Russia’s Industrial Output, Reserves And Currency All Slump Together

Russian industrial production dropped sharply again in December – by the most since at least 2003. Output was down 10.3 percent following an 8.7 percent fall in November, according to data from the Federal Statistics Service announced yesterday (Thursday) by central Bank Chairman Sergey Ignatiev. Output growth for the year was 2.1 percent, the slowest since at least 1999.

Manufacturing fell an annual 13.2 percent in December, compared with a decline of 10.3 percent in November, as steel-pipe production dropped an annual 35.3 percent and coking coal output plunged 44.2 percent. Truck production plummeted 67.1 percent.

This data is not surprising, and only confirms what we have been seeing in the VTB PMI. The next interesting data appointment will be on 2 February, when we should get to see what happened in January.

Reserves Drop Sharply

Russia’s international reserves fell $30.3 billion last week, the second-biggest drop on record, as the central bank accelerated the rate of the ruble devaluation and sold increasing quantities of foreign currency in an attempt to manage the pace of the decline. Russia’s reserves have now fallen 34 percent from the record high of $598.1 billion in August while the ruble has fallen 29 percent against the dollar over the same period.

Some of last weeks decline can be attributed to the dollar’s 1.5 percent gain against the euro in the week ended January 16, since this means a fall in the dollar value of the other currencies in the reserves. Evgeny Nadorshin, senior economist at Moscow’s Trust Investment Bank, estimates that about $18.3 billion of the drop can be accounted for by central bank interventions last week.

(The reserves are made up of 44 percent euros, 45 percent dollars, 10 percent pounds sterling and 1 percent yen).

The Ruble continued to fall today (Friday) after the central bank announced last night that it was “finished” with its gradual devaluation of the ruble and was going to let “market factors” help determine the level of the currency. The bank set the weakest end of the currency’s trading range against a target basket of dollars and euros at 41 as of today, or 36 per dollar, at a USD of around 1.3 to the euro. Bank Rossii has now widened the currency trading band 20 times since mid-November as it seeks to rebalance Russia’s economy amid plunging oil prices and the global financial crisis.

Following yesterdays announcement the ruble fell again this morning, dropping 1.5 percent (to 33.1073 per dollar), extending this weeks decline to 1.8 percent.

“This is an open invitation for speculators to test how quickly the ruble can get to 41,” said Ulrich Leuchtmann, head of currency research in Frankfurt at Commerzbank AG, which ranks itself among the biggest 10 traders of the ruble worldwide. “They wanted to decrease speculative pressures, but now they’ve given the market a good reason to increase them.”

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

11 thoughts on “Russia’s Industrial Output, Reserves And Currency All Slump Together

  1. We focus a lot on industrial production because it’s relatively easy to measure frequently and many countries have data on it. But of course most economies these days have large service sectors. Is there much known about what is happening to output in services? Focus on industry alone could be giving a misleading picture of what is happening to the overall economy, especially since IP will be particularly sensitive to trade.

  2. Hi PO Neill,

    “We focus a lot on industrial production because it’s relatively easy to measure frequently and many countries have data on it.”

    Check out my “Russia’s GDP Indicator Shows Marked Contraction” post on Afoe last week, its all explained there. Basically, the *composite* PMI is a pretty good GDP proxy, but in countries where industry is key – like Germany and Japan and China – the manufacturing PMI alone tells you a hell of a lot.

    “especially since IP will be particularly sensitive to trade.”

    The thing is, in export driven economies the whole shooting match is particularly sensitive to trade.

  3. If they are finished supporting the ruble, what will they do with the rest of the foreign reserves?

  4. “If they are finished supporting the ruble, what will they do with the rest of the foreign reserves?”

    Keep them for the next time? But seriously, they aren’t finished. They will try eventually to hold a line, but they will let the ruble fall till we get near that point.

    Also, if oil stays down they could well have a current account deficit to finance, and foreign loans to pay off. These reserves have plenty of uses really, but if they get to below say $200 billion, then the speculators could really start to whet their teeth. They need a buffer.

  5. A laymen’s question. Why is the decline in commodity prices causing the ruble’s decline? True, Russia’s economy is heavily reliant on exporting those commodities. However, they are mostly priced in dollars not rubles. So the West doesn’t need to buy rubles in order to buy e.g. Russian oil and therefore ruble should stay relatively unaffected by the swings in oil prices. TIA.

  6. Hi,

    “A laymen’s question. Why is the decline in commodity prices causing the ruble’s decline?”

    Well, in the first place you have capital flight. Investors have been pulling their money out since the start of August. In the second, currency movements (up or down) are self perpetuating until the main participants feel they have come to an end, since people (including importers and exports) buy and sell currency futures to try to hedge against anticipated movements. Thirdly straight speculation. A lot of ordinary Russians, especially feeling that the banking system may be not especially sound, either want to hold dollars, or transfer their money into dollar denominated accounts. Also, the banks need foreign exchange to cover the repayments on their external borrowing, and this becomes a one way movement (ie previously they were able to rollover) as external financing dries up (the credit crunch).

    All of these put downwward pressure on the ruble.

    The decline in commodity prices simply causes confidence in the Russian economy to fall, and devaluation to be the anticipated consequence. That is why “expectations” are so important. And the expectation that devaluation would happen is more driven by what happened in the non oil sector – ie rampant inflation – and the need to restore competitiveness to Russian industry.The thing is markets always “overcorrect”, which is why the final drop in the ruble will be much greater than that required to simply restore competitiveness. Once a boulder has started to roll it is in fact quite difficult to stop.

