Streetwise Professor

January 4, 2010

Contrarians

Filed under: Economics,Energy,Politics,Russia — The Professor @ 8:29 pm

Manufacturing output is rising around the world, with bullish reports from the United States, Europe and Asia.  The global purchasing managers index reached 55.9 in December: anything over 50 indicates an expansion in output.

But not Russia.  In fact, Russia’s PMI fell further in December, to 48.8 from 49.1 in November.  This indicates an accelerating decline in Russian industrial activity.  From Bloomberg:

The decline in new orders led to another round of inventories depletion that also contributed negatively to the PMI in December,” Dmitry Fedotkin, an economist at VTB Capital in Moscow, said in the statement.

Manufacturers including OAO Novolipetsk Steel are trying to adjust to smaller markets, with Deputy Industry Minister Andrei Dementiev projecting a 7 percent decline in the country’s steel industry in 2009, Interfax said on Nov. 10. Sluggish bank lending and gains in the ruble threaten to hamper a recovery led by last year’s 84 percent gain in Urals crude, Russia’s key export. The ruble gained 13 percent against the dollar in the last three quarters of last year, a trend the central bank has said it wants to curb.

The government has forecast a rebound from Russia’s 10.9 percent annual contraction in the second quarter, the steepest drop since at least 1995. Output fell a further 8.9 percent in the third quarter and will contract about 8.5 percent for all of 2009, Prime Minister Vladimir Putin said on Dec. 30.

. . . .

Exports “remained a key source of weakness” as new orders from abroad fell for a 15th month, VTB said. The work backlog contracted at the sharpest pace since April and inventories of finished goods continued to decrease “at a strong rate,” the bank said. Employment in manufacturing fell in December, extending a string of declines that started in May 2008, VTB’s gauge showed.

Earlier signs of recovery in manufacturing may have been caused by one-time effects. While industrial output expanded in November for the first time in more than a year, a six-fold jump in the production of hydraulic turbines accounted for much of the increase, Raiffeisen International Bank-Holding AG’s Russian unit said in a Dec. 22 research note. Chinese imports of raw materials failed to recover in November, “raising doubts that external demand will stimulate the growth of Russian industry,” according to the note.

Rising joblessness and a drop in retail sales in November indicate economic growth last quarter was close to zero, according to Raiffeisen. The unemployment rate jumped in November to a four-month high of 8.1 percent from 7.7 percent in October.

This contradicts Russian government happy talk:

The gloomier manufacturing outlook contrasts with a brighter picture presented by the government, which said on its Web site on Dec. 30 that the economy grew a seasonally adjusted 1.9 percent in the fourth quarter, citing preliminary figures. Putin predicted on Dec. 30 that the economy will expand about 3 percent in 2010.

Russia will post “steady” growth this year after domestic producers regained access to external financing and prices for oil, gas and metals picked up on improved prospects for a global economic recovery, central bank Chairman Sergey Ignatiev said on Dec. 22, forecasting an expansion of 5 percent or more.

The Bloomberg article mentions the unemployment rate.  Even the higher 8.1 percent rate seems very low, given the cratering of Russian manufacturing, and the lack of any appreciable rebound.  I’ve conjectured that most unemployment is masked, by companies either retaining and paying idle employees under pressure from the government, thereby weakening their financial condition and limiting their ability to expand later, or as a result of government support of some kind.

This article in SeekingAlpha (H/T LR) provides some color regarding how the government provides this support:

For those interested in where Russian deficit spending is going, much of it has been used to cushion the effect of what one former senior Putin advisor has called the most precipitous decline in Russian industrial output since the Axis invasion of 1941.

Furloughed Russian workers have been paid by regional authorities to re-paint and polish-up their inactive factories for limited periods of time. Government orders have been placed for unneeded equipment, just to keep people working. Make-work retraining and adult internship programs have been instituted. And last but not least, the automotive sector has been bailed out.

