Facebook Links

Quietly clicking my way through Bloomberg last Sunday afternoon, I came across this:

Facebook Members Register Names at 550 a Second

Facebook Inc., the world’s largest social-networking site, said members registered new user names at a rate of more than 550 a second after the company offered people the chance to claim a personalized Web address.

Facebook started accepted registrations at midnight New York time on a first-come, first-served basis. Within the first seven minutes, 345,000 people had claimed user names, said Larry Yu, a spokesman for Palo Alto, California-based Facebook. Within 15 minutes, 500,000 users had grabbed a name.

Mein Gott, I thought to myself, if 550 people a second are doing something, they can't all be wrong. So I immediately signed up. Actually, this isn't my first experience with social networking since I did try Orkut out some years back, but somehow I didn't quite get the point. Either I was missing something, or Orkut was. Now I think I've finally got it. Perhaps the technology has improved, or perhaps I have. As I said in one of my first postings:

Ok. This is just what I've always wanted really. A quick'n dirty personal blog. Here we go. Boy am I going to enjoy this.

Daniel Dresner once broke bloggers down into two groups, the "thinkers" and the "linkers". I probably would be immodest enough to suggest that most of my material falls into the first category (my postings are lo-o-o-ng, horribly long), but since I don't fit any mould, and Iam hard to typecast, I also have that hidden "linker" part, struggling within and desperate to come out. Which is why Facebook is just great.

In addition, on blogs like this I can probably only manage to post something worthwhile perhaps once or twice a month, and there is news everyday.

So, if you want some of that up to the minute "breaking" stuff, and are willing to submit yourself to a good dose of link spam, why not come on in and subscribe to my new state-of-the-art blog? You can either send me a friend request via FB, or mail me direct (you can find the mail on my Roubini Global page). Let's all go and take a long hard look at the future, you never know, it might just work.

The New Orthodoxy Is Upon Us

We seem to be witnessing the arrival of some kind of new financial orthodoxy. The IMF put it like this in the Hungary Standby Loan Report (which by chance I was reading last night):

In emerging market countries with debt overhangs, the “Keynesian” effect of fiscal adjustment is likely to be outweighed by “non-Keynesian” effects related to expectations and credibility. Non- Keynesian effects have to do with the offsetting response of private saving to policy-related changes in public saving. In particular, if fiscal adjustment credibly signals improved public sector solvency, a fiscal contraction could turn out to be expansionary, as private consumption rises based on the view that future tax hikes will be smaller than previously envisaged.
IMF - Hungary, Request for Stand-By Arrangement, November 4, 2008

So from Tallinin, to Riga, to Budapest, to Bucharest, the same sonata on a single note is being played, and the message is cut spending and you will expand. Funny how people are not very convinced about this idea in Berlin, London, or Washington. Sounds like they haven't heard about the paradox of thrift either.

Consumers are pulling back because they’ve realized that they’re too far in debt. The economy is shrinking in large part because consumers are pulling back. And the result, almost surely, is to leave household balance sheets worse than ever. I can’t do this accurately until the Federal Reserve’s flow of funds data have been updated, but almost without question the ratio of household debt to personal income has been rising, not falling, as consumers try to save more.

And today we learn that Dmitry Medevdevis is getting the gospel (via the evangelist Alexei Kudrin)and planning his own package of "expansionary" fiscal cuts for 2010.

Dmitry Medevdev, Russia’s president, on Monday ordered the government to prepare for a continuation of the economic crisis into 2010, delivering a markedly pessimistic view of the country’s economy and mandating wide-ranging budget cuts until now put on hold.

In an address to top government officials on the budget priorities until 2012, the president sided with the fiscal conservatives in an economic debate that has been raging within the Russian government since last autumn, over how much to cut spending in the face of the crisis.

One of the 10 priorities he announced was “transfer to a strict regime of saving budget resources”. This year Russia will run its first budget deficit in the decade, projected at 7.4 per cent of GDP, which is to be funded almost entirely out of official reserves. Monday’s forecasts, which assume a price of oil of $50 per barrel in 2010, put the budget deficit of 5 per cent of GDP in 2010, falling to 3 per cent in 2011.

Mr Medvedev’s remarks indicate the consensus view on the economy has been getting more bearish, in line with that of Alexei Kudrin, finance minister, who sees the crisis lasting longer than initial forecasts, which saw growth returning by the end of 2009.

