MBS Blog

As we have been reporting on this space, the Russian and Ukrainian currencies have been declining along with their economies. While Russia has been able to stave off a complete collapse due to the foreign currency reserves it holds, it is only a matter of time before the ruble descends to much lower levels.

For now though, the Russian Government has managed a slower depreciation. When the foreign reserves decline further, and oil & gas prices continue their current trend, capital flight will accelerate in 2009. This will force the ruble lower. 

For Ukraine there are fewer options. No cash reserves or oil resources means that Ukraine is subject to the whims of a volatile market in crisis. The recent emergency loan from the International Monetary Fund (IMF) to Ukraine stabilized the markets here to a great extent, but the real stabilization will come when the market hits bottom and government reforms. The loan from the IMF in fact, was contigent on reforms. 

As for 0900 this morning of Friday the 19th of December, the Ukrainain currency-the hyrvnia (UAH) is selling at 7 to 1 U.S. dollar at local kiosks here in Odessa. Yesterday it was at 10 to 1 U.S. dollar.

As we have mentioned in an earlier post on this blog, it is a seasonal ritual.  During the holiday season or summer tourist season, the Ukrainian Government shores up the hryvnia against foreign currencies. This past summer for example, the hryvnia was at 4.6 to 1 U.S. dollar. As soon as the tourists departed, it went back up to the 5 to 1 U.S. dollar rate where it had been averaging for the past several years in a tight trading range or “peg.”

In the end, neither the Russian or Ukrainian Governments will not be able to over-rule the markets.

Technorati Tags: Russia, Ukraine, U.S. dollar, Anton Olff, currencies, Odessa, ruble, hyrvnia, UAH, International Monetary Fund, IMF, economy, foreign reserves, foreign currency, Russian Government, depreciation, oil, gas, capital flight,

As with many emerging markets, Russia should continue to grow despite the Global Economic situation. The direct link between oil price levels and economic growth is key.

This from  www.themoscowtimes.ru:

GDP Posts Weakest Growth in 3 Years

10 December 2008By Maria Levina / Special to The Moscow Times

Economic growth fell to its slowest rate in three years in the third quarter, at 6.2 percent, the State Statistics Service reported Tuesday, and economists say even lower growth is in store for 2009.

Actual GDP growth in the quarter missed the Economic Development Ministry’s forecast of 7.1 percent, driven by significantly slower growth in the construction, retail, transport and communications sectors.

The decline continued a slide from 8.5 percent GDP growth in the first quarter and 7.5 percent in the second, and if the trend continues the final number for the year could be in the 6 percent range.

“Next year’s GDP growth could range from negative 5 percent to plus 5 percent, depending on what happens to oil prices and the steps taken by the Russian government,” said Yevgeny Gavrilenkov, chief economist at Troika Dialog. “If it continues to throw away currency reserves to defend the ruble, Russia may face a fiscal deficit and zero economic growth.”

He said allowing the ruble to depreciate is one step that could be taken to prop up growth numbers. 

“In the past, the Russian economy grew even with oil prices of $30, $40 and $50 per barrel but at a different exchange rate,” he said. “In the current environment, Russia’s goal should be to achieve positive economic growth and avoid a fiscal deficit.”

In year-on-year terms, growth in the fourth quarter could end up at zero, partly as a result of slower production growth and partly because the number was strong in the final quarter of last year, said Yekaterina Malofeyeva, chief economist at Renaissance Capital.

She said she expects growth this year to finish above the 6 percent mark — at 6.2 percent — and that next year’s figure could range from zero to 3 percent.

“If oil prices average $70 a barrel next year and the ruble is allowed to depreciate, GDP growth could reach 3 percent,” Malofeyeva said. “Otherwise, it could be flat.”

Although the Economic Development Ministry has yet to release an official forecast, in recent informal comments it has put the number at 3 percent to 3.5 percent if oil prices average $50 per barrel for the year.

But economists say conditions have been shifting so rapidly that providing anything resembling an accurate forecast for 2009 would be difficult until all the numbers for the final quarter of this year have been released.

The Economic Development Ministry said Monday that it was revising its forecast for manufacturing growth for the year downward, from 5.2 percent to 2.9 percent. The figure for the first 10 months of this year was 4.9 percent, so the ministry’s forecast suggests that it is expecting disastrous results in November and December, with production dropping by over 10 percent. 