  7. Hi Edward,

    Thanks for yet another great article on Russia! Just to add to the troubles ahead of us: the real estate is on the brink of collapse. Amazing bubble which grew in the housing during the last 5 years is about to burst. Even modest estimates say that the fall of prices will be at least 50%. For Moscow, where the bubble was extreme the fall is likely to be even bigger. And obviously this adds pressure on already weakened banking system.


  8. Thank you for your much detailed reply. I take from it that there were two economically fundamental factors for ruble’s decline: (1) the initial flight of capital (which I think was mostly caused by the urgent need for cash to avoid piling margin calls on subprime/toxic positions at home); (2) Russian banks no longer being able to rollover dollar and euro loans on good terms. The rest seems to be purely sentimental, although not less important of course in terms of its contribution.

  9. “If they are finished supporting the ruble, what will they do with the rest of the foreign reserves?”

    IIRC, Russian companies own more debts than Russia–as a country–has in Forex reserves so Russia might have to lend quite a bit of them (I am assuming that some might be let to fail.)

    Also, what if a Soros attacks the ruble? For a few hundred million dollars a desperate hedge fund operator might risk polonium poisoning 🙂 so Russia needs to have plenty of reserves, just in case. Russia has defaulted twice on debt so their credit isn’t exactly stellar.

  10. Hi everyone,

    The world bank gave an estimate for total external debt as of H1 2008 at $521 billion (back November). They also said the following (see below), which I dug out for a commentor on another post but which people here may find interesting. Albanez is right that it is corporates who have the biggest problem, but also don’t underestimate pressure from households to hold dollars as a hedge against possible further ruble devaluation. Incidentally, the WB concluded that “systemic risk to the banking sector, while rising, appears limited”, and this is still the case, although the level of systemic risk is now above what it was when they wrote in November, and will continue to increase while the crisis lasts, which could well be for some time. I think the world is currently divided between those who are hanging on in expecting a recovery (generally, not just Russia) in H2 2009, and those, like me, who more or less totally discount this possibility already. If this latter view is correct, expect systemic risk to rise further in the second half of the year.

    Russia’s private corporate and banking debt grew rapidly in the first half of 2008 and total external debt rose by USD . billion in the second quarter of 2008. Although the general government’s external debt remains modest, the private corporate and banking debt increased by USD37.8 billion in the second quarter of 2008. The corporate sector— officially classified as “private” but including such state controlled enterprises as Gazprom—accounts for most of the debt stock. In the corporate sector, both financial and nonfinancial institutions have increased their debt stock, but nonfinancial institutions have increased it more rapidly. Public external debt has moderated.

    While the overall share of short-term external debt of Russia remains low, accounting for less than 20 percent of total external debt, the share of short term debt in private financial institutions is significantly higher at around 40 percent. High levels of short-term debt make these private financial institutions, predominantly small and medium-size banks that were able to tap into international capital markets funding, vulnerable to the rollover risk and sudden changes in investment sentiment. Many banks relying on external borrowing must revisit their funding model under conditions of abrupt difficulties in access to new external credit and sharply rising rollover risk. For banks already relying on a broad deposit base, this may be easier to accomplish. Others, relying more on wholesale models and few and potentially volatile corporate clients, might need to seek additional sources of capital and reorient their funding model toward traditionalretail banking.

    With hefty repayment obligations at a time of sharply tighter global credit, the rollover risk has risen, but the systemic risk is limited. Russia’s external debt maturing in the third and fourth quarters of 2008 is around USD100 billion, of which about USD45 billion is due in the last quarter of 2008. After including on-demand deposits held by the banking sector, the total debt that requires repayment or refinancing exceeds USD120 billion. The external debt maturing for the entire 2009 fiscal year is slightly less, around USD100 billion, however. Certain sectors, especially private financial corporations, are likely to face challenges in rolling over their external debt. In addition, higher prices for debt refinancing are inevitable. Furthermore, a sharp drop in stock values that were used as loan collateral have resulted in sizeable margin calls on lending facilities with 1-2 year maturities. It is estimated that the total debt due in the fourth quarter of 2008 including the margin calls might, therefore, amount to about USD60-65 billion. Even so, systemic risk to the banking sector, while rising, appears limited because of the government’s resolve to support the systemically important banks and a sizable package of measures taken to date.

  11. Hugh, I believe couple of numbers will be of interest.

    Russia began to run budget surplus and surplus from oil sales in 2004, when oil was at 30$ per barrel. Currently, (after early repayment of government debt from oil sales in the order of 30B, and transferring about 30B from oil sales to retirement fund) Russia maintains something about 200-250B oil stabilization fund. Plus huge income from natural gas sales to Western Europe, with prices peaked in Nov 2008. Revenue from sales of NG to W. Europe is about to decrease, but Gazprom expects to boast revenues from marked price increase of NG sold to Ukraine:

    Notwithstanding common moans about “cheap oil”, oil is not cheap. Current 40+-5 $ per barrel, considering 20% higher US dollar (most external expenses of Russia are in Euros), is nothing but cheap.

    Plus, Russia is major manipulator (being major supplier) of price of nickel, uranium, platinum, palladium, rhodium, and fair player in gold and silver.

    Do not forget that Soviet ideology placed big emphasis in being totally self-reliant on everything, from commodities to manufactured goods. The legacy still remains: currently built in Russia assembly lines for cars of Chrysler, Renault, Toyota, Ford, GM, Hyundai are working 24/7, hurling about 100 000 cars per year each.

    Personally, I wouldn’t worry about Russian economy and well-being of Russians. They will be fine.

    Ukraine, well, is totally different matter…

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