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.
Comment
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?
