Streetwise Professor

January 2, 2012

Time to Short the Russian Market!

Filed under: Economics,Politics,Russia — The Professor @ 8:39 pm

Vladimir Putin declared that Russia is an island of stability.  Really:

Prime Minister Vladimir Putin said Russia’s economy is an “island of stability” amid the turbulence in the global markets and as he seeks another term as president.

“The world’s economy hasn’t calmed from turbulence,” Putin said in a New Year message broadcast on state television. “In this sense Russia is notably an island of stability — in any case for now.”

Gee.  Let me think.  When was the last time that the Russian government promoted the “island of stability” theme?  Think. Think. Think.

Oh, I remember now!  It was 2008, when the US and European financial crises were swelling and then cresting.  Kudrin used the phrase in January, 2008, right when the major cracks were beginning to appear in US and European financial markets.  Putin used the phrase at the Valdai event–in September, 2008. You know, the month of Fannie & Freddie, AIG, and Lehman.

We all know how that worked out.  The “island of stability” turned into a latter-day Atlantis in 2008-2009, and went further underwater than any other major economy.

The reason for that was clear: Russia is a high beta economy, dependent on natural resource exports that are acutely sensitive to world economic activity.  So if Europe or the US have problems, Russian problems will be worse.

Nothing has really changed.  Russia is still dependent on natural resources, particularly oil.  Budget wise, in fact, Russia is even more dependent on oil prices, requiring a price north of $95/bbl, substantially higher than in 2008.

This is not to say that the EU or the US will implode, or that China will.  These are very real possibilities, rather than certainties.  But the point is if these places turn out to be stable, Russia will be economically stable–relatively speaking.  If these points are not economically stable, however, Russian will definitely not be.

Putin’s attempt to distinguish Russsia’s economic fate from that of Europe, or the US, or China, is fundamentally flawed.  Contrary to Putin’s assertions, Russia cannot decouple from the world economy: Russia will not–cannot–be a refuge from world economic storms.  It is actually the worst place to be at that time.  Sort of like standing under a tall tree during a thunderstorm.

But we know that if, heaven forfend, that if another world crisis occurs, that Putin will rage at the injustice of it all, blame the West and the US.  He’s nothing if not predictable.

But it is quite revealing that Putin is apparently so unoriginal that he can only fall back on old propaganda to advance his new campaign, particularly inasmuch as that propaganda was proved to be farcically, tragically wrong.  Perhaps it shows the fundamental economic bankruptcy of Putinism.  He can’t advocate real change because that would be a mortal threat to the natural state, and the boodle that he and the rest of the elite pack away.  So he can only tout stability–stasis.  He has to do so even though that makes him repeat drivel that didn’t survive contact with reality the last time he said it.  He better hope reality doesn’t intrude again.

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  1. I got burned on this issue last time (don’t gloat, though, as the same can be said for your predictions on demography) so my thoughts on this issue this time round will be a lot more circumspect. So here goes:

    1. One of the major causes of the steep Russian recession of 2008-2009 wasn’t so much the oil price collapse but the sharp withdrawal of cheap Western credit from the Russian market. Russian banks and industrial groups had gotten used to taking out short-term loans to rollover their debts and were paralyzed by their sudden withdrawal. From what I have read, these practices have declined since, due to the perceived risk they have acquired. Now, short-term debts held by those institutions have halved relative to their peak levels in 2008; and Russia is now a net capital exporter. (It is called “capital flight” but I see the term as loaded because much of this “flight” actually consists of Russian daughters of Western banking groups recapitalizing their mothers in Western Europe; or Russian banks buying up assets in East-Central Europe).

    2. The 2008 crisis was a global financial crisis; at least *for now*, it looks like a European sovereign debt crisis (though I don’t deny that it may well translate into a global financial crisis further down the line). There are few safe harbors. Russia may not be one of them but it’s difficult to say what is nowadays. US Treasuries, despite the huge fiscal problems here? Gold?