Gavrilenkov said he believed that a 2.9 percent production forecast was overly pessimistic but, if accurate, would mean that the country is entering a severe depression.

He added that losses on the manufacturing side could be balanced somewhat by growth in the service sector, as consumer spending has remained relatively strong. As such, he said he expected GDP growth of 6.8 percent to 6.9 percent this year.

Natalya Orlova, chief economist at Alfa Bank, said she was surprised by how low the production numbers were.

“Given that the October numbers showed there was essentially no growth (0.6 percent), we originally assumed a drop in production of 2 to 3 percent in November and December, which would still imply a growth rate of around 5 percent for the year,” Orlova said. “But if we are to believe the numbers from [Economic Development Minister] Nabiullina, with a drop of more than 10 percent in November and December, then the situation seems more serious.”

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Russia’s economy is captive to oil & gas prices. If the price of crude continues to decline-and there is sufficient reason that it will continue to do so-then the prospects for Russia’s economy must also be adjusted.

Most Russians have painful memories of the 1998 financial crisis. It is one of prime motivations behind the Russian Government’s aggressive stance regarding the ruble. The political backlash of a currency rout could be devastating.

 As this article from the Financial Times (www.ft.com) states, Russia is now in a much better financial position compared with the 1990s. However, at the rate that the Russian reserves are being utilized, the Russian Government may not have sufficient ammunition to counter any new economic shocks.

At some point, the Russian Government might consider even closer ties with cash rich China.  These might include the sale or long term leasing of strategic assets located in Siberia.

Rouble exodus hits Russia credit rating

By Catherine Belton in Moscow

Published: December 8 2008

Russia on Monday became the first G8 country since the start of the financial crisis to have its credit rating downgraded after Standard and Poor’s took fright at the recent exodus from the rouble and sharp drop in oil prices.

S&P said it had lowered Russia’s foreign currency credit rating by one notch from BBB+ to BBB because of the “rapid depletion” of the country’s foreign exchange reserves and the “difficulty of meeting the country’s external financing needs”. It said the outlook for the rating was negative.

Russia’s reserves have fallen by $128bn since August to $455bn, as the country battles the capital flight that began following the war with Georgia and escalated as the oil price fell and the global crisis worsened.

S&P said Russia could be forced to spend all $200bn now parked in its two sovereign wealth funds on recapitalising the banking system and covering fiscal deficits in 2009 and 2010.

The agency expects Russia to run a current account deficit next year of 2.6 per cent of gross domestic product due to the oil price fall, putting further pressure on the balance of payments.

“There are a lot of layers of concern,” said Frank Gill, primary credit analyst at Standard and Poor’s. “There are macroeconomic and political risks . . . and Russia has not operated a current account deficit since 1997 and that was less than 1 per cent of GDP.”

Vladimir Putin, Russia’s prime minister, has staked his political credibility on avoiding a sharp rouble depreciation.

The thought of devaluation raises the spectre of the 1998 rouble crash that wiped out Russians’ savings, although economists say any devaluation this time.

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Feeling the effects of the current Global Economic Crisis, there is little doubt that Russian and Ukrainian Governments are preparing to let their currencies slide even further. The question remains as to how low they will go and what effect they will have on these emerging market economies.

In Ukraine, the hryvna is now hovering around 6 to $1USD, having lost more than 20% over the last 60 days.  The Russian ruble is also getting battered and could see levels against the U.S. dollar that it has not experienced since the financial crisis of the late 1990s.

Devaluations in either economy could exascerbate already high levels of inflation. Russia is particularly vulnerable as it relies on imports of basic food products, plus it derives a significant portion of its revenues for oil and natural gas exports. As oil revenue has declined, and subsequent market interventions have depleted Russia’s foreign currency reserves, Russia could be hit with a higher degree of stagnation than Ukraine. In fact, Ukraine may be able to weather a devaluation better than Russia.

The industrial sector located in Eastern Ukraine could benefit from the lower prices of their steel and chemical products, making their products competitive with China and South Korea. The Ukrainian agricultural sector could also benefit from devaluation.  The fomer “bread basket” of Imperial Russia and the Soviet Union, could regain this title, but with exports to Europe and Asia. This vastly under utilized sector could see a surge in foreign investment next year, or whenever the global credit markets become unfrozen.

In the meantime, businesses and individuals are going to have to adjust to the new reality.

Anton Olff

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