Streetwise Professor

May 18, 2009

Worser and Worser

Filed under: Economics,Financial crisis,Politics,Russia — The Professor @ 8:43 pm

Recently the Russian government reported that GDP was down in the first quarter 9.5 percent year on year.  More alarmingly, it was down 23.2 percent quarter on quarter:

Russia’s economy contracted sharply in the first three months of the year, hit by the global slowdown, Federal State Statistics figures show.

Economic output for the period to the end of March fell 23.2% compared with the previous quarter. On a year-on-year basis, output dropped 9.5%.

Russia’s economy had been growing thanks to high oil prices, which peaked at around $147 a barrel last summer.

But since then, the price of oil, a key export, has fallen by more than half.

The latest figures for the first three months of the year confirm estimates released last month by the government.

Industrial output has slowed in the wake of the global economic slowdown, and investors have withdrawn significantly from Russia.

I scratched my head when I first read the 23.2 percent number in a Bloomberg piece on Saturday (a piece which has mysteriously disappeared).  None of the articles I’ve read explain it fully, and the Russian government statistics websites are appallingly bad, so I couldn’t find the original source.  (The Federal Statistics Service website had a poll.  The least favorable response was “Could be improved”–which 90 percent of the 800 respondents had chosen.  A more reasonable alternative would be: “Couldn’t possibly be worse.”)  

My guess is that this is an annualized rate, indicating that quarter on quarter, GDP fell about 5.7 percent.  That is, fell from 100 on December 31, to 94.3 on March 31.  Ouch.  This is horrid, even by the abysmal standard set by Germany (a 3.8 percent decline, or about 16 percent annualized) in the first quarter, or Japan’s 12.7 percent annualized decline in the fourth quarter of 2008.  

\Russian manufacturing output continued to crater, and banks are racing to revise downwards their forecasts of 2009 growth; today Alfa Bank cut its forecast to -5.7 percent.  The only bright spot is the price of oil, which has been rebounding on OPEC cuts, the possibility of supply disruptions in Nigeria, and most importantly in my view, the prospects for inflation due to the Fed’s (and other central banks’) aggressive monetary policy.  

In other news of potential interest to some SWP readers (and you know who you are), today’s AFP carries an article on the implications of the economic contraction for Russia’s demographic woes:

Now the financial crisis has added to Russia’s pernicious mix of ill-health and  low birth rates, heralding an early reversal of the cheerier birth rates of the last three years, statisticians and sociologists said.

Russia’s state statistics agency Rosstat recorded 270,800 births in January and February, down by 3,700 from last year.

Rosstat head Vladimir Sokolin last month said the economically active population was shrinking by one million people per year and the country could face labour shortages as it emerges from the  global financial crisis.

“At this rate, the crisis could reduce to nothing all the government’s efforts of the last years to stimulate births,” said Valentina Petrenko, the head of Russian upper house’s committee for social policy and health.

“The risk of losing employment is in a big way linked to  pregnancy  and caring for young children.  Expectant mothers  and women, as a rule, are the first to be laid off,” she said.

Experts say that in the face of financial uncertainty more women plan against pregnancy and are opting for abortions.

Only five percent of women surveyed by state pollster VtsIOM as the first economic stress was felt in November said they planned pregnancies in the next two years.

Outside a city-run maternity hospital in northern  Moscow, two women stood apart from the knots of chatty families waiting in the spring sun with flowers and bottles of sparkling wine to celebrate a new addition to the family.

The two sat heads together, smoking and looking almost under dressed in jeans and sneakers.

Irina, who preferred not to give her last name and nervously grasped her friend’s hand, had come for the free abortion services offered at such clinics.

“I am still paying down my apartment each month, I can’t imagine being without a job much less anything else right now,” she confided, adding she was not living with her boyfriend.

“A friend of mine lost her job, but she said it would give her time to raise her child, but I don’t know…. I think it’s a bit crazy,” she said.

Andrei Akopyan, the head doctor at one of the Moscow’s reproduction and  family planning clinics, predicted the number of abortions would increase by 10 to 12 percent due to the  economic instability.

“It may be some families planned to have children, but they then found themselves forced to turn back on that decision,” he said.

“There are, of course, already more women who want to have abortions,” Khazem Alsoabi, a doctor at one private clinic, MedClinica, said. “The reasons I hear are financial, there’s no question of that.”

Searches for “abortion” on the Russian Internet portal Yandex have more than doubled since the onset of the financial crisis. The number of people who keyed in the search jumped from 94,526 in October to 151,471 in November.

According to the  United Nations,  Russia  has the highest rate of abortions in the world, in a hold over from Soviet times when the operation replaced traditional forms of contraception.

