Wednesday, December 10, 2008

Russian Collapse....Again

Global collapse continues to make itself felt in places thought to be impervious. The Russian economy is one such place:

"On 9 December, Russia’s State Statistics Service revealed the GDP growth figures for the third quarter. And – lo and behold – they are “surprisingly bad”, “much worse than expected”, “below market expectations”, etc. (Read the reports in The Moscow Times, Bloomberg and Reuters).

You might think that by now economists would no longer be surprised by the stream of dire economic news. For anyone who has been closely following what has been happening in Russia’s economy over recent weeks, it’s increasingly obvious that it has essentially stepped off a cliff. As Danske Bank economist Lars T. Rasmussen writes in a research note: “The question is whether there will be any economic growth at all in Russia next year.”

“But surely 6.2% growth in the third quarter isn’t so bad?” I hear you say. Think again. That figure is the year-on-year change, not the quarterly change. In other words, it includes the rapid growth that took place in the first half of this year and the fourth quarter of 2007, when Russia’s GDP was still growing by 8%. The month-on-month trends show that output is already contracting. Russia’s GDP fell by 0.4% in October, according to government officials.

Now, the signs are that production in Russia is not simply stagnating: It is in fact plummeting like a stone. Industrial output, generally an early indicator of GDP trends, has been falling for months – by a cumulative 5% between July and October. And the output decline appears to have accelerated dramatically in November and December. According to the latest government figures, cited in the Moscow Times article, manufacturing production will have plummeted by an additional 10% by the end of the year."

This puts the Kremlin in a precarious and perhaps more agreeable position than it has been regarding international relations but of course this remains to be seen. Energy concerns of course contintue to drop:

"With Russia’s reserves the third biggest after China’s and Japan’s, fiscal stimulus is a “feasible option” for authorities to counter the slowdown, though with revenue from oil eroded, a spending boost “faces constraints,” wrote Vogel. Russia’s reserves may be tied up in supporting banks through the lending drought, he said.

“Lower oil-price risk scenarios imply greater-than-expected defaults in the private sector, failures among smaller banks, continuing high interest rates and banking system problems,” Vogel wrote. Commodities-based companies will cut back capital investment by 20 percent to 30 percent, he added.

Urals crude, Russia’s main export blend, was at $39.81 today, plunging almost 60 percent in the past three months. Oil prices of $70-a-barrel average are required to balance Russia’s budget.

Safety Cushion

Russia’s reserves, including oil funds that exclusively act as a safety cushion for the budget, stood at $454.9 billion in the week ended Nov. 28. The government has pledged more than $200 billion of tax cuts, loans and other measures to support economic growth.

Russia has also drained about a quarter of its foreign-cash reserves to prop up the ruble since July, which it is now allowing to gradually depreciate. Vogel expects another 15 percent decline in the ruble’s value by the middle of next year against the central bank’s basket of dollars and euros.

The currency was at 27.9128 per dollar by 4:38 p.m. in Moscow, from 27.9279 yesterday. Against the euro, the ruble traded at 36.1476, from 36.1014. The ruble was little changed at 31.6153 versus the basket.

Barcalys lowered its forecast for Russian growth next year from a 4.6 percent prediction in June. "

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