Life in the Sanctionless World: Who will be the Survivors and at What Expense? The Russian political leaders believe that in a war of sanctions between a west that is barely out of recession and a Russia accustomed to belt-tightening, it will be the west that blinks first. One thing is obvious: believe it or not, the West is so far playing in the Kremlin’s team. Let’s check the interim results, if we can. In July Russia’s industrial output grew rather lukewarm, but still noticeable 1.5% annually compared with the June’s meager +0.4%. One of the main drivers behind that spike was the manufacturing sector which accelerated by 2.4% vs. +0.3% in June. More precisely, the biggest positive contributors were, quite logically, food and beverage producers (Pure coincidence? Maybe), as well as domestic producers of rubber, PVC materials, industrial equipment, and vehicles. However, there is strong evidence that the import substitution – the one of a kind Russia encountered back in 1999-2000 caused by the GKO default and the ruble collapse – is underway. All in all, at this point economists can only argue about its level of penetration and speed, but there are no more doubts it is taking place. Also tangible input was brought by the agricultural sector apparently benefitting from abundant domestic grain, fruit and vegetables harvest coupled with imposed embargo on certain food categories from the Western Europe. That sector posted annual growth of 8.5%. Retail sales edged up by 1.1% in annual terms compared with +0.7% as of June, albeit being under certain pressure from consumers now inclined to save more in the wake of the sanction-evoked fears (fears, unlike challenges, are there and thriving!), as well as ruble-weakening sparked inflationary expectations . After marginal slowdown in July caused by freeze of the consumer tariffs, CPI rose again in August – apparently on the heels of food inflation emerged as a result of the retailers’ embargo-triggered restocking. As a whole, over 1H 2014 positive balance of Russia’s Current account soared by almost 65% to $44.6bn, up from $26.8bn as of the sanctionless 1H 2013. Russia’s foreign trade surplus in 1H 2014 rose by 7.1% annually and reached $51.4bn. As a result, Russia posted a federal budget surplus of 2.2% of GDP in January-August 2014, although the Federal budget was approved with a 1.5%-1.8% deficit back in November 2013. As far as ruble weakening is concerned, although the Russian currency, along with many GEM currencies, entered a new downward spiral, it helped increase Russian exports, as well as obtain robust federal budget surplus. It’s hard to ignore presence of increasing amount of currency speculators in the currency section of MICEX: during the past couple of months, average daily volumes increased by 15-20%, which coincided with the ruble’s weakening to the tune of 11-12%. Given the fact that imports drastically decreased as a result of Russian embargo (fewer participants of the conversion operations), while most of the domestic institutions have been obliged to continuously hold onto ruble rather than dollar or euro because of their regular payments in domestic currency such as taxes, VATs, mineral extraction taxes, etc. – the conclusion is obvious: Russian currency market is infested by brokers of the non-resident sellers. Again, what amazes an ordinary analyst like me are traditionally oversimplified theories: if ruble is weak it could hurt Russia, if it’s strong – vice versa. In reality, weak ruble helps the Russian Ministry of Finance (and personally President Putin) to increase federal budget surplus and, thus, get by without hard-to-deal-with foreign bond placements. In contrast, weak ruble hurts the most the low income people such as retired and incapacitated ones. It’s hard to imagine the ultimate target of this game is exactly those deprived categories, or are they viewed as the main instigators of “much wanted anti-Kremlin protests”? French Le journal du Dimanche surprised last week reporting that the German Marshall Fund (GMF) think-tank showed that 81% of the French and 85% of Germans voted against supplying more arms to the Kiev authorities. Moreover, the study showed for the first time in the history of the survey that a majority of Germans wanted their country to take a more independent approach from the United States in security and diplomacy. According to the 13th Transatlantic Trends survey, 57% opted for a more independent approach, up from 17% in 2013. Just 19% of Germans said they wanted to have a closer relationship with the U.S., compared to 34% of Americans who wanted their country to get on a more shorthand basis with Germany. Beyond politics, speaking about global investors’ sentiment, widely recognized data from Boston-based fund tracker EPFR Global indicated that many investors continue to position for emerging markets to resume their upwards trajectory. Emerging equity funds (EPFR) saw inflows of $3.41bn during the week ended Sept. 10, with those specializing in Asia still reporting the largest inflows. The Market Vectors Russia ETF (RSX) managed to attract almost $200 million over the past month through Aug. 26. In fact, it has posted the biggest monthly increase since investors poured in $573.7 million in March. According to EPFR, over the week of Sept. 4 to Sept. 10 the net inflow into Russian equities quadrupled to $203m after having posted previous inflow of $44.6m. This is something that we, through virtue of our daily communications with HNWI and other broad types of retail investors, feel close to reality. Despite escalated anti-Russian anti-Putin rhetoric, investors don’t change their stance nor express particular indignity/worries about any unwanted outcomes. We are not talking about ever-present sympathies. In other words, it looks like the politicians and investors/big businesses live in the parallel worlds. So far, this coexistence was not particularly prohibitive. The more disruptive (and not properly communicated) top actions appear in the agenda, the closer these two parallel worlds approach to each other. So far mutual “damages” have been minimal, and one could argue benefitted certain business groups at the expense of the other ones, not inflicting notable wounds to the chosen targets. The final release of these tensions will likely occur when interests of the big commercial groups heavily intersect with the political ones. Change of the political faces would be another, equally plausible and anticipated, end to this saga, but we don’t want to speculate here beyond the spheres of our competence.
Posted on: Fri, 12 Sep 2014 15:14:53 +0000
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