Category Archives: Russian crisis

6/2/16: Down the Ruble Hole? Russian Opinions & Russian Economy

Latest Russian figures on wages and earnings, rounding up 2015, are pretty horrific. In USD terms, average wage is now down more than 30 percent in a year through December, falling to around USD560 per month at year end.

Wages Woes?

In Ruble terms, things are more palatable. Nominal wages are up 4.5 percent to RUB34,000, which means that real wages have fallen roughly 9.5 percent in 12 months through December. The average salary was down to RUB30,311 (USD381) per month, from end of September average of RUB32,911 (USD463). Rate of real wages decline accelerated in December compared to full year averages to 10 percent compared to December 2014.

However, average real incomes excluding wages, but including private business income and state payments, were down 4% y/y in 2015. One sign of the fiscal policy direction is that President Putin signed off on a minimum wage hike for 2016 that raised (as of January 1st) the minimum wage to RUB6,204 (USD87) a month, up on RUB5,965 or USD84 per month in 2015.

Beyond this, underlying labour markets trends, despite sharp cuts to employment reported in all surveys of PMIs for Services and Manufacturing over the last 24 months, official unemployment remains benign at 5.8 percent. This masks vast regional variation. In the Central Federal District, which includes Moscow, unemployment is below 4 percent, against, per BOFIT data, 12 percent in North Caucasus. BOFIT reports figure for Inigushetia at  30 percent. Unemployment rate for under-20 years of age is at around 20 percent.

2016 is expected to be another hard year for wage earners, as Korn Ferry — Hay Group forecast that Russian companies will increase salaries on average by only 7 percent in 2016. Given expected inflation in 14.6 percent range this will entail another 7.5 percent cut to real wages.

Feeding Rising Cutbacks by Households

Notably, economy, salaries and inflation have been identified as the main economic concerns in this week’s survey by state-run pollster VTsIOM. Low salaries were raised as concern by 13 percent of respondents in January survey. 12 percent of Russians were concerned about rising inflation in December 2015 and this rose to 20 percent in January data. Another 12 percent of respondents said they were concerned about unemployment.

These trends are feeding into decline in consumer demand. Based on state-run VTsIOM poll published earlier this week, as of the end of December 2015, some 63 percent of Russians have cut back purchases of goods over the last 6 months. 59 percent are substituting in favour of cheaper goods and 26 percent are dipping into personal savings to make ends meet.

In another poll, published at the end of December, covering the period of mid-December, VTsIOM, Russians are reporting lower social well-being with the welfare Self-Estimate Index reporting own conditions of the respondents falling to the lows of 2009 and 24 percent of Russians estimating their own financial situation as being “bad”. The Social Optimism Index was showing that only 27 percent of Russians think their lives are going to improve in 2016, and 33 percent of Russians said the economic situation in the country was bad.

That said, for now at least, 45 percent of Russians positively assess country’s overall development path and only 17 percent of respondents disagree with this view.

Still, based on yet a third poll (also from December and also by VTsIOM), if in August 2014 introduction of the food imports embargo against the Western countries was opposed by only 9 percent of Russians, by mid-November 2015, some 20 percent of respondents expressed opposition to the embargo. Still, as shown by the poll results, the majority of Russian citizens continue to support the ban on food imports, although the number of those supporting it falling from 84 percent to 73 percent since the introduction of the embargo. In line with this, fewer Russians consider the food embargo to be an effective measure: down from 80 percent in August 2014 to 63 percent mid-November 2015.

And Touching the Values Systems

In a way, all of this translates into some serious fodder for political analysts (apart from us, economists). You see, much of Russian system legitimacy rests on two factors: immense economic gains over the period of 2000-2012 or 2013 (depending on timings of the crisis) and national (not quite nationalist) aspirations for a historical revival.

Back in July 2015, Levada Centre - probably Russia’s most reputable polling organisation - found that 42 percent of Russians said they preferred "decent" wages and pensions over the freedom of speech and the opportunity to travel abroad. 49 percent, though said they won’t. The results in July 2015 (data was collected in June) were similar to those in 2013 survey (43 percent preferred financial stability over the opportunity to travel abroad and the right to free speech, against 46 percent who opposed such  trade off). But this still marked a big change on 2008 when only 35 percent of Russians were willing to trade freedoms for income and 54 percent of Russians opted for freedom of speech and travel ahead of pensions and salaries.

While the above figures suggest that large share of population is closely anchored to financial and economic fortunes of the country, there are preciously few signs that those adversely impacted by the crisis are willing to take up the issue with authorities. Levada Centre July poll found that 69 percent of Russians would tend to avoid any interactions with the authorities and only 23 percent were determined to press authorities to deliver on promises. Not surprisingly, 60 percent of Russians do not believe that people can hold authorities to account and 22 percent believe they can. Subsequently, only 18 percent of the Russian population thought that mass protests are likely to arise as the result of the ongoing crisis and only 14 percent of respondents expressed willingness to participate in protests.

