Lost the bottom: why the Russian economy didn’t support the optimists

As you know, the difference between an optimist and a pessimist is that when the second says, “Worse!”, the first says: “What are You, my friend, could be worse!”.

Another bottom

When in December 2014 the world price of oil rapidly declined and in Russia broke out full-scale currency crisis, many thought that must come if not a complete collapse of the Russian economy, its collapse. But this did not happen — Yes, the economy fell, but nothing like what we saw in late 2008 — early 2009, when it fell by 8% for the quarter. Since February of last year, oil prices went up, reaching $65, which led to the strengthening of the ruble and the General solace — in the summer of last year we announced (the first time) that the peak of the crisis passed. At the end of last year, oil prices again went down to around $30, the ruble again weakened and economic sentiment deteriorated. Oil but the swing continued to sway, and that oil has again gone up to $50, and again began to hear voices on the passage of the peak of the crisis, the inevitable fracture of the economic trends and the beginning of economic growth.

However, the statistics may show the economy slipped sharply. I must say, I don’t think it’s right, getting even very bad or very good data for one month, to draw far-reaching conclusions about the inevitable rapid decline or rapid growth — these predictions we need a more stable data series.

And still — what happened? Really now, even oil does not help the Russian economy?

Oil maneuver

Of course not. Oil was, is, and the next ten years will be the most important factor in determining the mood in the economy. But not the only one. The main thing that affects the price of oil, is the export revenue that comes in Russia, — oil petroleum products in 2011-2014 provides 50% of the value of Russian exports to the first quarter of 2016 dropped below 40%. Created in the mid 2000-ies the system of taxation of oil companies constructed so that the budget took away the lion’s share of export earnings — with the price of oil above $100 it reached 80%. Thus, Russian oil companies have received far less when prices were rising, but when prices began to decline, major losses also occurred in the proportion of the Federal budget. Moreover, the incident is two-fold devaluation of the ruble has sharply reduced the internal costs of oil in dollar terms, which helped them relatively painless to survive the fall in oil prices. So painless that, when preparing this year’s budget the Ministry of Finance decided their little “mow”, it did not prevent them to continue to increase production and export of oil.

Economic growth measured in fixed prices, i.e. the contribution of the oil sector and the entire extractive industries, the dynamics of Russian GDP in 2015 and 2016 remains positive — albeit this increase is not as rapid (1-1,5% annually), but nothing like at the beginning of 2009 year, when the mining sector dipped by almost 5% is not observed. The stability of the extractive industries provides the stability of railway and pipeline transport, which at the end of 2008 fell by 20%. And this is an important distinguishing feature of the current crisis, from what we saw in 2008: the external demand for products of the Russian economy, mainly raw materials and products of its primary processing, does not reduced; in fact, it’s growing, because the depreciation of the ruble made exports profitable for many marginal in its profitability sectors (coal, chemicals, fertilizers).

The main blow dealt to the fallen oil prices fell on balance of payments and on the Federal budget. Since the beginning of 2015 the average quarterly income from hydrocarbon exports in the balance of payments fell by $42 billion compared to 2013 first half of 2014, when oil prices were kept in the corridor of $100-120. Of course, this could not affect the exchange rate. For comparison, if the price of financial sanctions of the West to measure the amounts of repayment of external debt of Russian banks and companies, starting from the 2nd quarter of 2015, it slightly exceeds $10 billion per quarter.

A stronger ruble

So today, when someone says that, the increase in oil prices this spring have not led to the improvement of the economy, it is clearly sin against the truth. Remember, at the end of January the price of the dollar exceeded 80 rubles, and today it fell below 64. Such strengthening of the ruble increases the demand for imported goods (import stopped falling), i.e. raises the standard of living. Such strengthening of the ruble, at least, does not allow inflation to accelerate, and, perhaps, its slightly slow. Such strengthening of the ruble leads to the fact that the population carries on their savings (who they are) to the banks and places them in rubles, which removes from the banks currency risk and allows them to earn a profit. Just imagine what would happen to Russian economy if oil cost $30-35? The dollar flew to 90 rubles, inflation exceeded 10%, which would topple consumption even by five per cent from the current level, the population would be rapidly purchased currency, imports continued to fall, prompting a continuation of the collapse in wholesale trade.