Last year was the first since the  fall of the Soviet Union  when the number of births narrowly outstripped the number of abortions in the country.

“There is even a new social category of women who say they are having abortions because they can’t pay back their loans,” said Svetlana Rudneva, who heads the Family and Childhood fund, offering counseling forunplanned pregnancies.

She said the charity fund had seen a hike in calls to its crisis line and more inquiries from women seekinglate-term abortions. The operation is legal up to the 12th week in Russia.

Women are increasingly citing economic insecurity as the reason why their families might pressure them to have an abortion, said Irina, a psychologist at another pregnancy hotline.

“It’s one of many reasons cited to justify the abortion. But today, material difficulties is the main reason,” she said.

Migration to Russia could help compensate for the country’s drastic  population decline, said Anatoly Vishnevsky, head of the Institute of  Demography  at the Higher School of Economics.

But, for want of work,  migrant workers  are leaving Russia in droves. The number of migrants in the country fell by 27 percent in the first quarter of this year, according to the federal migration service.

“The situation was bad already. We’ve always been seen as a country in a demographic crisis. The population is falling and will keep falling,” Vishnevsky said.

“Of course, the current crisis will have an effect and that effect can’t possibly be good.”

This is journalism, not data.  But it does seem pretty clear that the economic bad news cannot be good news for Russian demographics–or public health.  

A major concern for Russian policymakers has to be that the measures they have taken so far appear to be having little effect:

Russia’s central bank could once again face a choice between allowing the rouble to weaken and taking steps to support the economy, says Gabriel Stein, chief economist at Lombard Street Research.

“According to estimates, Russian GDP shrank by 9.5 per cent in the first quarter from a year earlier,” he says. “There are some ‘green shoots’ of recovery – but even President Medvedev has acknowledged stimulus measures to boost the economy have so far not worked.”

Mr Stein says Russia is paying the price for its double exposure to the “most serious hazards of the modern world – energy and exports to continental Europe.” The former, he says, is the result of Moscow’s single-minded pursuit of energy control, regardless of the damage to Russia’s business climate.

“The rouble has strengthened this year, partly on . . . optimism about emerging markets, partly due to – but also a cause of – Russian stock market gains and partly  [on] high  interest rates.

“Rates were cut to 12 per cent last week, [but] remain attractive – and should provide a barrier to the rouble collapse that the state of the economy seems to call for.

“If maintaining the value of the rouble remains the goal, it will be very difficult to ease monetary policy further. Better to act now to moderate a devaluation which represents the loss of income implied by the collapse of energy prices.”

This is just basically a re-iteration of what I’ve said about the very difficult policy trade-offs that Russia faces.  

And other shoes remain to drop.  There are widespread predictions that loan performance will degrade dramatically in the coming months.  Moreover, the deep contraction will likely make the even more pessimistically revised government budget numbers non-operative in the very near future.  This will require a more rapid depletion of reserve funds.  

Inflation does appear to be abating–contrary to what I’ve been expecting.  But other than that, the prospects are very dark indeed.

Update.  This Bloomberg piece states that industrial output fell by a record in April.  This contradicts earlier estimates, based on PMI, that the pace of manufacturing contraction has been slowing.  

Russian  industrial production  fell at a record pace in April as the global economic crisis squeezed demand and companies cut investments.

Output dropped an annual 16.9 percent, the sixth consecutive decline and the biggest since the  Federal Statistics Service  moved to a new methodology in 2003, compared with a drop of 13.7 percent in March, it said in Moscow today. The median estimate in a Bloomberg survey of 11 economists was a decrease of 14 percent. Production fell 8.1 percent from March, when it grew 11.1 percent.

The economy of the world’s biggest oil producer shrank an annual 9.5 percent in the first quarter, the most in 15 years, as industrial output slumped and a 3 trillion-ruble ($93.4 billion) state stimulus package failed to boost lending. A $9 billion slate of state guarantees “failed” to kick-start lending to strategic companies, President  Dmitry Medvedev  said on May 13.

“The situation in manufacturing didn’t improve at all,” said  Vladimir Tikhomirov, the chief economist at Moscow’s UralSib Financial Corp., before the report. “Companies were still under a big strain to try to attract capital and were diverting a lot of their investment money to repaying current debt. Investment programs had to be postponed.”

The World Bank said on March 30 that a “silent tsunami” of bad debt threatens to stall a recovery in the world’s largest energy-exporting economy. As companies default on loans, the government may need to provide as much as $50 billion for bank bailouts, more than twice the amount pledged to banks in this year’s budget, according to UniCredit SpA.

