Russia’s state statistics agency RosStat and the Central Bank of Russia (CBR) have released a string of good economic results recently and improved their economic forecasts for this year. Of course Russia’s economy has been badly hurt by the extreme sanctions imposed by the West following the invasion of Ukraine, but the economy has done a lot better than expected. Maybe too much better?
Russia’s GDP was down 4.9% year on year in June, but that was a relatively mild contraction. The IMF has revised its outlook for this year to a 6% contraction, down from the 8% it previously forecast. That tallies with the CBR’s recent macroeconomic survey of professional economists that also revised their forecast down to a 6% contraction for this year. The CBR is even more bullish, now forecasting a 5% contraction. (chart)
Drilling into the details of industrial production and this picture is more nuanced as several sectors – automotive first among them – have been crushed by the sanctions, but overall the picture remains relatively positive, with industrial production falling less than expected. The same is true with the June producers’ PMI index result, which is also back in the black. (chart)
However, how reliable are these numbers? Russia has been hit with the most extreme sanctions ever imposed. It has had half of its hard currency reserves seized – some $300bn. Its oil exports were drastically curbed when international traders refused to buy it for months as they self-sanctioned. A swathe of crucial imports that are used in nearly branch of the economy simply stopped arriving and over a 1,000 multinational firms that generate billions of dollars in sales have shuttered their shops and left the market for good. And all this has caused a shock on a par with the relative mild setback Russia suffered in 2015, when oil prices tanked and not a meltdown worse than the default and collapse of the banking sector in 1998 or the global meltdown in 2008.
Russia is hurting more than it shows
It is easy to think that the Kremlin has ordered the numbers to be massaged to suit the propaganda purpose of reassuring the public its anti-sanction measures are working. The fact that the government has simply stopped reporting a lot of key data since the start of the war has raised suspicions that the Kremlin is portraying itself in the best light possible as part of this effort to drum up support for the war.
The Yale Chief Executive Leadership Institute (Yale CELI) released a detailed report in July that is a comprehensive attempt to see how badly the economy has been affected by not only looking at the official numbers, but also cross-checking them with non-standard statistics.
“Our team of experts, using Russian language and unconventional data sources including high frequency consumer data, cross-channel checks, releases from Russia’s international trade partners, and data mining of complex shipping data, have released one of the first comprehensive economic analyses measuring Russian current economic activity five months into the invasion, and assessing Russia’s economic outlook,” Jeffrey Sonnenfeld, the founder and president of Yale CELI, said in the introduction to the widely cited paper. Yale CELI has also been responsible for putting together a widely quoted list of foreign companies operating in Russia and reporting on who has left and who has stayed.
“From our analysis, it becomes clear: business retreats and sanctions are crippling the Russian economy, in the short term and the long term,” Sonnenfeld concludes.
The main conclusion of the study finds:
- Russia’s position as a major commodities exporter has “irrevocably deteriorated”;
- Russia’s imports have largely collapsed;
- Without the imports Russia’s domestic production has come to a “complete standstill”;
- Companies representing 40% of GDP have been forced to close;
- Putin is resorting to “patently unsustainable, dramatic fiscal and monetary intervention to smooth over these structural economic weaknesses”;
- Russian domestic financial markets are the worst performing markets in the entire world this year; and
- There is no path out of economic oblivion for Russia as long as sanctions remain in place and are enforced.
“Defeatist headlines arguing that Russia’s economy has bounced back are simply not factual – the facts are that, by any metric and on any level, [that] the Russian economy is reeling, and now is not the time to step on the brakes,” Sonnenfeld says.
There were a lot of problems with the report, as bne IntelliNews reported in an in-depth review of its data, but the basic premise that Russian President Vladimir Putin has ruined Russia’s investment case and doomed the country to long-term stagnation is sound.
The government has been accused of cheating before, when it changed its the methodology used to calculate its statistics several times. For example, RosStat significantly revised the 2018 GDP growth results to a six-year high from 1.6% to 2.3% as Russia emerged from a “silent crisis” caused by the collapse of oil prices in 2014 that raised eyebrows at the time.