    3. The Presidential elections are in March, so if a second crisis does come to Russia, it will be too late to really affect the political situation.

    4. Despite the imminent euro-apocalypse, I notice that the oil price has barely budged. I suspect that there is now severe upwards pressure on the oil price from depletion and long-term commodity investors that will prevent it from ever plumbing the depths it briefly reached in early 2009. So despite the ostensible irresponsibility of the increased social and military spending of the last year, I cannot see Russia’s budget going massively into the red.

    5. What is a problem (as the last crisis showed) is that the collapse in imports following a ruble depreciation can, despite its directly positive effect on GDP, be overwhelmed by knock-on effects on the retail sector. On the other hand, it’s still worth noting that the dollar-ruble ratio is now 32, a far cry it reached relative to the height of the Russia bubble in 2008 when it was at 23. Will the drop now be anywhere near as steep?

    6. I think a great deal depends on what happens on China. I happen to think that its debt problems are overstated and that it still has the fiscal firepower to power through a second global crisis, which should also help keep Russia and the other commodity BRIC’s like Brazil afloat. But if this impression is wrong, then the consequences will be more serious.

    Comment by Sublime Oblivion — January 2, 2012 @ 10:19 pm

  2. Sublime, you have also been burned by experts (Russian experts at that) about the demographics of Russia.

    It must suck to be wrong all the time.

    Comment by Andrew — January 3, 2012 @ 12:56 am

  3. I’m only going to point out that back in late 2008 Michel (I think his name was) and SWP were insisting that death rates would rise and birth rates would fall, whereas in reality the exact opposite happened with the rate of natural decrease falling to a mere 82,000 for the first ten months of this year (down from -360k for the whole of 2008).

    Otherwise, I’m going to remain on topic (this post is about economics) and refrain from discussing demography in this thread (especially with someone who has such a profound contempt for numbers and statistics).

    Comment by Sublime Oblivion — January 3, 2012 @ 1:29 am

  4. Typo. 82,000 should be 127,000. Doesn’t change my point in any substantive way.

    Comment by Sublime Oblivion — January 3, 2012 @ 1:31 am

  5. […] – Ready, set, short the Russian market! […]

    Pingback by FT Alphaville » Further reading — January 3, 2012 @ 2:26 am

  6. Russia is pumping oil at frenzied rate to keep its head above water. Can’t last forever.

    Comment by La Russophobe — January 3, 2012 @ 3:06 am

  7. The only one with contempt for numbers, statistics and facts is SUBLIME PSYCHOPATH, and Russia itself admits that is true:

    Russia is perishing and no amount of ridiculous lies can change that fact.

    Comment by La Russophobe — January 3, 2012 @ 3:07 am

  8. SUBLIME PSYCHOPATH: The Russian stock market has lost one quarter of its value in the past year. What language does one need to speak to explain to a “mind” like yours that this is not stability, but instability? To make you understand that Russia’s economy depends ENTIRELY upon the price of crude oil, a price over which Russia has ABSOLUTELY NO CONTROL?

    Comment by La Russophobe — January 3, 2012 @ 3:15 am

  9. […] Streetwise Professor: Time to Short the Russian Market! […]

    Pingback by Daily Reading – Tuesday, January 3, 2011 | Tainted Alpha — January 3, 2012 @ 8:17 am

  10. S/O. You are flirting dangerously with the “this time it’s different” mindset. Usually it isn’t. This is one of those times.

    1. Mixing up cause and effect. Yes, stresses on European and US banks were one factor leading to withdrawal of credit, but the withdrawal was a symptom of the underlying problem. Major resource firms (e.g., Rusal) were hammered by low prices, and were unable to pay their debt. Yes, Russian firms have reduced leverage, but they, and the Russian economy would still suffer dramatically from a similar decline in demand.

    2. Sovereign debt crises are typically the worst kind, and to think that there would not be a major financial crisis dragging down banks and shadow banking if a major Euro sovereign experienced a true crisis is delusional. I agree there are no safe harbors. My point is that it is beyond belief that Putin is suggesting–again–that Russia is one.