Mr Kudrin said lower budgets deficits could only be achieved if the whole system of budget spending was reviewed. “A review of spending, a transition to targeted spending and saving – these are the key words in the next three years,” he said.

Aleksander Auzan, an economist and director of the Social Contract Institute in Moscow, said the projections delivered by Mr Medvedev meant that the fiscal conservatives such as Mr Kudrin had won the debate for now.

Of course, as Krugman points out, the paradox of thrift normally operates in circumstances where monetary policy has been eased so far that interest rates are starting to get stuck around the zero bound, while Bank Rossii has been busy promoting ruble liquidity by pushing interest rates steadily up, although they have been eased slightly of late to 12%, still offering a yield which is very attractive in comparative terms and drawing in a growing crowd of carry traders who are systematically pushing the ruble to ever higher levels and weakening the export potential of Russia's non-oil manufacturing sector in the process.

Russia’s ruble climbed to a four- month high against the dollar, headed for its longest run of weekly gains in almost two years, as surging oil prices and higher interest rates lured investors to the country.

The ruble jumped to as strong as 31.1607 per dollar today, the most since Jan. 14, and is poised for a 2.8 percent gain in the week, its sixth weekly advance and the longest rally since September 2007. The central bank bought the most foreign currency on the market in almost a year this week as it sought to control the advance, said Mikhail Galkin, head of fixed- income and credit research at Moscow’s MDM Bank.

The ruble has climbed 16 percent since the end of January amid a 39 percent jump in Urals crude, the country’s chief export blend, and central bank efforts to deter bets against the managed currency. The ruble depreciated 35 percent in the six months to Jan. 31, spurred by Urals crude’s more than $100 slump from a record high and the worst global financial crisis since the Great Depression.

Bank Rossii, has been buying foreign currency on the market in a bid to limit the ruble’s volatility, the central bank’s First Deputy Chairman Alexei Ulyukayev said in an interview last week.

Deustche Bank last week specifically recommended buying Hungarian forint denominated assets - according to the bank the Russian ruble, the Hungarian forint and the Turkish lira are among the most interesting trades at present. At the start of April Goldman Sachs also recommended investors to take advantage of the unique opportunity and use euros, dollars and yen to buy Mexican pesos, real, rupiah, rand and Russia rubles.

But we need to be careful here. Kudrin is undoubtedly right, Russia does need to dig herself in for a longish winter. There may well be no global 'V' shaped recovery, and the Russian economy may well have to learn to cut its coat according to its cloth in order to live with oil at prices below the critical levels for Russian stability. But please, oh please, don't let's start fooling ourselves into thinking that applying fiscal and monetary tightening is expansionary!

The Russian Government Forecasts A Possible 8% GDP Contraction For 2009

Of course, with all these large negative numbers doing the rounds at the moment, we are all in danger of going rapidly dizzy, but some pieces of data still have the power to shock, like this morning's announcement from Russia's Economy Minister Elvira Nabiullina that the economy may shrink as much as 8 percent this year.

“The specific contraction numbers could be 4 percent or 6 percent or 8 percent,” Nabiullina said in an interview with Bloomberg Television in Moscow today. “We’re doing various calculations, pessimistic and optimistic. We believe much depends on how efficient we are.”

So the Russian Government is still running through the scenarios, and the ministry now promises to submit new growth forecasts by the end of the month, but it is worth bearing in mind that, as recently as last January, the most probable estimate stood at minus 2.2 percent. And the Economy Ministry aren't the only ones with the excel sheets and calculators out - Alfa Bank, Russia's largest private bank, Goldman Sachs, Citigroup and the International Monetary Fund have all revised their 2009 growth forecasts down recently, with Alfa this week cutting its outlook to minus 5.7 percent from an earlier anticipated drop of 3 percent. Nabiullina's deputy, Andrei Klepach, recently described the International Monetary Fund’s estimate for a 6 percent annual drop as “realistic.”

Russia's Economy Contracts By 7% In Q1 2009

According to Deputy Economic Development Minister Andrei Klepach last week, Russia's economy shrank by 7 percent year on year in the first quarter of 2009, a staggering turnaround for an economy which has just enjoyed eight years of solid oil-fueled growth.

"These figures are worse than we expected," Klepach said at a press conference in Kiev,citing preliminary figures. Klepach also stated that net capital outflows reached $33 billion in the first quarter of 2009, following record outflows of $130 billion in the second half of last year.