This deficit spending on bailouts and social programs is rapidly draining the country’s reserve funds:

Interfax reported Monday that in a meeting with President Medvedev, Finance Minister Kudrin claimed that the Reserve Fund of the Russian Federation—one of the two components of the Stabilization Fund set up in 2004 to serve as a rainy-day repository for oil superprofits—will be fully liquidated in 2010 in order to support government deficit spending.

The fund’s prognosis seems to be growing bleaker by the hour. In an interview earlier in the day with the news channel Vesti, Kudrin had said that total liquidation would only occur in the event that oil falls below $70 dollars per barrel for any substantial length of time, thereby depressing tax revenues and forcing Moscow to dip further into its reserves.

In that interview, the minister had also stated that Russia would start rebuilding the Reserve Fund no earlier than 2013.

The fund is currently invested in dollar-, euro-, and sterling-denominated sovereign debt. According to the Finance Ministry’s website, the fund’s value has dipped from $142.6 billion in September 2008 to $75 billion at present—a decline of over 47 percent, attributable largely to asset liquidation to cover Russian deficit spending of roughly 6.3 percent of GDP in 2009.

Putting this altogether provides some insight onto the mixed blessing that an increase in oil prices (courtesy of Helicopter Ben and his Chinese counterpart) is for Russia.  The higher price has eased somewhat the pressure on the reserve funds and helped the government’s fiscal situation, but at the same time it has provided support to the ruble.  This has harmed industrial exports (n.b., a “key source of weakness” per the Bloomberg article), and thus manufacturing.

Moreover, although Goldman Sachs continues to be bullish on Russia, and the Russian equity market has rebounded, foreign direct investment has not kept pace.  This reflects myriad factors, not the least of which is the growing realization (hey, it’s never to late to learn!) that investing in Russia under the shadow of expropriation is a mug’s game:

Foreign investors in Russia are playing a game that Nathan Detroit, the host in “Guys and Dolls” of “the oldest established permanent floating crap game in New York,” found unwinnable. On a losing streak, the gun-toting thug, Big Julie from Chicago, forced use of his own dice— which had no spots (“I know where they are,” Big Julie assured the players)—and proceeded to roll only winners.

The modern version of Lenin’s famous prediction that “the capitalists will sell us the rope with which to hang them,” might be that they will provide the capital to develop Russia’s natural resources so the regime can dominate its “near-abroad” and increase Western Europe’s dependence on it for supplies of natural gas. But investing in a nation in which there is no established rule of law is to shoot craps with Big Vladimir of Leningrad.

One reasonable conclusion to draw from all this is that Russia is likely to be a laggard, rather than a leader, in the world recovery.  Yes, a recovering world will boost oil prices and generate some tax revenues–but it will also boost the ruble, thereby impeding a recovery in manufacturing, which will be a drain on the fisc.  Investors are still relatively cautious around the world, and hot money aside, Russia offers a lot of dangers that they are quite happy to avoid, thank you.

The result?  A familiar one: purgatory.

In (somewhat) better news, Russia’s population didn’t decline in 2009:

Despite Russia’s natural population decline, immigrants ensure the country’s overall growth, the health and social development minister said on Thursday.

Tatyana Golikova said as of November 1, Russia’s population was 141.9 million and that by January 1, 2010, it would be 15,000 to 25,000 more than for the same period in 2009.

She said although natural decline continued, the birth rate was 3-3.5% higher than a year ago and that 1.76-1.78 million babies were expected to be born this year.

Mortality was also down 3.-3.5% on last year, but still rather high – a total of 1,985,000.

According to the Russian Federal Migration Service, 333,474 foreign nationals and stateless individuals received Russian citizenship in January through November 2009.

Something of a mixed bag: more immigration, a slight decline in mortality, a slight increase in the birth rate, but still a natural decline (a “symbolic” in the words of one official increase in total population of about 20K, with immigration of 333K implies a natural decline).