Rate Cuts

The central bank cut its key interest rates for the second time in less than a month on May 14 in a bid to reduce high borrowing costs during the downturn.

Manufacturing tumbled an annual 25.1 percent in April, compared with a drop of 20.5 percent in March. Cement and brick output fell 34.7 percent and 39.9 percent respectively in April while production of trucks and vans fell 68.1 percent. Car production tumbled an annual 55.9 percent.

Billionaire  Mikhail Prokhorov, Russia’s richest man, said Russian property developers may suffer more as the country slides into the worst economic slowdown in a decade.

“The crisis hasn’t hit developers in full yet,” Prokhorov told reporters in Yelets, Russia, on May 15. “The worst is yet to come.”

“The worst is yet to come.”  Frightening words, indeed.

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18 Comments »

  1. “the only bright spot is the price of oil”

    Depends how you look at it. If the only thing the Russian economy has going for it right now is the price of oil — and that’s as sure as tomorrow’s sunrise — then it’s the only reason for any action in the stock market. In other words, the Russian economy is the slave of oil prices determined by foreigners, Russia has been utterly conquered.

    And that’s just about the worst news Russia could possibly get, a black hole rather than a bright spot.

    Comment by La Russophobe — May 19, 2009 @ 7:50 am

  2. Nine years of Putin’s FSB economics which isn’t exactly on the curriculum in that institute and it’s no wonder that Russia will crash and burn. Putin and his siloviki thugs only mandate over the years was to keep their trough full and throw a few crumbs to the masses. It’s too little and too late now.

    I wish that I could feel more empathy for Russians, but, they’ve passively watched Putin take over the airwaves, dissolve elections for regional governors, censor the newspapers, politicize the courts, personally and with malice abuse the Yukos defendants, murder journalists, change the terms of their constitution, basically snuff out any chance to advance a civil society for themselves. Before the screws got tightened and they had a chance to take it to the streets they didn’t. OMON owns the streets now.

    Sadly, if the Russian mob were to take a risk for their children’s sake and take it to the streets their economic and civil society illiteracy would give them the wrong outcome again in history.

    Russia is a study in what four generations of mind numbing Communism imposed on an already dysfunctional culture looks like. There are categories of personality disorders in psych that are more often clinical zeros, in other words no amount of psychotherapy results in insight and permanent behavioral changes. Damage control is the best you can do.

    I’m open to any argument that refutes my negativity about Russia.

    Comment by penny — May 19, 2009 @ 9:23 am

  3. […] but it was unfortunately made from the 1967 Soviet text without the advantage of the Worser and Worser – streetwiseprofessor.com 05/19/2009 Recently the Russian government reported that GDP was down in […]

    Pingback by Ладушки.Net » Blog Archive » Posts about Russia as of 19/05/2009 — May 19, 2009 @ 12:47 pm

  4. SWP:

    The 23% figure can be found a bunch of places:

    http://www.google.com/search?hl=en&q=russia+gdp+23.2+quarter&btnG=Google+Search&aq=f&oq=

    Comment by La Russophobe — May 19, 2009 @ 1:01 pm

  5. LR–Yeah, I’ve seen the 23 pct figure many places. It’s just I haven’t seen a coherent statement of exactly what it measures. My best guess is that this is an annualized quarter-to-quarter number.

    The ProfessorComment by The Professor — May 19, 2009 @ 1:12 pm

  6. Bad economic news from Russia is great news to me.
    Because the better Russian economy the more obnoxious (Ras)Putin will become.

    My guess is that Russian statisticians are using the wrong tools.
    They should use O’Bum administration approach.
    They say that about 100 million jobs will be saved.
    Do you know how they calculate it?

    There were 110 million jobs before O’Bum administration.
    10 million jobs will be lost, and (110 million minus 10 million) 100 million jobs will be saved, – because 100 million jobs will still be there. 🙂

    With regard to inflation, I’ll find that page about the money supply growth.

    Comment by Michael Vilkin — May 19, 2009 @ 1:26 pm

  7. SWP:

    You make an excellent point to which far too little attention is made, namely that when the source of data is the Russian government (here, it’s RIA Novositi, Russian source controlled by the Kremlin, reporting what the Russian government says) you have to factor in both corruption and incomptence before you can even begin to consider any kind of data. But Russians themselves are much more bound by their own sources than we are, and this is why Russia is such a ridiculous mess of a country.

