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Sanctions-Proofing Helps Russia Keep Economy Chugging Along

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President Vladimir Putin’s efforts to protect Russia after past rounds of U.S. sanctions are leaving the economy more insulated even as the threat of further penalties rattles markets this week.

Four years after the first major curbs were imposed over the Ukraine crisis, Russia’s economy is growing about as fast as the central bank thinks it can, thanks to policies that have allowed the currency to trade freely and reduced reliance on foreign capital. But that very self-restraint means growth is hardly enough to achieve Putin’s goals of dramatically raising living standards.

Downhill From Here

Russian economy set to decelerate after fastest growth this year

Source: Federal Statistics Office, Bank of Russia forecast

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Data due as early as Friday will show gross domestic product added 1.9 percent last quarter from a year earlier, compared with 1.3 percent in the first three months, according to the median of 20 forecasts in a Bloomberg survey. That compares with the Bank of Russia’s estimate of between 1.8 percent and 2.2 percent.

Facing a long-term drag as sanctions limit access to foreign technology and capital, Russia has countered by revamping its fiscal and monetary policy, channeling extra income into a sovereign wealth fund and unloading most of its holdings of U.S. Treasuries. While domestic assets have suffered as sanctions damage sentiment, Russia is less vulnerable to outflows of foreign capital than its embattled peers such as Turkey.

“Russia is more prepared,” said Charles Robertson, global chief economist at Renaissance Capital. “They are trying to say that however bad it gets, the government isn’t going to be borrowing much money, it will not be requiring financing from abroad.”

The Bank of Russia said on Friday that it reduced planned foreign-currency purchases in response to the ruble’s volatility. The Russian currency pared some of its losses after the statement. It has weakened about 5 percent against the dollar in three days, the second-worst performer among 24 emerging-market currencies tracked by Bloomberg.

All About the U.S. Sanctions Aimed at Putin’s Russia: QuickTake

Congress is weighing draft legislation proposing more sanctions that target Russia’s sovereign debt and its largest banks, as a response to alleged election meddling. The U.S. State Department also announced new restrictions to punish Putin’s government for the nerve-agent attack on a former spy and his daughter in the U.K.

Russia will treat any measures that limit banking activity or the use of foreign currencies as an act of “economic war,” Prime Minister Dmitry Medvedev warned in televised comments on Friday.

What Our Economists Say…
“The U.S. is likely to steer clear of the extreme scenarios — sweeping restrictions on trade and debt — but investors might not wait around to see what happens. The pressure on the ruble and rates could carry a sharper sting, squeezing household budgets and pushing up borrowing costs.”

–Scott Johnson, economist, Bloomberg Economics.

For more, see his RUSSIA INSIGHT

Putin is looking to jumpstart the economy so that it outpaces global expansion, which the International Monetary Fund predicts at 3.9 percent this year and next. But without structural reforms, Russia’s central bank has warned that medium-term GDP growth won’t exceed a range of 1.5 percent to 2 percent.

A rally in oil is helping to dull the economic pain of the standoff with the U.S. What’s more, government efforts to improve tax collection have brought down the price of crude Russia needs to balance its budget to a projected $61 a barrel this year from $67 in 2017, according to Alfa-Bank. With a higher value-added tax set to go into force in 2019, the lender estimates next year’s break-even at about $50, which would be the lowest since 2008, making Russia least dependent on oil among major crude producers.

Still, the chokehold of sanctions is curtailing investment and Russian access to technology. Over the medium-term, Western restrictions could result in a cumulative output loss of 9 percent, according to the IMF. Analysis in July by the domestic rating company ACRA found that the penalties affected about a fifth of Russian GDP. Meanwhile, retaliatory measures by Russia pushed up prices and reduced personal incomes by two to three percentage points in 2014–2018, it said.

“If the new bill on sanctions is approved and the U.S toughens the measures, then in the nearest future we can forget about growth in the area of 2 percent,” said Tatiana Orlova, an economist at Emerginomics in London.

— With assistance by Zoya Shilova, and Olga Tanas

(Updates with Bank of Russia in sixth paragraph, Medvedev in eighth.)

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    Global Slowdown Looks More Likely in Trade Turmoil: Economy This Week

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    1. Global Slowdown Looks More Likely in Trade Turmoil: Economy This Week  Bloomberg
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    Fed's Powell still has a chance to save the economy before it's too late, Cramer says

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    With a month left until the Federal Reserve’s next widely expected interest rate hike, Fed Chair Jerome Powell is facing a critical juncture that could determine the trajectory of the U.S. economy, CNBC’s Jim Cramer said Thursday.

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    After hearing Powell’s remarks in a Wednesday interview with Dallas Fed President Robert Kaplan, Cramer felt that for the first time, Powell was growing cautious about the pace at which the Fed is raising rates. The central bank has said it plans to raise rates once more in December and three times in 2019.

