Alex Isakov
@x1skv
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Russia & CEE Economist at Bloomberg. Views mine.
Washington, DC
Joined June 2009
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🇷🇺 Russia-watchers are looking for reasons why sanctions produced only a shallow recession
here's an often overlooked one: there was not much to destroy in the first place
🇷🇺 economy has never recovered much after '15 shock
you just can't destroy something twice
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🇷🇺🇰🇿 Kazakhstan likely quietly took over Russia's 1st place in CIS's GDP $ PPP per capita rankings around mid-2023
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here's what happened with 🇷🇺 budget deficit in January:
-- biggest problem is 'hyper'-spending - not revenues
-- oil&gas revenue drop in line with Urals - matches estimates
- non-oil taxes drop by 30% - surprising and likely a one-off
-- nat. wealth fund to last into 2025
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🇹🇷 and 🇷🇺's decision to switch payments for natural gas to rubles won’t be welcomed by the US or Europe, but can benefit both countries
here's how we think it will work and what's in it for both - a 🧵
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🇷🇺 A major force behind Russia's +3.6% 2023 growth is the reverse migration of Russian, who fled war in 2022
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🇷🇺 Russia's military mobilization has a side effect: registered crime rates dropped ~20% in highly mobilized part of the country in excess of secular trend
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🇷🇺 If there’s one sector of Russia’s economy that illustrates how devastating sanctions can be, it is car manufacturing
At the same time it's probably also the sector best illustrating how rapidly 🇷🇺 can integrate with 🇨🇳
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The problem here is obvious: no seasonal adjustment. Each 1Q is weaker vs 4Q: long holidays, cold weather and harvest cycles: wheat doesn't grow in the snow.
When seasonally-adjusted GDP actually expanded 0.5% in 1Q, before starting to drop in 2Q
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🇷🇺 needs a way to store its excess oil revenue today to keep the economy stable tomorrow
but there 🇷🇺's options are limited.. in fact, they are limited to 🇹🇷
🧵 on why 🇹🇷 has lots of leverage with respect to 🇷🇺and recent natural gas concessions are only a start...
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The study states that sanctions have already "crippled Russian economy". This is supported by an illustration of a drastic contraction across a sample of sectors in 1Q22 - construction is down -60%, agri -55%
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🇷🇺 Russia's local sovereign debt is quietly melting down over the last 2 days - 5Y yield moved over 14%, which means government's local ccy borrowing cost is highest since 1Q15
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⚡️🇷🇺 Bank of Russia halts CNY purchases for Minfin to stop RUB decline
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🇷🇺 There's a strong domestic political cycle in Russia's economic policy
Its best illustration are regular real wage spikes around presidential campaigns - public wage got a boost around all recent campaigns, and will spike again in the run up to March 2024
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🇷🇺🇮🇳 India will take delivery of 2 Russian-made warships in the next few months - BN
- Delivery was delayed as countries struggled to find a payment mechanism that didn’t violate US sanctions
- Now both have been able to work around the payments issue
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Again - understanding conditions on the ground in 🇷🇺 is more important than ever and report is a commendable effort to do just that.
However, there are a few pieces of evidence may be strengthened
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🇨🇳🇷🇺 How do China's banks respond to US threat of secondary sanctions?
Strongly
Impaired access to yuan liquidity for Moscow is obvious from the drastic and persistent surge in overnight rates in Moscow and Shanghai - the RUSFAR CNY - SHIBOR
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This has been the strangest way Moscow residents got an extra day off
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This is hard to justify, as the federal budget has recorded a surplus of 1% of GDP in the 1H22 + an expected full year deficit of 2% GDP is does not endanger fiscal stability with manageable 20% debt/GDP
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🇷🇺 One outcome of the international reserve freeze is that the influence over the economy is shifting from the government to corporations, whose decisions steer the currency more than before
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🇷🇺 April tax data suggest Russia's will collect around $125B in oil and gas federal revenues in 2024
Russia's fiscal position will remain relatively sustainable at any Brent price north of $70
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Yes, this was true in March, when the
@bank_of_russia
doubled interest rates to 20% and closed trading in financial markets.
