Monday, September 1, 2014

1/9/2014: BRIC Manufacturing PMIs: August 2014

With Brazil PMIs for Manufacturing sector finally in, time to update chart for BRIC Manufacturing PMI (data by Markit):

The above shows several interesting things:

  1. Overall BRICs performance (Manufacturing data so far) is a mixed bag: Brazil and China barely above 50.0, signalling very slow growth (if any, as these readings are not statistically distinguishable from 50.0). Meanwhile, Russia showing relatively weak, but growth, while India showing rather modest growth.
  2. Brazil posted its first above 50.0 reading after four consecutive months of below 50 readings. But the 'recovery' rate is very weak. Brazil's 3mo average through August is 49.3, which is lower than 3mo average through May 2014 (49.8) and basically unchanged on 3mo average through August 2013 (49.4). All suggests that things are still 'recessionary' in the manufacturing sector in the country.
  3. Russia, despite sanctions already in place, posted second fastest growth amongst the BRIC countries in August and third fastest in July. Current 3mo average is 50.4, which better than 3mo average through May 2014 (48.6) and slightly better than 3mo average through August 2013 (50.1). Last two months saw readings above 50.0, breaking the cycle of 8 months of consecutive readings below 50.0. If anything, manufacturing data suggests stronger performance in the wake of sanctions than prior to them. The rot in the sector set on in the case of Russia back in July 2013, well before any troubles in Ukraine started. First round of sanctions saw PMIs falling from 48.5 to 48.3 - minor impact. Second round of sanctions saw PMIs rise from 48.5 to 48.9, while third round of sanctions saw PMIs staying flat at 51.0. 
  4. India continued the trend of growing PMIs in August, with 3mo average now at 52.3, up on 3mo average through May (51.6) and up on recessionary 3mo average of 49.6 back in 3 months period through August 2013. All in, this marks the tenth consecutive month of PMIs above 50 for India, with all but one of these months recording PMIs above 51.3.
  5. China posted 5 consecutive months of PMIs reading below 50 in January-May 2014. This negative momentum was reversed in June-August with the current 3mo average standing at 50.9, 3mo average though May 2014 at 48.5 and 3mo average through August 2013 at 48.6.
One more point on Russian PMIs dynamics: the switch in trend from below 50 to above 50 took place in July and involved a PMI swing of 1.9 points - the sharpest recovery for all BRIC manufacturing sectors during the last round of recoveries. Despite this, we only have two months of data above 50.0 and it will require at least 2-3 months more to determine if the Russian manufacturing is moving back onto sustainable growth path or if the current improvements are temporary.

1/9/2014: Irish Manufacturing PMI: August 2014

Irish Manufacturing PMIs released by Markit and Investec today show very robust and accelerating growth in the sector in August. These are seasonally adjusted series, and given this is a generally slower month for activity, acceleration is more reflective of y/y trends than m/m. Nonetheless, the PMI hit 57.3 in August, up on already blistering 55.4 in July, marking the highest PMI reading since December 1999.

Per release: "…output and new orders each rose at sharper rates. This encouraged firms to up their rates of growth in input buying and employment. Meanwhile, input prices fell for the first time in over a year and firms lowered their output charges."

This marks fifteenth consecutive monthly rise in Irish Manufacturing PMIs.

New orders and export orders are up (allegedly, as we have no data given to us by the Markit/Investec), but part of the sharp rise was down to firms working through backlog of orders, so that forward backlog of orders fell. This can lead to moderation in growth in months ahead 9note: moderating growth is not the same as contraction, so there is no point of concern on that front).

Full release here:

Couple of charts:

The above shows that Manufacturing PMI in Ireland is strongly breaking out of the post-crisis period averages, pushing the average toward longer-term levels observed in pre-crisis period. Thus, by PMI metric, Irish Manufacturing should have already fully recovered from the effects of the crisis. Alas, of course, we can see from the latest QNHS data that this is not the case when it comes to employment levels in the sector: In fact, Industry (ex-Construction) employment has been shrinking, not growing.

Chart below shows the shorter-term trends, distinguishing three periods in recent history:

Despite very robust rates of growth, overall PMIs expansion in the second period of recovery (second shaded block) have been slower than in the first period of recovery. But the trend is for solid recovery, nonetheless.

So lots of good news overall, but we will need a confirmation of this from actual production data, exports data and employment data in months to come. Let's hope the PMIs are signalling more than subjective optimism.

