Streetwise Professor

August 12, 2015

Hey, It’s August: The Russian Economy Imitates the Kursk

Filed under: China,Economics,Energy,Politics,Russia — The Professor @ 1:37 pm

Despite happy talk from the government in recent months, Russia continues its downward economic spiral. The economy contracted by 4.6 percent in the second quarter. This is pretty appalling, given that oil prices had rebounded some. The Economics Ministry says this is “the lowest point” for Russia, but given the recent rout in oil prices, and the troubling signs coming out of Russia, this seems unduly optimistic. If anything Q3 and Q4 are likely to be worse. These therefore seem to be more realistic predictions:

“While second-quarter growth surprised on the downside, perhaps far more importantly is the fact that the outlook for the Russian economy has deteriorated so far in the third quarter,” Piotr Matys, a London-based foreign-exchange strategist at Rabobank, said by e-mail.

. . . .

“The economic prospects for the coming quarters look pretty grim,” Liza Ermolenko, an analyst at London-based Capital Economics Ltd., said by e-mail. “Industry appears to have been a major cause behind the deterioration in the second quarter, having gone from being a relative bright spot in the first quarter.”

The consensus is now that the current economic situation is more dire than 2008-2009, and that it is likely to persist far longer.

On top of this, China’s sudden devaulation of the Yuan has caused a further decline in commodity prices, with Brent now below $50/bbl. This has contributed to a further decline in the Ruble, which fell about 2 percent in the aftermath of China’s move.  The Russian currency is now around 65 to the dollar.  Russia is particularly vulnerable to an extended Chinese malaise, not to mention a hard Chinese landing.

The Russian Central Bank now faces the same conundrum that it confronted last summer and fall. It can choose between loosening monetary policy to spur the economy but would thereby spur inflation (already running at over 15 percent) and pressure the ruble even further. Or it can choose to defend the Ruble, which would hamstring the real economy, and potentially spur capital flight if the credibility of the RCB’s action is doubted. Which leg does it chew off?

Wherever Putin and his economic advisers look, the scene is bleak indeed. The situation in China is particularly ominous, because Putin had grabbed onto China like a drowning man, hoping it would rescue him from the blows raining down from sanctions and the commodity price implosion. But the Chinese devaluation, combined with a litany of other grim statistics coming out of China, suggests that if China is not drowning itself, it is struggling mightily to keep its head above water.  Russia is particularly vulnerable to an extended Chinese malaise, not to mention a hard Chinese landing. Putin counted on China’s economic support to allow him to continue his Ukrainian adventure and weather the resulting sanctions.  It’s not happening (Chinese direct investment into Russia has fallen by 25 percent), and the prospects of it happening anytime soon are diminishing daily.

Nor are the long run prospects particularly encouraging, not with Bloomberg running articles titled “Russian Workers Vie With Greece in Race for Productivity Abyss,” the upshot of which is that Russia has the lowest productivity in Europe, running at 50 percent of the European average and 30 percent below Greece. (Which makes this boast by the Russian Minister of Industry and Trade that Russia has overtaken the US in labor productivity even more hilarious.)

In brief, the Russian economy is doing an imitation of the Kursk, 15 years ago. The only difference is that Putin has yet to admit the economy has sunk.


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  1. Another (potentially) crucial difference is that this time the person who banned a rescue mission is inside “the Kursk”, even if well-barricaded on the bridge. Will the crew take the hint, or will they just keep knocking on the hull until all the oxygen runs out?

    Comment by Ivan — August 12, 2015 @ 2:42 pm

  2. So. Which of the prospective presidential hopefuls seems to be fit to take on Putin in all earnestness? Which one is ready or even willing to tackle this?

    Looks pretty grim so far.

    Comment by LL — August 12, 2015 @ 6:17 pm

  3. Wasn’t there another cute statistic recently (tweeted), showing that Chinese investment in Ukraine has gone up significantly?

    Ah yes:

    Comment by Wilhelmus Janus — August 12, 2015 @ 7:52 pm

  4. Here’s a good article on our old friend Gazprom, which covers several of the points you frequently raised on here. They are deep in the shit, and I would imagine Rosneft is in not much better shape.