The changes were part of the detailed reporting on the make-up of growth in the previous year that RosStat releases every year in January, and are supposed to reflect most accurate estimates. The agency always releases preliminary results around the end of the year, but they are usually revised after the full breakdown for all sectors of the economy are calculated. However, this time the revisions were unusually large.
Rosstat caused another scandal when it revised the results again to improve the 2020 GDP results to show a milder 3% contraction as Russia came out of the 2014 induced recession.
Manipulating data smacks of the GosStat-era, the Soviet-era statistics organ that was a key part of the five-year plans as it set and then measured the targets in the plan. The centrally planned economic system partly failed as managers simply lied to GosStat if they missed their targets.
RosStat explained the changes in methodology by saying it was bringing its practices more in line with those used by the likes of International Monetary Fund (IMF) in an effort to make Russia’s statistics more directly comparable to those of other leading economies.
Despite these concerns, analyst say that on the whole RosStat’s statics are believable. One of the things preventing blatant cheating is there are so many official estimates. RosStat is the official statistics organ, but all of the CBR, Finance Ministry and Economics Ministry bring out their own estimates. In addition to these official numbers, there are dozens of independent economists that have their own assessments and check the official numbers by cross-referencing things like industrial production with power consumption, as reported by the individual, and the mostly listed power utilities that are therefore obliged to report results.
This set up makes it much more difficult to cheat. Indeed, the CBR surveys the results of 20 independent economists in its own macroeconomic survey every month and lists its own forecast against what the independent economists are saying. In addition, Russia’s official results usually tally closely with those of the international financial institutions: the IMF recently improved its growth forecast for this year from -8% to -6%, whereas the CBR improved its own forecast at about the same time from -8% to -5%, but published this in its survey, where professional economists also forecast a 6% contraction.
One of the main reasons that the analysts at Yale are suspicious is that the Russian government has simply stopped reporting a lot of key data since February because “it might be used to impose more sanctions.”
Among the statistics that have not been reported in five months are: foreign trade, details of budget spending, oil and gas production results, major state-owned company results and the banking sector profit, as well as details on deposits and loans. This makes it harder to fully assess the impact of sanctions.
And some of the numbers have been so good that it has led many to claim that the sanctions are not working. Russia is currently running the biggest current account on record. In the five months of the war Russia has recorded a surplus of $136bn, which is already more than it took in during the whole of last year, which was also a record.
The West has targeted Russian oil exports, but thanks to significant leakage – India and China have bought up all the oil that previously was sent to Europe – Russia is actually earning more from the sanctions than it does in normal times. But the Kremlin is also cherry-picking from amongst the statistics, says Sonnenfeld, promoting those that put it in the best light.
“Even those favourable statistics which are released are questionable if not downright dubious when measured against cross-channel checks, verification against alternative benchmarks and given the political pressure the Kremlin has exerted to corrupt statistical integrity,” says Sonnenfeld. “Concerns over meddlesome political interference must be given even more weight now that Putin appointed Sergei Galkin, the former Deputy Economic Minister and the most blatantly political pick in recent history, as head of RosStat in May.”
The jury remains out on what the true picture is, but as much of Yale’s own report relies on the official statistics to make its points and as many of those statistics, even the ones cited by Yale, paint a picture of milder pain than the headline proclaims, on balance it appears Russia’s economy is doing much better than expected… for now.
There is no denying that commodity prices have been supercharged by the war and that this is to Russia’s benefit. There is also no denying that the efforts to stymie Russia’s oil exports have largely failed, so Russia is earning outsized revenues, even if its ability to spend that money is curbed. But as the conflict wears on and prices return to earth then the technology sanctions in particular, which have been almost 100% successful, will start to bite and the real pain of sanctions will begin to tell, dooming Russia’s economy to stagnation. The question then becomes not how much the Russian economy is suffering but when will this suffering kick in in earnest?
The World Economy Is Slowing More Than Expected, a New Forecast Shows – The New York Times
Economies around the world are slowing more than expected, as Russia’s war in Ukraine drives inflation and the cost of energy higher, forcing the Organization for Economic Cooperation and Development on Monday to scale back its projections for growth in the coming years.