It would be interesting to know whether the increase in the birth rate is more than one would have expected, conditional on the fact that women born during the last Soviet baby boomlet are at their years of peak fertility.  I’m sure somebody will answer that question for me.

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17 Comments »

  1. I know that conspiracy theories are not appreciated, so I will try to make this one short.

    It looks to me that the main purpose of Russian government, starting from Gorbachev, was to discredit democracy and capitalism, get 20 or 30 years of peredishka (time out), and strike back.
    Decline of the population was the result of cheap vodka that was allowed. Putin used to be a spymaster in West Germany, and he knows history: “Give ’em more vodka”. Putin used cheap vodka to clean up the population from alcoholics. A couple of weeks ago the government outlawed cheap brands of vodka. Looks like the goal has been reached.

    They did succeed to discredit capitalism and democracy. I read Russian forums. It’s ugly. If they could exterminate all Americans at once like cockroaches, 90% of Russians would not hesitate a split second. Hate towards the US is visibly increasing every year. Media, which is under control of Russian government, is playing the major role to fun the hate.

    As I said before, before O’Bum is out of the office, there will be a war, and Russia will win. They are hell bent to teach us a lesson.
    On the forums they say that for the US a possibility to lose 20 or 25% of the population is unacceptable. For Russians, if they have a good chance to exterminate all Americans, everything is acceptable.

    Russian government knows that the better people live the less they want a war. That is why Russian economy is bad, oligarchs are allowed to move billions of dollars oversees, to buy incredibly expensive exclusive real estate, and all this is reported in the media. And who is at fault? Capitalism, democracy, and, most of all, America.
    Needless to say that ordinary people are ready for a war. If there is a war, 90% of Russians will support the government.

    It’s not that Russian economy is poor because they are stupid.
    I’m afraid that it’s American government that is extremely stupid.

    P.S. I’ve tried my best to keep it short.

    Comment by Michael Vilkin — January 4, 2010 @ 11:04 pm

  2. 1. Good that you acknowledged that I was correct, and you were wrong (remember all that spiel about the imminent abortion apocalypse you and Michel were spinning). Even though you did put it at the end of a long post. 😉

    It would be interesting to know whether the increase in the birth rate is more than one would have expected, conditional on the fact that women born during the last Soviet baby boomlet are at their years of peak fertility. I’m sure somebody will answer that question for me.

    That is one factor, but another major factor has been the increase in TFR from 1.17 in 2000 to more than 1.50 by 2009. The “echo” effect of more women (born in 1980’s) reaching child-bearing age has only been significant to around 2005, since then the increase in TFR (which is independent of the population’s age pyramid) has been dominant.

    From around 2015 the “echo” effect is slowly going to fade, reaching a nadir at around 2040, but this will likely be accompanied by improvements in mortality rates. The main question is whether 1) further increases in TFR and 2) the fall in mortality due to rising life expectancy will outrun the decline in women of child bearing age, and the level of immigration. You can make various scenarios using different figures for future trends in TFR, LE, and immigration, I’ll quote a relatively pessimistic one below from Faces of the Future.

    [Assuming very modest decreases in mortality (such that LE reaches 75 years by the late 2020’s), annual immigration of 300,000, and a constant TFR of 1.5 from 2010 onwards (it was at 1.49 in 2008).]

    Population growth starts from 2011, going from 142mn to 143mn by 2023. Then it falls slowly to 138mn by 2050. The birth rate peaks at 11.5 in 2013, falls sharply to 7.8 by 2032, and then remains in the 8-9 range. The death rate troughs at 11.4 in 2032, then rises to 12.9 by 2050. Positive natural increase is never attained.