1/9/2014: Russia Manufacturing PMI: August 2014

Russia's HSBC Manufacturing PMIs for August show that the economy "continued to experience a tentative recovery in business conditions in August. Faster growth of new orders led to a further rise in output, albeit at a weaker rate than in July."

On the negative side, "Growth of new orders and output remained historically weak, however, and new export business continued to decline in the latest period. Input price inflation strengthened for the first time in five months, linked to the weaker ruble and shortages of some inputs. Output prices also
increased at a stronger rate, but overall inflationary pressures remained weak in the context of historic
survey data."

Another negative is that m/m improvements have now fallen to 0.0% which marks the first non-positive month of m/m changes in PMI since March 2014.

Overall, Manufacturing PMI came in at 51.0 which signals the same rate of growth as recorded in July. This marks a second consecutive month of above 50.0 readings for the sector. 3mo average came in at 50.4 compared to 3mo average through May at 48.6 and compared to 50.1 3mo average through August 2013.

The numbers remain weak both in economic terms and statistically, albeit the distribution of PMIs is non-normal. Historical average for the series is only 51.9, with STDEV of 3.44, negative skew of -1.93 and kurtosis of 7.27.

Chart to illustrate:

Sunday, August 31, 2014

31/8/2014: Did President Putin Call for a Statehood for E. Ukraine?

Yesterday, Russian President Vladimir Putin gave an interview to Interfax news agency in which he said (in Russian): "Президент России считает, что киевские власти должны начать переговоры по вопросам государственности юго-востока страны. "Нужно немедленно приступить к субстантивным, содержательным переговорам, и не по техническим вопросам, а по вопросам политической организации общества и государственности на юго-востоке Украины с целью безусловного обеспечения законных интересов людей, которые там проживают", – цитирует "Интерфакс" интервью Владимира Путина программе "Воскресное время" на Первом канале."

This is being widely reported across all of the Western media as the Russian President calling for granting of independence to the Eastern Ukrainian regions, or calling for the creation of a new state, called Novorossija.

For example, here is BBC report of his interview: "Russian President Vladimir Putin has called for talks to discuss "statehood" for eastern Ukraine. He said the issue needed to be discussed to ensure the interests of local people "are definitely upheld."

I have no idea what Mr. Putin had in mind when he used the word "государственность". Then again, Western media has no such idea either. The problem is that the word used by President Putin - "государственности" - does not mean creation of new state or discussion of the statehood for Eastern Ukraine. In fact, it means something entirely different.

Google Translate does equate word "государственность" with "statehood". But in the context of scientific and jurisprudential use of the term, "государственность" means "organisation of the structure of state". Here is a link (in Russian) to a Russian text book on "Theory and Legal Aspects of the State" In this text, there is a clear difference drawn between terms "государствo" and "государственность".

Specifically, it says at the very top of the page that: "Если государство представляет собой организацию политиче­ской власти в обществе, то государственность, по существу, олице­творяет глубину, широту и качество проникновения в общество идей и взглядов, освещающих реальную деятельность государст­ва. Государственность - это целостная система идей и взглядов, используемых в организации и деятельности самого государства."

Let me attempt to translate this [I preserve Russian punctuation for ease of tracing the text]: "If the state [государство] represents in itself the organisation of the political power system in a society, "государственность" [or 'statehood' in Google translate terms], in essence, embodies depth, spread and quality of development of ideas and views of the real activity of the state in a society. "Государственность" - is a comprehensive system of ideas and views, used in the organisation and operations of the state itself."

In other words "государственность" is defined as something that characterises the state, but not the statehood as a formation of distinct state or a new state.

The text book goes on to say that: "В процессе формирования государственности в современных условиях принято опираться на общечеловеческие ценности, подхо­дить к характеристике государства как объективно необходимого, культурно-ценностного явления. "

Again, translating as well as I can: "In the process of formation of "государственности" in modern conditions it is customary to rely on common human values, approaching characterisation of the state ["государства"] as an objective necessity, cultural and values-based entity."

Nothing in the above definition of "государственность" - the term used by Putin - implies a call for independent statehood or for formation of a new state. All of it is consistent with a call for a discussion of what values and systems of a Ukrainian state should look like in Eastern Ukraine.

If President Putin wanted to suggest that we need to open the discussion of statehood for Eastern Ukrainian regions, he would have used either term "государствo" - directly translated as "state" or "statehood" - or term "независимость" - directly translated as "independence".

