Where next for interest-rates and bond yields?

As we find ourselves in a phase where possible solutions to the Covid-19 pandemic are in the news, the economic consequences for 2021 are optimistic. For example, it looks as though it will mean the type of Lockdown the UK is experiencing will get less and less likely. That is a relief as the issue of the Lockdown strategy is that you end up in a repeating loop. The more hopeful reality does have potential consequences for interest-rates and some of this has been highlighted by Reuters.

LONDON (Reuters) – Expectations of interest rate cuts in some of the world’s biggest economies have melted within the space of a month on hopes a successful coronavirus vaccine will fuel a growth bounceback next year.

Why? Well in line with this from Bank of England Chief Economist Andy Haldane yesterday.

LONDON (Reuters) – Bank of England Chief Economist Andy Haldane said the economic outlook for 2021 was “materially brighter” than he had expected just a few weeks ago despite short-term uncertainty from a renewed COVID-19 lockdown in England.

Except as you can see the changes are in fact really rather minor in the broad scheme of things.

Between Nov. 5-9, a period when it became clear Democrat Joe Biden had won the U.S. election and Pfizer announced its vaccine news, eurodollar futures, which track short-term U.S. rate expectations, flipped to reflect expectations of 10 bps in rate hikes by Sept 2022.

Just the previous week, markets were predicting no changes. Futures now expect U.S. rates at 0.50% by September 2023, from 0.25% forecast a month previously.

At the ECB where rates are already minus 0.5%, a nine bps cut was expected by September 2021 but that is now slashed to only five bps.

After all the interest-rate cuts we see that the US is expected to increase interest-rates by a mere 0.25% over the next 3 years. That is a bit thin if you note the promises of economic recovery. But it is in line with one of my main themes which are that interest-rate cuts are for the now and are large whereas interest-rate rises are for some future date and are much smaller if they happen at all. For example Bank of England Governor Mark Carney provided Forward Guidance for interest-rate increases in the summer of 2013. It is hard not to laugh as I type that his next move was to cut them! There was a rise some 5 years or so later to above the original “emergency” level of 0.5% which rather contrasts with the cuts seen in March.

As to the ECB which hasn’t has any increases at all since 2011 there has been this today by its President Christine Lagarde.

While all options are on the table, the pandemic emergency purchase programme (PEPP) and our targeted longer-term refinancing operations (TLTROs) have proven their effectiveness in the current environment and can be dynamically adjusted to react to how the pandemic evolves.

So Definitely Maybe, although these days interest-rate cuts may not be widely announced as for example the present TLTROs allow banks access to funds at -1% as opposed to the more general -0.5% of the Deposit Rate.


I did point out earlier that interest-rate cuts are for the here and now and they seem to be rather en vogue this morning starting early in the Pacific region.

BI Board of Governors Meeting (RDG) in November 2020 decided to lower the BI 7-Day Reverse Repo Rate (BI7DRR) by 25 bps to 3.75%, as well as the Deposit Facility and Lending Facility rates which fell by 25 bps, to 3.00% and 4.50%.

Bank Indonesia did not have to wait long for company as the central bank of the Philippines was in hot pursuit.

At its meeting on monetary policy today, the Monetary Board decided to cut the interest rate on the BSP’s overnight reverse repurchase facility by 25 basis points to 2.0 percent, effective Friday, 20 November 2020. The interest rates on the overnight deposit and lending facilities were likewise reduced to 1.5 percent and 2.5 percent, respectively.

Perhaps the Bank of  Russia fears missing out.

Russian Central Bank: Monetary Policy To Remain Accommodative In 2021…….Russian Central Bank: See Room For Further Rate Cuts But Not That Big.

Probably they are emboldened by the recent rise in the oil price which is a major issue for the Russian economy.


We looked at the Pacific region back in 2019 as an area especially affected by the “trade war” between the US and China. Some of that looks set to fade with the new US President but the Pacific now has another one.

China is digging in its heels as the trade spat between Canberra and Beijing continues, with officials laying responsibility for the tensions solely at Australia’s feet. ( ABC)

As well as the interest-rate cut Bank Indonesia is working to reduce bond yields.

As of 17 November 2020, Bank Indonesia has purchased SBN on the primary market through a market mechanism in accordance with the Joint Decree of the Minister of Finance and the Governor of Bank Indonesia dated April 16, 2020, amounting to IDR 72.49 trillion, including the main auction scheme, the Greenshoe Option (GSO) and Private Placement.

Primary purchases are unusual especially for an emerging market and another 385 trillion IDR have been bought via other forms of QE.


The central bank gives us a conventional explanation around inflation as a starter.

