Further Pieces of the Puzzle Reveal Themselves…

As our regular readers may know, we’ve been taking note of the economic unravelling of the Russian Federation over recent weeks and months. Our main contention has been that the prevailing monetary conditions have been creating profound economic and financial stress. Here, I present two further pieces of the puzzle.


First of all, the recent GDP numbers revealed that ‘economic growth’ hasn’t been quite as rosy as previously thought. This fits in with the archetypal progression of events when monetary dynamics turn negative: Deteriorating conditions with respect to the production of ‘IOU money‘ (i.e. the extension of credit) at first remain hidden from consensual eyes. When the effects are belatedly felt in the business world, economic growth drops to the surprise of consensual market participants. People then proceed to outline their amusingly easy-to-understand explanations as to why growth disappointed. The online.wsj.com reported yesterday:


MOSCOW—Russia’s economy grew less than expected in the first half of the year, official data showed Wednesday, as months of high oil prices couldn’t overcome the effects of more than $30 billion in capital flight.


Gross domestic product grew by 3.7% on a year-to-year basis in the first six months of 2011, less than the economy ministry’s 3.9% forecast.


Russia is struggling to ramp up growth to pre-crisis levels and remain competitive with Brazil, China and India, its peers in the so-called BRIC group of developing economies. Prime Minister Vladimir Putin said in May he expects Russia to double its GDP in the next 10 years and take its place within the world’s top five economies.


The latest economic data, however, reveal an economic recovery that was sputtering even before the latest wave of global growth concerns caused Russia’s Micex index to plunge over 10% this month and brought down the high-flying ruble. Industrial output grew less than expected in July, while activity in the manufacturing sector that month showed its first decline in 20 months, according to purchasing managers’ index data for the period.


“A big part of this is due to the country’s capital-outflow problem,” said Julia Tseplaeva, chief economist at BNP Paribas in Moscow. “Instead of staying here and having the opportunity to grow and develop, this money is going somewhere else.”


Russia’s capital outflows—totalling $31.2 billion in the first six months of the year—have been blamed on everything from a poor investment climate to uncertainty ahead of 2012 presidential elections. Neither Mr. Putin—Russia’s most powerful politician—nor President Dmitry Medvedev has said whether they will run next year.


The disappointing data came despite prices for oil, Russia’s chief export, staying elevated in the period. Russia has raised the average oil price on which its 2011 budget is based, to $105 a barrel from $81 a barrel.


Now, as worries swirl regarding European debt and U.S. growth, analysts have begun lowering their growth expectations for Russia. This month, J.P. Morgan cut its Russian growth forecast for 2011 to 3.7% from 4.5%, citing a decline in oil prices and worsening access to capital markets.


Official forecasts see the economy growing by 4.2% this year.


Fixed investment also came in lower than expected, Wednesday’s data showed. It rose by 7.9% in the year to July, compared with an analyst forecast for an 8.8% increase.


[NOTE: Now that analysts have started to lower their forecasts, we’ll be thinking carefully about when we might have cover short positions in the coming monthly newsletters.]


The second piece of the puzzle is more interesting; Trading was halted on the Russian Stock Exchange today, and although we’ve all heard this story before, people are still maintaining that it was because of a ‘technical glitch’. [Remember the news on the day of the 'flash crash'?.] The following was reported on a blog on wsj.com:


Dow Jones reports that trading on Russia’s Micex has been halted for technical reasons.


Russia’s RTS index, which has been the strongest in Europe this year,  up 10.8%, was only down 2.25% at last check today. So maybe this is a real technical issue, rather than a “let’s take a breather to preserve our melting faces” halt.


Update: DJN has more:


Trade on Russia’s Micex Stock Exchange was halted Thursday because of a technical glitch, a spokesman for the country’s biggest exchange said Thursday.


Trading was interrupted at about 16:11 local time and may be restored later in the day, the spokesman said. Trading of the ruble on the bourse’s foreign exchange section appeared to be unaffected.


Moscow’s RTS exchange, home of some stock trading and high levels of derivatives trading, was also unaffected.


Isn’t it funny how these troublesome technical glitches seem to emerge when stocks are headed lower?


See below for our recent articles on the Russian Federation:


See here for our collection of rare historical economic data.

Posted Aug 18, 2011
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