But the situation turned around by June: demand for loans is on the rise and lending standards are easing, bond placements in reached avg. 2021 levels
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the study points out that credit remains frozen and no amount of incentives "are enough to spur businesses to underwrite new investments and capital expenditure"
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A more thorough accounting of sectoral activity, the credit market and fiscal policy would help reconcile the verdict of the Yale report with our out-of- consensus call of a limited 3.5% GDP decline in 2022
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there are more subtle issue, i.e. report's statement that FX reserves are being rapidly spent -- which does not account for the fact that they are held mostly in EUR, CNY etc and thus declined vs USD on mark-to-market
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1-st and foremost it is capital outlflow - 🇷🇺's households started to move savings abroad since the start of the war
On our estiamtes an excess accumulation of foreign deposits exceeded $40bn since Feb'22 ... and this is just one type of capital outflow
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🇷🇺 population has been declining pre-war and the war will reduce it further
Reasons? Emigration, lower fertility and war-related casualties
This will erode potential growth and stretch fiscal policy, as the govt tries to reverse labor-force decline with pro-natalist policies
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The study states that Russia "is resorting to patently unsustainable, dramatic fiscal and monetary intervention to smooth over these structural economic weaknesses, which has already sent his government budget into deficit for the first time in years"
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lastly, Russia's corporates are bringing less and less FX back home
Some of this is due to increased settlement in local currencies that results in revenue getting stuck in import countries' banks
But increasingly exporters also prefer just keep their export proceeds offshore
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🇷🇺 MinFin did another jumbo debt auction borrowing 0.6% GDP in one day
Banks' balance sheets are strained after taking a hit in spring and no govt recap is forthcoming
=> new debt issues is interest rate floaters: no % risk for banks, a lot for govt
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The reasons behind reverse migration: (i) rejected residence permits renewals, (ii) difficulties to get money out of Russia and (iii) difficulty getting work permits
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🇷🇺 How's Russia's economy doing in early 2024?
According to our non-financial GDP proxy in February economy is up 8.5% YoY
Why? Leap year added around ~3ppt + military industry surge + booming retail turnover
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“This is a gift for us,” said the president of the Kurchatov Institute National Research Center, Mikhail Kovalchuk, after CERN, the European Organization for Nuclear Research, known for the Large Hadron Collider project, announced that it would stop working with Russians
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🇷🇺 +70% YoY hike in military spend, ~1% GDP deficit in 2024 according to official budget projections
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We've update our oil&gas tax model for 🇷🇺- the system has become quite compex over the years
So what 2023 looks like for 🇷🇺 budget?
* at $50/bbl Urals 🇷🇺 would collect ~RUB 7tn of oil&gas tax falling short of budget plan of 8.9tn
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🇨🇳🇷🇺 Trade flows between Russia and China are more or less balanced - but financial positions are very asymmetric
The total stock of 🇨🇳 FDI's in 🇷🇺 is only around $3 bn as of early 2022, while Russia's international reserves in CNY are ~$130bn
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🇷🇺 After getting its first annual net loss since 1999 Gazprom scales back CAPEX by an amount equivalent to 1.5% of Russia's total gross fixed capital investment last year - one of the reasons I think IMF's +3.2% GDP 2024 forecast is too high
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🇷🇺🇨🇳 Sanctions on Russia affect trade flows both between "geopolitical block" but also within them, => Russia's dependence on China > bi-lateral trade numbers say
China's exports to Russia are higher than they appear. But only a small share of China's "excess" exports to Central Asia are restricted goods.
@x1skv
and I think these countries (especially Kyrgyzstan) are offering sanctions insurance for "Crussian" counterparties. 1/
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🇷🇺🇺🇦 Since Russia invaded Ukraine we looked for a framework to forecast interstate war duration
Bennett & Stam's work provides exactly this - empirical benchmark, which avoids polarized 'brief vs forever' calls
But (B&S,1996) is mute on likely outcome
We address this now...
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strong ruble is hurting 🇷🇺’s exports and budget
%-rate cuts will help, but they don't RUB as much as they used to, when capital flows were unrestrained
to tame the currency the MinFin will have to mop up FX - either buy or borrowing CNY - a 🧵
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🇷🇺 About 800 oil tankers that were previously insured by International Group of P&I Clubs migrated into Russia's shadow-fleet
Result? $60 oil price cap is becoming increasingly unenforceable
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I would also like the report to provide more of the "cross-channel checks" and "data mining through complex big data sources" as example of cross-check for official stats are hard to find in the text
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🇷🇺 How do you pay for a war?
Russia is ditching flat income tax dogma to raise ~0.5% GDP/year in revenues + around 1% GDP in revenues from corporate profit tax starting 2025
Top marginal tax rate is still lowest among BRICS at 22%
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"EU has the power to push Russia into permanent deficits"
for a country to run deficit, another country needs to fund it, =>, lower cap may reduce exports, not push curr. acc into deficit, as that would imply Russia's external borrowing is up
lower cap = weaker RUB, not deficit
Russia's current account flipped into deficit of -$2.1 bn in Jun. '23 vs a surplus of +$28.2 bn in '22. This isn't the G7 cap, but just normal mid-year seasonality. EU has the power to push Russia into permanent deficits. It just has to stop kowtowing to Greek shipping oligarchs.
