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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.

Thursday, January 22, 2009

Russia's Industrial Output Slumps As Reserves Leave At A Record Rate

Russian industrial production dropped sharply again in December - by the most since at least 2003. Output was down 10.3 percent following an 8.7 percent fall in November, according to data from the Federal Statistics Service announced yesterday (Thursday) by central Bank Chairman Sergey Ignatiev. Output growth for the year was 2.1 percent, the slowest since at least 1999.

Manufacturing fell an annual 13.2 percent in December, compared with a decline of 10.3 percent in November, as steel-pipe production dropped an annual 35.3 percent and coking coal output plunged 44.2 percent. Truck production plummeted 67.1 percent.

This data is not surprising, and only confirms what we have been seeing in the VTB PMI. The next interesting data appointment will be on 2 February, when we should get to see what happened in January.

Reserves Drop Sharply

Russia’s international reserves fell $30.3 billion last week, the second-biggest drop on record, as the central bank accelerated the rate of the ruble devaluation and sold increasing quantities of foreign currency in an attempt to manage the pace of the decline. Russia’s reserves have now fallen 34 percent from the record high of $598.1 billion in August while the ruble has fallen 29 percent against the dollar over the same period.

Some of last weeks decline can be attributed to the dollar’s 1.5 percent gain against the euro in the week ended January 16, since this means a fall in the dollar value of the other currencies in the reserves. Evgeny Nadorshin, senior economist at Moscow’s Trust Investment Bank, estimates that about $18.3 billion of the drop can be accounted for by central bank interventions last week.

(The reserves are made up of 44 percent euros, 45 percent dollars, 10 percent pounds sterling and 1 percent yen).

The Ruble continued to fall today (Friday) after the central bank announced last night that it was “finished” with its gradual devaluation of the ruble and was going to let “market factors” help determine the level of the currency. The bank set the weakest end of the currency’s trading range against a target basket of dollars and euros at 41 as of today, or 36 per dollar, at a USD of around 1.3 to the euro. Bank Rossii has now widened the currency trading band 20 times since mid-November as it seeks to rebalance Russia's economy amid plunging oil prices and the global financial crisis.

Following yesterdays announcement the ruble fell again this morning, dropping 1.5 percent (to 33.1073 per dollar), extending this weeks decline to 1.8 percent.

“This is an open invitation for speculators to test how quickly the ruble can get to 41,” said Ulrich Leuchtmann, head of currency research in Frankfurt at Commerzbank AG, which ranks itself among the biggest 10 traders of the ruble worldwide. “They wanted to decrease speculative pressures, but now they’ve given the market a good reason to increase them.”


Anonymous said...

After the last two weeks(this week Monday) of extreme interventions by the CBR don't you think that the CBR is now pretty much in control of the ruble? it has now absorbed a tremendous amount of ruble liquidity(50 bln$ FX liquidity in banking sector and banking sector is now long FX, what is huge considering all the loans they have taken out). today's repo auction was again at record highs- 600 billion rubles(damand was 612). One month interest rates at 28% and rising. All the CBR needs to squeeze the banks is to cut the repo amount and cut daily swap amounts (today limit was 0,5 bln$ ).
After banks start to seek ruble liquidity, the CBR could avoid revaluation of the ruble by buying these dollars back.
CBR has already announced to limit next week repo auctions at 300 billion rubles and to cut non- collateral loans. So is there somewhere a mistake in my reasoning or what can now (after months of ruble selling)put the ruble under pressure if not the CBR itself by flooding the system with rubles?

Nobody said...

Hi Eduard

Do you know exactly how much of Russian companies short term debt is about to mature this year?

Edward Hugh said...


Well the world bank gave an estimate for total debt as of H1 2008 at $521 billion (last November).

They also said this:

Russia’s private corporate and banking debt grew rapidly in the first half of 2008 and total external debt rose by USD . billion in the second quarter of 2008. Although the general government’s external debt remains modest, the private corporate and banking debt increased by USD37.8 billion in the second quarter of 2008. The corporate sector— officially classified as “private” but including such state controlled enterprises as Gazprom—accounts for most of the debt stock. In the corporate sector, both financial and nonfinancial institutions have increased their debt stock, but nonfinancial institutions have increased it more rapidly. Public external debt has moderated.

While the overall share of short-term external debt of Russia remains low, accounting for less than 20 percent of total external debt, the share of short term debt in private financial institutions is significantly higher at around 40 percent. High levels of short-term debt make these private financial institutions, predominantly small and medium-size banks that were able to tap into international capital markets funding, vulnerable to the rollover risk and sudden changes in investment sentiment. Many banks relying on external borrowing must revisit their funding model under conditions of abrupt difficulties in access to new external credit and sharply rising rollover risk. For banks already relying on a broad deposit base, this may be easier to accomplish. Others, relying more on wholesale models and few and potentially volatile corporate clients, might need to seek additional sources of capital and reorient their funding model toward traditionalretail banking.

With hefty repayment obligations at a time of sharply tighter global credit, the rollover risk has risen, but the systemic risk is limited. Russia’s external debt maturing in the third and fourth quarters of 2008 is around USD100 billion, of which about USD45 billion is due in the last quarter of 2008. After including on-demand deposits held by the banking sector, the total debt that requires repayment or refinancing exceeds USD120 billion. The external debt maturing for the entire 2009 fiscal year is slightly less, around USD100 billion, however. Certain sectors, especially private financial corporations, are likely to face challenges in rolling over their external debt. In addition, higher prices for debt refinancing are inevitable. Furthermore, a sharp drop in stock values that were used as loan collateral have resulted in sizeable margin calls on lending facilities with 1-2 year maturities. It is estimated that the total debt due in the fourth quarter of 2008 including the margin calls might, therefore, amount to about USD60-65 billion. Even so, systemic risk to the banking sector, while rising, appears limited because of the government’s resolve to support the systemically important banks and a sizable package of measures taken to date

Edward Hugh said...

Hi Comrade,

"After the last two weeks(this week Monday) of extreme interventions by the CBR don't you think that the CBR is now pretty much in control of the ruble?"

Well I think you probably understand the dynamics of this kind of thing much better than I do, so really I can't help you too much. I am an observer of all this rather than a particant, although I am wary of the idea that this situation can be under control at this point. The strength of the real economy contraction is very, very strong at this point, and this is going to put tremendous stress all over the system.

Given the extent of private and corporate dollar lending, defaults are likely to be significant, and something somewhere are simply going to give. There is a lot of downside ahead as we move across 2009.

Edward Hugh said...

Also Comrade,

"So is there somewhere a mistake in my reasoning or what can now (after months of ruble selling)put the ruble under pressure if not the CBR itself by flooding the system with rubles?"

Basically expectations of further devaluation. If Russian households fear (possibly irrationally so) further devaluation, their urge to convert rubles into dollars to hedge against the possibility can make their fear become a reality, not to mention all the people who might simply be speculating on this outcome.

Part of the reason that currency and financial crises tend to be self fulfilling is that the government and the cb tend to be playing from a point of weakness and not one of strength, and the CBR need to be able to demonstrate they are in control for them de facto to be in control. Recent events don't suggest that this is the case at the moment, hence the boulder keeps rolling down the hill.