    3. That’s really what it’s about with you, isn’t it? Whether Putin wins.

    4. My analysis is a conditional one–would Russia be a safe harbor if there was another major financial crisis. That crisis has not yet ripened, so no surprise that oil prices have not declined substantially. If there is one, it will. Period.

    5. Yes. It can.

    6. That’s another thing that is really different this time. China’s position is more precarious than it was in 2008. I don’t think that’s disputable. You and I differ on how precarious it is now. But I think it’s beyond cavil that its ability to take a 2008-size hit is diminished. This is something Russia should be very worried about. There are two major risks here. The first is that a major European problem hits Chinese exports and leads to substantial problems in the Chinese financial and fiscal systems (esp. local government finance). The second is that the Chinese financial/fiscal system self-detonates. The effects of either on commodity prices–and hence Russia–would be severe. Both risks are quite real.

    In sum: Russia is still acutely vulnerable to tail risks. Those risks are as big now as when Kudrin and Putin made their “island of stability” claims in 2008. Indeed, in some respects, they are bigger, primarily because of the China situation and the fact that the hit the world financial system took in 2008 has made it even more vulnerable this time around. If any of those risks are realized, Russia will be inundated, yet again. Putin was full of it in 2008, and he is even more full of it now.

    Maybe even he understands this. Look at the qualifier in this remarks: “in any case for now.” Uhm, that’s not really the point. The point is how Russia will fare in the next storm.

    The ProfessorComment by The Professor — January 3, 2012 @ 9:34 am

  11. Nothing has really changed. Russia is still dependent on natural resources, particularly oil.

    Let’s not forget gas, and prostitutes.

    Comment by Finnpundit — January 3, 2012 @ 9:50 am

  12. […] Russia is a high beta economy.  (Streetwise Professor) […]

    Pingback by Tuesday links: rule respecting traders | Abnormal Returns — January 3, 2012 @ 12:40 pm

  13. My point is that it is beyond belief that Putin is suggesting–again–that Russia is one.

    What would you have him do differently? Tell investors that Russia is a dump which they should flee from at the first opportunity? That’s more Medvedev’s style. 🙂

    3. That’s really what it’s about with you, isn’t it? Whether Putin wins.

    Erm, you’re the one who is always keen to stress the political implications of economic crisis on “Putinism.”

    5. Yes. It can.

    Why? Even today’s level of 32 rubles per dollar makes it historically very cheap by the standards of the last decade.

    But in general I don’t disagree with all your other points.

    Comment by Sublime Oblivion — January 3, 2012 @ 5:22 pm

  14. […] Russia is a high beta economy.  (Streetwise Professor) […]

    Pingback by Tuesday links: rule respecting traders — January 3, 2012 @ 5:55 pm

  15. @S/O re your 1. He should take Twain’s advice: “Better to remain silent and be thought a fool than to speak out and remove all doubt.” Re 5. Historical standards–irrelevant. Starting from where the ruble is now, if there is a dramatic future weakening of the world economy, resulting in a substantial weakening in Russia’s terms of trade, budget situation, etc., the ruble will weaken further. The current price takes into account history, and future possibilities and their likelihood. If a bad future draw is experienced, the ruble will weaken.

    The ProfessorComment by The Professor — January 3, 2012 @ 8:17 pm

  16. Let’s not forget gas, and prostitutes.

    The prostitute thing pretty much ended around 2004/5, if it ever was that big. You go around the hooker bars of the world these days (i.e. any bar in an oil town) and you’ll find no Russians. Even the central Asians aren’t there in the same numbers they used to be. And back in Dubai’s boom days in 2000-2003, when Russian girls were supposedly everywhere, most of them were from Moldova or were ethnic Russians from central Asia.

    Comment by Tim Newman — January 3, 2012 @ 11:45 pm

  17. There are still a hell of a lot of Russian girls in Dubai….

    Comment by Andrew — January 5, 2012 @ 3:24 am

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