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Russia looking to avoid worst of economic downturn
Published: 19 May, 2010, 11:44
Edited: 16 October, 2010, 14:49
TAGS: Markets, Russia and the global economy, Economy, Finance
A volatile Eurozone sees Russia with almost no exposure to national debt, but with markets pricing in a wider contagion, Russia would be affected by a return to recession.
With the budget woes of Greece now well and truly being implicated in debt markets across the Eurozone, markets are increasingly pricing in the prospect continuing problems, with the PIIGS nations of Portugal, Italy, Ireland, Greece and Spain all seen as financial disaster areas, and sentiment in the northern European nations, such as Germany and the Netherlands, which have some scope for offering assistance, wearing thin.
Russia’s direct exposure to the emerging Euro-contagion is limited according to Andrew Howell, CFA Emerging Markets Strategy at Citigroup
“There’s much less of a direct financial link either through debt markets or through to the banking sector from Greece in particular and even from some other struggling European economies to Eastern Europe and Russia.”
But that doesn’t mean Howell believes wont be affected. It is almost certain that the tightening of in debt markets and mass investor desertion of government debt from the PIIGs nations will lead to a slowdown in a European economic recovery that has barely come out of the last recession, and in the directly affected nations, hasn’t come out of recession at all. With the EU the worlds largest single economy, and Russia’s largest trading partner, the implications for Russia – despite it not being a buyer of Euro debt – are enormous.
“Real contagion and that has to do with a direct impact of slower economic growth in Europe on the emerging markets and there you do worry if you’re going to see major downgrades to the European growth. But the losers from that would be those countries which are exposed to the European import markets.”
Europe is the important customer for Russia's energy and commodity exports. A major downturn in revenues from these will quickly be felt in Russia’s current account and budgetary position. Another key factor is that the EU is a major provider of many products that Russia imports. The devaluation of the Euro against the Rouble – it has dropped from more than 43 to 1, to less than 38 to one in less than 2 months – means that those exports are now more competitive against any domestic producers.
Elina Ribakova, Citigroup Chief Economist says that Russia’s underlying budget and corporate debt environment is particularly sound meaning it is in a good position to weather a downturn if worse comes to worst.
“If you look at balance sheets of different sectors of the economy we see that the sovereign balance sheet is very healthy, the corporate balance sheets have stabilized. And then the final and most important aspect in Russia’s economy balance sheet is the household balance sheet and that one has a particularly healthy debt to GDP ratio of households at less than 10%.”
But even with a sound debt position to help square up to any renewal of a global economic downturn, Russia’s economy and economic leaders, would prefer to avoid it. The country is still barely gaining traction on an economic rebound with the 1Q 2010 GDP figures worse than forecast, and only massive government expenditure warding off major social consequences of the 8.9% contraction of 2009. As the government looks to wean the economy off its expenditure in 2010 and beyond, any further reversal into recession in the EU could leave the Russian economy more exposed, a second time around.
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The seeds for a sound Russian economic structure were sown 10 years ago, and now that effort is bearing good fruit for now and the future. The economic protection of solid assets in reserve are the cornerstone of any decent economy, and Vladimir Putin's determination to pay off national debts, and build a large reserve have protected Russia from the worst ravages of the current global crisis. Maria, you're right that Russia is selfcontained with a mix of natural resources, and ever increasing standards of technology, and manufactured goods. It's worth remembering that Russia is a new democracy, and the country has no history of democracy, so it'll take time to develop, in the Russia "way". As a briton living in Russia, i'd rather live here than in Britain, as the vibrancy and spirit of Russians is undimmed by years and years of onslaught by foreign "lifestyle" commodities. The same can not be said for Britain, and britons would do well to take a leaf from the book of Russian life. The future's looking bright for Russia, and i wish all its citizens good health, and happiness. Changing your political and economic systems almost overnight is a massive task for any country to take on, and even with some challenges along the way, it's my opinion Russia has done this successfully. The recent decision by Angel Merkel to ban short selling (a criminal activity disguised as financial creativity) is the start of a change across Europe, and i would hope the Russian government continue their strong monitoring of these financial weapons, and crush them as soon as possible. The attacks on the Euro and Rouble will continue from wall street and the city of london, we all know that, but i think it's time for Russian and Central Asian companies to switch from selling oil and commodities in dollars, to Euros, and Roubles. This move alone will fundamentally change the position of currencies in the world, and put more power back in the hands of those currency owners.
History of economics can be a wonderful guide. In focusing on this part of a foundation, Russia is quite unique. Mr. Putin and Mr. Mevedev have actually put into action many Good things resulting in positive happenings. It should always be remembered that Good things take time and bad things can happen quickly. As an example in the “Western World” we all saw what Naked Short Selling was allowed to do in their financial markets a couple of years ago. To the point, Russia probably is the only Country that has everything needed for a sound economy. You have a complete inventory of natural resources and people who are hard workers. Can anyone imagine as only one example once Mr. Putin and Mr. Medvedev modernize the Motor Vehicle situation (cars, trucks, motorcycles, motor scooters, etc.)? An idealistic situation is your Country's population alone would be able to support such a situation. This would include the natural resources needed, all from within your Country, the designing and manufacturing of such vehicles in your Country, the purchasing and financing of such vehicles in your Country, the Power source (gasoline, diesel, electric, or other proprietary protected methods) all from your Country of Russia. I am a “nobody” but can anyone imagine the potential growth of Russia in a Good way in the next ten years and on? The only thing that may be needed is careful monitoring, as Russia sells its natural resources to others and accepting only their "paper money".
One thing is very sure. Global economies are decoupling from each other, as the first crisis meeting in London that pushed the world to STIMULATE created only deepening crisis. In Europe, battle cry to "stimulate" resulted in each government adding to its sovereign debt as a result. Then the same Wall Street banks that urged the world to "stimulate" turned in shock and horror by "discovering" increased sovereign debt burden in Europe. Greece was the selected target (could have been Ireland, Portugal, Italy or Spain), as it was the least politically tricky to attack. Europe and Euro had to come up with the massive standby guarantees, provided Greece does not deepen the debt any more. But, what if another country is "picked" and the same scenario is repeated? Germany led this time with sane solution: reverse stimulus, and begin cutbacks. So, while one side of Atlantic is continuing "quantitative easing", the other is tighening. Resource-rich countries on the other hand, need to worry about loosing markets, even if crisis pushes commodities prices up. China, in a class by itself, need to gradually prick the baloon of its huge dollar reserves, by spending them --- such as Greece's commercial port, shipping industry, tourism. Or buying worldwide hard assets. Russia, that still depends on commodities, needs to be prepared for reduction in revenue. This can be ONLY compensated by fast increase in small to mid scale manufacturing of products that are currently being imported. Primarily, increase is needed in processed foods, household goods, domestic construction materials and the massive increase in urban construction. Cars industry will not keep Russia afloat, as it depends on banks giving credits to purchasers, and any increase in indebteness is risky. The prolonged crisis can bring about even further erosion of incomes, so consumer lending is on shaky ground. However, increase in the real economy creates goods at "real' prices.