Friday, February 5, 2016

"The Russian Central Bank Has Just Published its Assessment of the State of the Russian Economy "

From SaxoBank's Trading Floor blog:

Russia's central bank guards reserves as economy shrinks
  • Turbulent January with low oil and rouble and higher CPI
  • Gloomy central bank issues cautious economic forecast
  • Real GDP seen contracting for first 6 months of 2016
  • Bank's analysts assume low probability of Russia/Opec deal
  • Ultimate effect of focus on steady FX reserves is unknown
The Russian central bank has just published its assessment of the state of the Russian economy after a turbulent January, when the Urals oil price averaged $28.75/barrel, the rouble hit historic lows and inflation accelerated to 0.9% m/m (vs 0.8% in December 2015). The six-month interbank interest rates (MosPrime) rose 0.3% since the start of the year to 12.1% as of February 4.
The central bank paints a sombre picture and makes a cautious economic forecast. The real GDP is to contract quarter on quarter both in Q1 2016 and Q2 2016, inflation will remain elevated and the budget deficit looms large. The forecast seems to be based on the assumption that the Urals oil price will trade within the range of $20-$40 per barrel over the coming months, i.e. averaging $30-$35 per barrel or so. 

The bank's analysts assume a low probability of an agreement between Russia and Saudi Arabia on production cuts, and see the Chinese demand for the oil bought for strategic reserves as s a swing factor on the supply side (to the tune of one million barrels a day). 

It is noteworthy that the central bank report compares the current situation in the oil market (from Q1 2009 onward) with a similar episode of Q4 1979 until 1986. Then as now, a surge in oil production led to a sharp drop in oil prices, followed by a period of almost five years during which Brent oil traded within the range of $25-$35/b (in 2014 prices, i.e adjusted for inflation).

Under the low oil price scenario, the central bank forecasts the Russian economy will contract by 0.7% quarter on quarter in Q1 2016 and then another 0.3% q/q the following quarter. In other words, the economy will shrink by 1% in the first half of this year compared to the end of 2015. The economy seems to be adjusting to ever lower oil prices (i.e. contracting), and there are few signs of economic stabilisation. 

The central bank notes that the budget policy remains pro-cyclical, which means that proposed cuts in budget expenditure will contribute to the drop in real GDP. If the oil price averages $35 per barrel in 2016, the Russian government will have to cut 1.4 trillion roubles ($18 billion) of federal budget expenses, or 9% of the total.
The reduction of current federal expenses by 0.6 trillion will cut real GDP by 0.2–0.3%. The remaining 0.85 trillion roubles would have to be cut from long-term capital projects or would need to be covered by Reserve Fund, privatisation proceeds or borrowing. 

Rather frankly, but in a footnote, the central bank says that additional borrowing by the government in the domestic market would need to be done at a significant premium to current market rates. 

The privatisation plans for few state-controlled companies, which made quite a stir in the market at the start of the week, might not be a sure thing. Out of all potential stakes, the shares in Rosneft and Bashneft would have the highest chances of being sold. Both assets, however, have an unfortunate history of being first privatised and than nationalised in, to put it mildly, controversial manner. 

A superstitious investor might mark the shares as jinxed. A more relaxed one might ask for a steep discount to the current market price....MORE

Table. Russia' s quarterly trade balance and current account surplus, $ bn