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at least 1/5 of the of the anomalous increase in foreign deposits ends up in small number of
geographically close countries
This inflow benefitted local currencies in the region and still helps partially shield them global food/energy price swings
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🇷🇺it may seem that tracking what's really happening with 🇷🇺 is becoming harder, but in many ways it is easier than ever
case in point - there's now weekly data on federal budget execution on
@TheTerminal
:
RUBUFRED Index - is YTD revenue
RUBUFEXD Index - is YTD spending
HTH
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second reason - the CBR has eased too agressively in 2022 cutting the policy rate from 20% to just 7.5%
🇷🇺's policy rate is now closer to Fed's rates than at any time in the last 30 years, =>, local rates just don't compensate savers for local risk
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there's a lot of useful reflections on the past 12 months of 🇷🇺's invasion of 🇺🇦 - but let's try to understand what is coming next
In a recent note
@ZiadMDaoud
and I estimate the likely duration of the conflict - here's how we do it
🧵
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The biggest issue is 'hyper'-spending:
-- federal spending is up +60% YoY in January
-- spending may be unusually front-loaded (10% of the total annual limit) or an early sign the govt is not commited to the spending freeze
-- the latter is more likely
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🇷🇺 Ruble is the weakest EM ccy over the last 5 days
Reasons: i) fx outflow minfin process more corporate divestment deals, ii) outflow of ccy as worries of global banks remaining in Russia are rising, iii) decline in fx sales by exporters after the 'tax week'
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🇷🇺 What's up with Russia's budget revenue in 1Q24?
Geopolitical risk to oil supply = Russia's balanced budget:
- Oil & gas tax revenue is up 79% YY on higher oil price, weak RUB + some tax changes and one offs carried over from 2023
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🇷🇺 How reliable is RU official data?
Neat study uses webscraping dataset for ~2 years to show official CPI used to be reliable, but less so now
Scraped prices indexes for select goods indexes seem no longer be cointegrated with official CPI
🚨 Sanctions 🇺🇦🇷🇺🚨
New paper with
@luigi_palumbo
on the impact of
#sanctions
against 🇷🇺 on consumer prices and product availability.
What are the effects of this economic policy for each product category, and how have online and official prices diverged?
#WarinUkraine
🧵1/9
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🇷🇺Russia's factories rush to buy drone defense equipment
- Since the start of it's invasion of Ukraine Russia more than doubled output of anti-drone-related equipment, based on industrial stats
- EW equipment isn’t invincible against drone attacks, but can limit damage
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🇷🇺 Slow, but steady sovereign debt meltdown continues - 5Y yield is now close to 15% - highest since 1Q15
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🇷🇺 with trade data in the open, we've also been able to compile data on federal budget spending by category - which last year has been closed
These are 'flash' estimates of federal spending, but still useful
Russian trade data is getting published again, by Russian customs!
Spare a thought for all the analysts who built sophisticated models to guesstimate Russian trade over the last year...
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Oil&gas revenues are down by -46%
-- In line with reported Urals @ ~$45-50/bbl
-- The govt is looking for alternatives to Urals as the benchmark for oil taxes
-- This will expand the tax base - something like Brent - $20/b.
-- We expect oil revenues at 7 tn ruble vs plan 8.9
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The 🇪🇺 agreed to put a price cap on 🇷🇺 oil at $60 a barrel
this is about $10 above 🇷🇺 oil production cost (incl. mineral extraction tax, transport, capex etc.) which is $50/bbl, according to official Rosstat data
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Inflation day in 🇷🇺: CPI to drop from 11% yoy to 3.4% yoy - lowest in Eastern Europe/Central Asia region
It will be even lower in April at 2.5%
Why so is inflation low? 🇷🇺 benefitted from energy price shock: stronger currency + less energy cost spillovers to goods/services
🧵
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G7 will set the 🇷🇺 oil price cap above the production cost
so what is the production cost per 🇷🇺 barrel of oil?
around $50/bbl - the largest cost part of it are taxes, which the govt collects, while lifting and transportation are small
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🇷🇺 had half of its FX reserves frozen
does this prevent 🇷🇺 from continuing to stockpile FX assets?
not a single bit - when central bank halted open-market operations, private sector stepped in
bank and corp FX asset purchases total $100bn+ in 2022, or 1/3 frozen reserves
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@RobinBrooksIIF
@RobinBrooksIIF
- love your work, but this is kinda not the case - tons of ways to move savings out of 🇷🇺 even for retail/ordinary savers - some CIS banks open accounts remotely, RU clients are growing niche for brokers etc. - can discuss in more depth if intstd.
