At the present time the main geopolitical issue is what plans does Russia have for Ukraine? We have seen the troop and tank movements and also the response of the UK with the RAF flights delivering anti-tank missiles to Ukraine. But as ever our interest is the economic situation and let us start with something which raises a wry smile.
BREAKING NEWS: RUSSIA OPENLY CONSIDERING ACCELERATING ITS DECISION TO DITCH THE U.S. DOLLAR IN FAVOR OF ITS NATIONAL CURRENCY WHEN DEALING WITH TOP TRADE PARTNER CHINA ( @GoldTelegraph )
The basis for this comes from Newsweek.
During an interview with the state-run Tass Russian News Agency on Tuesday, Denisov said the two nations “are switching to national currencies” when it comes to bilateral transactions. And though the pair was not planning to “completely switch,” he suggested that the introduction of sweeping sanctions by Washington may “somewhat speed up” the process.
The wry smile comes from the fact that we have heard this for some years now so it is hardly breaking news. Also the recent warmongering gas pushed the Russian Ruble from just below 75 to the US Dollar ti just below 79 so now may not be the best time to push its use.
Actually the Russian authorities have been selling the Ruble as an oil price hedge.
(Bloomberg) — The Bank of Russia said it’s halting purchases of hard currency in a bid to ease pressure on the ruble, which has slumped amid tensions over Ukraine.
Policy makers are suspending buys of foreign exchange on the open market in order to “reduce financial market volatility,” according to a website statement. The central bank conducts the transactions for the Finance Ministry as part of Russia’s fiscal rule, which is aimed at reducing the economy’s exposure to fluctuations in oil prices.
But have stopped for the moment so they do not add to the Ruble’s fall.
Interest-Rates
We learn quite a bit from this.
On 17 December 2021, the Bank of Russia Board of Directors decided to increase the key rate by 100 b.p. to 8.50% per annum
There is more bad news from the US Dollar replacement theme because you would not need an interest-rate of 8.5% if your currency was strong. After all we live in a period of ZIRP ( Zero Interest-Rate Policy) and indeed NIRP. A plus is that they take inflation targeting seriously as in one move they have achieved what the US may do in the whole of this year in response to this.
Inflation is developing above the Bank of Russia’s October forecast. In October and November, seasonally adjusted growth in consumer prices rallied to a six-year high. Annual inflation went up to 8.4% (from 7.4% in September). It is estimated at 8.1% as of 13 December.
They target inflation at 4% and are willing to increase interest-rates even further if necessary.
If the situation develops in line with the baseline forecast, the Bank of Russia holds open the prospect of further key rate increase at its upcoming meetings.
Oil and Gas Reserves
Russia has extraordinary commodity resources and the developments in oil and gas markets brought it quite a windfall last year.
MOSCOW, Jan 21 (Reuters) – Russia’s sales of oil and natural gas far exceeded initial forecasts for 2021 as a result of skyrocketing prices, accounting for 36% of the country’s total budget.
According to Reuters there were some quite extraordinary numbers here.
According to its Finance Ministry, Russian oil and gas revenues exceeded initial plans by 51.3% in 2021, totalling 9.1 trillion roubles ($119 billion). In October alone, revenues were 1.1 trillion roubles, or almost $500 million per day.
– Total budget revenues reached 25.29 trillion roubles last year, up from 18.72 trillion roubles in 2020.
So there was quite a fiscal windfall as well as a boost to GDP from this. The trade figures look very strong too.
According to the central bank, Russia’s total exports reached $489.8 billion in 2021. Of that, crude oil accounted for $110.2 billion, oil products for $68.7 billion, pipeline natural gas for $54.2 billion and liquefied natural gas $7.6 billion.
Trade Surplus
This meant that there was quite a balance of trade surplus.
A historic-high Russian current account surplus of $120.3 billion, equal to 7% of the gross domestic product and driven by high gas prices last year, is rouble-supportive, ING said.
So returning to the Rouble theme we have a currency backed by relatively high interest-rates and a current account surplus. Why is it not soaring? If you like Russia should be seeing a version of what became called the Dutch Disease where commodity resources lead to a higher exchange rate. But there are two problems with that. Firstly as we looked at earlier the state was selling. It was far from the only one.
Yet net capital outflows widened to $72 billion last year, its highest since 2014 and up from $50.4 billion in 2020. “This keeps the local currency undervalued, making it continuously favourable for the trade balance,” ING added.
This is a familiar theme for Russia and can be combined with the oligarch influence. Any economic strength seems to get frittered away into other areas.
Bank of Russia Foreign Exchange Reserves
The selling of the Ruble means that FX reserves are now over 630 billion Rubles which is more than a tidy sum and is up around 35 billion on a year ago. This includes some 133 billion Rubles of gold meaning that the Bank of Russia will appreciate the rise above US $1800 for gold that 2022 has brought.
This is also a type of sovereign wealth fund but is different from the Swoss version in that it invests in bonds. The countries below will have found their bond markets boosted by this in a type of foreign QE.
Austria; · Belgium; · Canada; · Denmark; · Finland; · France; · Germany; · Luxembourg; · the Netherlands; · Spain; · Sweden; · the United Kingdom; · the USA.
There is a sort of irony in holding UK and US bonds right now. However recent times of falling bond markets will not have been welcome although central banks usually only hold shorter-dated bonds.
Stock Market
Central bankers keen on wealth effects will be very disappointed to see the MOEX index have such a rough run. In late October it nearly made 4300 but even with a 3% rally so far today it has not reached 3400.
Comment
The theme here is generally one of disappointment. Russia has economic strengths mostly from its geography and natural resources. But the story of the Ruble is something of a metaphor for the whole position as it is very disappointing in the circumstances. After all many oil benchmarks are over eighty US Dollars.
Considering the oil and has situation this feels disappointing too.
According to our estimates, economic activity is growing faster this quarter as compared to the previous one, but predictably more slowly than during the period of its active recovery in the second quarter of 2021. As of the end of the year, the overall increase in GDP might reach nearly 4.5%. ( Bank of Russia)
On the more positive side there seems to be work for those who want it.
I would now focus on the labour market. In October, unemployment decreased to 4.3%, which is its record low. The demand for labour continues to grow. The number of vacant jobs is significantly higher than two years ago, specifically by about a third. Many industries are facing a shortage of workers, including both specialists and low-skilled workers.
And maybe even some real wage growth which is rare these days.
several executives of our regional branches stressed that increasingly more companies were forced to raise wages at a double digit pace to be able to retain their employees.
But as you can see under the hard exterior of troops and tanks the underlying economic position is more fragile than you might think.