The Russian State Statistics Service have also released official gross domestic product figures for the fourth quarter of 2008. GDP was up 1.2 percent year on year, the worst reading for any quarter since the first quarter of 1999, and down from a revised 6 percent in the previous three months. The World bank are now suggesting that the present slump may be deeper than the one that followed the government debt default and ruble devaluation in 1998.

Certainly the data are bleak. Industrial production contracted for a fourth consecutive month in February - falling by 13.2% year on year - as the credit squeeze and falling incomes eroded demand for metals, cars and consumer goods. Retail sales contracted in February for the first time since February 1999. Unemployment was also up, at 8.5 percent in February, the highest level since January 2005.

Manufacturing output plunged with the collapse in demand in the last two months of 2008, and it is likely to contract further in 2009. According to Rosstat five of 14 major manufacturing industries reported outright output declines in 2008, with electronics, electrical, and optical equipment hardest hit (-7.9 percent), followed by textile and sewing (-4.5 percent) and by chemicals (-4.2 percent). Most of the dislocation took place in November and December 2008, when total manufacturing output respectively fell 10.3 and 13.2 percent (year-on-year). As credit continues to tighten and demand to fall, manufacturing is likely to contract further in 2009. According to recent statistics, manufacturing output dropped 24.1 percent in January 2009, compared with January 2008, and 18.3 percent in February 2009, compared with February 2008. In February 2009 the most significant declines were registered in the production of electro-technical and optical equipment (-46.6%), other non-metal products (-33.3%), and transport and transportation equipment (-31%).

Tighter credit, collapsing global demand, huge global uncertainty, and rising unemployment have hurt both investment and consumption growth in Russia. According to Rosstat, total fixed capital investment grew 9.8 percent in 2008, compared with 21.1 percent growth in 2007. More worrisome is the investment decline by 2.3 percent in the fourth quarter of 2008 (year-on-year), largely reflecting escalating liquidity problems in the banking sector and the resulting credit crunch and a deceleration in consumption growth due to rising unemployment and lower growth. (World Bank Report, April 2009)

GDP Indicator Shows 5.4% Contraction in March


The latest data we have to hand confirm the ongoing character of the contraction. The Russian economy is thought to have declined by 5.4 percent in March compared with March 2008, according to the latest GDP indicator estimate provided by VTB Capital. The VTB GDP indicator also registered an average 4.4 percent contraction for the first three months of 2009, which would be the worst decline since the economy shrank 5.1 percent in the fourth quarter of 1998. The difference between the VTB estimate and the 7% estimate put forward by Klepach would lie in the fact that the VTB indicator does not include contstruction, and construction activity has declined sharply in recent months, so the two pieces of data are consistent with one another.



Purchasing power has been reduced by lower wages and less access to credit, togther with rising unemployment rates. 6.4 million Russians, or 8.5 percent of the economically active population, were unemployed in February, a 5 percent increase over January and a 20 percent increase on February 2008. The World Bank forecast recently that unemployment would rise to 12% in 2009.

The weakening in retail sales and other consumption indicators is not that surprising given the strength of the contraction, and especially since there is now growing evidence that Russia's employers, in order to make cost savings while maintaining staff levels during financial crisis, are more and more resorting to salary reductions or part-time working schedules. This approach is thought to be being used widely and appears to have much more legitimacy under Russian law than simply telling employees to go home and take unpaid leave. Employers are being advised to take special care when unilaterally modifying major terms and conditions in employment contracts, since although under the Labour Code, changing the terms and conditions of an employment contract is permitted only by mutual written agreement of both parties, there is an exemption from this rule – Article 74 of the Code - which specifies that in the event of a change in organizational or technical working conditions which make it impossible for the previously agreed terms of an employment contract to be maintained, an employer is entitled to unilaterally change such terms on his or her own initiative.

As a result of this contraction in output and weakening in the labour market real incomes have declined substantially in Russia since the autumn of 2008. Rising unemployment and worsening enterprise finances (wage arrears have increased considerably) have meant that in the fourth quarter of 2008 alone, real disposable income dropped 5.8 percent year on year, and by 10.2 percent in January 2009 (again year-on-year). And unpaid wages as a share of total enterprise turnover tripled to 0.12 percent in December 2008, compared with August 2008. The stock of wage arrears as of March 1, 2009 (8 billion rubles or about USD 240 million) remains small but is likely to increase as the crisis grows. At the present time such arrears are thought to affect up to 450,000 people, significantly less than 1 percent of total employment. Growth in real wages came to a complete halt in January-February 2009, following double-digit increases in previous years.