Latest baseline forecasts continue to indicate a benign inflation environment over the policy horizon, with inflation expectations remaining firmly anchored within the target range of 2-4 percent. Average inflation is seen to settle within the lower half of the target band for 2020 up to 2022, reflecting slower domestic economic activity, lower global crude oil prices, and the recent appreciation of the peso. The balance of risks to the inflation outlook also remains tilted toward the downside owing largely to potential disruptions to domestic and global economic activity amid the ongoing pandemic.

But we all know that the main course is this.

Meanwhile, uncertainty remains elevated amid the resurgence of COVID-19 cases globally. However, the Monetary Board also observed that global economic prospects have moderated in recent weeks. At the same time, the Monetary Board noted that while domestic output contracted at a slower pace in the third quarter of 2020, muted business and household sentiment and the impact of recent natural calamities could pose strong headwinds to the recovery of the economy in the coming months.


As you can see the story about the end of interest-rate cuts has already hit trouble. Central bankers seem unable to break their addiction. I will have to do a proper count again but I am pretty sure we have now had around 780 interest-rate cuts in the credit crunch era. So it seems that the muzak played on the central bank loudspeakers will keep this particular status quo for a while yet.

Get down deeper and down
Down down deeper and down
Down down deeper and down
Get down deeper and down.

There are issues as I noted on the 11th of this month as all the fiscal stimuli puts upward pressure on interest-rates. But the threshold for interest-rate cuts is far lower than for rises. Also we get cuts at warp speed whereas rises have Chief Engineer Scott telling us that the engines “cannae take it”

Putting it another way we have another example of a bipolar world where there may be drivers for higher interest-rates but the central banksters much prefer to cut them.This gets more complex as we see so many countries with or near negative interest-rates and bond yields.

What is the economic impact of an oil price shock?

The economic news event of the weekend was the attack on the Saudi oil production facilities. It looks as though Houthi rebels and Iran were involved but forgive me if I am careful about such things along the lines of this from the Who.

Then I’ll get on my knees and pray
We don’t get fooled again

As you can imagine there was a lot of attention on the London oil price opening last night and no doubt fear amongst those who were short the oil price. Their fears were confirmed as we saw an initial flurry of stop loss trading which can the price of a barrel of Brent Crude Oil go above US $71 which was some US $11 higher. It then fell back to more like US $68 quite quickly. For those unaware this is a familiar pattern in such circumstances as some will have lost so much money they have to close their position and everybody knows that. It is a cruel and harsh world although of course you need to know the nature of the beast before you play.

Thus the first impact was some severe punishment for sections of the oil trading market. The rumour was that a lot of quant funds were short of oil and we will have to wait and see if there is a blow-up here. If we move on we see that the oil price has been falling this morning leaving the price of a barrel of Brent Crude at US $65.50 or up over 8%.So let us start by looking at the winners from a higher oil price.


A clear group of winners and presumably the group who have taken the edge off the higher oil price are the shale oil wildcatters in the United States and elsewhere.

“Since the last in-depth review five years ago, the United States has reshaped energy markets both domestically and around the world,” the IEA’s Executive Director, Fatih Birol, said at the presentation of the report on Friday, accompanied by U.S. Secretary of Energy Rick Perry. ( oilprice.com )

If we continue with this analysis here is some more detail.

U.S. crude oil exports have soared since the ban was lifted at the end of 2015, to reach 3.159 million bpd on average in June 2019, according to the latest available EIA crude export detail.

As you can see the impact of the shale oil era had one underlying effect last night and this morning via the way that Saudi production is not as important as it was. But also there is the economic model of the shale oil industry which I have pointed out before is more of a cash flow model than a profit one. So I would have expected them to rush to hedge their production last night and this morning. As it happens these levels are ones which would be profitable for them as their costs are often around US $50 per barrel. However they will not be making as much as you might think as they would have impacted more on the WTI ( West Texas Intermediate ) benchmark which is about US $5 lower than the Brent benchmark.

Other companies in the production business will also be winners and we see an example of that as the British Petroleum share price is up 4% at 523 pence today.

Next comes the countries who are net oil producers. We have looked at the US already and the position for Saudi Arabia is mixed as it is getting a higher price but has lower production. Russia is a clear winner as its economy depends so much on its oil production.

Exports of mineral products (consisting mainly of oil and natural gas) accounted for 59.2% of total Russian exports in 2016 (Rosstat, 2017).

There is quite a list of winners in the Middle East including ironically Iran assuming it will be allowed to sell its oil. Then places like Kazahkstan as well as Canada and to some extent Australia. There is also Norway where according to Norskpetroleum it represents some 16% of GDP and 40% of exports as well as this.