    In other news Gazprom, supposedly Russia’s mightiest ecoomic powerhouse, has just announced it will cut this year’s dividend a breathtaking 87% from last year, to just a handful of kopecks.

    http://www.businessweek.com/ap/financialnews/D988LG900.htm

    Comment by La Russophobe — May 19, 2009 @ 1:29 pm

  8. Hmm, the government’s stimulus measures have been a total failure, huh? Economy heading into the crapper, eh?

    Gosh, then it would seem the prime minister would have his head on the chopping block, wouldn’t he? After all, he’s responsible, isn’t he?

    Seems like betting is popular around here. Anybody wanna bet when Medvedev will fire Putin and get somebody with actual economics knowledge and/or experience?

    *snort*

    Comment by La Russophobe — May 19, 2009 @ 1:34 pm

  9. What’s to change the situation? There isn’t much of a middle class demanding that their stuff be protected. Heck, there isn’t even private property rights firmly established after all of these years. The lower level government clerks and pensioners will vote for United Russia rather than take a risk. The monocity manufacturing folks aren’t unionized. And, the rural folks are simply out of it.

    I hope the EU isn’t wasting this crisis in Russia. Obama would be smart to just sit on the sidelines while Russia implodes economically.

    Comment by penny — May 19, 2009 @ 2:47 pm

  10. Here is a link to the web site of central bank of Russia, English version.

    http://www.cbr.ru/eng/daily.aspx

    In the lower half of the front page, on the left side,
    there is “Macroeconomics indicators” and a link to Money Supply, in billions of rubles.

    http://www.cbr.ru/eng/statistics/credit_statistics/MS.asp

    Wow !
    I did not look at it for a few months.
    Money supply is collapsing, – at the same time there is
    inflation at about 10% per year.

    It means that banks are collecting debt, but are not making
    enough loans to keep money supply from contracting.

    Inflation here is not a monetary phenomenon, which is a rule.
    Inflation here is caused by adjustments in exchange rates, and
    represents an exception from the rule.

    When price of oil was sky-high, billions of dollars were being
    exchanged for rubles, and it pushed price of rubles sky-high.
    As price of oil descended from the sky, so did price of ruble.

    Because Russia imports a lot of food, low price of ruble
    means higher prices of imported food. Hence, inflation.

    But contraction of M2 money supply at 10% , wow !
    It looks like an economic depression.

    Comment by Michael Vilkin — May 19, 2009 @ 9:01 pm

  11. Russians Become Healthier This Year – Ministry

    MOSCOW, May 19 (Itar-Tass) – Russians become healthier this year, says the Health and Social Development Ministry.

    “Over the first four months of 2009 health indexes of the Russian population continue to improve despite the crisis,” Deputy Health and Social Development Minister Veronika Skvortsova said in her report at the 62d World Health Assembly that opened in Geneva on Tuesday.

    “Over the first three years the national project on health proved its efficiency,” an official at the ministry told Itar-Tass. “The total mortality reduced by 9 percent, including child mortality – by 22.7 percent and maternal deaths – by 15.4 percent.”

    At the same time, the birth rate increased by 18.7 percent. In general, the Russian population decline reduced by more than half, while life expectancy increased by 2.5 years.

    “Despite the crisis in 2009 the health project’s financing increased by 8 percent as against 2008 and will continue to grow in 2010,” Skvortsova said.

    The deputy minister reiterated that healthy lifestyle, large-scale preventive measures, better primary care with the use of state-of-the-art mobile and telemedicine technologies as well as protection of maternity and childhood remain the national project’s priorities.

    Moreover, “the ministry drafted a long-term concept for Russia’s healthcare development until 2020 that is based on state guarantees for free medical aid to the population,” she said.

    Comment by Sublime Oblivion — May 20, 2009 @ 1:35 pm

  12. The 23% figure is seasonally unadjusted, so it’s not of much use.

    (Q4 usually has by far the highest level of output)

    Comment by Sublime Oblivion — May 20, 2009 @ 1:37 pm

  13. Quoting ITAR-TASS quoting the Kremlin itself may be the single stupidest comment effort I have ever seen on a blog. What abject, ludicrous nonsense!

    Russia currently ranks #157 on the list of world nations by average lifespan. I guess if it jumps up to #147, you’ll want to pin a medal on Putin’s chest. But for the rest of the world, Russia will still be a nation on the verge of extinction, ruled by a KGB spy.

    With “friends” like these, Russia needs no enemies.

    Comment by La Russophobe — May 20, 2009 @ 3:14 pm

  14. “This is journalism, not data.”

    And I recognize the inference you made, SWP.

    But Penny is right – mind-numbing control has had its effect.

    What does it tell you about a society in general when the best form of birth control is – abortion?

    To me, it screams volumes about the mentality – there is no planning, no anticipation of impacts or consequences of action or failure to act, no nothing – just deal with tragedy.