Russian Services Contract Less Slowly In March

Activity in Russia’s service sector continued to contracted in March, although the seasonally adjusted headline VTB Services Purchasing Managers Index rose to 43.9 in March from 40.0 in February. Since any readings below 50.0 signals contraction, we can see that while Russia's services are still contracting, they are contracting somewhat less rapidly than in earlier months.



Activity and new business both declined for the sixth consecutive month, however the rate of decline in the volume of new business was at its lowest rate since last October. However a survey-record decline in employment was registered in March, with redundancies at their most severe in hotels and restaurants. Firms raised output prices at a weaker rate in March, as input price inflation moderated and pricing power remained weak due to falling demand for services.

“Surging price competition on the back of weak market demand has urged companiesto tighten their cost cutting programs. Among the measures that have been applied are further redundancies that resulted in the fastest rate of employment contraction in the history of the survey. The input price inflation eased slightly, however, the pressure of utilities charges remains significant,” Svetlana Aslanova, an analyst at VTB Capital, commented on the survey.

As Does Manufacturing


Russian manufacturing contracted at the slowest pace for five months in March as companies reduced their stocks of unsold goods and the decline in new business eased, according to the latest PMI report from VTB Capital. The VTB Purchasing Managers’ Index was at 42 last month after a 40.6 reading in February. Stockpiles of unsold goods fell at the fastest rate since December 2005, according to the survey of 300 purchasing executives.



Inflation Rising Again

Russia’s inflation rate rose to a five-month high in March as the weaker ruble boosted import prices. The rate rose to 14 percent from 13.9 percent in February, while consumer prices grew 1.3 percent month on month, compared with 1.7 percent in February.




Inflation was spurred at the start of the year by the weakening ruble, which pushed up import prices, helping the annual rate jump to 13.9 percent in February from 13.4 the month before. The ruble has now lost 29 percent against the dollar since August. The most recent spike in inflation is evidently producing quite a headache for the Central Bank, since chairman Sergei Ignatiev last week that if April's inflation is “significantly less” than it was a year ago, the central bank may consider cutting interest rates for the first time since 2007, giving some kind of monetary relief to an economy which is badly in need of it. Russia’s inflation rate went as high as 15.1 percent last June, and has since come down somewhat from that peak, but really the record of the central bank in containing inflation has been pretty abysmal.

Bank Rossii has been forced to raise its refinancing rate twice since last November, to the current level of 13 percent, in an attempt to limit the amount of rubles available to banks and companies and to slow the decline of the ruble against the dollar. On the other hand the central bank may be in danger of excessive optimism at this point, with Ignatiev telling journalists that his expectation was that the economy may pick up within “several months,” thus trying to offer hope that Russia's banks won’t suffer that “second wave” of crisis that Finance Minister Alexei Kudrin said may hit as bad loans eat up capital. I am of the opinion that Kudrin is right to be cautious here.

Rising delinquency “is a serious problem, but I don’t share the opinion that a second phase of the crisis is unavoidable,” is Ignatiev's view. Overdue retail loans rose to 4.4 percent as of 1 March from 3.2 percent on 1 September. “I believe the most serious phase of the economic crisis is over," Ignatiev told journalists. Would that he were right, unfortunately I think he is wrong, the worst is still ahead.

Obviously the continuing inflation is a problem for Russia's central bank since they would obviously like to offer monetary easing to the economy, just as the U.S. Federal Reserve, the European Central Bank and the Bank of England are doing by bringing their benchmark rates close to zero to bolster banks and pull their economies out of recessions. Bank Rossii last cut the refinancing rate in June 2007, and it has now increased the repurchase rate charged on central bank loans four times since November.


The refinancing rate, seen as a ceiling for borrowing money and a benchmark for calculating tax payments, is currently at 13 percent after being raised in November and December. The central bank increased the repo rate charged on central bank loans twice in February.


Ignatiev admitted that problems with dealing with non-performing loans “could arise", and that he did not "think this is just empty talk,” although he stressed Bank Rossii would seek a solution should the banks be forced to increase reserves to deal with possible losses on loans. Bad loans are still a very low proportion of total debt, nut they are rising. NPLs held by OAO Sberbank, Russia’s largest lender, now make up about 2.8 percent of the bank’s loan portfolio, Chief Executive Officer German Gref last week.