Approximately the same picture is observed in the Federal budget. The grown up prices for oil have slightly improved the situation with the income that (so far) has allowed the Finance Ministry to waive more stringent sequestration mandated by law costs (today it is 10%) and yet to stay within the approved limit for the use of the Reserve Fund (2 trillion per year). And imagine that the oil remained at $35 — held the new sequester, 5-7 percent, not only reduces aggregate demand in the economy, but also the crumbling plans of many public institutions and organizations, their suppliers, decreases the quality of public services…

Adapted to competitive prices

Another thing that raised the price of oil did not run the mechanisms of growth! And who said that they are obliged to do it, if the mechanisms of inhibition of growth in Russia are purely political-institutional in nature? Of course, if the oil price will begin to steadily move towards $100, the Russian economy will inevitably come alive and even show 3-4% growth, but this growth will not be sustainable and long term. Remember, growth in Russia stopped in 2013 — the price of oil was $108, and GDP grew at a meager 1.3 percent.

The Russian economy has already adjusted to new, lower price of oil — a 40% reduction in import price of 15% drop in retail turnover and a corresponding reduction of the standard of living of the population (the budget is not adapted, but that’s a story for another conversation). Today, its dynamics is not determined by oil prices, and domestic problems, which manifest themselves quite clearly even with a short introduction with some statistics.

Don’t know what happened yesterday

Here I must make a digression. Once again, Rosstat changed the methodology of calculating GDP, it has ceased to publish data on the dynamics of the economy in fixed prices and with the elimination of seasonal and calendar factors. In simple terms, today, Rosstat does not report what happened in the economy in the first quarter of this year compared with the fourth quarter of last year. The most that can be gleaned from its data has changed compared with the first quarter last year. That is, what has changed in the course of the year we can still see, but when it happened last spring or this winter, we don’t know. Of course, many experts, and government and independent solve this problem, telling us about their assessments, but it and government statistics exist, this must be done by Rosstat.

To deal with the management of the economy, in the absence of such data, which is about the same as driving a car, where the windshield, the driver sees what actually happened a few seconds ago — a chance for the right decision is, but the cost of failure increases dramatically.

The decline continues

The results of the first quarter talking about the fact that in the Russian economy over the past year grew by only four sectors: mining, agriculture, financial activity, real estate operations. Another sector is the production of electricity, gas, water, was stable; all others decreased. 4% decrease in production of manufacturing industries. Now answer the question: what is happening there outside of the defense industry, which grew by 13%? The total construction volume fell by only 1.7%, but the volume of housing construction — more than 16%. The fishing industry declined by 6.5 per cent (the fruits of contracti), the public sector — by 3%, wholesale trade — 2.5%. Investment continued to shrink or minus 5% at the end of the first quarter.

The sad truth is that this economic structure is fairly stable. Any economy relies on demand and on sentiment. External demand, as I said above on Russian products sufficiently stable, and the limit exists on the supply side — not the Russian economy to extract more oil or coal. Domestic demand continues to shrink — the budget sequester, frozen salaries, neyroendokrinnye pensions, destroyed (as a result of sanctions or a rise in price of imports) investment plans. Push it would the Ministry of Finance, agreeing on a fiscal stimulus due to the growth of the national debt, but he was afraid, because he himself is not convinced of the stability of the political-economic structure. Thing that could provide the lifting of sanctions, but the Russian President once again firmly stated that the Minsk agreement must meet Ukraine, not Russia. The population could take on more credit and less to accumulate on Deposit, but intuitively it feels that the bottom is not yet completed, so hurry up with the radical change in consumer models is not necessary. (During the crisis of 2008-2009, the population began to spend more only in late summer 2009, after four months of sustainable economic growth and real wages).

So all, what today can seriously say it will be the economic decline of 1% or 1.5%. But you can guess, but it is impossible to predict. In the economy where delivery to the customer of one nuclear submarine can change minus to plus, and this can happen in December or January, and divination within this range is equivalent to guesswork. The General conclusion, which sounds to me very sad: the bottom is not passed, the recession continues — with a high degree of probability will be relevant in the end of the year.

The authors ‘ point of view, articles which are published in the section “Opinions” may not coincide with ideas of editorial.