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Bank Rossii Eases Further As Russia's Economy Contracts At A Record Rate

The ECB's Balance Sheet At A Glance.

Monday, February 2, 2009

Russian Manufacturing Continues The Rapid Contraction In January

Russian manufacturing contracted at its second-fastest pace since 1998 in January as companies continued cutting production and jobs amid collapsing demand at home and abroad, according to the latest manufacturing PMI report from Markit Economics and VTB Capital. VTB’s Purchasing Managers’ Index rose to 34.4 from December’s record low of 33.8. The length of the manufacturing contraction is now just one month short of the slump that occurred during the 1998 economic collapse. Basically we still need to see the services PMI (out later this week), but this looks to me (on a rough calculation basis) like a 1% quarter on quarter GDP contraction rate, or an annual rate of GDP contraction of 4% in January.

“There were numerous reports from panelists that the weaker ruble had partially offset the impact of falling global commodity prices, resulting in a slower overall rate of deflation,” the report said.

Meanhwhile the ruble weakened again this morning, and fell below the central bank’s target exchange rate of 36 per dollar, only two weeks after Chairman Sergey Ignatiev widened the trading band and committed to using reserves to defend the new level. The ruble depreciated as much as 1.7 percent to 36.3550 per dollar in trading this morning, its weakest level since January 1998.


Nobody said...

If they float the rouble and let it fall as much it it can, do you believe this can revive Russia's manufacturing? I am asking this because this should probably restore, at least to some degree, their competitiveness, but on the other hand I see that markets for exports are shrinking everywhere.

Nobody said...

Given the situation in China now I assume that it's unlikely that OPEC succeeds to lift the price of oil any time soon. At least during this year both China and the US will be either contracting or stagnating. The oil market won't recover under these conditions

Edward Hugh said...

Hi Nobody,

"Given the situation in China now I assume that it's unlikely that OPEC succeeds to lift the price of oil any time soon. At least during this year both China and the US will be either contracting or stagnating. The oil market won't recover under these conditions."

I would agree with this assumption, and I don't expect any large move in commodity prices this year. We can talk about 2010 when it gets a bit nearer.

"If they float the rouble and let it fall as much it it can, do you believe this can revive Russia's manufacturing?"

Well look, we don't only need to think about exports here, there is also import substitution. So if imports get more expensive, people will buy local products more. This also helps.

But in the longer run we have to imagine that the global economy will recover, and that Russian industries will be able to export again, and it would be better if they were more price competitive when they get to that point. That is, it may be better to get all the bad news over with now, and then get on with the future, although this may even include another sovereign default, since the way things are moving and gathering momentum it is hard to see how they can stop the runaway train.

Nobody said...

Another sovereign default? Basically as far as I can see it if they let the rouble fall, a lot of cracks will open. They may have to bailout a half of the world over there. On the other hand I was thinking that maybe they should better do it now, as long as they still something left in their rainy day funds. To let the rouble crash and use the funds to bailout all those systemically risky banks and companies. As it looks right now, by the end of the year they will burn through the bulk of their funds and if the crisis does not hit the bottom by that time, they will be done.

Edward Hugh said...


"As it looks right now, by the end of the year they will burn through the bulk of their funds and if the crisis does not hit the bottom by that time, they will be done."

This I fear could be the case. Also on the wealth funds etc, remember that they are going to use these to fund the fiscal deficit (see my longer post yesterday), and that will in all probability be larger than budgeted.

Also Bloomberg have just given us a 2008 whole year number for GDP:

Gross domestic product grew 5.6 percent, according to the Economy Ministry’s spokeswoman, who spoke on customary condition of anonymity. She cited a preliminary estimate and declined to provide any explanation.

This is smaller than expected, but doesn't really tell us what we want to know, which is what the Q4 q-o-q number was.

they also quote an S&P analyst:

“The degree and pace of decline, as well as the volatility observed recently in the oil and metal sectors, have exceeded historical precedents,” Standard & Poor’s credit analyst Elena Anankina said in a report before the GDP data were released.

I presume she was talking about 1998,

John said...

I found an interesting interview with Oleg Deripaska, the richest businessman in Russia. He isn't so doom and gloom. He basically says that the internal market will likely prop up the economy during the crisis due to internal demand and the lack of credit based debt in Russia. He does make some good points, it's an interesting read: http://www.russiablog.org/2009/02/oleg_deripaska_russian_economy.php#more

I see another default as extremely unlikely, given that they're in an infinitely better position now than they were in 1998. One indicator of this is the fact that they're still giving out billions of dollars worth of loans to other former Soviet states. They just gave $2 billion to Kyrgyzstan a couple days ago, and they're thinking of giving Belarus a few billion more. That doesn't sound like something a country worried about default would do.