Also, on the general economic front the pessimists more or less balance out the optimists. The latest in the pessimist camp, Vladimir Yakunin, head of OAO Russian Railways, said this week that the slowing in the decline of cargo shipments in March doesn’t seem to him to indicate that the country is pulling out of its economic crisis.

“We are only at the beginning of the crisis and we should wait for better and
more solid indications,” Yakunin, chief executive officer at the Russian state
rail monopoly which operates the world’s longest rail network, said in a
Bloomberg Television interview in his Moscow office today. “We didn’t yet pass
the middle point of the crisis.”

Railway cargo turnover fell by 15.8 percent in March from a year earlier, compared with a 32 percent fall in January and a 26 percent decline in February. The data is a “leading indicator of the trend in Russian industry,” according to VTB analysts in their GDP indicator. Yakunin said Russian Railways is “fighting” to limit this year’s cargo turnover drop to 19 percent as it is forced to slow down its development amid falling investment.

We also learn this week that Siberian Services, an oil-drilling company among whose clients are to be found OAO Rosneft, has defaulted on $100 million of bonds, thus becoming the first Russian borrower to fail to repay its foreign debt this year. Siberian Services didn’t redeem the 13.75 percent notes due 2010 by an April 3 deadline after bond holders exercised a so- called put option, according to Bloomberg news, citing some of the investors involved.


State-owned Finance Leasing skipped an interest payment on $250 million of securities in December, according to Bloomberg. Russian borrowers are struggling to refinance about $100 billion in foreign notes maturing this year as banks reduce lending following $1.3 trillion of losses and writedowns since the start of 2007.

Conflicting Futures?

While the Organization for Economic Cooperation and Development and the World Bank are forecasting that the Russian economy will decline by 5.6 percent and a 4.5 percent, respectively, in 2009, the Russian government is still stubbornly holding fast to its official forecast of a 2.2 percent fall. Publicly government officials are sticking to their view, and diiging in around the idea that they expect a recovery in the final quarter. Deputy Economic Development Minister Klepach said that the government forecast takes into account a package of anti-crisis measures currently being debated by lawmakers that should bolster domestic demand and help boost GDP. Without it, the economy could contract by 4 percent to 5 percent, Klepach noted.

The Central Bank, on the other hand, continues to forecast a 4.5 percent contraction for the current year.

The Russian Cabinet approved last month a revised budget containing the first deficit in 10 years. The budget anticipates a deficit of 7.4 percent of projected gross domestic product, but since the current forecast is for a GDP contraction of only 2.2%, the final deficit may be considerably larger. The Finance Ministry is now transfering money from the Reserve Fund to cover the deficit, and anticipates using some 2.7 trillion rubles this year to help fund the budget gap.

The Ministry of Finance has released the main parameters of its revised federal budget for 2009 which is based on lower oil prices (USD 41 a barrel, Urals) and a drop in budget revenues from the original 21.2 percent of GDP (under the old assumption of USD 95 a barrel) to 16.6 percent, or RUB 6.72 trillion. At the same time, expenditures will be increased by RUB 667.3 billion to RUB 9.69 trillion, to produce a deficit of RUB 2.98 trillion (about 7.4 percent of GDP), a massive reversal of the fiscal position from the 4.1 percent surplus in 2008.

The total consolidated general government deficit is expected to be around 8 percent in 2009 deficit and will be financed largely from the Reserve Fund (7 percent of GDP) with modest domestic borrowing (up to 1 percent of GDP). With a large fiscal deficit, however, and the need to preserve some reserve fund resources for the uncertainty likely to extend into 2010, the space for more fiscal stimulus this year appears limited.


So the level of the contraction which the Russian economy undergoes in 2009 really is rather big beer, since it will condition the size of the eventual fiscal deficit, and the percentage of the Reserve Fund which will need to be used this year. If there is no rebound in oil prices in 2010 then Russia's position can complicate on a number of fronts, since the Central Bank Reserves will be significantly depleted, the Reserve fund also, and there may be less room for fiscal easing in the face of potential credit rating downgrades, while monetary easing may also prove difficult given the need to support the currency, and protect Central Bank Reserves. Which brings is back to that “second wave” of crisis that Finance Minister Alexei Kudrin said may hit as bad loans eat up capital. Russian overdue bank loans are increasing by 20 percent a month, according to OAO Sberbank Chief Executive Officer German Gref this week. He also stated that about 3.7 percent of Russian bank loans are currently delinquent, a figure which compares with the 40 percent level hit at the peak of the 1998 crisis. The IMF are already predicting a 10% loan default rate, but at this pace we will hit that level in the autumn, while the 40% rate looms in the spring of 2010, unless there is significant upward movement in oil prices. In fact a Bloomberg survey of 17 bank analysts this week gave a mean estimate that Russian bank bad loans will quadruple to $70 billion this year, with non-performing loans rising to 12.8 percent of the 18.4 trillion rubles ($549 billion) owed by Russian companies and individuals. HSBC Holdings Plc, Europe’s biggest bank, expects delinquencies to reach 23 percent, Europe’s highest rate after Hungary at 25 percent.