The government’s total net cash flow from the petroleum industry is estimated to NOK 251 billion in 2018 and NOK 263 billion in 2019

Thus I am a little unclear how Oxford Economics are reporting that Norway would lose from a higher oil price.

There are quite a few African countries which produce oil and Libya comes to mind as do Ghana and Nigeria ( assuming the output of the latter can avoid the problems there).

Another group of winners would be world central banks especially the ECB after its moves on Thursday. The reason for this is that they have been trying to raise the inflation rate for some time now and either mostly or entirely failing as Mario Draghi pointed out on Friday..

The reference to levels sufficiently close to but below 2% signals that we want to see projected inflation to significantly increase from the current realised and projected inflation figures which are well below the levels that we consider to be in line with our aim.

Should this transpire then we will no doubt see a shift away from core and the new “super core” measures of inflation which for newer readers basically ignore what are really important.


These are the net oil importers which are most of us. In terms of economic effect the standard view has been this from FXCM.

Data analysed by the Federal Reserve shows that a 10 percent increase in the price of oil is associated with about a 1.4 percent drop in the level of U.S. real GDP.

The 10% depends on the actual price but that has been a standard with the Euro area thinking there would be the same effect on it from a US $5 move. Of course these days the US would see more offset from the shale industry and I think worldwide the advance of renewable energy would help at the margins. But a higher oil price leads to a net loss overall as the importers are assumed to fall by more than the exporters rise. Geographically one thinks of China, Japan and India.

The effect on inflation is unambiguously bad and let me offer a critique of the central banking view above. The impact of inflation on real wages will make workers and consumers worse and not better off reminding us that central bankers have long since decoupled from reality.


There are a couple of perspectives here. The first is that in any warlike situation the truth is the first casualty. This leads to a situation where we do not know how long Saudi oil output will be reduced for, which means that we do not know how long there will be an upwards push on the oil price. Next comes a situation where looking ahead there will be fears that attacks like this could happen again. That is in some way illogical as defences will no doubt be improved but is part of human nature especially as we now know how concentrated the production facilities are in Saudi Arabia.

Another perspective is provided by the fact that the oil price is back to where it was in May and some of July.

Oh and central bankers used to respond to this sort of thing with interest-rate increases whereas later this week we are expecting an interest-rate cut from the US Federal Reserve. How times change…..


Thank you to those of you who have supported this as the listener numbers on Soundcloud on Saturday alone exceeded any previous week..


Russia has similar inflation to the UK but interest-rates are ~8% higher

As a contrast to the Bank of England move or not at midday which I analysed yesterday let us look at developments at another point of the interest-rate cycle. To do this we need merely to look at Russia where this was announced this last Friday.

On 27 October 2017, the Bank of Russia Board of Directors decided to reduce the key rate by 25 bp to 8.25% per annum.

We learn various things here. Firstly even in this time of Zero Interest Rate Policy ( ZIRP) and indeed NIRP where N = Negative we see that there are countries where the trend has bypassed. Much of Africa has been too. I also note that 0.25% moves seem to be en vogue for which we in the UK should be grateful as I recall the Bank of England hinting at a 0.15% cut this time last year as its Forward Guidance shot itself in the foot. Returning to the Russian situation on the face of it the move looks a bit weak in the circumstances as frankly what is moving from 8.5% to 8.25% really going to achieve? Especially if we note this about inflation.

Annual inflation holds close to 4%. Estimates as of 23 October 2017 indicate that annual inflation is 2.7%. Its downward deviation against the forecast is driven mainly by temporary factors. In September, food prices showed stronger-than-expected annual price decline, on the back of larger supply of farm produce. This extra supply owes its origin to growing crop productivity and the shortage of warehouse facilities for long-term storage. The slowdown of inflation was also triggered by exchange rate movements.

Inflation is projected to be close to 3% by late 2017; going forward, as the temporary factors run their course, it will approach 4%.

So we see that the inflation situation currently has quite a few similarities with the UK as our inflation will also be close to 3% late this year and our inflation has a strong exchange rate influence as well. Yet interest-rates are around 8% different! Central bankers eh?

Let us look deeper.

Oil and Gas

This is a powerful player in the Russian economy and the recent rise in the oil price will put a smile on economic developments. In July an economic paper from the University of St. Petersburg put it like this.

In the first phase of the shock, the government’s income suddenly increases. In other words, the price rise enhances the real national income through the increase in the petroleum exports revenues. This might lead to the reinforcement of the national currency value (or foreign currency depreciation) in the exchange rate systems (fixed or managed floating systems). In the floating exchange rate system, the foreign exchange coming from the increase in the world oil prices would lead to the appreciation of the real exchange rate.