    Comment by Tim Newman — August 13, 2015 @ 12:09 am

  5. @Tim-Thanks. I especially liked the part where the Russians blame the problems on warm winters. Sort of like how the Soviets blamed decades of low agricultural output on bad weather. Old habits die hard, and old excuses never die.

    The ProfessorComment by The Professor — August 13, 2015 @ 10:33 am

  6. I’m reminded of the old saying that Russia is never as strong as she looks; Russia is never as weak as she looks. Just as Putin’s quick actions in Crimea hid the rot inside Russia, the problems reported now disguise certain strengths of the Russian leadership.

    Low oil prices and certain sanctions has definitely taken the wind out of Putin’s sails, but not changed Putin’s policy or goals. If this continues another six months, Putin may finally give up stirring up trouble in the Donbas, but he will always keep an eye open to start again once favorable economic or international political conditions appear.

    Putin has demonstrated he is willing to go to any lengths to remain in power, and the opposition is neither coherent enough or dedicated enough to tolerate the casualties can impose at this time. A palace coup to remove Putin and install a policy that reconciles Russia sufficiently enough to restore the status quo antebellum remains unlikely. Things would need to severely deteriorate in Russia compared to now.

    The US and Europe just can’t wait this out. They need to make plans based on Russia/Putin challenging as ongoing Kremlin policy.

    Comment by Chris — August 13, 2015 @ 10:55 am

  7. The recent meeting between Saudi and Russki energy ministers is ominous. These are the swing oil producers. Saudis are browned off about the Iran deal, have their own rent/ welfare for tribes problems; and Russia is going bust if they can”t raise the price or sell more arms. Will Putin throw Assad and Iran off the sledge in return?
    Expect some gyrations in the spot price, therefore. Wish I was a hedgie with an inside track.

    Comment by James Harries — August 13, 2015 @ 3:08 pm

  8. Public execution by bulldozer of 3 Hungarian whole geese in Russia:
    The supervisor was promptly reprimanded for failing to burn the enemy geese at the stake instead.

    Comment by Ivan — August 14, 2015 @ 2:54 pm

  9. @Ivan-No doubt PETA has been declared a Foreign Organization in Russia, and perhaps an enemy of the people.

    The ProfessorComment by The Professor — August 14, 2015 @ 5:52 pm

  10. The greatest mystery wrapped in enigma about Russia is: with absolutely no societal checks on autocratic idiocy, how come they are not all starved to death by now. On second thought, periodic American food relief missions might go a long way toward explaining it.

    Next time, would you please impose dekagebezation and demilitarization in exchange for humanitarian aid? From purely economic standpoint, it is pretty wasteful for the US to expend such vast resources on containing the Russian threat, only to nurture it again.

    Comment by Ivan — August 14, 2015 @ 7:23 pm

  11. 7.8 kg of Lithuanian tomatoes: auto-da-fé.

    Comment by Ivan — August 14, 2015 @ 7:41 pm

  12. -4.6% is no explosion yet. The Kursk maybe a good analogy to current economy – huge and in poor condition, but the accident is yet to happen.

    Comment by Cypriot — August 17, 2015 @ 2:28 am

  13. Chris, the commodity boom that Putin’s presidency happened to coincide with isnt going to re-ignite anytime soon. Not with the way the world economy is trending — there isnt another China sized economy to re-boot demand for oil the way China’s own rise did in the early 2000s. This is 1980s level stagnation all over again. The real danger though is that Russians are too zombified to act even mildly rationally — in the 80s Communism was a broken idea and the only ones interested in perpetuating the state were the people directly milking it. Today the vast horde of Russians are not benefiting from the state in any way yet most of them mindlessly defend Russia for ‘rising up’. The reality is that barring a post-WW2 style occupation by forces of the civilized world, Russia is on its way to North Korea land, threatening the world for handouts with its nukes. The war in Ukraine will grind on simply because Russian zombies have nothing else to look forward to.

    Comment by d — August 17, 2015 @ 7:50 pm

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