Timothy Ash: “Russian Recession Finds No Bottom as Economic Skid Picks Up Pace”

Nomura’s Timothy Ash says: “…there is still no evidence of fundamental structural reform and a willingness to address the problems which are well known to domestic and foreign policy elites. Arguably this is because the kinds of reforms that Russia needs would undermine Putin’s power vertical/sovereign democratic model which is the cornerstone of his power in office. Simply put a new development model is not saleable to the man at the top. And, until we see change – e.g. in oil prices, an easing off of the stand-off with the West over Ukraine (unlikely at this point) or real and substantive reform in Russia, then Russia will remain in terminal decline, and Russian markets will have a weakening bias – with the ruble likely in the front line therein.”

LONDON, Aug 11, 2015 (UBO) – The noted international economist Timothy Ash of Nomura International at 10:59 today issued an analysis of Russia’s outlook for the future that raises serious questions for the future that says in part: “Suffice to say dreadful numbers out of Russia – and little sign of any recovery any time soon.”

The complete text of the Ash analysis appears below:

Suffice to say dreadful numbers out of Russia – and little sign of any recovery any time soon. Q215 drop of 4.6% YOY in GDP (very weak fixed capital investment and PC, while net exports provided an uplift mainly as imports collapsed on the back of the ruble depreciation), after 2.2% YOY fall in Q1 - most people had been revising up growth estimates for Russia, but I think now a full year decline of 4% or so will likely emerge as the consensus, and people will become more downbeat again.

Recession is being driven by a combination of factors:

(-) Underlying weak growth drivers due to years of failed (more like a lack of) reform policies. The first question you, and more pertinently Russian policy makers, need to ask is how come, pre-Ukraine crisis, and with oil prices at over USD100 a barrel (twice the long run average), was the Russian economy only growing at a pace of 1% or so. The answer lies in the weak institutional story – essentially boiling down to the idea that Russia has a dreadful business environment, with red tape, corruption, bureaucracy, poor demographics, labor immobility/brain drain. This was all reflected in huge levels of capital flight – at least USD50bn a year for the past 20 years, and even prior to the current crisis in Ukraine – as Russians did not want to invest in their own economy due to the problems above, plus insecure property rights. Londongrad was the big beneficiary, alongside a range of wannabe British football clubs.

(-) Lower oil/commodity prices – 80% of exports are commodity-related, and half of budget receipts are oil/energy related. And while the writing has been on the wall for years, little effort has been made at diversification – rather money fritted away on Potemkin-like projects like Sochi-2014. Roughly each USD1bn change in the oil price costs the BOP USD3bn in lost receipts, likely 0.15% of GDP.

(-) Ukraine crisis and Western sanctions – Have served to undermine domestic confidence, and Western sanctions have acted as a further drag on the financing of the economy, and raised long term concerns over development of the energy sector. Arguably Russian countersanctions have been counterproductive – with the food import ban just boosting inflation, increasing the sense of isolation, and with little real hope of bringing import substitution (the Russian food/agri sector is in need of far reaching reform/change both up and downstream). Efforts to diversify towards China are not very realistic given that over the longer term China and Russia are major rivals in the Far East – the Chinese are more than happy to cut a deal over the Eastern/Western Siberian gas pipelines routes, but at discount pricing, and with Russia having to pay for pipeline construction, funded by Chinese banks (but at lucrative rates to reflect the risk and lack of alternative financing sources).

Now Russian policy makers have deployed a range of stop gap anti-crisis measures, allowing the ruble to weaken, and now trying to cut policy rates, while allowing some fiscal stabilisers to work. However, these address the symptoms but not the underlying causes of the problems in Russia. More like sticking plasters – there is still no evidence of fundamental structural reform and a willingness to address the problems which are well known to domestic and foreign policy elites. Arguably this is because the kinds of reforms that Russia needs would undermine Putin’s power vertical/sovereign democratic model which is the cornerstone of his power in office. Simply put a new development model is not saleable to the man at the top. And, until we see change – e.g. in oil prices, an easing off of the stand-off with the West over Ukraine (unlikely at this point) or real and substantive reform in Russia, then Russia will remain in terminal decline, and Russian markets will have a weakening bias – with the ruble likely in the front line therein.

ukrainebusiness.com.ua