I'd have to say that in the long run, this can only be good for the Russian economy. Call it growing pains. It's FORCING them to grow, diversify, become less oil dependent. In 10-15 years or so, I think this will be looked back on as the turning point; when the Russian economy began to truly modernize.

Edward Hugh said...

Hello Jonn,

Well, I have just been reading this in the FT this morning.

Russia signalled a change in its policies to fight the financial crisis on Wednesday, indicating that it would switch from bailing out individual companies to supporting the economy through the banking sector. Moscow also plans huge budget cuts in an attempt to limit its fiscal deficit – rejecting pressure to follow the US and other western countries to try to stimulate the economy with a big boost in public borrowing.

So in some ways, due to a combination of pragmatics (the original plan isn't working) and argguments like those from Deripaska, they seem to be changing course. I noticed this bit in the interview:

Deripaska: "hard work" will have to replace declining oil and gas revenues and previously cheap foreign credit for the Russian economy. Deripaska tells The Wall Street Journal that Russia must develop its infrastructure and human capital, and subtly critiques the string of bailouts in the West as haphazard and driven by political whims rather than economic realities, "Today we are helping General Motors, tomorrow we are not."

This is not disimmilar to some of the things traditionalist (or anti new dealer) critics of the Obama plan are saying almost daily now in the US (see Krugman NYT blog for lots of counter arguments, eg).

I see three problems in this whole argument (one of which is Russia specific).

a) the question of time horizons. Things like improving human capital, raising productivity, getting into new higher valued activeities, doing more R&D are all very worthy, and important in the longer run. But this is it, all this only works in the longer run, and we, and especially Russia (even more than the US) need to provent meltdown now.

I mean any new R&D initiative set in motion this year, even assuming it comes up with a major useful idea, will hardly be having a major impact on production and jobs much before 2015 I think, since this is how these things work.

Drawing our attention to this horizons issue - you know, in the long run we are all dead, was Keynes's real genius I think (and certainly his biggest lasting influence on me), the ability to take the clinical scalpel out, and nit pick about time horizones. Economies are path dependent (another idea that the anti intervention proponents don't seem to get), so the processes are often very sensitive to initial conditions and how we respond to them (this point post dates Keynes I think). The other view - that you simply do nothing and the whole thing will rebound - is sooooo 1930-ish. The clock simply has stood still for many people, but then again, sometimes I feel Krugman in his response to all this is also just running the 1930s stuff over and over.

b) Following on the path dependent stuff influences how much damage you do during the fall I think. If you just let it meldown you may incur structural damage which takes longer to fix. Just like if you jump from the top of a tall building with or without a parachute. There are U, V and L shaped recoveries, and it is better to avoid the L.

Russia has little danger of a very long L I feel, since when the global economy picks up again oil prices will rise, at least this time round, and this will kick start the economy. I don't give much credance to the Russian internal consumption issue - I mean we are now about to see one hell of a lot of loan defaults, both among households and corporates following the devaluation, and bleeding jobs is normally a big consumption negative. Also, the cost situation will now be favourable to Russian industry in exporting as the environment recovers, but they have to get inflation under control still. All in all a very challenging environment.

C) The third argument is Russia specific, and that is the very difficult demographic future it faces (see a variety of posts on this site for this). Basically, I doubt that growing domestic consumption as Deripaska envisages is going to work in Russia, since rapidly ageing and declining populations don't normal have a strong consumption profile, they are normally export dependent, or totally lethargic. Russia does have resources, so it is unlikely to be lethargic in the near future.

The problmes all start to lock in over the next decade, and then after 2020 they really lock in. My worst fear is that we are mored in all this till 2012, and then, when things do take off, the same political and institutional factors come into play again as last time round, so that when we get to the next cycle peak exactly the same thing happens as has happened this time. Then, on that worst case scenario, you get to 2020, and that is it. You are really done, although you can limp along till the demand for oil really starts to drop below its supply as the alterative energy ideas Nobody keeps talking about really take effect.

Basically Russia needs to use this crisis to make the political and institutional changes which would enable it to address some of these challenges during the next upswing, but since I am not optimistic she will avoid default, and especially not after todays news (as per the FT article) and sovereign defaults are not conducive to stable political evolution (the Argentina syndrome) then I am simply not optimistic.

Edward Hugh said...

