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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.

Sunday, January 18, 2009

VTB Bank Russia GDP Indicator Shows 1% Contraction In December

As the ruble falls below the weakest level seen during the 1998 Russian crisis it may well be a timely moment to ask ourselves just what is happening to the real economy in Russia. To help us do this we have the latest survey data from VTB Bank Europe, which points to an overall contraction in Russian GDP in December. For an economy that was only months ago growing at a 7% annual rate this sharp contraction is astonishing. The VTB GDP Indicator is derived from the bank's Europe’s PMI surveys of business conditions in the manufacturing and service sectors of Russia. By weighting together the output measures from these surveys, an indicator of total output is produced. Regression analysis is then applied to derive an estimate of GDP growth. The bank itself describes the indicator as follows:

The Russian GDP Indicator has been developed for VTB Bank Europe by Markit Economics to provide a tool to help policymakers and investors monitor economic conditions in Russia. Key features of the Russian GDP Indicator are:

It is available several weeks ahead of official first estimates of GDP (for example, Goskomstat did not release their first estimate of 2005 third quarter growth until December 2005);

It is produced monthly, rather than quarterly, allowing quicker identification of changing business conditions and turning points in the economic cycle;

It is internationally comparable with other GDP Indicators that Markit Economics has launched, including the Eurozone GDP Indicator;

On average, Markit Economics’s GDP Indicators have been more accurate at estimating GDP growth rates than official first estimates (the latter tending to be revised significantly after initial publication)
VTB Bank

In December, the Russian GDP Indicator fell below zero for the first time since March 1999, to -1.1%, from 2.1% in November. Over Q4 as a whole, the GDP Indicator has signalled a year on year expansion of 2.0%.

But this is perfectly consistent with a quarter on quarter contraction, as we can see in the monthly diffusion index GDP chart. So there is no doubt about it as far as I am concerned, the Russia economy contracted in Q4 2008, and really, effectively, the Russian recession has now started.

Further evidence for the slowdown can be found in the fact that unemployment rose 400,000 in November and while retail sales grew at the slowest annual rate in five years. Also in November, real disposable income fell on an annual basis while capital investment growth continued to drop back. The rouble ended 2008 20% lower versus the US dollar and 15% weaker against the euro, while the budget for 2009 remains under threat from falling oil prices.

The most recent official GDP figures from the Federal Statistics Service indicated year on year GDP growth of 6.2% in the third quarter of 6.2%, a figure which was itself a three-year low. This result was rather weaker than the advance trend registered by the GDP Indicator, which averaged 6.8% over the same period. The stronger VTB GDP Indicator may well reflect the absence of construction coverage in the PMI surveys – annual growth of construction value added in Q3 almost halved compared to the previous quarter – and probably also did not fully capture the effect of plummeting oil prices and weakening investment growth, on the other hand it the number is not a bad first estimate at all, and I emphasise, we get it at the end of the month in question.

In fact over the past nine years the official statistics office series and the VTB GDP Indicator have had a pretty close relationship, and the correlation is currently 0.88 (see chart below). Moreover, the Indicator has successfully captured the major peaks and troughs in growth throughout the period, thus I think we need to take the latest PMI based data very seriously indeed.

The ruble depreciated today to 33.1710 per dollar, its lowest level since early 1998. The ruble has lost 7.7 percent since official trading resumed this year, extending the decline to 29 percent since August, 2008. Investors have now withdrawn $245 billion from Russia since August according to data from PNB Paribas. Russia’s reserves, which are the world’s third-largest, fell by $171.6 billion to $426.5 billion between August and Jan. 9.

Bank Rossii, which manages the ruble against a basket of about 55 percent dollars and the rest euros, widened its target range again today. The currency has fallen 29 percent versus the basket since Aug. 1 and is now able to decline about 22 percent from a target rate, from about 3.6 percent on Nov. 11, the start of the current round of depreciation. The ruble weakened 1.4 percent to 37.8224 against the dollar-euro basket by 5 p.m. today in Moscow, extending this year’s drop to 6.7 percent. It depreciated to 43.8880 per euro, the lowest since the common currency’s introduction in 1999, and has lost 5.7 percent this year.