Although it shied away from forecasting a global recession, the organization downgraded its outlook, maintaining its expectation that global economic growth would be a “modest” 3 percent this year, and an even weaker 2.2 percent next year, down from 2.8 percent a few months ago.
“The world is paying a very heavy price for Russia’s war of aggression against Ukraine,” said Mathias Cormann, the organization’s secretary general.
The organization lowered its growth forecast in virtually all of the 38 countries it represents, which include most of the word’s advanced economies. It projected growth of just 3.2 percent for China for this year and 4.7 percent for next year, one of the lowest rates for the country since the 1970s, said Álvaro Santos Pereira, the O.E.C.D.’s chief economist.
Comparing its current projection with one issued at the end of last year, a gap of about $2.8 trillion in foregone output for 2023 emerged, a figure that is roughly the size of the French economy. That represented the organization’s rough estimate of the economic toll the war is taking on the global economy.
“The global economy has lost momentum in the wake of Russia’s war of aggression in Ukraine, which is dragging down growth and putting additional upward pressure on inflation worldwide,” the report said.
Europe remains the most vulnerable region, with several countries facing the threat of a recession. Germany, the European Union’s largest economy, is projected to contract by 0.7 percent next year, after growing only 1.2 percent this year. Both France and Italy are forecast to see growth of less than 1 percent next year.
In the United States, projected growth was scaled back to 1.5 percent this year, from 2.5 percent forecast in June, and to 0.5 percent in 2023, down from 1.2 percent in the June report.
Soaring inflation, fueled by the high price of energy and food, is driving the slowdown and spreading to other goods and services, weighing heavily on households and businesses. The high cost of energy and the threat of gas shortages in Europe remain key risks, as countries head into winter with storage tanks nearly full, but with uncertainty about how long they will last.
“The risks are very much tilted to the downside,” Mr. Cormann warned.
The world economy has an ominous August 2007 kind of feeling – Axios
August 2007 was, on the surface, a fine month for the U.S. and global economy. Unemployment was low. The stock market had a few bumpy days, but nothing too dramatic.
Why it matters: Many consider it to be the beginning of what we now call the global financial crisis. And there are some ominous parallels with what the world is experiencing right now.
- To be clear, we’re not predicting a new crisis as severe as the one that rocked the world in 2008. Rather, we’re arguing that major (and accelerating) underlying shifts are underway and likely to reverberate for years.
- How significant the pain will be is hard to predict. It could vary significantly across countries and industries. It’s plausible that the economic damage in most sectors of the U.S. economy will be mild.
In this parallel, the tumult in Britain — where the currency and government bond prices are plunging — is the equivalent of when French bank BNP Paribas experienced funding problems due to mortgage losses.
- The bank required a liquidity lifeline from the European Central Bank on Aug. 9, 2007, which many date as the beginning of the global financial crisis.
- As it was then, the U.S. economy remains strong, and the financial disruptions across the Atlantic seem remote. But in that episode, they were in fact early manifestations of profound adjustments that were only beginning, and would eventually affect economies worldwide.
State of play: For a decade-plus after the 2008 crisis, the world was stuck in a low-interest rate, low-inflation, low-growth rut.
- Central banks searched for novel ways to loosen monetary policy to stimulate demand, including negative interest rates and quantitative easing.
- They concluded that the “neutral rate” of interest had become much lower, due to seismic forces like demographics and globalization.
- The widespread view — reflected in bond prices and officials’ comments — was that after the pandemic’s disruptions passed, this low-rate normal would return. Until recently, at least.
What’s happened in the last few months — and with dizzying speed in the last several days — is that markets are adjusting to the possibility that the era of extremely low rates and liquidity is over, and the 2020s will be very different from the 2010s.
- Consider that at the start of the year, a 30-year U.S. Treasury bond yielded 1.92%. That’s up to 3.62% as of 10:45am EDT this morning.
- The effects of that repricing are only beginning to ripple through the economy. It’s most visible now in housing, but could eventually affect everything from the sustainability of large budget deficits to the viability of any business relying on lots of leverage.
Flashback: Donald Kohn, who played a key role in fighting the global financial crisis as the No. 2 official at the Fed, had some prescient comments last year.
- “It’s possible that [the natural rate of interest] is higher than backward-looking models now suggest,” he said at the 2021 Jackson Hole symposium, noting loose fiscal policy and pent-up savings.