What I don't see at all in the Deripaska view is how the following two quoted parts fit together. He obviosuly knows a lot about the businesses he is in, but his grasp of macro economics is, I feel, quite limited. Unfortunately I see a lot of these kind of arguments coming out of Eastern Europe these days.

This is deleveraging that is so dangerous for the U.S. economy, but is not as dangerous for us because our level of financial penetration is very small. Even in the automobile sector, less than 26% of cars were sold on credit. So the consumer paid, himself, for 75%. I mean the sector as a whole, including commercial machinery. This is when I talk about credit, leasing … . We had less than 18% of apartments sold on credit. So the problem is not that large. On the other hand we had this inexhaustible resource, revenue from the rising prices of raw materials.

The second issue that I was really glad to see is the level of trust and understanding that exists between the management and the workers. When the management explained that the demand is such that we need to produce five times less… We have many factories that are the only ones in a city, where entire families work. And people began to make the right decisions, part of the workers decided to go on unpaid leave. So the system itself, from the inside, found a humane solution. The machinery construction declined by 50%, the same as ferrous metallurgy. And there are no problems with strikes, when union leaders try to oppose the action of others. The most market-driven sectors are those of construction, services, machine-building.

I mean, just how are all those workers in single factory towns who are being so understanding and simply going home and waiting able to keep buying cars and other consumer items which will keep the system going?

Edward Hugh said...

Oh, I get it, Russian workers simply have a much better understanding of the rationale of "creative destruction" (which I think in its origins was a Russian "constructivist" idea) than they Western counterparts. Years of bitter experience of it must have helped evolve this more "mature" view.

In rentable sectors, at Gazprom, aluminium, copper, nickel companies, everyone is used to high salaries. But even they have a good understanding of the problems that we encountered, and they are prepared to wait for a year and a half or two years.

Probably they can use the gap spending time with their family, and going for trips in their newly acquired cars. After all, petrol must now be pretty cheap.

Sublime Oblivion said...


I see the rate of contraction in China is slowing (http://online.wsj.com/article/SB123374286802047489.html?mod=googlenews_wsj), which is not really surprising because now that Western demand for their exports collapsed, now their economy is already shifting gears to serve their domestic market (which is basically sound, unlike the debt-burdened Anglo-Saxon economies).

This also means, I think, that oil prices will start going up by the second half of this year again. Interesting factoid - for the first time ever this January more cars were sold in China than in the US.

Re-longterm oil issues.

Some serious analysts are skeptical about the ability of renewable energy sources to replace oil rapidly enough, especially if its decline rates turn out to be great enough. I think its quite possible that we are entering a new economic era in which short-lived booms are followed by collapses to a lower level over and over.

Edward Hugh said...

Hi SO,

"I see the rate of contraction in China is slowing"

Yes it is, but only slightly, we need to see more data, so lets take this a month at a time, and do remember that any number under 50 is very bad news for China, since they badly need to grow, not shrink as their rate of population growth is still quite rapid (although that is set to change sharply quite soon).

"now their economy is already shifting gears to serve their domestic market (which is basically sound, unlike the debt-burdened Anglo-Saxon economies)."

Well, this is what we are all about to see, isn't it.

"This also means, I think, that oil prices will start going up by the second half of this year"

Well, again there are two views on this. The investor consensus is that you are right, in fact they are all already chafing at the bit to get started. But there is the other view, that this is a bit premature, and that the global economy, and thus demand for oil will be very very weak all year, and then we will see about 2010.

I take the latter position, but then, we won't be long in finding out. I think your administration are now hedging their bets that this might be a longer run problem, and are moving away from running such a large fiscal deficit this year, as they may need some of the Wealth Fund money for next year too. (post coming later today on this).

Certainly I have been doing some back of the envelope calculations with oil (which was around 25% of GDP last year) at the present price (less than half last years average) and output down due to low demand, then GDP will take a very large hit this year if prices don't move.

"I think its quite possible that we are entering a new economic era in which short-lived booms are followed by collapses to a lower level over and over."

Well I am not optimistic either. I think the impact of this contraction will be longer than most presently contemplate, then we will get one more good cycle as places like India and Brazil come out of the depths of poverty, then if the next recession is in the early 2020s I think the ageing population bit will really lock in and the world will become a very different place.

No society of any form in the whole of human history has ever carried the sort of elderly dependence ratios we are all looking at.

Sublime Oblivion said...

So basically you think that there will be economic stagnation due to high dependency ratios, and I think there might be stagnation or regression due to dwindling high-EROEI (energy return on energy invested) energy sources. :)

PS. It's not "my" administration as such since I don't live in Russia, though I do have a high opinion of it.