One of the themes of this blog over the past year or so has been that the fall in the price of crude oil and other commodities is good overall for the world economy. Mostly the argument revolves around the fact that there are a lot more oil consumers than producers as we note that lower consumer inflation has pushed real wages higher in net consuming countries. However this begs a question for producers and squarely in that camp we find Vladimir Putin’s Russia which will note this morning’s news with dismay. From Marketwatch.
February Brent crude LCOH6, -1.59% on London’s ICE Futures exchange fell 80 cents, or 2.7%, to $28.14 a barrel, but overnight fell to as low as $27.67 a barrel.
If we look back we see that it puts it some 43% lower than a year ago as the disinflationary burst for the world continues. However for reasons I shall explain below this is an example of deflation for Russia which comes combined with inflation in what is an example of how quite a lot can go wrong at once.
As an aside regular readers may recall when Brent Crude Oil pushed above WTI or West Texas Intermediate by over US $20 at one point and the justifications which followed. I wonder where they have gone as I see that Brent Crude is now lower by around 70 cents. Was this another sign of financialisation of commodity markets?
Also this reminds me to point out that Russian crude has a benchmark called Urals Crude which is trading some US $3 below the Brent benchmark so that Russia is only getting around US $25 right now. Back in the commodity boom days it too traded over giving Russia not that long ago an extra US $100 per barrel in the boom times.
The cost of the oil price fall to Russia
Back on the 23rd of November last year I looked at oil production.
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.
Back then we thought that Russia had trouble with an oil price of US $44 per barrel,little did we know what would happen next! Back then I calculated that Russia was around US $680 million per day worse off compared to the past “tractor beam” price of US $108 well now it is more like US $890 million per day. A back of the envelope style calculation but you get the idea.
The Bank of Russia did its own calculation in its December Monetary Report.
In January-September 2015, the decline in prices for oil, oil products, gas, coal, iron ore and nickel led to a reduction in export earnings in these categories of commodities compared with the same period of the previous year by more than 110 billion US dollars,
The plunging Ruble
The currency markets responded to this change in Russian fortunes by marking the Russian Ruble sharply lower and this has carried on. Back on November 23rd I pointed out that the low 30s had been replaced by 66 which was quite a drop. Well the drumbeat has continued since as a lower oil price as Russia Today informs us.
The euro rose more than one ruble on the Moscow exchange, exceeding 85 rubles for first time since December 2014. The dollar reached nearly 79 rubles.
Thus we see that Russians will find everything from abroad to be more expensive and in fact much more expensive. This will impact on matters such as the Central London housing market and the concept of Chelski as I note that it takes 112 Rubles to buy a single UK Pound £.
A currency fall on this scale means that there will be imported inflation and this of course differentiates Russia from a world of zero or even negative inflation. From the Bank of Russia.
At the end of 2015, inflation will be roughly 13%. In 2016 Q1, inflation is estimated to be at 7.5–8.0%.
Since last summer 2014 when most of the rest of the world was seeing falling and then zeroish inflation prices in Russia have risen by 20 % or so. This is what has hit the ordinary Russian if we look at purely domestic terms and them going to the shops. The amount shoots higher whenever we look at foreign purchases or anything which is imported.
The falls in real wages of the order of 9 to 10% have had a clear impact on domestic consumption.
The annual rate of decline in household spending on final consumption was 8.7– 8.9% in Q3, according to estimates. In October, the contraction in consumer demand continued, as shown by the decline in retail trade turnover (to 11.7%).
These are Greece like numbers and we see something else familiar from that situation if we look at trade.
The weak ruble and low income of all economic agents meant that the high rate of decline in import quantities of goods and services persisted (roughly 30%).
This means that in a surprise to those who have not observed such a situation before we see this impact on economic growth and GDP (Gross Domestic Product).
As a result, the positive contribution of net exports to GDP growth increased. According to estimates, this trend in net export dynamics will remain in 2015 Q4.
This impact will be temporary and flatters the current situation as it will fade away over time as some import demand will remain and be inelastic. However in spite of this positive influence it was a grim 2015 and 2016 whilst better is none too bright either.
the estimated overall GDP growth for 2015 was revised upwards to the upper bound of the range defined by the Bank of Russia in the previous Monetary Policy Report, i.e. to -(3.7–3.9%). In 2016 Q1, the annual rate of GDP decline will continue to slow to -(1–2%).
Some care is needed with reporting these numbers as they are of course in Russian Rubles as we note the impact of this. What I mean is that these are bad enough but of course if we were to price things in US Dollars the situation is much worse. This is how people tweet and write about Russian GDP looking so bad in US Dollar terms as a falling GDP is combined with a plunging Ruble. Of course it is also true that Russian GDP will have taken a dive in most currencies but it is particularly bad against the US Dollar as we wonder if this is another front in the currency wars.
If we look at the central bankers favourite part of the economy we see trouble too. If we start with the stock market we see that it had a surprisingly stable 2015 but has fallen 9% in 2016 so far. As to house prices the Bank of Russia tells us this.
However, with subdued economic activity and, in particular, shrinking real disposable household income and falling investment demand, it is highly likely that monthly growth in housing prices will remain negative up to the end of 2015, and a decrease in prices will be recorded at the end of the year.
We do not know what will happen next to the oil price and care should be taken in using a marginal daily price to cover a country’s economic prospects. But there clearly has been a major shift lower in oil and commodity prices and that shift has hit the Russian economy very hard. From our point of view it is hard to imagine a place where imported good and services have doubled in price and some have done more than that. The economy itself will have the problems of money illusion too – as Ruble prices will adjust over time rather than immediately – which UK economic history shows does not help.
The forecasts stated above are based on a higher oil price than now so Russia faces the prospect of 2016 being another year of economic contraction. Also there are two other things which stand out in its economic situation. One is the problem of repaying debt in US Dollars with a depreciating Ruble. The other is having an interest-rate of 11% as much of the world has near zero and some of Russia’s neighbours have negative interest-rates. If we combine the two it must be awfully tempting to borrow in US Dollars, Euros and Yen mustn’t it?