- “But the transition to a higher rate environment could be pretty bumpy given that a lot of asset values and assessments of debt sustainability are built on very low interest rates for very long.”
What they’re saying: In a note out this morning, Joseph Brusuelas, chief economist at RSM, said that dollar funding markets have shown some of the strains they have in crises past (though not as severe.).
- He writes that it is likely economies that have been “characterized by insufficient aggregate demand and low inflation over the past two decades, will now be characterized by insufficient aggregate supply, negative supply shocks, geopolitical tensions and higher inflation,” which require different monetary and fiscal policies.
- “Fixed income markets are signaling a shift in perceptions of financial stability and raising a caution flag for investors,” he added.
The bottom line: We’re in the early days of seeing how a world of tighter money will play out across sovereign nations, real estate, the corporate sector and more.
Energy, inflation crises risk pushing big economies into recession, OECD says – Reuters
PARIS, Sept 26 (Reuters) – Global economic growth is slowing more than was forecast a few months ago in the wake of Russia’s invasion of Ukraine, as energy and inflation crises risk snowballing into recessions in major economies, the OECD said on Monday.
While global growth this year was still expected at 3.0%, it is now projected to slow to 2.2% in 2023, revised down from a forecast in June of 2.8%, the Organisation for Economic Cooperation and Development said.
The Paris-based policy forum was particularly pessimistic about the outlook in Europe – the most directly exposed economy to the fallout from Russia’s war in Ukraine.
Global output next year is now projected to be $2.8 trillion lower than the OECD forecast before Russia attacked Ukraine – a loss of income worldwide equivalent in size to the French economy.
“The global economy has lost momentum in the wake of Russia’s unprovoked, unjustifiable and illegal war of aggression against Ukraine. GDP growth has stalled in many economies and economic indicators point to an extended slowdown,” OECD Secretary-General Mathias Cormann said in a statement.
The OECD projected euro zone economic growth would slow from 3.1% this year to only 0.3% in 2023, which implies the 19-nation shared currency bloc would spend at least part of the year in a recession, defined as two straight quarters of contraction.
That marked a dramatic downgrade from the OECD’s last economic outlook in June, when it had forecast the euro zone’s economy would grow 1.6% next year.
The OECD was particularly gloomy about Germany’s Russian-gas dependent economy, forecasting it would contract 0.7% next year, slashed from a June estimate for 1.7% growth.
The OECD warned that further disruptions to energy supplies would hit growth and boost inflation, especially in Europe where they could knock activity back another 1.25 percentage points and boost inflation by 1.5 percentage points, pushing many countries into recession for the full year of 2023.
“Monetary policy will need to continue to tighten in most major economies to tame inflation durably,” Cormann told a news conference, adding that targeted fiscal stimulus from governments was also key to restoring consumer and business confidence.
“It’s critical that monetary and fiscal policy work hand in hand”, he said.
Though far less dependent on imported energy than Europe, the United States was seen skidding into a downturn as the U.S. Federal Reserve jacks up interest rates to get a handle on inflation.
The OECD forecast that the world’s biggest economy would slow from 1.5% growth this year to only 0.5% next year, down from June forecasts for 2.5% in 2022 and 1.2% in 2023.
Meanwhile, China’s strict measures to control the spread of COVID-19 this year meant that its economy was set to grow only 3.2% this year and 4.7% next year, whereas the OECD had previously expected 4.4% in 2022 and 4.9% in 2023.
Despite the fast deteriorating outlook for major economies, the OECD said further rate hikes were needed to fight inflation, forecasting most major central banks’ policy rates would top 4% next year.
With many governments increasing support packages to help households and businesses cope with high inflation, the OECD said such measures should target those most in need and be temporary to keep down their cost and not further burden high post-COVID debts.
Our Standards: The Thomson Reuters Trust Principles.
The Commercial Real Estate Market: Crash, Train Wreck, Or Apocalypse? – Forbes
Chinese politics has become even more of a black box under Xi Jinping – The Globe and Mail
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Europe kicks off vaccination programs | All media content | DW | 27.12.2020 – Deutsche Welle
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