The ruble weakened 5.3 percent against the dollar and 9.8 percent versus the euro last week, the most since 1999. That compares with a record 71 percent slide in the week to Aug. 28, 1998, and a 42 percent slump the week after. Russia’s Mosprime rate, the average interest- rate banks charge to lend money to each other, rose to a two- month high of 12.5 percent today, according to the central bank.

Russia’s economy will probably grow more slowly this year than earlier forecast as the price of oil, the country’s chief export earner tumbles, according to Merrill Lynch & Co. Gross domestic product will probably expand 0.9 percent, rather than the previous projection of 3.7 percent, Merril’s Moscow-based economists Yulia Tsepliaeva and Ivan Bokhmat wrote in a report sent to clients.

“Russia has been unable to avoid the strongly negative impact of the global crisis and downward correction of commodity prices,” Tsepliaeva and Bokhmat said. “The inefficiency of the government plan and limited channels to deliver government support and liquidity to mid-sized companies make a hard landing scenario more and more likely for Russia.”


Nobody said...

How much of this would you attribute to purely external factors and how much to to the unwind effect you mentioned in comments of your previous posts? Clearly Russia's economy was overheating in the last years and developing symptoms of a massive bubble. Would you say that it's external factors that brought the economy down or the external influences punctured something developed locally?

Edward Hugh said...

Hello again,

"How much of this would you attribute to purely external factors and how much to to the unwind effect you mentioned in comments of your previous posts?"

Very difficult to quantify. I guess that the oil price is the key in Russia's case, since if oil were over $100 they could manage easily enough, although they would, as I was trying to argue in my earlier stuff, still run into Dutch disease type problems.

But this and the demographic stuff is longer term in its impact. It means that whatever happens now there can be more problems in store, and they won't just go away.

But coming back to now, obviously if oil were at $100 then global demand would not be collapsing, since there is a reason why oil prices are so low. And the critque of Russian policy was always that they weren't making the institutional advances needed to handle an external issue on this scale. ie they were too oil dependent, and too laud back when it came to non productivity driven rising wages and inflation.

Of course, I will agree readily that hardly anyone could have seen the force of this global crisis, so you can't single out the Russian leaders as unique, but there were things they could have done to shore up the fortifications.

"Would you say that it's external factors that brought the economy down or the external influences punctured something developed locally?"

Basically, and in the light of what I say above, the latter. Again, taking Spain as my benchmark, almost everyone here believes that the problem is a global and not a Spanish one. But the Spanish construction bubble was always going to burst, it was just that the US sub prime set the whole thing off.

I think you could go round a lot of countries and find this pattern repeated.

Nobody said...

Hi Eduard

Frankly the more I think about it, the more I tend to think that this crisis owes a big part of itself to factors that are more psychological and behavioral than economic. The global economy was doing too well in the recent years and the US has got away too cheaply with the dot com bubble. This encouraged complacency on the part of governments and risky behavior on the part of financial institutions. I think it may be time to rethink our ideas about anti cyclical policies in general, economies need to go through full cycle. Downturns have a function to play in the economic life of societies. They deflate bubbles and bring people back to their senses. When a society gets used to uninterrupted growth, people eventually tend to lose the last trace of self restraint and start basing their plans and actions on unreasonable expectations. Downturns are necessary to puncture possible bubbles, and even more important, to deflate people's anticipations.

Nobody said...

By the way, I don't know if you saw it. I posted a link on your previous post to Krauthammer's editorial in the Weekly Standard, calling for a revenue neutral gas tax. There is a certain talk these days in the US to take advantage of the low gas prices and carry out a tax swap by imposing a sizable gas tax mirrored by equal tax cuts in payroll and possibly other taxes.

Alex said...

Global crisis as Russians see it

The corridors in office buildings have either pluses or minuses. Let’s not speak about minuses but about pluses. Everybody knows each other; you can hear helloes, greetings, goodmornings.

But the last few months silence dominates here.

Crowds of clients just disappeared, nobody enters and asks:”Sorry, where can I find?..” , there are no more strangers smoking in common rest rooms, girls from nearby offices don’t rush in asking to change money for a change. The director of real estate office drooped off, you can’t hear scissors and hairdryers from a hairdressing salon, and women from the office you never could spell its name frequently hang “Closed for today” card. People drink a lot in the offices and it’s impossible to breathe in smoking areas. Visits of Santa and parties had been cancelled this year.