009, while nickel dropped to the lowest level since July 2003. Zinc lost 2.5 percent as of 8:13 a.m. in London,

Russia is also the world’s main producer of palladium and last week we were told this.

Palladium, also mostly used in pollution-control devices, has plunged 32 percent, and prices are near a five-year low set in August.

Completing the series comes a reminder that Russia is a substantial gold producer as well and the drum beat continues. From Emirates 24/7 today.

Gold extended losses on Monday, falling towards a near-six-year low reached last week…….Spot gold had dropped 0.7 per cent to $1,070.36 an ounce.

The Ruble

This has fallen this morning so that it again requires some 66 Rubles to buy one US Dollar. If we look back to the better times for the Russian economy we see that it was in the low 30s so in essence the shift from the commodity boom to commodity disinflation and for Russia deflation has halved its currency. Quite chilling when put like that isn’t it?

We have seen quite a lot of volatility in 2015 as there was a rally to around 50 in May and a couple of times it has rumbled around 70. So we learn two things. Firstly how can Russian industry and businesses possibly plan in such a volatile environment? Secondly that rather than being a short sharp shock followed by a recovery this is something which to quote the Stranglers is “Hanging Around”. This leads to quite a different set of economic influences especially as we wonder if it will persist for long enough to be described as “temporary”?

Inflation Inflation Inflation

The September Monetary Report of the Bank of Russia summed it up like this.

Therefore, given the ruble depreciation in July-August 2015 and the elevated inflation expectations, consumer price growth in 2015 will be higher than expected – 12.0-13.0%.

This compares to a developed world average inflation rate that is in essence zero per cent and if we look to see the components we are told this.

the contribution of exchange rate dynamics to annual inflation in August was roughly 7 pp and lower demand reduced inflation by about 1 pp.

So the former tells us of  an inflationary burst and the latter tells us of a consequence of deflation. A combination which Britney has helpfully described for us.

Don’t you know that you’re toxic?

Two consequences

The first is that something which low inflation is helping in many countries which is real wages is seeing a doppelgänger in Russia. From Danske Bank today.

real wages growth (-10.9% y/y) shrank the most in 16 years

They also give us a clear consequence of this.

pushing retail sales to their lowest level since 1998 (-11.7% y/y)

Also I note that it is not a good time to be poor in Russia as a basic staple so basic in fact that central bankers describe it as “non-core” has done this.

High food inflation is weighing heavily on private consumers, posting 18.4% y/y in October and 21.2% y/y in the ten months so far.

The second consequence is much closer to home from my point of view as we note this from Bloomberg on the state of play in London’s property market.

Russian buyers acquired 4.2 percent of homes sold in central London’s best districts in the third quarter, compared with 10 percent a year earlier, according to broker Knight Frank LLP.

In Ruble terms UK property has doubled in price over the last 15/18 months as again it nudges 100 Rubles to the UK Pound £.  Russians who invested heavily in the UK in central London such as Roman Abramovich have played a bit of a blinder although it is probably best to hide such matters from Vladimir Putin.


Central banks especially ones subject to the whims of Vladimir Putin tend to have an optimistic bias so let us touch base with the Bank of Russia.

The Bank of Russia estimates GDP to contract by 3.9-4.4% in 2015…….According to the Bank of Russia forecast, GDP will fall by 0.5-1.0% in 2016 and the economic growth rates are expected to be 0.0-1.0% in 2017 and 2.0-3.0% in 2018.

As you can see things are not so good when even those with a clear incentive to get out the rose tinting can only forecast a return to growth in a period which fans of Carole King would describe as “So Far Away”.

If we move to other issues we see that Russia has quite a lot of the inflation that central bankers are trying to create on a smaller scale elsewhere and via the route (currency depreciation) which some are trying to get it albeit on a smaller scale. I think you would find that Russian consumers and workers would offer quite a critique of the effect on them.

If we move wider there is the ongoing issue of paying US Dollar denominated debt with ever more Rubles and that being deflationary in itself. Of course with interest-rates as shown below there is hardly much incentive to borrow in Rubles either.

the Bank of Russia decided to limit its key rate reduction to 50 basis points in July and cut it to 11.00% p.a.,

Added to these economic factors are the political and military which are intertwined with it. I discussed the military interventionism earlier and we also see Europe extending its sanctions but in economic terms the disruption is highlighted by this from the Wall Street Journal.

State of emergency declared in Crimea after pylons supplying energy from Ukraine are blown up.

Are we seeing inflation in states of emergency too?




11 thoughts on “Russia faces another round of its economic crisis

  1. Hi Shaun
    Russian oil tends to be priced by the Ural Blend Index. Its fallen 60% in $ since mid 2014, 20% in RBS.
    The new ‘normal’ of NIRP ( and no bank trading desks) means that abundant oil prices will reflect lower than marginal costs as everyone just chases cash flow. Not only are stocks rising from all time highs , this doesn’t take into account the vast fleets of tankers around the world lying around just waiting…

    • Hi JW

      Thanks for that I have just been looking it up. The spread with Brent crude seemed to be trading circa US $2 but now maybe headed for US $4 in another unfavourable trend for Russia as Brent Crude is higher.

      Still at least the tankers have a job and a role which seems to place them in a better position than the cargo carriers right now.

    • Hi therrawbuzzin

      Saudi Arabia sneaks into many categories. After 9-11 the likely terrorists seemed to be of Saudi origin so we invaded Iraq and trampled all over Afghanistan. Beheading is brutal when done by ISIS but apparently okay when Saudi does it.

      So the western establishment looks the other way in return for favours provided?

  2. Perhaps the RAF should concentrate on the 2 historical bottlenecks, first class pilots and first class aeroplane manufacturing capability. We had the 1930s millionaire’s squadron (who paid for their own flying) and various university and volunteer reserve squadrons. The ability to provide first class fighters was also shown to essential.

    Britain could also benefit from an industry training scheme to train reserve transport/airline pilots and avionics specialists in partnership with civil aviation industry participants. Good for jobs, benefits civil aviation by increasing the skilled employee pool affordably and good the the country in the event of a crisis.

  3. That’s an interesting analysis but a similar, quite recent fall in the value of the Australian currency has come as an enormous relief following the end of a minerals boom, with the reason for that being that Australia was suffering from Dutch disease effects during the boom.
    There is a case for suggesting that Russia has also experienced Dutch disease symptoms and that the current shock has the Russians in serious difficulty but a fall in the value of the ruble may also bring longer-term benefits.
    I know that there are enormous differences between the 2 countries. Australia has stronger non-mining export industries, stronger import-competing industries, its mines are largely foreign-owned (pretty dumb) and the government is less reliant on minerals taxes..
    But, that’s kind of the point in a way. If a fall in the ruble’s value assists by increasing the competitiveness and development of Russia’s non-mineral exporters, and import-replacing industries. If that reduces their reliance on imports and oil in the long term that may be a good thing all-round.

    • Hi Marco and welcome to my corner of the web

      The problem here is how long is the long-term or to be more specific over what time period do major investment decisions operate? My opinion is that Russia may have to wait quite some time (several years) before that begins on any scale. After all a rise in the oil price (even worse middle east conflict for example) would send the Rouble higher. It is one of the debates in economics as to how quickly expectations change and I fear that they have slowed.

      Also as you indicate what Russia has now in terms of industry is small and I wonder if many of them have the critical mass to grow on any sizeable scale. It is an issue pondered in my own country the UK where we have let some industries go. Could they ever return and if so what would cause it?

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