All in all then, 2010 could be a very hard year for Russia and its citizens.

Russian Manufacturing Contracts More Slowly In March

Russian manufacturing contracted at the slowest pace for five months in March as companies reduced their stocks of unsold goods and the decline in new business eased, according to the latest PMI report from VTB Capital. The VTB Purchasing Managers’ Index was at 42 last month after a 40.6 reading in February. A figure below 50 means a contraction and above 50 implies growth. Stockpiles of unsold goods fell at the fastest rate since December 2005, according to the survey of 300 purchasing executives.

“Stocks of unsold goods declined which, combined with a sluggish contraction of the new business sub-index, suggest that the headline index may keep rising into the second quarter,” Dmitri Fedotkin, a VTB economist, said in the statement. Still, “no sharp recovery” in the index is to be expected.

The index showed contraction for the eighth straight month, a longer period of decline than the one registered in 1998, when the government devalued the ruble and defaulted on $40 billion of debt.

The manufacturing workforce shed jobs for the 11th month in a row, the longest period of contraction in the survey’s history, VTB said. “Firms reported that the redundancies resulted from lower workloads and the subsequent need to cut spare capacity,” it said in the statement.

OAO Severstal, Russia’s biggest steelmaker, plans to cut as many as 9,500 jobs at its Russian units, Chief Executive Officer Alexei Mordashov said on March 11. The metals industry as a whole could cut as many as 60,000 jobs this year, or 5 percent of the workforce as demand and prices slump, the Industry and trade Ministry said.

Russia's Contraction Slows In February

News from Russia's crisis stricken economy has certainly been a lot less dramatic of late, but even as Finance Minister Alexei Kudrin seeks to reassure us that everything is coming back under control and that lending in the Russian economy is "in full swing" once more, doubts remain. Are we simply seeing the temporary impact of all those stimulus measures that have been put into place, or is a more general recovery possible at this point?

Certainly if we come to look at the purchasing managers indexes we can see that things were better in February than in January. The VTB services index rose to 40 in February from 36.8 in January, although since any reading under 50 indicates contraction, it is clear that Russia's services industries are still shrinking at a pretty hefty rate.

The manufacturing PMI also improved slightly, rising to 40,6 from January's record low of 34.4.



This impression gained from the PMIs is also confirmed by the latest data for Russian industrial production, which dropped an annual 13.2 percent in February, the fourth month of decline, but still rather better than January's 16% decline.



And there are other signs of stabilisation, since job losses are now flatlining at 300,000 per month, while nominal wages have risen from January's eight month low. Even a 14.1 percent fall in capital investment in January was less than expected.

However, whatever the improvements, the Russian economy continues to contract, and the February reading for the Markit GDP Indicator fell to an annual contraction of 4.7%, down from a revised 2.9% drop in the first month of the year.

And indeed the contraction may be even sharper, since Economy Minister Elvira Nabiullina informed the Russian government last week the Russia's gross domestic product is likely to contract by 7 percent year-on-year in the first quarter, according to Ministry estimates. However the ministry is still sticking to its forecast for a full-year contraction of just 2.2 percent, suggesting they continue to hope for a dramatic turnaround in the second half of the year.


So the data we now have to hand for the first two months of 2009 point to a further outright contraction over the first quarter, following on the back of the sharp growth downturn in the final quarter of last year. The PMI-based Indicator of year-on-year GDP has now fallen continuously since hitting 7.4% last June and has been in negative territory for the past three months.

The Total Activity Index rose to 38.8 in February from 32.1 in January, indicating a further sharp decline in output, although this was the weakest rate of deterioration since last October.