I do not claim to know what exactly Mr. Putin has meant by his comment. Nor do I know in which context Mr Putin used the term "государственность" in the context of Eastern Ukraine. But I do know that it is simply wrong to translate his use of word "государственность" as a call to "discuss statehood for Eastern Ukraine".

Please note: I have consistently held a view, expressed in numerous posts here and in my media interviews over the span of months since January 2014, that Ukraine is an independent state and should remain such. I said that all parties to the conflict, including Russia, should exercise full respect for Ukraine's territorial integrity, including in Eastern Ukraine and prior to that in Crimea. This view remains. Russia has no business in putting troops in Ukraine and I called before for Russia to seal its borders with Ukraine to any traffic of troops (volunteer or not) and weapons. My point in the above is not to excuse any alleged Russian wrongdoings in the Ukrainian crisis, nor to excuse the separatists actions or support their aspirations. I am simply concerned that we should be very careful in how we interpret statements by Mr Putin and all other leaders.

Update 19:58: confirms my analysis above. H/T @Planoltom 

31/8/2014: Changes in Employment by Sector

Previous posts covering QNHS release for Q2 2014 provided analysis of

Here is a summary of changes in employment by sector:

Good news in green, bad news in red.

Several top-level points worth raising:

  • Construction employment grew, which is good news, by 3,600 in 12 months through Q2 2014. Bad news is that Industry employment (ex-Construction) shrunk 2,700 over the same period.
  • Services employment grew by a sizeable 23,800 in 12 months through Q2 2014 and higher value-added sectors employment expanded by 8,300 on Q2 2013. Many jobs have been added in Professional, scientific & technical activities (+6,100) and in Administrative & Support Services (+6,200) both of which also include MNCs trading in ICT services sectors, which is consistent with strong inflows of younger migrants into Ireland recorded in the year through April 2014. 
  • Non-agricultural private sector jobs expanded by 21,400 in 12 months through Q2 2014 (up 1.68% y/y) which is a far cry from the Government boisterous claims of 50-60,000 of new jobs being created. Overall across all sectors, the economy added 31,700 jobs on Q2 2013 level (+1.7% y/y).
Slower rates of growth:

Overall rate of jobs creation has declined significantly in Q2 2014. In Q2 2014, y/y growth in all employment has stood at 1.70%, down from 2.31% growth recorded in Q1 2014 and the slowest rate of jobs growth since Q1 2013. Industry and construction sector jobs growth fell from 1.5% y/y in Q1 2014 to 0.26% in Q2 2014, the slowest rate of jobs growth since the onset of recovery in the sector back in Q2 2013. Services sectors jobs growth also fell to 1.67% in Q2 2014 compared to 1.71% in Q1 2014, and currently stands at the slowest rate of growth in 3 quarters. Non-agricultural private sector jobs growth in Q2 2014 was 1.68%, down from 2.18% in Q1 2014 and the slowest rate since Q2 2013. High value-added sectors jobs growth is down to 1.22% in Q2 2014, the lowest reading in any quarter since Q3 2012.

31/8/2014: Irish Dependency Ratio Rises in H1 2014

Previous posts covering QNHS release for Q2 2014 provided analysis of

In the present post, a quick summary of changes in overall dependency ratio. I define a ratio of those at work to total population. This is imprecise as we only have estimated population figures for the year, and year coverage is for 12 months through April each year. The data is directionally-indicative more than actual levels, so many caveats here. However it does show where this economy is heading in terms of how many people support via work the rest of the population.

Here are the trends, set against 5 year averages:

In H1 2014, the ratio of those at work to total population declined to 0.3997 from 0.4026 in H2 2013 and up on 0.3927 in H2 2013. This is less material than the fact that current average (from H1 2013 through H1 2014) is running at 0.3983 - the lowest for any 5 year period on record.

In simple terms, there are fewer people supporting through work larger number of those who do not work for any reason.