Actually the value of the Rouble and the oil price are correlated over time. If we look back to a nadir for oil prices back in early 2016 when the Brent Crude benchmark fell into the mid-30s in US Dollar terms then it took 75 Roubles to buy one US Dollar. If we skip forwards to today when Brent Crude is around US $60 we see that it takes only 58 Roubles to buy one US Dollar. They do not always move in lock step but over time there is usually a similar trend.

Thus we get to the conclusion that a higher oil price reduces Russian inflation. This does not mean that it does not raise domestic inflation as of course there will be familiar price rises from fuel costs which will trigger other price rises. But that there will be an offsetting move from a higher currency that usually is larger. Accordingly I find this from the Bank of Russia a little strange.

Inflation expectations remain elevated. Their decline has yet to become sustainable and consistent.

We are back to a timing issue as in you need to move ahead of events rather than waiting for them to happen and chasing them.

Impact on the Russian economy

The US Energy Information Authority published this on Tuesday.

Russia was the world’s largest producer of crude oil including lease condensate and the third-largest producer of petroleum and other liquids (after Saudi Arabia and the United States) in 2016, with average liquids production of 11.2 million barrels per day (b/d). Russia was the second-largest producer of dry natural gas in 2016 (second to the United States), producing an estimated 21 trillion cubic feet.

So a big deal which has this impact domestically.

 Russia’s economic growth is driven by energy exports, given its high oil and natural gas production. Oil and natural gas revenues accounted for 36% of Russia’s federal budget revenues in 2016.

Also it is the major export.

In 2016, Russia exported more than 5 million b/d of crude oil and condensate……..Russia also exports fairly sizeable volumes of oil products. According to Eastern Bloc Research, Russia exported about 1.3 million b/d of fuel oil and an additional 990,000 b/d of diesel in 2016. It exported smaller volumes of gasoline (120,000 b/d)[50] and liquefied petroleum gas (75,000 b/d) during the same year.

As to the impact on the overall economy it is not easy to be precise as Factosphere points out.

Experts estimate the share of Oil&Gas sector in the Russian GDP to vary from 15% to 20%, but that does not take into consideration effect of a number of related and supporting industries that depend on O&G sector performance (equipment producers, transportation, etc.). Therefore, the overall influence of the sector on the Russian economy and GDP shall be much higher.


There is a fair bit to consider here but if we stick with the inflation issue then with Brent Crude Oil around US $60 per barrel it seems unlikely that Russia will see much imported inflation generated. Quite possibly the reverse. We know that the Urals production is cheaper but the principle remains. Thus the difference between it and the UK in terms of inflation prospects hardly seems to justify an around 8% interest-rate gap.

There is one clear difference though which ironically would be seen as a success in the UK. From Trading Economics.

Real wages in Russia rose 2.6 percent year-on-year in September 2017, following a downwardly revised 2.4 percent gain in August and missing market expectations of 3.9 percent. Average nominal wages jumped 5.6 percent to RUB 37,520 while annual inflation rate slowed to 3 percent, the lowest since at least 1991.

So higher interest-rates yes but nothing like that much higher. The fun comes in figuring out how much the Bank of Russia and the Bank of England are wrong!

Meanwhile it seems set to be a relatively good year for the Russian economy and a nod from it to OPEC for its efforts in raising the crude oil price. Looking ahead there are of course issues as we mull the impact of having large resources on the wider economy or what became called the Dutch Disease. One of them is the transfer of resources and wealth or if you prefer the oligarch issue.

Currently there is also the issue of economic sanctions on Russia.

Me on Core Finance TV


Russia faces the economic consequences of a plummeting oil price

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 £.

Imported Inflation

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.

Economic growth

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.

Asset prices

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?





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?



Nominal GDP targeting would be subject to errors,revisions and likely inflation

One of the features of economic life is that there are a lot more reinventions of old ideas than there are new ones! One of these has been exhumed and shocked back to life by The Economist magazine and it is nominal GDP (Gross Domestic Product) targeting. Perhaps they hoped that everyone has forgotten! But the gist of the argument is that there were flaws in the system of targeting consumer inflation in the run-up to the credit crunch and that nominal GDP growth targeting would be a better system. Firstly let me agree that the advent of the credit crunch plainly did show up the flaws inherent in the consumer inflation targeting system of central banks. However as someone who replied to the Bean Review of UK Economic Statistics on Friday and is off to discuss the matter this evening at the Royal Statistical Society it is clear that so many issues are raised here.

What does the Economist argue?

It opens with this.

That is because the usual relationship between inflation and unemployment appears to have broken down.