    In a question-and-answer session during the interview in Dallas, Powell acknowledged that the pace of global economic growth was slowing, but said it was “not a terrible slowdown.” Earlier this year, Powell said the Fed was “a long way” from neutral interest rates, signaling more hikes to come.

    “Kaplan’s questions allowed Powell to walk back his sadly intemperate comments from October, comments that seemed to be almost blithely oblivious to some of the more worrisome data out there,” Cramer reflected on “Mad Money.” “After all, there are degrees of slowdowns that, nonetheless, can cause an awful lot of havoc and cost a lot of jobs, and that’s what we’re on the verge of here.”

    And after last night, it became clear that “Powell gets it, too,” Cramer said. The central bank chief is realizing that “there’s another side” to the U.S. economy that is splintering under the dual pressures of higher rates and higher tariffs, he said.

    “Is it too late? Yes, if we get four more hikes. Absolutely. No if we only get one and we wait,” the “Mad Money” host said. “Powell knows now that normalizing interest rates isn’t the goal — no one knows what normal is these days anyway.”

    Instead, Powell has realized his job is to taper the “end-of-cycle talk” that has been filtering through the stock market and the broader economy and that many see as being tied to his rate hikes and the president’s tariffs, Cramer said.

    “We know Powell’s now concerned that we actually could be at the end of the economic expansion. That’s a soft reversal of his earlier position from just one month ago, when he was so wedded to the explosive-growth conceit that he talked about overshooting with rate hikes to stamp out inflation,” the “Mad Money” host said. “The guy’s clearly paying attention to the data now. You know what? That’s all you can ask for.”

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    Cramer says CEOs are telling him off the record the economy has quickly cooled

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    Company leaders across industries are telling Jim Cramer — off the record — that they’re worried about a slowdown in the U.S. economy, Cramer said Thursday on CNBC.

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    “So many CEOs have told me about how quickly things have cooled,” the “Mad Money” host said. “So many of them are baffled that we could find ourselves in this late-cycle dilemma that wasn’t supposed to occur so soon.”

    Cramer has been warning investors for weeks about a manmade slowdown in the U.S. economy, fueled by the two-pronged pressures of the Federal Reserve’s interest rate hikes and the Trump administration’s tariffs. Now, high-profile CEOs are worried about growth slowing so drastically that it could actually hurt the economy, he said.

    “There are degrees of slowdowns that, nonetheless, can cause an awful lot of havoc and cost a lot of jobs, and that’s what we’re on the verge of here,” he said. “That’s what the markets are saying. That’s what the CEOs are worried about offline.”

    The situation reminded Cramer of when, on the cusp of the 2008 financial crisis, his corporate sources confided in him that the Fed “seemed to be out of touch … with what was happening” on Wall Street, he said. That led to his now-famous “They know nothing!” rant blasting the Fed for its lack of diligence.

    “I was right,” he said. “I did my best and, at that time, I made a resolution. If I thought we would ever get back into one of these situations again, I promised myself I’d be vocal about what could go wrong, even if I knew it wouldn’t be as serious as the Great Recession.”

    Now, with market commentators warning about the U.S. economy being “late” in its cycle, meaning that another recession could be on the horizon, Cramer’s getting vocal.

    Weakness in Europe and Asia’s economies isn’t helping, he said, pegging the respective slowdowns to Brexit pressures and instability in the Italian government and China undergoing a mass slowdown tied to President Donald Trump’s tariffs.

    If the Fed and Trump stay the course on their policies, the weakness will feed into the stock market as it did on Thursday, the “Mad Money” host warned. The action in shares of Walmart, Home Depot and Macy’s told the story, he said: all three companies recently reported strong quarters, but subsequently saw their stocks plummet on economic fears.

    “This end-of-cycle logic raises its head everywhere,” Cramer said. “Everything was good, so good that it can’t ever be better because we’re at the end of the cycle. ‘Late-cycle.’ It’s become almost circular reasoning. The stock can’t go higher because it’s the end of the cycle and it’s the end of the cycle because the stock’s down.”

    That, combined with the chief executives’ warnings, told Cramer that stocks can’t possibly be safe while the bearish narrative about debilitating economic weakness reigns supreme.

    “If the Fed changes course and says ‘No more rate hikes … next year unless the data gets more positive,’ or if President Trump gets a trade deal with China or even does this kind of truce, then the end-of-cycle proponents may have to change their tune and the market can rocket higher,” he said. “Otherwise, though, rallies like today are going to be used to re-position portfolios because the bears have the late-cycle microphone and they just will not let go.”

    Questions for Cramer?
    Call Cramer: 1-800-743-CNBC

    Want to take a deep dive into Cramer’s world? Hit him up!
    Mad Money TwitterJim Cramer TwitterFacebookInstagramVine

    Questions, comments, suggestions for the “Mad Money” website? madcap@cnbc.com

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