Solus Alternative asset management strategist Dan Greenhaus examines the state of the market on ‘Making Money.’
The Russian economy is poised to collapse this year after the U.S. and its European allies hit the Kremlin with a slew of crippling financial penalties over its unprovoked invasion of Ukraine.
Russian manufacturing activity plunged in March, contracting at the sharpest pace since May 2020 as businesses confronted a sharp rise in prices and a big decline in new orders. Western sanctions have effectively isolated Russia from the international financial system and prevented it from accessing new technology.
Experts think that is just the beginning of a major slide for the Russian economy this year.
The Institute for International Finance (IIF), a Washington-based think tank, estimated that Russian gross domestic product, the broadest measure of goods produced in a nation, could plunge by 15% in 2022 and 3% in 2023 as a result of the sanctions, wiping out decades of growth. A contraction of that size would be about twice as sharp as the Russian recession during the global financial crisis in 2008.
“Further escalation of the war may bring more boycotts of Russian energy, which would drastically impair Russia’s ability to import goods and services, deepening the recession,” the IIF said in an analyst note last month.
At the same time, Goldman Sachs forecast the economy could shrink by 10% this year — having previously predicted growth of about 2% — while Capital Economics is forecasting a 12% contraction. Barclays economists, including Brahim Razgallah, said in an analyst note that the Russian economy could plunge by as much as 12.4% in 2022.
Russian President Vladimir Putin attends a meeting with young award-winning culture professionals via videoconference in Moscow, Russia, Friday, March 25, 2022. (Mikhail Klimentyev, Sputnik, Kremlin Pool Photo via AP, file / AP Images)
“Due to the current geopolitical conditions, we assume sanctions will be long-lasting,” they wrote.
Western allies targeted Russia with severe financial penalties following the Feb. 24 invasion of Ukraine, including cutting off a key part of the Central Bank of Russia by preventing it from selling dollars, euros and other foreign currencies in its roughly $630 billion reserve stockpile; blocking certain financial institutions from the Swift messaging system for international payments; and sanctioning hundreds Russian lawmakers and elites who have close ties to President Vladimir Putin.
On top of that, hundreds of Western companies — including Coca-Cola, McDonald’s and Goldman Sachs — moved to sever ties with Moscow after the invasion began as they faced intense pressure from investors and consumers. The pace intensified as the unrelenting fighting in Ukraine spawned a massive humanitarian crisis.
Putin has warned that Russia faces rising unemployment and inflation as it confronts the international sanctions, which he has referred to as an “economic blitzkrieg.”
Moscow is also on the brink of a historical debt default, according to Moody’s, because it attempted to service its dollar-denominated bonds in rubles. It would make the first time Russia has defaulted on foreign debt since the 1917 Bolshevik Revolution.
Pedestrians pass the entrance to a branch of Uniastrum Bank LLC, part of the Bank of Cyprus Group, in Moscow, Russia, on Tuesday, March 19, 2013. A double-tax avoidance treaty and low tax rates have made Cyprus the conduit of choice for Russians movi (Andrey Rudakov/Bloomberg via Getty Images / Getty Images)
Russia made a payment due on April 4 on two sovereign bonds in rubles rather than the dollars it agreed to pay under the terms of the securities.
Russia “therefore may be considered a default under Moody’s definition if not cured by 4 May, which is the end of the grace period,” Moody’s said on Thursday. “The bond contracts have no provision for repayment in any other currency other than dollars.”
Finance Minister Anton Siluanov told Russian state media earlier this month that if the Kremlin is forced to default on its debt, it will take legal action.
“We will sue, because we undertook all necessary action so that investors would receive their payments,” Siluanov told pro-Kremlin Izvestia newspaper. “We will show the court proof of our payments, to confirm our efforts to pay in rubles, just as we did in foreign currency. It won’t be a simple process.”
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
OTTAWA – Canada’s inflation rate fell to two per cent last month, finally hitting the Bank of Canada’s target after a tumultuous battle with skyrocketing price growth.
The annual inflation rate fell from 2.5 per cent in July to reach the lowest level since February 2021.
Statistics Canada’s consumer price index report on Tuesday attributed the slowdown in part to lower gasoline prices.
Clothing and footwear prices also decreased on a month-over-month basis, marking the first decline in the month of August since 1971 as retailers offered larger discounts to entice shoppers amid slowing demand.
The Bank of Canada’s preferred core measures of inflation, which strip out volatility in prices, also edged down in August.
The marked slowdown in price growth last month was steeper than the 2.1 per cent annual increase forecasters were expecting ahead of Tuesday’s release and will likely spark speculation of a larger interest rate cut next month from the Bank of Canada.
“Inflation remains unthreatening and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate,” wrote CIBC senior economist Andrew Grantham.
Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO, said Tuesday’s figures “tilt the scales” slightly in favour of more aggressive cuts, though he noted the Bank of Canada will have one more inflation reading before its October rate announcement.
“If we get another big downside surprise, calls for a 50 basis-point cut will only grow louder,” wrote Reitzes in a client note.
The central bank began rapidly hiking interest rates in March 2022 in response to runaway inflation, which peaked at a whopping 8.1 per cent that summer.
The central bank increased its key lending rate to five per cent and held it at that level until June 2024, when it delivered its first rate cut in four years.
A combination of recovered global supply chains and high interest rates have helped cool price growth in Canada and around the world.
Bank of Canada governor Tiff Macklem recently signalled that the central bank is ready to increase the size of its interest rate cuts, if inflation or the economy slow by more than expected.
Its key lending rate currently stands at 4.25 per cent.
CIBC is forecasting the central bank will cut its key rate by two percentage points between now and the middle of next year.
The U.S. Federal Reserve is also expected on Wednesday to deliver its first interest rate cut in four years.
This report by The Canadian Press was first published Sept. 17, 2024.
FREDERICTON – New Brunswick‘s finance minister says the province recorded a surplus of $500.8 million for the fiscal year that ended in March.
Ernie Steeves says the amount — more than 10 times higher than the province’s original $40.3-million budget projection for the 2023-24 fiscal year — was largely the result of a strong economy and population growth.
The report of a big surplus comes as the province prepares for an election campaign, which will officially start on Thursday and end with a vote on Oct. 21.
Steeves says growth of the surplus was fed by revenue from the Harmonized Sales Tax and federal money, especially for health-care funding.
Progressive Conservative Premier Blaine Higgs has promised to reduce the HST by two percentage points to 13 per cent if the party is elected to govern next month.
Meanwhile, the province’s net debt, according to the audited consolidated financial statements, has dropped from $12.3 billion in 2022-23 to $11.8 billion in the most recent fiscal year.
Liberal critic René Legacy says having a stronger balance sheet does not eliminate issues in health care, housing and education.
This report by The Canadian Press was first published Sept. 16, 2024.