Although he was looking at average earnings and unemployment Ben Broadbent of the Bank of England was not convinced of this.

Uncannily, the regression line was pretty much exactly the same as that identified by A.W.Phillips

But if we continue with the theme we are told this.

Now, by contrast, unemployment has fallen to remarkably low levels, but inflation remains anaemic.

Unlike The Economist I see this as a good thing! Fewer people are out of work and to coin an old phrase “the pound in their pocket” is going further or at least being much less affected by the ravages of inflation. To continue with the theme it is implied that this is a bad thing.

Their recoveries have instead proved nearly inflation-free

This has then proved to be a problem for central banks in setting policy. You may note the implied view is that a few central bankers are more important than the general population who are having their best economic phase for a while. So there is a bit of a straw man issue here but let us investigate the proposed solution.

Oh and perhaps no-one at The Economist has tried to buy a house in the past couple of years.

Nominal GDP targeting

Let us first check on what is meant by nominal GDP or NGDP.

the sum of all money earned in an economy each year, before accounting for inflation

This would do the following according to The Economist.

A target for NGDP growth (ie, growth in cash income) copes better with cheap imports, which boost growth, but depress prices, pulling today’s central banks in two directions at once

Does it? As it is reduced itself by lower inflation I think that they should be very careful with that argument. Let me explain with some numbers. The NGDP target has usually been for 5% with the breakdown hopefully for its supporters being 3% real GDP growth and 2% inflation. So in the UK right now we have not far of 3% real GDP growth but very little inflation, so they would stimulate the economy to hit the 5% target? That does not seem to help much! Rather than tighten central bankers would be easing into a boom, what could go wrong?

Some may think the real reason for NGDP targeting is shown blow which is why I have emphasised this sentence.

Nominal income is also more important to debtors’ economic health than either inflation or growth, because debts are fixed in cash terms.

With apologies to Meghan Trainor this sounds rather like this.

I’m all about that debt.

So many so-called reforms boil down to this which is in effect as confession that there is too much debt and we need to inflate it away except of course they are trying to do so by creating a fog where this is hidden. A bit like those who want a 4% inflation target. So in a world where in one sense there has been plenty of printed narrow we discover as we look at the wider situation that the situation is Simply Red.

Money’s too tight to mention
Oh mo-ney mo-ney mo-ney mon-ey
Mo-ney’s too tight to mention.

Debts are fixed in cash terms

Someone had better tell the UK Debt Management Office as it has some £506.6 billion of UK index-linked Gilts in issue by market value. These are indexed to Retail Price Inflation in the UK. Whilst the UK has a relatively large inflation-linked bond market it is far from alone.

The other problems with NGDP targeting

The Economist addresses the issue in one sentence.

Critics fret that NGDP is hard to measure, subject to revision, and mind-bogglingly unfamiliar to the public.

I have no idea why they are so hung up on the last bit as it could be explained. If we look at the numbers and assume a 5% target we have another problem. According to FRED (San Francisco Fed) UK NGDP growth has gone 4.7%,4.6%,4.3% and 3.4% over the past four quarters so we should be stimulating the economy?

Oh and there is another problem you see back in the second quarter of 2010 NGDP growth was running at an annual rate of 6.25%. Well actually not a problem for me as I was arguing that the UK was heading for inflation problems and needed to take action but I was rather alone, oh and correct. But for NGDP targeters there was 5%,6.25% and then 5% so happy days! What happened next?

Can we measure NGDP reliably?

Nope. GDP is often revised heavily and if we look back into UK economic history we see that the 1967 devaluation of the UK Pound £ was not necessary and that Denis Healey probably did not have to call in the IMF in 1976. More recently there was the “triple-dip” for UK GDP that in fact was not! You may be spotting something of a flaw here.

As a flow concept it measures construction of things but does not measure destruction meaning that wars for example boost it. There is a wide margin of error which invariably gets forgotten. I also think that it is poor at adjusting for technological changes -one of my points made to the Bean Review was about the measurement of the UK service-sector- and right now is a period of extraordinary technological change in many areas.

I guess some of you are thinking right now about the contribution of Volkswagen and perhaps quite a few other car manufacturers to GDP!

Another way of considering this is to look at the troubled series for US GDP in the 1st quarter of 2015. The nominal version went +0.1%.-0.9% then -0.2%. The annualisation makes this worse but there is a problem here.

Oh and there are three versions of GDP which are output expenditure and income. Most countries use output but Japan for example uses expenditure. They should come to the same answer but they do not except in the UK! Are we better at it? No, back when he was Chancellor Nigel Lawson insisted on it. Meanwhile in the United States the income and output measures give rather different answers. Or as the Bureau of Economic Affairs puts it.