    Comment by Sublime Oblivion — January 4, 2010 @ 11:37 pm

  3. * Correction: birth rate of 11.5 in 2013 in last paragraph should be 12.5

    Comment by Sublime Oblivion — January 4, 2010 @ 11:41 pm

  4. The threat of guaranteed mutual destruction should be credited for absence of nuclear war – or any major war – for so long time.
    After the US and Russia reduce their nuclear stockpiles, there will be no longer a threat of the guaranteed destruction.

    Russians know that they have twice larger territory. To destroy everything on that territory one needs to have if not twice, at least 50% more nukes than Russia needs to destroy everything on the US territory.
    If the war is at the winter time, nukes will only do a lot of defrosting in Siberia, but not a total destruction.
    Major cities are protected by C-300 and C-400 antimissile batteries.

    In short, as soon as there is mutual reduction in nukes, the war in Europe – and a new collective defense agreement without the US – will become very possible. Again, Russia will win, because the barbarians are willing to lose a much higher percentage of the population. A civilized society like US is no mach.

    Comment by Michael Vilkin — January 4, 2010 @ 11:50 pm

  5. Lunev, is that you?

    Comment by So? — January 5, 2010 @ 3:03 am

  6. “In short, as soon as there is mutual reduction in nukes, the war in Europe – and a new collective defense agreement without the US – will become very possible. Again, Russia will win, because the barbarians are willing to lose a much higher percentage of the population. A civilized society like US is no mach”

    Yes Michael, couple that with the fact that Russia has the second highest birth rate of any major European country, exceeded only by that of France,and the threat of the Russian Army marching on Gibralter is clear. Europe will be inundated by the 1st through 53rd Guards Tank Hordes as soon as we turn our backs!

    Oh, wait a minute…. the Russian Army is *reducing* its number. And look, the countries of NATO have 3 times as many tanks as Russia, 3 times as many infantry fighting vehicles as Russia, 3 times as many artillery pieces as Russia, and a vast armada of combat helicopters and tactical fighters.

    Guess they don’t plan to invade Europe quite yet, lol! I know this will aggravate your allergy to facts, but posts like this one of mine are sometimes a necessary public service.

    Comment by rkka — January 5, 2010 @ 6:22 am

  7. One of the arguments that could be used to claim that the actual unemployment in Russia is much higher than what it is reported to be is the fact that, typically, a significant portion of the employed population, if not the majority, receives the salaries owed to them with a couple of months delay. Frequently, it eventually results in not paying to them a month of two of the owed salary and there is nothing they can do about it. They have to forgo the owed salary or be laid off. Surely, they chose the first one.

    Comment by MJ — January 5, 2010 @ 6:42 am

  8. rkka, tell me where all those tanks and military assets are located around Europe.
    Tell me how much of those are located close to Russia, – Poland and Baltic countries.
    In case Russia suddenly buys thousands of tanks from China and delivers then using the new railroad Russia is planning to build under disguise of development of a coal mine in Mongolia, – in this case Russia will be able to crash whatever peanuts are in Poland and Baltic countries.

    Tell me what economic sense makes development of a coal mine in Mongolia when coal mines in Russia will be developed by China?

    That is why a threat of guaranteed mutual destruction is still necessary. The barbarians are still at the gate. Reduction of nuclear stockpiles will only make their desire to strike back more tempting.

    Comment by Michael Vilkin — January 5, 2010 @ 9:42 am

  9. Great minds think alike!

    http://larussophobe.wordpress.com/2010/01/04/editorial-russia-on-the-brink/

    Comment by La Russophobe — January 5, 2010 @ 3:02 pm

  10. SUBLIME OBLIVION is hilarious! The clear implication of his drivel is that the Kremlin wouldn’t lie about population data, not even going into an “election” where Putin will reclaim power. The very notion of relying on the Kremlin’s own data in this regard is so funny it makes me split my sides.

    Meanwhile, of course, he ignores the horrific avalanche of data showing Russia is headed for a double dip recession. Typical Soviet nonsense to try to change the subject, typically ridiculous.

