Category Archives: Rouble

3/9/15: Russian Manufacturing, Services & Composite PMIs: August

Russia PMI data for Services, Manufacturing and Composite posted sub-50 performance across all three indicators in August, returning the economy back to where it was around June 2015, and erasing the fragile expectations of stabilisation that were based on July data.

As noted in my analysis of BRICs manufacturing PMIs earlier (link here):

Russia Manufacturing PMI fell to 47.9 from 48.3 in July, marking 9th consecutive month of sub-50 readings and worst performance in the sector since May 2015. August move effectively demolished previous expectations of stabilisation in Manufacturing sector in Russia.

Per Markit release: "Operating conditions in the Russian manufacturing sector continued to deteriorate during August amid reports of a deterioration in the economic environment. Output was little changed, while new orders and employment both fell to the greatest degrees since May. Notably, a depreciation in the Russian rouble against the US dollar led to a sharp and accelerated increase in average input prices by raising the cost of imported goods. …The net effect was a decline in demand and a drop off in levels of incoming new business."

Meanwhile, Services PMI posted a disappointing decline from 51.6 in July to 49.1 in August, pushing the index below 50 mark once again. The index fell to its lowest level for the period covering last 5 months.

Per Markit: "The Russian service sector registered a slight fall in business activity during August as incoming new orders were barely changed and excess resources remained evident. Backlogs of work were again cut sharply, placing further downward pressure on staffing levels… Undermining service sector activity was a general lack of growth in incoming new business. Latest data showed that new work was only marginally higher, with companies bemoaning a lack of funds at clients amid evidence of a challenging economic environment.

With booth Manufacturing and Services down, Composite PMI for Russia fell below 50.0 marker in August, reaching 49.3 against 50.9 in August. This marks the second month in the last 3 months of sub-50 readings and August Composite PMI level is at the lowest levels since April 2015.

SUMMARY: As I noted consistently in the past, any sign of stabilisation in Russian economy coming on foot of disappointing 1H 2015 will require several confirmations before we can call a switch in the growth trend. This confirmation (on foot of July upside performance) did not arrive to-date.

15/8/15: Russian External Debt: Big Deleveraging, Smaller Future Pressures

Readers of this blog would have noted that in the past I referenced Russian companies cross-holdings of own debt in adjusting some of the external debt statistics for Russia. As I explained before, large share of the external debt owed by banks and companies is loans and other debt instruments issued by their parents and subsidiaries and direct equity investors - in other words, it is debt that can be easily rolled over or cross-cancelled within the company accounts.

This week, Central Bank of Russia did the same when it produced new estimate for external debt maturing in September-December 2015. The CBR excluded “intra-group operations” and the new estimate is based on past debt-servicing trends and a survey of 30 largest companies.

As the result of revisions, CBR now estimates that external debt coming due for Russian banks and non-financial corporations will be around USD35 billion, down on previously estimated USD61 billion.

CBR also estimated cash and liquid foreign assets holdings of Russian banks and non-bank corporations at USD135 billion on top of USD20 billion current account surplus due (assuming oil at USD40 pb) and USD14 billion of CBR own funds available for forex repo lending.

Here are the most recent charts for Russian external debt maturity, excluding most recent update for corporate and banks debt:

As the above table shows, in 12 months through June 2015, Russian Total External Debt fell 24%, down USD176.6 billion - much of it due to devaluation of the ruble and repayments of maturing debt. Of this, Government debt is down USD22.1 billion or 39% - a huge drop. Banks managed to deleverage out of USD59.9 billion in 12 months through June 2015 (down 29%) and Other Sectors external liabilities were down USD88.8 billion (-20%).

These are absolutely massive figures indicating:
1) One of the underlying causes of the ongoing economic recession (contracting credit supply and debt repayments drag on investment and consumer credit);
2) Strengthening of corporate and banks' balance sheets; and
3) Overall longer term improvement in Russian debt exposures.

5/8/15: Russian Services & Composite PMIs: July 2015

Having covered Russian Manufacturing PMI for July here:, let's take a look at the today's Markit release of Services and Composite PMIs.

Services PMI rose to 51.6 in July compared to 49.5 in June, with new business activity reaching fastest growth in 20 months. On a 3mo average basis, sector performance through July was at 51.3 - showing a marginal rate of recovery, and a major improvement on 3mo average through April 2015 (at 46.0), as well as on 3mo average through July 2014 (48.5).

As chart above shows, Russian Services PMI posted above 50 readings in three out of last four months. However, by historical standards, this expansion is extremely weak.

Per Markit: "The Russian service sector returned to modest growth during July, with activity rising on the back of the strongest gain in new business for over a year-and-a-half. Still, excess capacity remained a problem, with companies again comfortably able to make inroads into their work outstanding despite cutting jobs for a seventeenth month in succession."