For a given quarter,the estimates of GDP and GDI may differ for a variety of reasons, including the incorporation of largely independent source data.


Perhaps this was in someones diary to try again in three years as pretty much that time ago I pointed out this.

Put another way it feels at times like the episode of Star Trek where Captain Jean-Luc Picard is trapped in a repeating loop.

By escaping from the loop Captain Picard did better than the economics profession which is back to the past. Three years ago I pointed out this.

As even one of its supporters Martin Wolf admits inflation is an issue. They have no way of controlling the inflation – real growth mix  and frankly no certainty that there will be any real growth at all. Still at least they are not preparing the ground by attempting to emasculate our measures of inflation. Oh wait a minute!

This neatly fits with one of the points I intend to make tonight at the Royal Statistical Society. If you put in asset price inflation such as house prices you get a very different picture where there is disinflation in some areas but inflation in others. One thing we can be sure of is that establishment wheezes to try to hide inflation will continue.

In many ways it would suit the new economic advisory panel for the Labour party although no-one seems to have suggested it yet

Yet more economic woe looks on the cards for Russia

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.

The Rouble

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
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

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.

Economic Growth

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.

Lower prices are providing quite an economic boost for the UK, Spain and Ireland

Today I wish to reinforce a theme I established a couple of months ago, back on the 29th of January to be precise. This goes against the economic orthodoxy which tells us that consumers when faced with lower prices then expect even lower prices and defer consumption. Frankly that always looked dubious to me in a country like ours as the UK these days seems to be to be something of an instant gratification nation unlikely to be able to wait long for anything. Also even before these times of economic difficulty we had seen falling prices for many electronic goods and we saw booming sales of mp3 players I-Pads and the like rather than falls. Back on the 29th of January I reinforced the case in this fashion.

The results were fueled by all-time record revenue from iPhone® and Mac® sales as well as record performance of the App Store℠. iPhone unit sales of 74.5 million also set a new record.


This led me to this conclusion.

However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly.


And a subset conclusion about the likely behaviour of a profession that is prone to stuck in the mud type thinking.

If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories.


UK Retail Sales

My theory and theme received considerable reinforcement from yesterday’s UK Retail Sales data which were very strong and provided another sign that it has been a solid first quarter for the UK economy.

Year-on-year estimates of the quantity bought in the retail industry continued to show growth in February 2015, increasing by 5.7% compared with February 2014. This was the 23rd consecutive month of year-on-year growth and the longest period of sustained growth since May 2008 when there were 31 periods of growth.


Quite a powerhouse performance when we consider that UK consumer inflation was on its way to disappearing in February. But we get an even more significant implication if we look at retail price behaviour over the past year and the emphasis is mine.

Average store prices (including petrol stations) fell for the eighth consecutive month, falling by 3.6% in February 2015 compared with February 2014. This is the largest year-on-year fall since consistent records began in 1997. Once again the largest contribution to the year-on-year fall came from petrol stations, which fell by 15.5%, the largest year-on-year fall in this store type on record.


So for the deflationistas we should be seeing large amounts of deferred consumption to take advantage of expected lower prices in the future. It is not so easy to square that with year on year growth of 5.7% in the retail sector is it?! Indeed we are seeing quite the reverse as around 60% of the increase in the volume of retail sales is due to the effect of lower prices enhancing volumes. Furthermore if we drill down to the latest three months which is the period where consumer inflation has lurched down to zero we see this.

The underlying pattern in the 3 month on 3 month movement in the quantity bought continued to show growth for the 24th consecutive month, increasing by 2.0%. This was the longest period of sustained growth since November 2007


The doom,doom,doom theories of conventional economics should instead be listening to the Outhere brothers.

I say boom boom boom let me hear u say wayo
I say boom boom boom now everybody say wayo


What is happening here?

We find ourselves examining a much longer-term theme of this blog which is that the above target consumer inflation in the UK which the Bank of England “looked through” contributed to a decline in real incomes and therefore had a contractionary impact as opposed to the promised expansionary one. However now we found ourselves in an environment where even the current level of weak wage growth -let us hope that this was a one-off- is higher than consumer inflation and is much higher than inflation in the retail sector. We do not have a like-for like comparison but even the 1.1% wage growth of January will make consumers and workers feel better off when it faces the 3.6% fall in prices in the retail sector in the year to February. Put this way we have quite considerable real wage growth here and accordingly no wonder we are seeing a boom.

An International Perspective

Y Viva Espana

Back on January 29th I also established the view that disinflation was providing an economic boost for Spain too. As you can see below prices are falling in Spain.

