Continued Weakness in the Russian Federation…

As mentioned in our June 2011 newsletter, we have been bearish on the Russian Federation for several months now. This view was tentatively corroborated a few weeks back by the revelation of folly in the Russian banking system. Now that poor manufacturing numbers have been released for July, we’re confident that this trend is far from over.


As the Moscow Times reported yesterday:


Russian manufacturing contracted in July for the first time since December 2009 as slowing growth in China and the euro zone damped demand for the country’s exports.


The Purchasing Managers’ Index fell to a seasonally adjusted 49.8 from 50.6 in June, HSBC Holdings said in a report Monday, citing data compiled by London-based Markit Economics. A reading below 50 indicates contraction.


Russia, the world’s biggest energy exporter, is lagging behind growth in emerging market peers Brazil, India and China. Gross domestic product expanded 3.7 percent from a year earlier in the second quarter, less than the 4.1 percent increase in the first three months of 2011, according to the Economic Development Ministry.


Moreover, Putin reiterated his distaste for the dollar reserve standard:


Putin criticized Washington for its economic irresponsibility. The United States “does not live within its means and is laying part of the burden of its problems on the entire global economy — parasitizing on the global economy and on the dollar monopoly,” he said.


Although we sympathise with Putin’s frustration with the dollar and US fiscal and monetary policies, we should keep one thing in mind: The dollar reserve standard implies that central banks holding dollar reserves unwittingly debase their currencies when the Federal Reserve debases the dollar. Meaning, ‘IOU money‘ (or fiduciary media, or credit, or ‘claims on wealth‘) becomes easier (and more profitable) to issue. Resultantly, profilgate monetary policy in the US ends up creating booms (and then busts) elsewhere in the world. Now, we could be wrong, but we would hardly imagine that Putin would follow his own advice if he was in the position of the American authorities! His frustrations – we suspect – are with the unappetizing timing of monetary debasement (that is inherent in the dollar reserve standard), rather than monetary debasement per se.


Anyhow, for those who are interested, we’ll be posting a long piece on the ‘Dollar’s Fall from Grace‘ soon. This will explain the monetary mechanisms, political frustrations and investment trends involved with the world’s current monetary system. In the meantime, we invite you to take a look at our sample newsletter and – if you like it – you might consider subscribing (the August edition will be published on the 15th).


Vladimir Putin

Vladimir Putin - 'Your pesky dollars are exacerbating the boom-bust cycle in our country!!!'


EDIT: Looks like another weak day for ‘risk assets’. As can be seen from the chart below, the Russian MICEX index may be on the verge of heading down to test the May 23rd low.


MICEX index quote & chart

MICEX index quote & chart. - Click to enlarge. Source: Bloomberg


Likewise for the Market Vectors Russia etf (RSX):


RSX index chart

Market Vectors Russia ETF (RSX) - Click to enlarge. Source: FINVIZ.COM

See here for our collection of rare historical economic data.

Posted Aug 3, 2011
by | Categories: Other