Russia's economy will contract 2.2 percent this year after 5.6 percent growth in 2008, according to Economy Ministry estimates, and the government anticipates a budget deficit equal to 8 percent of gross domestic product, its first in a decade.

However a number of factors lead towards the conclusion that this estimate for 2009 GDP growth may be rather over optimistic. Only today Ford Motor Co., whose Focus is the top-selling western car in Russia, cut its industry forecast for the country, saying sales may plummet as much as 50 percent this year in what used to be their second-fastest growing auto market. Ford, which stopped production at its St. Petersburg plant for one month from mid-December to mid-January, is looking at further adjustments to “plan realistic inventories,” according to the company statement.

Russian car sales in the first two months of 2009 were down 36 percent to 252,314 vehicles.

The Russian government has responded to the fall in car sales by pledging to spend about 220 billion rubles to aid the industry, offering to subsidize loans on car purchases and making plans to upgrade at least 12 percent of the federal car fleet. The government also raised import duties on cars and trucks to encourage domestic production.

On another front Russian wage arrears climbed by 16 percent in February, the second consecutive month that this figure has risen. Total unpaid wages were 8.09 billion rubles ($235 million) on March 1 following a 49 percent in January, according to the Federal Statistics Service. Half a million people were affected by the delayed payments, with 47 percent of the money overdue coming from the manufacturing sector. The unemployment rate rose 8.1 percent in January, the highest level since March 2005, with the total number of unemployed up by 300,000 and reaching 6.1 million people.

List Of Companies Approved

The work of trying to contain the damage continues on an almost daily basis. Earlier this week it was announced that Russia’s Trade and Industry Ministry have approved a list of 600 companies who may apply to receive state funds during the economic decline. The ministry, whose budget before the crisis reached 120 billion rubles ($3.59 billion), is already “actively” involved with a third of the companies on the list.

Russia's Economy Declines At An 8% Annual Rate In January

Russia’s economy contracted at an annual rate of 8.8 per cent in January, according to the latest statement by the Russian economy minister. This data point, which provides us with the latest confirmation that a very sharp contraction is now taking place in Russia, follows last week's announcement by economic development minister Elvira Nabiullina, economic development minister, that the economy shrank by 2.4 per cent between December and January. Industrial production also fell 16 per cent year-on-year in January, while there was a 17 per cent decline in construction.

It also gives us some indication of the viability of VTB’s Russian GDP Indicator (as posted here) which indicated a year on year rate of contraction of 4 percent in January, down from December’s 1.1 percent decline, and November's 2.1 percent expansion. This is somewhat under the actual reading, but it is an estimate in real time (we got this at the start of February) and it was by far the nearest estimate I have seen.

In its official estimates, the economy ministry said the global downturn was filtering deeper into the real economy and had begun to weigh heavily on ordinary citizens.

"Among the negative consequences of the deepening crisis, we can now count a notable drop in the population's real income growth (6.7 percent), increasing unemployment and, as a result, falling consumer demand," the ministry said. "The most important reasons for the economic fall of January 2009 is the significant fall in industrial production, the decline in investment activity, a drop in construction and slowing consumer demand."

Among the hardest-hit segments, the ministry cited fertiliser producers, which cut output by 42 percent, while tyre producers reduced their output to almost zero. Car production also fell, by 80 percent, and the ministry cited lack of cheap car loans amid a general decline of personal income and excessive production in 2008. Retail sales and agriculture still remained in positive territory areas which were still growing - at 2.4 percent and 2.6 percent respectively - although they are already down sharply and there is evidently more to come.



Exports fell more than 40 percent to $20.2 billion as the country exported less oil and gas at lower prices, while imports fell by a third to $10.3 billion as a 35 percent rouble devaluation, which continued throughout January, started hitting importers. Consumers of heavy machinery reduced purchases of foreign equipment by 47 percent and food and chemical imports fell by 25 and 29 percent, respectively.

All of this, of course, has quite serious implications for Russia's public finances, and the budget deficit is now projected to reach 8% of GDP in 2009, according to Nabiullina, who said the figure took into account so-called quasi-budgetary expenditures in the form of subordinated loans to business, which would (in principle) be repaid at a later date. The federal budget for 2009 originally set expenditures at 9.024 trillion rubles ($250 billion at current exchange rates) and revenues at slightly over 10 trillion rubles ($277 billion), but the drop in oil prices has cut the expected income dramatically.

The budget was based on an average oil price of $95 per barrel for the year, but is being recalculated based on a figure of $41 per barrel.