The Harmonised Index of Consumer Prices (HICP) annual change stands at –1.2%, thus it increases three tenths as compared with January.


Indeed prices have been falling in Spain since last July, so much more time for the deflationistas doom-doom cycle to kick in. Er well not quite at least not according to the Bank of Spain…

During 2015 Q1 the economy saw a continuation of the expansionary path of the previous year. On the information available, GDP is estimated to have grown at a quarter-on-quarter rate of 0.8% in Q1, which would take its year-on-year rate of change to 2.5%. This estimate marks a slight acceleration in activity on the final stretch of 2014.


Against this backdrop, estimated GDP growth for 2015 has been revised upwards to 2.8%. This 0.8% revision of the projection.


So rather than collapsing in on itself in the fashion of a black hole the Spanish economy is for now at least showing hints of escape velocity. The Bank of Spain launches itself on a rather wordy explanation of all this but does at one point approach something of a singularity in its explanation of what is causing at least part of the expansion.

the decline in prices


Of course it is taking its part in the ECB QE effort to end this boost to the Spanish economy, but I will leave that as a matter for them and the consciences.


It would be remiss of me to not also examine the data of the third country from my original analysis which is the Emerald Isle which is currently basking in its Six Nations rugby triumph. How is the economy doing? Well it has falling prices.

Prices on average, as measured by the EU Harmonised Index of Consumer Prices (HICP), decreased by 0.4% compared with February 2014.


So the economy has collapsed? You no doubt have guessed the answer but I doubt that you guessed the scale of it.

The  volume of retail sales (i.e. excluding price effects) increased by 3.3% in January 2015 when compared with December 2014 and there was an increase of 8.8% in the annual figure.


The motor trade has surged over there. Whilst this is not quite like for like as Ireland is tardy with some of its data we see that it is certainly boom-boom rather than doom-doom.


So far the evidence is clear that disinflation is producing boom-boom rather than the doom-doom of conventional economic theory. Of course we have finite evidence and there are other factors impacting at the same time. These can offset the gains as we have seen in Greece. But we get a reinforcing note from the other side of the coin. You see Japan is the ying to this yang as it has forced consumer inflation higher via its consumption tax rise and Yen depreciation. How is that going? From Japan Today earlier.

Separate data from the ministry showed household spending dropped for the 11 months in a row since the tax hike, falling 2.9% on-year in February.


Now of course the higher tax rate had an impact but so in my view has the higher level of prices. Accordingly unlike the Bank of Japan I see the fact that its adjusted favourite measure of inflation has fallen to 0% as a benefit and not a loss.

Ben Broadbent speaks

We are in the season for Bank of England speeches and Mr.Broadbent has made a case for QE which must sound weak even to his own ears.

For one thing I think the evidence suggests that unconventional policy is effective: even if they don’t circumvent it entirely, asset purchases help soften
the constraint of the zero lower bound.


Oh and the zero lower bound is back to 0.5% Base Rates again in a version of the hokey-cokey as one speech puts it back and the next dismisses it.

Also after Mark Carney’s speech on the Euro you might think that attacks on other countries policy would be a no-no. I guess many will miss the implied criticism of Denmark, Switzerland, Bulgaria et al.

 if it’s not ruled out by an exchange rate peg


Still if they complain he could take a leaf out of the lyrics of Luther Vandross.

Out of my head to say the things I said
I didn’t mean a word

And I really didn’t mean it




The economy of Russia is exhibiting some of the signs of hyperinflation

Just when ordinarily markets would begin shutting up shop for Christmas and the New Year, at least in the western world, another crisis has hit financial markets. A side effect of the falling oil price if we add in a soupcon of other issues has seen a financial crisis rage in Russia. One impact of this illustrates something which I have discussed since the beginning of this blog which is that so much of modern life depends on the ability to know or at least estimate a price for a good or service. In this instance it was not the consumer in difficulties but the produced as PC Advisor explains.

On Monday, the price of a 16GB iPhone 6 on the Russian Apple store was equivalent to $688 at the day’s exchange rate. On Tuesday, that same smartphone was going for the equivalent of just $574, a 17% decline for Apple.

Apple had already tried to deal with the falling ruble by boosting the price of the iPhone 6 by 25% last month, from 31,900 rubles to 39,900 rubles for the 16GB model.

In response to such volatility of price Apple closed its online store in Russia yesterday. It is not really something that we expect in the modern era is it? We have some to expect technology and its variance appliances to be on tap whenever we want them to be.

Russian shoppers

These have been acting logically if you think about it and for once some part of what is known as economics 101 is coming true.