31/8/2014: QNHS by Principal Economic Status: Unemployed, Working & Retired

Previous two posts covering QNHS release for Q2 2014 provided analysis of

Now, let's take a look at the principal economic status of working age population in Ireland (age 15 and above):
  • Total number of individuals of age 15 and above residing in Ireland decreased from 3,596,500 in Q1 2014 to 3,593,900 in Q2 2014 a drop of 0.14% on Q1 2011 when the current Coalition Government came to power, following a 0.07% decline recorded in Q1 2014. Year-on-year, the number of residents that are economically active or potentially active was up 0.21%.
  • Of the above, population at work rose from 1,834,300 in Q1 2014 to 1,842,600 in Q2 2014. Year-on-year, number at work rose 2.17% which is below a 2.73% rise y/y recorded in Q1 2014. Compared to Q1 2011, current numbers at work are up 2.31%
  • Numbers of unemployed fell to 298,100 in Q2 2014, marking a y/y decline of 9.67% and the first quarter since Q1 2009 that the numbers of unemployed fell below 300,000. However, rate of decline (y/y) in Q2 2014 was lower than in Q1 2014 when the levels of unemployment dropped by 10.43%. All together, these are healthy numbers, with current numbers of unemployed 18.49% below those recorded in Q1 2011.
  • Student numbers fell 0.89% y/y in Q2 2014, slightly slower rate of contraction than recorded in Q1 2014 (-1.26%). 
  • Numbers of those engaged at home rose from 476,100 in Q1 2014 to 478,100 in Q2 2014, but are down y/y some 1.77% and are down on Q1 2011 by 9.83%.
  • Numbers of those retired from employment stood at 410,500 in Q2 2014, up on 407,200 in Q1 2014 and up 1.61% y/y. The numbers of retirees are up 17.86 on Q1 2011 and there is a distinct pattern of higher levels of retirees in the economy since the onset of the crisis (see chart below). Prior to the crisis, numbers of retired in the economy were averaging around 300,300 in 2007. In last 12 months these averaged 402,300. Retired persons are not counted as unemployed, even if they took early retirement and are available for work, so early retirement schemes deployed in the public sector on a grand scale in recent years are de facto schemes that superficially reduced unemployment, while increasing real dependency ratios in the economy as a whole.
  • 'Other' category - capturing those who are not unemployed officially and do not work for reasons other than being students, being engaged at home or retired - rose from 150,500 in Q1 2014 to 152,800 in Q2 2014. However, y/y their numbers dropped 2.21% but Q2 2014 figures were up 1.26% on Q1 2011. There is a similar problem here as the one evident in the case of the retired cohort: in 2007, numbers of those falling into 'other' category were running at an average of 129,100. In the last 12 months period they averaged 152,100 - a rise of 23,000.
  • Together, average 12 month period increases in retired persons and 'others' compared to 2007 are around 130,000. 

Good news: proportion of those classified as being at work as percent of total population of age 15 and older rose in Q2 2014 to 51.27% from 51.0% in Q1 2014 and compared to Q2 2013 when it stood at 50.29%. H1 2014 average is now at 51.14% which is higher than the proportion of those at work recorded in H1 2011-2013.

Proportion of those not at work fell to 48.86% in H1 2014 from 50.02% in H1 2013. Which is also good news. But, consistent with the earlier mentioned trend, proportion of those in retirement rose to 15.59% in H1 2014 from 15.34% in H1 2013 and is now at its highest level since the records began in Q1 1998.

Finally, a chart to illustrate rates of change (year-on-year) in numbers at work and numbers of those not at work:

In level terms, in Q2 2014 compared to Q2 2013:
  • Population age 15 and over classified by all principle economic status rose 7,600 
  • Numbers at work rose 39,100
  • Numbers unemployed fell 31,900
  • Student numbers fell 3,700
  • Numbers of those engaged on home duties fell 8,600
  • Numbers of those in retirement rose 6,500
  • Numbers of 'others' rose 5,900
  • As the result of the above, numbers of unemployed, retired and 'other' fell 19,500 in 12 months through Q2 2014.

Saturday, August 30, 2014

30/8/2014: Both Unemployment and Participation Rates Fell in Q2 2014

In the previous post, I covered duration of unemployment across age cohorts data for Q2 2014. This time around, let's take a look at labour force participation rates and unemployment rates.

As noted earlier, there are some good news in the latest QNHS data. And this theme continues with unemployment rate statistics.

Official unemployment rate has declined from 12% in Q1 2014 to 11.5% in Q2 2014 (seasonally-adjusted basis). Thus, Q/Q unemployment rate dropped by a substantial 0.5 percentage points, which is faster than the 0.2%points decline in Q1 2014 compared to Q4 2013. It is worth noting that in Q2 2013, Q/Q decline in seasonally-adjusted unemployment rate was shallower 0.1 percentage points. Overall, over H1 2014, unemployment rate declined by 0.7 percentage points compared to the end of 2013. Over the same period of 2013, decline was 0.6 percentage points.