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🇷🇺🇦🇪 Russians are the top buyers of properties from Dubai’s biggest developer
- For Russians this provides a hedge against domestic risks, safe savings heaven
- Result: RUB rout + Dubai property market boom
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🇷🇺 Drop in Russia's budget revenue from export duty on crude and products is down to the that export duty is set at 0% starting Jan'2024
Russia has been moving from taxing oil exports to taxing extraction since ~2018
2024's zero export duty is the end point of that story
You can study Russian data. Or you can just read Dostoevsky. Both are works of fiction with little bearing on reality. Take Russia's current account surplus (black), which used to track its oil tax receipts (blue). Not anymore. Putin is understating Russia's surplus...
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🇷🇺 Our estimates for Feb budget deficit proved pretty close to what MinFin ultimately reported EST. RUB 2.4tn vs reported RUB 2.6tn
1) New data on Russia's federal
#budget
in February is out. Some normalization after a high January deficit was expected, but the opposite happened. The deficit grew to 2.6 tn RUB, 1.7% of GDP after two months. Revenues in February 2023 were 1.8 tn RUB, expenditure 2.6 tn RUB.
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🇷🇺 April's current account surplus at $6.8 bn - double that of March
- April's OPEC+ output cut helped Russia get more revenue
- Wider current account surplus reflects rising demand for foreign assets / capital outflow
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🇷🇺 has reduced 🇪🇺 nat gas exports to 1/5 of 2021's volumes
there are lots of estimates of 🇪🇺 macro costs, but what does the nat gas divorce mean for 🇷🇺?
🧵 on the export revenue, budget and growth implications for 🇷🇺
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🇷🇺🌱 3 regions in Russia announce emergency as freezing temperatures destroy some crops
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🇷🇺 March oil production to be cut by 500,000 barrels a day
Oil prices jumped on the news, with Brent +1.8% to $85.99/b.
🇷🇺 Oil and condensate output was ~10.9 mb/d in early Feb, budget is built around ~9.8 mb/d output => another 0.5mb/d cut is possible
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It's an interesting point, but debatable - if/when Russia decides to reduce militarization it could use that fiscal space for any other type of spending: building more infrastructure, housing, whatever
Russia’s economy grew by 3.6% in 2023 and is projected to expand by more than 3% in 2024. How come?
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@mironov_fm
data on 🇷🇺 semiconductor imports matches available official data v v closely
wonder whether reason remains for not publishing foreign trade stats for 🇷🇺 when they both can be found on this site and are reported by trading partners
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... and the 🇷🇺 deficit will go up to ~3% GDP @ $50/bbl Urals
Our estimate of the revenue shortfall is larger mostly because of the unrealistic nat gas export assumptions in the budget which inflate nat gas export duty by ~25% - 🇷🇺 expects to collect RUB 1.7tn / $24bn
Russia is rich to be a problem but not rich enough that there isn’t a solution.
I estimated $10 per barrel per year drops the budget by about $15 billion, but
@x1skv
, I think, is more aggressive.
The budget law 2023 deficit is 2%, with oil at $70
@markets
@BenjaminHarvey
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🇷🇺 Russia's state relied on yuan reserves to offset declining oil revenues & stabilize RUB
- Many are still wondering when 🇷🇺's yuan stash will run out
- This may be a stale question - our estimates show 🇷🇺 will to stop selling yuan and start rebuilding this stock in next 3 mo
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Sanctions on Russia = Subsidies for China's ICE automakers
#crussia
To be sure, much of these subsidies are paid by Russia's consumers
Sanctions on Russia have been a boon for Chinese ICE automakers.
@x1skv
and I estimate that 58% of the increase in China’s ICE exports in 2023 compared to 2021 is Russian demand, factoring in transshipment. New Russian demand accounts for 6% of China's ICE car production. 1/
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🇷🇺 Raiffaisen Russia just introduced a 50% fee (up to $500) for incoming $ transfers of private clients
This will reinforce "relocation" of Russia's households' savings to banks in so called near abroad and further weaken RUB
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🇷🇺 RUB is the best performing major EM ccy over the last 3 months - why?
