Ash disagrees with remarks by German Vice-Chancellor Gabriel

2014/7/30 14:45:11

Ash: “With growth drivers overall weakening in the economy, the MOF is likely to look to loosen fiscal policy to try and pump prime growth, and this will undermine the public finance profile - a larger deficit, and more domestic debt. Already the MOF is raiding the pension pot to pay for reconstruction costs in Crimea. Poor/inappropriate policy choices are being made.”


 

 

 

 

 

 

 

 

BERLIN/LONDON, July 30, 2014 (UBO) – Germany’s Vice-Chancellor Sigmar Gabriel is quoted in some news reports as saying that the latest round of sanctions on Russia will impact very quickly. Standard Bank chief emerging market economist Timothy Ash takes a substantially different view from Gabriel, as evidenced below:

 

I think the market might take the opposite view. Indeed, these are fairly naive comments, which could easily backfire - if you make these kinds of statements, you better be sure that they will come to fruition, or else credibility suffers. The West could have imposed sanctions which had large scale and immediate market impact, but chose to gradually ratchet up the pressure, and impose longer term economic pain on Russia, and obviously the wider impact on Western economies was important.

                                                                                                                               The Russian economy is hardly blowing on all cylinders at present, but is also far from going into a crash/crisis. Real GDP growth is running at close to zero, and the sanctions might just push it into recession, but I doubt this is going to cause an immediate far reaching Russian collapse - e.g. akin to 1998 or 2008. Nor do I think the West really wants to do that - as everyone suffers. Sanctioning secondary trading in Russian debt/equity would have had a much more brutal impact on Russian markets - likely causing extreme capital flight, pressure on the rouble and reserve depletion. But the EU/US has opted to avoid this option just yet, opting for a more gradual approach.

 

Cutting off access to foreign long term financing, will tighten the noose around the Russian economy, by increasing borrowing costs, and this will impact on investment, and then growth. But this is a much slower burn impact.

 

Gross FX debt liabilities falling due over the next year amount to around USD160bn and the CBR can presumably draw down some of its USD472bn in FX reserves to cover some of these - likely pumped in using VEB as in 2008/09. This will deplete/undermine the overall sovereign balance sheet - or at least undermine FX liquidity, albeit the FX debt/GDP ratio could actually improve as debt is paid down net.

                                                                                                                                          Russia is still running budget and current account surpluses which obviously help durability in the short term.

                                                                                                                              With growth drivers overall weakening in the economy, the MOF is likely to look to loosen fiscal policy to try and pump prime growth, and this will undermine the public finance profile - a larger deficit, and more domestic debt. Already the MOF is raiding the pension pot to pay for reconstruction costs in Crimea. Poor/inappropriate policy choices are being made.

 

In the short term the current account position could improve as domestic demand deflates, but over the longer term the restrictions on investment in the energy sector, and lack of financing could undermine scope for output hikes in the energy and primary production sector, weakening the current account position over the longer term.                                                                                                                                        

 

Overall, events in Ukraine, the worsening relationship with the West, and the focus on the poor policy choices being taken by the Putin regime will undermine domestic and foreign investment into Russia - foreign companies will think twice about committing any new investment. This will act as a drag on growth - remember Putin's ambition to double GDP over the decade - forget about that now. Plus he also had the aim of getting into the top-20 in the WB Doing Business tables, so forget about that now also.

 

Ultimately the sanctions as rolled out by the EU/US this week do not really threaten an immediate and brutal hit to the Russian economy, but rather offer the prospect of further isolation, stagnation and decline for Russia. The question is whether Putin understands or cares really about this. I would still argue that the crisis in Ukraine has all been driven by legacy issues for Putin - he wants to make his long term mark on Russian history, by rebuilding Russia's global status as a power to be reckoned with, and equal to the likes of the US, the EU and China. The question is do the sanctions, as being rolled out by the West, threaten that in Putin's eyes?

 

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The Ash commentary above represents a personal view, is not investment advice or Standard Bank research, but may contain extracts from published research.

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