Without seasonal adjustment, things are slightly different. Y/Y Q2 2014 unemployment rate is down 2.1 percentage points and in Q1 2014 the same decline was 1.7 percentage points. These rates are faster than the rates of y/y declines in unemployment for the same period of 2013.

All of which is good news as illustrated by the chart below:

Things are not as good on the participation rates front, however.

Non-seasonally-adjusted Participation Rate fell from 60.5 in Q2 2013 to 60.0 in Q2 2014. H1 2014 average participation rate was 59.85 against H1 2013 average of 60.0, H1 2012 average of 59.9 and H1 2011 average of 60.1, in H1 2010 the average was 60.8, in H1 2009 it was 62.2 and so on... Q2 2014 participation rate was lower than Q2 2011 reading of 60.5. By all metrics, participation rate has fallen and not just y/y, but also compared to other periods of the crisis.

On seasonally-adjusted basis, Participation Rate also fell, from 60.1 in Q1 2014 to 59.8 in Q2 2014. This marks the lowest Q2 participation rate since Q2 2000. Last time seasonally-adjusted participation rate expanded in Ireland was in Q2 2013.

Chart below to illustrate:

As chart above illustrates, the bad news is that participation rate is not growing and is basically flat since Q2 2011. Worse news is that it is now matching the crisis period low. Even worse things is that the participation rate is running below historical trend in every quarter since Q2 2010. Guess those higher taxes, as well as high cost of childcare for families, are keeping people out of the labour force (remember, labour force includes employed and unemployed workers who are searching for a job).

Or by definition: The labour force participation rate is computed as an expression of the number of persons in the labour force as a percentage of the working age population. The labour force is the sum of the number of persons employed and of persons unemployed.

So in basic terms, of every ten persons of working age, six are either employed or unemployed, and four are neither working nor seeking a job. At the peak of the Celtic Tiger, the ratio was 6.4 to 3.6.

30/8/2014: Irish Unemployment: The Plight of Long-Term Unemployed Older Workers

Some blogposts based on the latest QNHS data for Q2 2014 are due next, so to start with:

Duration of Unemployment in Ireland:

Two tables below summarise y/y and current on Q1 2011 (tenure of the present Coalition Government) changes in unemployment by age groups and duration of unemployment.

Couple of things worth mentioning (keep in mind, analysis of other aspects of unemployment are to follow, so we are focusing here on duration of unemployment):

  1. Overall unemployment declined. This is good news, albeit not very new nor very interesting.
  2. Y/y there were more significant declines in long-term unemployment for all those in the labour force (year on year, down 16.3% for those unemployed 1 year and over as opposed to a decline of 15.4% for those in unemployment in general). 
  3. There were comparable declines in unemployment compared to Q1 2011 for those in long-term unemployment (down 17.2%) as for all unemployed (down 17.3%).
  4. Caveat to (2) and (3) above: while these are good numbers, longer term unemployment declines are more heavily influenced by drop outs from the workforce than other durations.
  5. In year-on-year terms, 15-24 years old have performed significantly better than average in terms of declines in unemployment of any duration and somewhat better than average in terms of declines in long-term unemployment. This suggests that some component of the current younger long-term unemployed is still structural - and cannot be easily removed by switching them into either education, training or into new jobs. Younger long-term unemployed also performed better than average for their reference group in terms of current levels compared to Q1 2011. This suggests that there have been some successes in shifting younger people off unemployment and longer-term unemployment too. Which is good news.
  6. In year-on-year terms, mid-age group of long-term unemployed outperformed the average in terms of declines in unemployment (-20.9% against -16.3% average). But overall declines in unemployment in this group are basically around average (-15.8% against -15.4% for the overall group). Things are better for this category of workers both in short and long-term unemployment when compared to Q1 2011. Again, this is good news.
  7. Bad news are for the category of workers 45 years of age and over. Why? In year-on-year terms, their unemployment rates declined less than across all age categories (-11.8% for all 45+ years of age against -15.4% for all workers) and in comparison to Q1 2011, their unemployment levels are higher (+2.7% for all 45+ years of age against -17.3% for all workers). Even worse news are for the long-term unemployed workers of age 45 and over: their unemployment rates declined much less than across all age categories (-8.1% for all 45+ years of age against -16.3% for all workers) and in comparison to Q1 2011, their unemployment levels are significantly higher (+14.4% for all 45+ years of age against -17.2% for all workers). This is the bad news: older workers are becoming increasingly less and less employable and the jobs being created in the economy, as well as training and activation schemes made available by the state are not working for this group.
Thus, overall, share of longer-term unemployed is declining, but remains still very high, while share of the long-term unemployed in the older age cohort of workers is rising:

The problem of long-term unemployment is bad enough - unemployment of duration in excess of 6-12 months has very long-term effect on employability of the workers, their skills, their psychological well-being, but also permanent effect on their wages and the probability of future jobs losses spells, and so on. The problem of long-term older workers is worse. Workers left without the job for a year or so, whilst in their older age are facing much greater barrier to re-entry into the workforce and suffer much more significant losses to their pensions, health status and social standing than their younger counterparts. They are also much harder to re-train and up-skill, so activation programmes generally designed to deal with the acute unemployment crises are not suitable for their needs. 

Stay tuned for more analysis of QNHS figures.

Friday, August 29, 2014

29/8/2014: Stability... of Negative Growth: Euro Area in Historical Perspective

Washington Post has a nifty chart plotting the demise of Europe...

Here it is:
That's not just 'periphery' up there in black. It's the entire euro area, with the stellar performer Germany, solid Austria and exports-rich Belgium and the Netherlands, competitiveness-leading world superstar Finland, the best-educated country in the solar system Ireland, and on... and on...

It has been 6.5 years since euro GDP been below pre-crisis levels. And things are getting worse, not better as we speak.

Remember, this is supposedly the European Century, per comfortably overpaid outgoing EU Commission. This is the Age of Europe, per majority of the comfortably overpaid incoming EU Commission. This is the state of delusion. 

29/8/2014: While New Financial Sanctions Loom

When America sneezes, Europe catches a cold… These days, America is more pointing than sneezing, and Europe is heading for the bite rather than a cold. The bite of sanctions against Russia.

Yesterday, at an advisory call I highlighted the details of potential impact that deeper financial sector sanctions against Russia can have on Russian banks and investment. You can read more on the topic here:

In my view, the damage can be heavy. And this was based on the US proposals being aired around to ban Russian banks' access to short-term funding and derivatives markets.

Today, the UK joined the chorus of 'throw Russian financial system into the dark ages'.

Let's start from the latter.

The UK is planning to push EU leaders to ban Russian access to the Society for Worldwide Interbank Financial Telecommunication system, commonly known as SWIFT. If SWIFT access for Russian banks is interrupted, the impact will be big. Cross-border banking will become excruciatingly expensive and limited for Russian companies and banks, including all companies and banks - whether sanctioned explicitly, or left off the list of sanctions to-date. Trade flows and payments will be disrupted too.

Russia has been preparing for this already, having announced back on August 7 that it is working on creation of the domestic system for banks transfers and data transmissions.

Swift is a 'worldwide' system because it is used worldwide, covering 215 countries, but the company is incorporated under the Belgian law and as such is a hostage to the EU, which did block Iranian banks' access to the system back in 2012. This raises a major point for the stability of the global financial system: a major technical part of it is a de facto subject to the political choices of the EU.

If Russia succeeds in developing its own system (and it is hardly nuclear science to put one together) and, as planned, if it were to wire China into it too to cover settlements in yuan and ruble, there will be two repercussions that the UK leadership is not considering:

  1. Much of flows between Russian banks and flows with other partnering banks will fall outside the normal international system that offers some transparency; and
  2. The system can create a new competitor to SWIFT - a competitor outside the regulatory net of the Western authorities. 

Meanwhile, the US is pouring over its own 'solutions'. As was reported earlier this week, the US is looking into limiting derivatives trading (including commodities options and futures, plus currency derivatives) and short-term loans for Russian corporates and banks.

So far, sanctions have impacted only longer-term debt issuance by the companies listed explicitly on the sanctions list, but also cooled off other Russian corporates' access to the US and European debt markets, despite them not being on the list. Bloomberg reported earlier this week that  Russian companies placed only USD4.1 billion of bonds abroad since mid-March 2014, which is less than a fifth of issuance in the same period last year.