    Case in point –

    La Russophobe’s blog recently ran a video by the Russian Army Choir, singing and clucking and chuckling gleefully about how Rasha was going to cut off the gas to Ukraine and Europe.

    The “hook” (the tag line in each chorus) was – “we’ll just cut off the gas to Ukraine and Europe.”

    Chuckle, chuckle, chuckle.

    What’s the mentality?

    Didn’t Gazprom just lose several billion dollars in revenue from the last gas cutoff?

    All the Rashan idiots sitting there, applauding gleefully – how do they think an economy works? By cutting off revenues?

    Gazprom-the “power vertical” – no need to distinguish between business and government. It’s all the same – and somehow the money will keep rolling into Rasha, even if Rasha “cuts off the gas.”

    Planned contraception? Abstinence? Condoms? Birth control pills?

    Why worry about that? Why make any prudent precautions? Why plan? Why anticipate?

    Let the “worst” happen – and then moan and groan, and worry.

    From top to bottom, it is a sick, sick mentality.

    And Penny is right.

    Comment by elmer — May 21, 2009 @ 9:42 am

  15. I agree with what you say, Elmer. I know too that statistics demonstrate that abortion is the modal form of birth control, as amazing–and sad–as that is. The journalism vs. data comment was just intended to point out that you can’t rely too much on anecdotal evidence characteristic of journalism (and relied on in the linked article) to demonstrate a tie between the economic crisis in Russia and a RISE in abortion rates. There well may be such a link, and (to the extent Russian official statistics can be relied upon) I will be quite interested to see how that hypothesis fares when confronted with the data.

    My old professor George Stigler once wrote “Data is not the plural of anecdote.” That is a very succinct way of summarizing the limitations of journalism in providing insight on broad socio-economic developments.

    And, the choir thing was, indeed, mental (in the old school slang meaning of the term).

    The ProfessorComment by The Professor — May 21, 2009 @ 10:01 am

  16. I 100% agree. They should at least made the offer to replace gas with uranium! 🙂

    Comment by Sublime Oblivion — May 21, 2009 @ 11:23 am

  17. “we’ll just cut off the gas to Ukraine and Europe.”

    After that the Russian Army Choir may prepare to sing at street corners of European capitals of their choice (as they actually, more or less, did back in the 1990’s!) for contrary to popular perception, overdependence on Russia is not a pressing issue for Europe as a whole.

    “Russian gas accounts for just 6.5% of the EU’s total primary energy supply, a share that has barely changed since 1990. Second, Russia’s market share of EU gas imports has been halved since 1980, from 80% to just over 40%.”

    “Six of the ten new member states in central and eastern Europe import more than 80% of their gas supply from Russia. But …on average, the rate of energy dependence on Russian gas – the share of total primary energy covered by imports of Russian gas – is about 15%
    (the figure for the EU15 is about 5%). Russian gas supplies a particularly high share of total energy in only four countries – Lithuania, Latvia, Hungary and Slovakia – each of which is reliant on Russian gas for around a third of its energy use. …Diversity of supply does not tell the whole story; the structure of gas consumption is another important determinant of gas security. Countries like Lithuania, Estonia, Bulgaria and Poland consume relatively large volumes of gas as feedstock for the petrochemical industry. This type of consumption is highly interruptible; in the event of gas supply disruption, the plants can simply be shut down and petrochemical products imported. Similarly, Lithuania, Estonia, Bulgaria and Latvia consume virtually no gas in the household sector (home heating), the least interruptible of all. But in Hungary, the Czech Republic, Slovakia and Poland, this sector represents between 25% and 35% of gas consumption, suggesting a greater need for storage capacity in these countries. Hungary and Slovakia in fact already have significant storage capacity (85 and 100 days of baseload demand respectively).

    Finally, it is worth noting that, in absolute terms, gas imports from Russia amount to relatively small amounts
    of energy in the four highly exposed countries, especially Latvia and Lithuania. This suggests that it may
    be possible for these countries to implement policies of partial substitution away from natural gas, in favour of oil products and imported electricity, given the relatively small
    volumes involved.”
    Source: Noël (ECFR) 2009 http://ecfr.3cdn.net/c2ab0bed62962b5479_ggm6banc4.pdf

    Comment by Dixi — May 22, 2009 @ 2:35 am

  18. Dixi – which is exactly what they’ll do – substitute away from any dependence on Russia.

    But the rashan extremely oveblown sense of self-importance is visibly clear – as evidenced by the Russian Army Choir, and the people in the audience chuckling and cackling away.

    Comment by elmer — May 24, 2009 @ 2:44 pm

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