Yet, for all their imperfections, opinion polls are showing some tremors in the facade of the public support for state policies and institutions.

Obshchestvennoye Mnenie Foundation poll published on February 5th showed that 54 percent of Russians see economy as being in a crisis. 41 percent said the economic situation in Russia is satisfactory and only 3 percent of the participants said that the economy is in a good state. The number of Russians that have a negative view on the state of the economy is increasing, and rapidly so: just 43 percent of the respondents in December last year felt the economy was in bad shape and only 30 percent did so in May of 2015. And 58 percent now think that the economic situation in the country is worsening, while a month ago this answer was given by 41 percent of people. Which flies in the face of many analysts and the Government view that the economic crisis has bottomed out. Note: it is worth noting that in general, public opinion on timing of bottoming out of the recessions lags actual underlying numbers. Still, for a ’stabilising’ economy, only 9 percent of Russians currently believe that the economic situation is improving.

Levada Centre poll published at the end of January found that 45 percent of Russians believed that the country was “moving in the right direction”, down from 64 percent in June 2015, and from 56 percent in December 2015. January marks the first time for over a year that the state policy approval rating fell below 50 percent mark. Meanwhile, those who feel that the country was on a “wrong route” rose to 34% in January poll compared to 22 percent back in June 2015 and to 27 percent in December 2015.

President Putin's personal approval rating fell to 82 percent in January, compared to a record high of 89 percent in June 2015 and to 85 percent in December 2015. The proportion of respondents who named him among the politicians they trust also declined. This currently stands at 58 percent, down on 64 percent in June 2015 and 60 percent in December 2015.

What Does All of This Mean?

All of the above adds up to a picture in which the country is sliding gradually toward becoming un-anchored from the key driver for social cohesion: economic normalisation (compared to the 1990s) delivered during the so-called Putin Era. While the ongoing geopolitical revival still compensates for the negative economic momentum, that compensation is starting to fade.

One reason for it - cumulative losses on the economy front. Key responses to the crisis have been: devaluation of the Ruble, push toward imports substitution and conservative push back against the pressures on capital account side. All were necessary and rather successful. But all of them also transferred large amounts of pain onto the shoulders of the households and SMEs working in the private sector. Public sector employment and wages have been better shielded from the crisis, but there too, strains are starting to appear. As the result, real, tangible and compounded pain is now feeding through to the ordinary folks.

The other reason is the weakening of the geopolitical dividends perceived by the ordinary Russians. Crimea was the high point of 'return to roots' in Russian psyche - a point of reversal of perceived historical injustice inherent from the Soviet times and a point of a payback for years (since 1991) of virulent anti-Russian rhetoric across the majority of the former USSR states, including Ukraine. These were perceptions of the average Russian (do not confuse them with my own views). The conflict spillover into Eastern Ukraine was already a step away from the Crimean narrative, but it was a proximate one. And hence it had weaker, but nonetheless significant, support on the ground in Russia. But Russian push into Syria has completely divorced the country geopolitical strategy from the hearts-and-minds of the Russians on the ground. Syria is a foreign land, with alien religious strife and probably more reminiscent of Chechnya to an average Russian, than of the traditional spheres of Russian interest.

The twin factors: increased economic pressures and weakening geopolitical dividends, are now working through public perceptions. The outcome of these is far from predictable. Current lack of serious discontent is likely to persist over time: Russia is not Ukraine and it will not opt (socially) for the convulsions of knee-jerk 'revolutions' . But, if the economic crisis continues unabated, there will be political 'blood'. One way or the other.

A note to the above: Surveys in Russia — even those conducted by reputable pollsters such as Levada Center — need to be taken with a pinch of salt. Reliance on polls is a tricky thing, especially for polls in societies highly skeptical of social researchers and authorities, like Russia. Here is a good article on some problems identified in some recent polls:

26/3/15: Russian imports outlook 2015-2016

Per BOFIT, Russian imports "will react strongly in 2015, partly dragged down by the economic contraction" and in part by weaker ruble and continued counter-sanctions. Import volumes adjust sharply during Russian recessions: in 2009 imports volumes fell 30% as GDP contracted by 8%. However, current Ruble is in a weaker position than in 2009: "the real exchange rate of the rouble has now depreciated much more than in 2009: it is a quarter weaker than the average rate for 2014. Russia’s income on exports, which dropped by a third in 2009, will deteriorate under the forecast oil price assumption[USD55 pb], by almost a quarter in 2015."