Combined, the two approaches will impose a significant cost onto Russian economy. More importantly, the measures will disrupt legitimate, non-sanctioned (to-date) ordinary day-to-day business conducted by Russian companies. They will also put pressure on Russian funds outside the country, including ordinary savings, small business funds and investments. The sanctions, if passed, will have to be matched by Russia, and it is very hard to imagine what the co-measurable response can be.

Bigger issue, of course, is that sanctions are not only unproductive in achieving the Western goal of stopping Russian engagement in Ukraine, but are actually counter-productive. Ukraine is a geopolitical conflict theatre today, not an economic one. And the conflict goes across three core points:

  1. Russia's security in the face of encroaching Nato - including the 2002 Nato-Ukraine Action Plan, the 2005 Intensified Dialogue, the 2008 Bucharest declaration that effectively invited Ukraine to join Nato "when it wants to join and meets the criteria for accession"and so on - all temporally pre-dating December 2013.
  2. Russia's sense of humiliation suffered over the last 24 years, compounded by the endless nationalist and Russophobic rhetoric emanating from a number of Eastern European countries and promoted by the West in the 1990s and 2000s and 2010s, including tolerance of the EU over the third-rate citizenship status for Russian-speaking 'minorities' in some Accession States, and
  3. The failed state of Ukraine.

I am not going to expand extensively on any of the above points, let the historians deal with them, but it is clear that none of them have anything to do with economic conditions in Russia. However, all of them are being only reinforced by the sense of political and popular consolidation that is sweeping across Russia today, triggered in part by the sanctions. The current leadership of Russia is actually being helped, not harmed by the sanctions precisely because their imposition and acceleration continue to remind ordinary Russian people that points (1) and (2) are valid. They need no reminder that point 3 is valid as millions of Ukrainians work in Russia, trying to make some sort of a future that is simply infeasible in Ukraine itself.

In a nutshell, anyone who knows Russian history also knows that Russian culture, history, social institutions - all rest on the foundations of securing unity in adversity. The more adversity you throw Russian way, the greater consolidation the Russian system will achieve.

Time to smell the roses, folks. The West will not [rightly] put its own boys-in-uniforms into Ukraine to protect the Maidan Government. The West [for want of funds and will] will hardly even pay the cost of rebuilding the Ukraine. The West [for lack of capability absent any serious Federalist reforms in the country] is not going to create a functional state out of the failed one. Ukraine is not Latvia or Estonia. Expecting a functional democracy to emerge in a large state fragmented by linguistic, ethnic, cultural, historical and social divisions of the magnitude that prevail across the Ukraine without some sort of a Federal state not anchored in chauvinistic nationalism exercised by either side is naive. Iraq is a model here, not Czechoslovakia.

Time to smell the roses, folks. Time to do something along these lines:

29/8/2014: Some Unpleasant Forecast Revisions for Russian Economy

Russian Economy Ministry updated its 2014-2015 economic forecasts. 2014 forecast for real GDP growth remains at 0.5%, a notch below 0.6% forecast by the Central Bank. The ministry lowered forecast for 2015 to 1%, from 2% previously.

Notably, the Ministry did not raise its GDP growth forecast for 2014, despite numerous recent comments by Ministry officials that they expect 2014 GDP to come in at closer to 1% growth.

Updated inflation forecast is for 7-7.5% y/y in 2014. This reflects an uplift of 1-1.5% on previous forecast (6%) and is 1.5-2% above the official CBR target. CBR own forecast is for 6% for 2014. Revisions in inflation forecast are down to impact of imports bans on food which is expected to add 1% to the inflation rate in 2014 and 0.5% in 2015. Furthermore, sales tax introduction in 2015 (on top of 18% VAT already in place) will add another 1% to inflation. Ministry 2015 forecast for inflation is now at 6-7% which is an increase of 1-2% on 6% forecast issued previously. CBR target for 2015 was 4.5%.

You can read more about GDP growth conditions, inflationary pressure and the impact of the imports ban in food sector here:

Analysts consensus forecast is for 0.3% GDP growth and inflation of 6.5% in 2014. The latest forecasts from the Ministry suggest that there will be serious revisions to the Budget for 2015.

Growth in retail sales for 2015 is forecast to fall to 0.5% (latest growth of around 1%), while fixed investments is forecast to increase by 1.5% (current rate is -2%). Ministry projects a nearly 8% drop in Russia’s imports this year, in line with 'normal' Russian economy's reaction to a growth slowdown and in a clear response in capital imports demand to higher CBR rates. Investment is forecast to return to growth of less than 1% in 2015.