According to press reports, Russian consumers Tuesday rushed to purchase high-ticket goods, particularly appliances, before the value of the ruble fell even further or prices were boosted to compensate, hoping to have something tangible in hand in case the currency collapsed.

Technology as an apparent or perceived store of value gives us plenty of food for thought. After all it says something about the perceived value of (Rouble) money in Russia that a relatively fast depreciating product is preferred to it does it not?

Indeed another sign of turmoil has been indicated by the Wall Street Journal.

’Lanta Bank, a midsize Moscow lender, said its foreign counterparts would be unable to send foreign currency Wednesday as aircraft that typically transport cash are full.

What got us into this mess?

It was only last Thursday that I pointed out that the Russian economy was facing a grim 2015 and since then plenty of things have changed sadly almost entirely for the worse. The oil price was then US $63.42 (Brent Crude) and the level of the Rouble was already at crisis levels.

This morning it has fallen to yet another new low of 57.7 Roubles to the US Dollar.

The Rouble continued to fall and on Monday night the Central Bank of Russia released an extraordinary statement which I would say was full of machismo if the Governor was not a woman.

From 16 December 2014 the Bank of Russia Board of Directors decided to raise the Bank of Russia key rate to 17.00 percent per annum. This decision is aimed at limiting substantially increased ruble depreciation risks and inflation risks.

You would not want a tracker mortgage there would you? If you did have one your mortgage rate has gone up by more (6.5%) than the vast majority pay in the UK in total. You may note that the statement mentions the R(o)uble depreciation risks first when previously we have been told that the interest-rate rises were to limit the march of inflation.

This reminded me of the crisis days at the Bank of England in 1992 when it announced interest-rate rises totalling 5% on a single day. However the latter part of 3% never actually happened as before the next day the UK had been forced out of the Exchange Rate Mechanism. There was a difference here as the Bank of Russia made the move.

Currency Turmoil

There was a brief half-life for the resultant rally in the Rouble which saw it push back up to 58 versus the US Dollar or to where it had been only a few days before. However after at best a couple of hours it started to fall again and my did it fall! Some found it significant as it moved into the 60s and passed the oil price (Brent Crude), other remarked on it passing Vladimir Putin’s age and then on “When I’m 64” by the Beatles. Then as the downwards spiral continued the opportunity was provided by the Connells to sing along with this.

I was the one who let you know
I was your sorry ever after ’74-’75
Giving me more and I’ll defy
‘Cause you’re really only after ’74-’75

At one point within a two-minute period I saw people reporting that the exchange rate was at 72 and 80 respectively. That is what you call a fast market! Of course it is also a wide market and I would imagine that they had been asked which way they wanted to trade?!

So an extraordinary adrenalin rush took place combined with a lot of unease and confusion. Russians may well have been putting Genesis on their existing I-Pods but not new ones….

There’s too many men
Too many people
Making too many problems
And not much love to go round
Can’t you see
This is a land of confusion.

The braver ones might have associated this line with their leader.

Ooh Superman where are you now?

Meanwhile the Bank of Russia was presumably counting its losses on its currency intervention which had been just shy of US $2 billion on Monday alone. So far this month estimates of its total expenditure are of the order of US $10 billion.


The Bank of Russia or its later ego the Ministry of Finance has had another go at ramping the price of the Rouble. It started the day at around 70 to the US Dollar then retreated to 72 followed by a sharp rise to 63 but has now fallen back to 68. There are now various threats around a possible introduction of capital controls which seems a bit late don’t you think? Also there is a promised enquiry into exchange-rate manipulation. By the Bank of Russia? Oh hang on…


If we step back from the wild gyrations of this week which are remarkable considering it is only Wednesday there is much to ponder. If we just look at Russia itself we see that foreign goods right now do not have a price, or to be more specific only have one until existing supplies run out. The next price will be much higher. This will be true to a lesser extent for Russian goods too if they rely on imported goods and services. As time goes by even primarily domestic goods are being impacted more and more by inflation. No wonder Russian have mobbed their shops and presumably places like Apple’s online store whilst they could anyway!

Accordingly if we move to wider economic and financial aggregates where do we and they stand? It will be extraordinarily hard to have any idea of what inflation is in Russia and therefore economic output is virtually impossible to measure in such turmoil. Trade values will vary markedly depending on which currency you use to price/value them. In other words this week in Russia has seen many of the features of a hyperinflationary episode just as so many were telling us such an event was impossible in these times.

That is before we look at the wider implications of such events. If your business involves trade with Russia what can you do except insist on payment in another currency? At the moment many may not be so keen on being paid in oil. If we look beyond the economics there are clear dangers in prodding the Russian bear this way.

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.


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