The decline in Manufacturing (see link above) meant that the Composite PMI for Russia was weaker than the Services PMI. Nonetheless, Composite PMI reached 50.9 in July, up on 49.5 in June. 3mo average through July is at 50.7 against 3mo average through April at 47.4 and 3mo average through July 2014 at 49.5. Just as with Services PMI, Composite PMI has now posted above 50 readings in three out of four last months.

The above suggests strengthening in the stabilisation and early recovery momentum in the Russian economy, albeit we need a rebound in Manufacturing to above 50.0 reading for a couple of months to confirm robustness of this development. While it does appear the Russian economy is now past the worst period of contraction, calling any recovery will require at least couple of more months of improvements in PMIs.

18/6/15: Russian Central Bank Targets Rebuilding of Foreign Reserves

Recently, speaking at a banking conference in St Petersburg, Elvira Nabiullina, head of the Central Bank of Russia outlined the CBR position on foreign exchange reserves. Nabiullina note that Russian reserves are large - sufficient to cover almost 11 months of imports. However, Nabiullina's 'comfort zone' target for the reserves to cover 2-3 years of "substantial capital outflows", implying she would like to see Russian reserves rising back to USD500 billion mark. Nabiullina is now targeting purchases of forex over the next few years to drive up reserves and to that objective she has been buying on average USD200mln worth of forex per day since mid-May.

In line with forex reserves rebuilding objective, Nabiullina cautioned about markets expectations of further large scale cuts to interest rates as the CBR is trying to balance out inflation targeting (requiring tighter monetary policy), investment supports (requiring looser policy) and accumulation of reserves (implying looser policy).

Per Nabiullina: "Attempts to reduce the interest rates too fast or even acquire certain assets may simply lead to stronger inflation, to an outflow of capital or to dollarisation of the economy, and that would slow down the economic growth, other than promote it."

In its latest outlook, CBR forecast unemployment reaching 6.5% this year from the current rate of 5.6%, before falling to 5.6-5.8% by 2018. GDP is expected to shrink 3.2% in 2015, returning to trend growth of 1.7-2.4% around 2017-2018. Inflation is expected to hit 11% at the end of 2015 with rather optimistic outlook for a decline to "less than 7%" by June 2016, and "close to the target level" of 4% in 2017.

Net capital outflows are expected to decline from USD90 billion in 2015 to USD55-65 billion in 2018. "We are expecting the financial sanctions against Russia to remain in place. Payments on foreign debts during this period will constitute the bulk of the capital outflow. It will gradually reduce from $90 billion to about $55-65 billion during 2015-2018, depending on the scenario," according to Nabiullina.

Russian International Reserves reached USD360.6 billion at the end of last week, up on USD356 billion low registered in April 2015. Still, the reserves are down USD117.7 billion y/y (-24.6%) and down USD132.73 billion (-26.9%) on pre-sanctions period.

15/6/15: CBR Cuts Rates to 11.5% in Hope of Lifting Sagging Investment

Central Bank of Russia cut policy rate to 11.5% today from 12.5%, undershooting markets expectation for a 150bps cut to 11.0%. The move was expected and relatively modest cut this time around suggests more heavy cuts in 2H 2015. In part, this reflects relatively sharp decline in growth in April: having contracted modest 1.9% in 1Q 2015, Russian GDP fell at an annual rate of 4.2% in April. Another incentive for CBR to lower rates is the Ruble, which posted surprising comeback in early 2015, putting new pressure on the federal budget. CBR bough USD3.6 billion in May, in an attempt to keep Ruble lower.

Rate cut is a welcome move, but in current environment it also shows just how little room for manoeuvre the monetary policy has. Russian banks are deleveraging. Loans outstanding in the corporate and household sectors have fallen in 1Q 2015. The trend continued in April: SME loans share of total corporate loans fell from 22% in April 2014 to 18% in April 2015. In January-April 2015, corporate lending outstanding was up nominally 17% in ruble terms compared to the same period 2014. Inflation run at around 15.8%, which means that in real terms, corporate loans remained basically flat. Household loans grew by 4% y/y in ruble terms. Which means in real term, level of outstanding loans to households fell. As usual, roughly 1/3 of all corporate loans were denominated in foreign currency.

The rate cut will also help with non-performing loans. Stock of NPLs in the corporate sector rose by roughly 30% y/y in the first four months of 2015 to 6% of the total stock of corporate loans. Household credit NPLs stood at 7%. Both rates of NPLs are relatively benign, by Western standards, but the growth rate in NPLs is worrying. Lower cost of carrying these loans will help alleviate some of the pressures.

Overall, Russian investment remains a major bottleneck for the economy. Chart below shows Russian Investment as percentage of GDP, compared to both the Emerging Asia economies and Emerging Europe economies. This clearly highlights the dire state of Russian investment over 2000-2013, and a significant decline in investment from 2014 on, including the IMF forecasts for 2015-2020 period.