It has been a shocking day in the progress of the crisis in Ukraine. As evidence mounts of yet more direct and duplicitous Russian military activity on Ukrainian soil, Russian assets have taken a hammering. The rouble fell 1.5 per cent against the dollar even after paring earlier losses and the RTS index of Russian stocks was down 3.3 per cent on the day, also after staging a recovery.
President Vladimir Putin denies Russia is involved in Ukraine at all, even as the Russian people hail him as a conquering hero with popularity ratings to match. But the chances that his adventure will be to their benefit are looking increasingly slim. As Neil Shearing of Capital Economics argued in a note on Thursday, “Russia is likely to be the major loser from any further escalation in the conflict.”
He told beyondbrics, “Its economy is on the brink of recession, if not already in recession. None of the measures needed to fix that are among the government’s priorities now.”
Shearing thinks the consensus view on the outcomes for both Russia and the eurozone are wrong, for a string of reasons. Europe’s dependence on Russia both as an export market and as a source of energy is overstated, he told beyondbrics. (It is notable that, since the crisis began, energy prices have actually fallen – not a sign of an impending energy crisis.)
Russia’s economy, already slowing sharply before the crisis, is more vulnerable than ever, he says. GDP growth had already fallen from 4.2 per cent in 2011 to 1.3 per cent in 2013. It was just 0.8 per cent year on year in the second quarter and is heading into recession.
Those who argue that Russia’s balance sheet is strong – after all, it had $468bn in foreign exchange reserves at the end of July – miss significant pockets of weakness such as the high levels of debt in the corporate sector. Those borrowers have been shut off from global capital markets by western sanctions and will be hard pressed as repayments approach. The state can use its forex reserves to ease some pressures but, Shearing notes, it doesn’t take long to burn through $200bn or $300bn in a crisis.
Russia’s ban on food imports in response to the sanctions will add to food price inflation and make it harder to reverse the interest rate rises enacted by the central bank since the crisis began. “It is hard to see inflation coming down quickly and easy to see it going up sharply,” Shearing said. “If unwinding ever does become possible it won’t happen quickly. The structural problems in Russia’s economy mean that weaker growth has not been accompanied by lower inflation.”
Those problems are well known: a lack of investment, weak productivity growth, a bad business environment, failure to attract foreign direct investment and so on – all things that recent events in Ukraine only work against.
The net result is that Russia is unlikely to enact structural reform or be able to cut interest rates while the nation’s attention is on foreign conquest. Those investors who expected Russia to bounce quickly back to the 3 or 4 per cent growth of recent years will be disappointed – and ordinary Russians, even more so.'via Blog this'