All of this means that Russian "imports will have to adjust to the smaller export income even more than usual [more than in 2009], since it would be difficult to fund a current account deficit in the present situation." It is worth noting that Russian economy does not run current account deficits to smooth out volatility in imports. "The current account last posted a deficit for a short period only, during the crisis of 1998."

Which means that BOFIT projects sharper decline in imports this time around: "import volumes are estimated to fall by a fifth in 2015. [On top of already sharp contraction in 2014]. The decline in imports will level off after 2015 as the economic contraction eases. In addition, the rouble’s real exchange rate will strengthen, since inflation is considerably faster in Russia than in its trading partners (the difference has grown to over 10%). In the absence of shocks which would lead to capital outflows, the rouble’s nominal exchange rate is expected to remain fairly stable, because net capital outflows stemming from e.g. repayment of foreign debt by non-financial corporations and banks will not necessarily exceed the surplus on the current account."

In other words, BOFIT does not expect an external funding crisis to be triggered by the debt redemptions.

"The current account will be bolstered by diminishing imports and a recovery in Russia’s export income resulting from rising oil prices. The recovery in export income will, in turn, create room for an increase in imports."

All of which is consistent with the Government policy: "the Russian Government has increased reactive manual steering in several areas ahead of the recession. Import controls have been intensified, e.g. by raising certain import duties and favouring domestic products in public procurement and also projects of state-owned enterprises. Capital outflows have been restricted by e.g. strengthening banking controls and issuing instructions to state-owned enterprises. Companies have been encouraged to apply targeted price controls, although this has not been widely used, as yet."

Exporters to Russia, especially from the EU, can expect some rough years ahead.

26/3/15: BOFIT Latest Forecasts for Russian Economy 2015-2017

BOFIT published their new forecasts for the Russian economy. Here is the summary with my comments:

Pre-conditions: "Russian economic growth has slowed for three years in a row, due to e.g. waning growth in the available labour force, capital and productivity. In addition, a slight decline in export prices, the Ukraine crisis, sanctions, Russia’s counter-sanctions and other negative measures, with the accompanying increase in uncertainty, slowed Russian GDP growth to just over 0.5% in 2014. ...The impact [of oil price drop in H2 2014] began to show in the early months of 2015, with a slight contraction in GDP. Without transient factors, the economy would already have contracted in 2014."

What transient factors supported growth in 2014?

  • "As in 2013, industrial production was partly supported by strong growth in defence spending."
  • "The depreciation in the real exchange rate of the rouble since the early months of 2013 has [created room for some industrial imports substitution], and may also have slightly boosted exports of certain non-energy basic commodities."
  • "The rouble’s strong depreciation led to consumer spending rushes, which kept private consumption growth at some 2%. However, wage growth slowed, as did pension growth. Inflation rocketed (to almost 17% in February) on the back of rouble depreciation and Russia’s counter-sanctions in the form of restrictions on food imports. Consequently, real household incomes contracted in annual terms for the first time since 1999. Aggregate income was underpinned by employment, which remained buoyant for the time being. Household borrowing decreased further."
  • "Steered by the government, investment by most large state enterprises was relatively high. This was, however, insufficient to prevent total investment from falling by some 2%. The net capital outflows of the corporate sector increased, due partly to repayment of foreign debt and considerable constraints in access to foreign funding as a result of domestic uncertainties and external financial sanctions."

External position forward: "Export volumes declined by 2%. Exports of crude oil and gas dwindled markedly, while exports of petroleum products continued to grow at a robust pace. As the fall in ex-port prices steepened, export income in the last months of 2014 was already well over 10% lower (in euro terms) than a year earlier. Import volumes declined by 7% in 2014 and have now been in decline for 1½ years. The decline steepened considerably towards the end of the year."

BOFIT forecasts for 2015 assume oil price at USD55 pb and above and sanctions and counter-sanctions to remain in place "unchanged for a relatively long period".

"The impact of [oil price] change will be profound, since energy exports ac-count for almost a fifth of Russia’s GDP."

Do note: energy exports include not just crude petroleum and natural gas, but also refined products and electricity (including nuclear). This puts the Russian economy into perspective not usually considered in the Western media - the economy is much more diversified than many believe and claim. Further note, energy (total energy, not just oil and gas) accounts for just over 60% of total exports income.

Outlook summary: "...Russian GDP will contract by over 4% in 2015. The high degree of uncertainty will cause a shrinkage in private investment, while private consumption will be cut particularly by rapid inflation. Even though Russian imports have already edged down, they are estimated to fall further, by one fifth, in response to the sharp depreciation of the rouble during the last months of 2014. In 2016–2017, global economic growth and world trade will pick up, and it is assumed the oil price will rise to around USD 65 a barrel. The Russian economy is expected to continue slightly downward, before a slow recovery in 2017. The drop in investment is expected to flatten out towards the end of the forecast period. With real household income remaining low, it will also take time for private consumption to recover. Export volumes will grow at a very subdued pace. Imports will recover after 2016."