    Comment by La Russophobe — January 5, 2010 @ 3:04 pm

  11. National projects? What national projects? Huh?

    http://www.rferl.org/content/blog/1916865.html

    BTW SWP, sub-50 PMI is a recession indicator. If things are so great in Russia, why is the Kremlin still furiously cutting interest rates? There’s only one possible reason.

    Comment by La Russophobe — January 5, 2010 @ 3:07 pm

  12. :”rkka, tell me where all those tanks and military assets are located around Europe.”

    Th fact that you have to ask a question like this shows pretty clearly that you hav eno factual basis for your bloviations.

    But we knew that,

    “Tell me how much of those are located close to Russia, – Poland and Baltic countries.”

    Ditto.

    “In case Russia suddenly buys thousands of tanks from China and delivers then using the new railroad Russia is planning to build under disguise of development of a coal mine in Mongolia,”

    Soooo….. Russia suddenly buying thousands of Chinese tanks is the threat you’ve dreamed up… Tanks… wih no mention of supporting arms and services, not to mention the trained personnel for same….

    Or maybe… Russia hires the whole PLA for the job?

    “If things are so great in Russia, why is the Kremlin still furiously cutting interest rates? There’s only one possible reason.”

    Phoby, Phoby, Phoby…

    So… since there’s only one possible reason for cutting interest rates… that reason must be the same one for Greenspan cutting interest rates from ~5% to about ~1% after 2001, right?

    Youse two are such a hoot!

    Comment by rkka — January 5, 2010 @ 6:16 pm

  13. Most of China’s tanks are old junk (dressed up T-55s).
    http://mdb.cast.ru/mdb/4-2009/item1/article1/
    Russia is scrapping much better, much newer tanks.

    Comment by So? — January 5, 2010 @ 7:39 pm

  14. This post is about a double-dip recession due to manufacturing collapse, and “So?” is yammering about Chinese tanks. How very aptly named this moron among morons really is!

    Comment by La Russophobe — January 5, 2010 @ 9:32 pm

  15. rkka, Russia has more than a few thousand people who can operate tanks.
    The fact is that China is capable to manufacture modern tanks if given Russian designs and technology. You have no reason to say that a few years from now Russia will not be able to buy suddenly a couple of thousands tanks from China and deliver them to the western border.
    America should keep this possibility in mind. It’s not that Russian agent will agree though…

    Comment by Michael Vilkin — January 5, 2010 @ 11:07 pm

  16. Someone forwarded me this piece:

    http://www.reuters.com/article/idUSLDE5BN0LM20091224

    He/she followed up with this note:

    The matter of cutting corruption might be the single most important point in Medvedev’s speech. With the described measures taken, Russia is on course for a more progressive situation in a decade or so. The involved actions couldn’t be taken without the position undertaken by Putin and Medvedev.

    ****

    Only a SWOT Analysis Will Tell if Things Are Good Or Bad
    http://www.themoscowtimes.com/business%20for%20business/article/only-a-swot-analysis-will-tell-if-things-are-good-or-bad/396571.html

    ****

    An upbeat perspective:

    http://www.andyverich.com

    Comment by jojo — January 6, 2010 @ 12:43 am

  17. Phoby, Phoby, Phoby…

    “This post is about a double-dip recession due to manufacturing collapse, and “So?” is yammering about Chinese tanks. How very aptly named this moron among morons really is!”

    The one who introduced Chinese tanks to this thread is your political soul-mate, Vilkin.

    Have a nice day, youse two. And get a room….

    Vilkin, crews are only the beginning. It’s the supporting arms and services that really suck up personnel.

    Oh, and the Chinese are gonna want cash. Nothing in Poland or the Baltics worth the price.

    Especially since the Baltics are rapidly depopulating, at the rate of 0.3% to -0.65% per year. What would be the point of invading now?

    Comment by rkka — January 6, 2010 @ 6:02 am

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