Three reasons:
(i) sanctions on MOEX and NCC - rub is the 'reserve currency' for local banks and corporations in a sense that when risk of new sanctions is high they reduce hard ccy exposure
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🇷🇺 Russia's emergency rate hike seems to have worked - but its cost will emerge in the coming months
a 🧵on RUB, rates and (future) recession
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For more see this discussion on settlement:
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🇷🇺 Russia's government mandates key exporters to report FX sales plans to Bank of Russia and introduces mandatory FX revenue surrender for select corporates
Essentially, govt will rely on corp FX assets as decentralized FX reserves
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🇷🇺 Recent industrial production figures show Russia's output of passanger cars is ~30% below pre-war level...
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🇷🇺 last week we've highlighted how data on ruble liquidity showes an abnormal cash outflow from banks, totalling RUB 2+ trillion since October 2022
today images of piles of this cash start to emerge:
Russian War Economy Is Awash With Bags of Cash Kept Out of Banks
Surge in cash demand indicates growing shadow economy and stealth payments
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🇷🇺 with fiscal break even north of $90, cutting oil output would mean less hard currency to fund imports, pushing inflation back up again - something the leadership will want to avoid
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So what remains is $55.8B cash-like bit of the NWF
On our estimates it will be depleted within 1-2Y years if RU oil export price <$50
Russia will continue to deplete NWF in 2024, if oil price is <$73
That's roughly consistent with a Brent ~$85
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🇷🇺 For Bank of Russia the cost of skipping a hike in June meeting is a need for a larger hike next week
Inflation and labor market data points towards a +200bp hike to 18%
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National Wealth Fund's liquid assets stood ~$91 bn in early February
At $50/b. Urals NWF will last into early 2025
It is used in 2 ways:
-- funding spending above the fiscal rule - costs $40bn and $18bn in 2023 and 2024
-- funding oil tax shortfall - costs ~$15bn/year
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🇷🇺 we've substantially updated our inflation page
you'll now find detailed inflation breakdown + CPI item weights - all cleanly organised
ECST RU <GO>
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this is because of the so-called oil tax maneuver: Russia each year moves some weight from taxing export to taxing extraction
Export vs extraction coefficients go from 0.33/0.67 to 0.17/0.83
Export duty will go to zero in Jan'24
Russia set to lower oil export duty to $16.70/ton from Jan. 👀
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🇷🇺🇹🇷 Turkey’s Trade Boom With Russia Stalls Under Weight of Sanctions - but does it really?
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🇷🇺 reasoning behind which indicators to hide is kinda peculiar - most of hidden data tends to be available through alt sources: for oil it's opec reports & shipping
while hiding oil, 🇷🇺 continues to report on industrial production, incl. good proxies for mil equip output 🤷♂️
Rosstat stops to publish statistics on oil output. Thanks
@x1skv
for the discovery.
Recently Ministry of economic development closed a set of figures related to oil&gas sector at its forecast. In spring 2022 Russia closed CDU TEK data (detailed statistics on energy)
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🇷🇺 foreign trade data released today helps illustrate how statistally odd is the reported +5% YoY growth in investment for 2022
This scatter plot for growth rates of investment vs imports of machinery&equipment in 2006-22
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technical point on this: YoY changes for econ activity variables give a misleading impression of current trend
in this case, most variables turned the corner mid-'22 if one tracks seasonally adjusted levels
these YoY charts will only catch up to this fact in 3 months or so
🇷🇺 - Sanctions on Russia are working [updated with February '23 data]
• Oil, gas, coal extraction recorded annual drops (again) in February, weighing on Kremlin's finances
• Russia's GDP will not recover to pre-war ('21) level until 2027 - long-term economic outlook is bleak
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🇷🇺 At the start of 2024 Russia's 16% policy rate seemed high enough to bring inflation down from double digits back to 4% target
As the summer local market and economists think another hike will be needed to stabilize prices
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S&P reports 🇷🇺 PMI in services is 53.1 in Feb with stronger demand and slower cost inflation noted by the survey
PMI survey valuable as it remain among a handful of independent data points on activity
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🇷🇺 US sanctions Russia's some of the core institutions of Russia's financial infrastructure
Sanctions on the National Clearing Center have long been expected, but still mean a huge change to how Russia's FX market works
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🇺🇦 Ukrainian Finance Minister Serhiy Marchenko will be part of the talks among G7 finance chiefs and central bankers on May 23-25 - Russia sanctions and Ukraine support will be in focus
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Russia’s drop in crime follows a historical pattern - reasons for the drop in suicides in 🇺🇸 around the start of WWI, according were: "many opportunities for war service, the deflection of morbid introspective tendencies, and the sudden diffusion of prosperity among wage-earners"
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