All in-line with my own outlook.

Private consumption "…will decrease substantially in 2015, and slightly further in 2016" driven primarily by inflation eroding household incomes and weak prospects for growth in private sector wages in nominal terms and public sector wages expansion below the rate of inflation. Notably, "the government is also seeking to cut the number of public sector employees." BOFIT expects pensions to "barely keep pace with inflation, at best".

Household credit will remain subdued, "even though the debt-servicing burdens stemming from payback of short-term loans will ease gradually. As during the crisis of 2009, savings may be rather substantial."

Public consumption "will decline amid pressures on the central government finances."

Investment "…will dwindle substantially this year and next. Private investment, in particular, will be depressed by a number of uncertainties relating to the ongoing tensions in East Ukraine, uncertain prospects for sanctions and the unpredictability of Russian economic and trade-related measures stemming from possible additional sanctions and recession countermeasures." So no surprises, then.

Fiscal side: "…the federal budget deficit is set to grow so large in 2015 (to about 3.5% of GDP) that the government Reserve Fund may be eroded by as much as a half. It is possible that support measures will be implemented using government bonds (as in the bank support operations in December 2014, which amounted to 1.4% of GDP). The support operations can also draw on debtors’ bonds (as in the funding of the state-owned oil giant Rosneft, which was just under 1% of GDP)."

The longer-term outlook is deteriorating: "The foundations of growth are being eroded by the contraction in private investment. Government spending is focused increasingly on defence and pensions, while public investment is subject to the largest cuts."

Chart below summarises forecasts:

Sources: Rosstat, BOFIT Forecast for Russia 2015–2017

20/3/15: Russia: Agri-food Sector and Falling Real Household Incomes

As BOFIT reported last week, 2014 marked the first year since 1999 crisis when Russian households experienced a decline in real household income. In 12 months through December 2014, real (inflation-adjusted) incomes declined by around 1% y/y, with the rate of decline accelerating to 5% y/y in November-December 2014, at the peak of the Ruble crisis. Even at the depths of 2008-2009 crisis, Russian real household incomes stayed in positive growth territory, as chart below illustrates:

One area of severe squeeze on actual (nominal) incomes has been in the public sector. As BOFIT noted: "As recently as 2013, public sector wages were rising nearly 20% a year. By the end of 2014, however, on-year nominal wage growth had fallen to zero, while inflation was running at 11.4%. Hence, real wages in the public sector fell substantially." Private sector wages shrunk by around 2% in dealt terms, y/y. Pensions rose by about 10% y/y in 2014, still below inflation increases.

As BOFIT reported: "The average 2014 wage (excluding grey-sector wages) was about €650 a month. In January this year, due to a massive drop in the value of the ruble, the average monthly wage was only about €450. The average pension last year was €220 a month, but in January, that amount had fallen to just €150."

Going forward, both public and private sectors are facing tough times in terms of wages growth. Meanwhile, composition of inflation - especially rapid inflation in food and other staples prices - is more significantly impacting retirees. As the result of inflation in food sector, Rosstat has revised its formula for the cost of consumer goods and services basket, increasing the relative weight of food by almost 1 percentage point to 37.3% of the total household spending. This means that going forward, higher inflation in food sector will have greater impact on CPI. And we can probably expect that higher inflation. 2014 was near-record crop year that is unlikely to repeat. Meanwhile, Russian agriculture is suffering from dire need of modernisation capes that is nowhere to be seen. There is some room for imports substitution via increased domestic production and via alternative supplies from outside the EU, US and other economies that imposed sanctions and suffered Russian counter-sanctions, but that substitution is severely limited by:

  1. Bottlenecks in supply expansion in Russia; and
  2. Lower exports revenues due to high oil prices.

Neither has much to do with sanctions: in the current oil price environment, lending to Russian corporates, even if it were available outside sanctions, would have been very subdued and expensive.

To lift production in the sector, the Government needs to simultaneously:

  1. Increase capital investment supports to the producers;
  2. Open and incentivise markets for agri-food production and supply sectors in Russia to foreign investment (lifting sanctions on imports of food will do absolutely nothing to food prices, as imports pricing will be linked to forex rates and cost of capital);
  3. Set up long-term targeted incentives for Russian producers to increase output quality and volumes (preferably via tax system and streamlined land ownership, as well as improved access to markets). Less arbitrary enforcement of regulations would also help; and
  4. In distribution and retailing, local authorities in a number of larger urban centres have tightened and consolidated control over retail markets, resulting in higher margins for retailers, lower margins for producers and cutting off producers' access to direct sales to consumers, especially for smaller producers. This should be reversed.