17/1/17: Russian Economic Policy Uncertainty 2016

In the previous post (link here), I covered 2016 full year spike in economic policy uncertainty in Europe on foot of amplification of systemic risks. Here is the analysis of Russian index.

As shown in the chart above, 2016 continued the trend for downward correction in Russian economic policy uncertainty that took the index from its all-time high in 2014 (at 180.4) to 160 in 2015 and 142.5 in 2016. All data is rebased to 1994 - the first year for which Russian data is available. However, at 142.5, the index is still well above its historical average of 94.1 and stands at the fifth highest reading in history.

Much of the reduction in economic policy uncertainty over 2016 came over the fist seven months of the year, with index readings rising into the second half of 2016 and peaking at 251.1 in December.

In simple terms, while the peak of 2014 crisis has now passed, questions about economic policies in Russia remain, in line with concerns about the sustainability of the nascent economic recovery. Moderation in economic policy uncertainty over the course of 2016 appears to be closely aligned with:

1. Variations in oil prices outlook; and
2. External geopolitical shocks (including the election of Donald Trump, with raw index data spiking in August and September 2016 and November and December 2016, while falling in October, in line with Mr. Trump's electoral prospect).

In other words, relative moderation in the index appears to reflect mostly exogenous factors, rather than internal structural reforms or policies changes.

18/2/15: IMF Package for Ukraine: Some Pesky Macros

Ukraine package of funding from the IMF and other lenders remains still largely unspecified, but it is worth recapping what we do know and what we don't.

Total package is USD40 billion. Of which, USD17.5 billion will come from the IMF and USD22.5 billion will come from the EU. The US seemed to have avoided being drawn into the financial singularity they helped (directly or not) to create.

We have no idea as to the distribution of the USD22.5 billion across the individual EU states, but it is pretty safe to assume that countries like Greece won't be too keen contributing. Cyprus probably as well. Ireland, Portugal, Spain, Italy - all struggling with debts of their own also need this new 'commitment' like a hole in the head. Belgium might cheerfully pony up (with distinctly Belgian cheer that is genuinely overwhelming to those in Belgium). But what about the countries like the Baltics and those of the Southern EU? Does Bulgaria have spare hundreds of million floating around? Hungary clearly can't expect much of good will from Kiev, given its tango with Moscow, so it is not exactly likely to cheer on the funding plans… Who will? Austria and Germany and France, though France is never too keen on parting with cash, unless it gets more cash in return through some other doors. In Poland, farmers are protesting about EUR100 million that the country lent to Ukraine. Wait till they get the bill for their share of the USD22.5 billion coming due.

Recall that in April 2014, IMF has already provided USD17 billion to Ukraine and has paid up USD4.5 billion to-date. In addition, Ukraine received USD2 billion in credit guarantees (not even funds) from the US, EUR1.8 billion in funding from the EU and another EUR1.6 billion in pre-April loans from the same source. Germany sent bilateral EUR500 million and Poland sent EUR100 million, with Japan lending USD300 million.

Here's a kicker. With all this 'help' Ukrainian debt/GDP ratio is racing beyond sustainability bounds. Under pre-February 'deal' scenario, IMF expected Ukrainian debt to peak at USD109 billion in 2017. Now, with the new 'deal' we are looking at debt (assuming no write down in a major restructuring) reaching for USD149 billion through 2018 and continuing to head North from there.

An added problem is the exchange rate which determines both the debt/GDP ratio and the debt burden.

Charts below show the absolute level of external debt (in current USD billions) and the debt/GDP ratios under the new 'deal' as opposed to previous programme. The second chart also shows the effects of further devaluation in Hryvna against the USD on debt/GDP ratios. It is worth noting that the IMF current assumption on Hryvna/USD is for 2014 rate of 11.30 and for 2015 of 12.91. Both are utterly unrealistic, given where Hryvna is trading now - at close to 26 to USD. (Note, just for comparative purposes, if Ruble were to hit the rates of decline that Hryvna has experienced between January 2014 and now, it would be trading at RUB/USD87, not RUB/USD61.20. Yet, all of us heard in the mainstream media about Ruble crisis, but there is virtually no reporting of the Hryvna crisis).

Now, keep in mind the latest macro figures from Ukraine are horrific.

Q3 2014 final GDP print came in at a y/y drop of 5.3%, accelerating final GDP decline of 5.1% in Q2 2014. Now, we know that things went even worse in Q4 2014, with some analysts (e.g. Danske) forecasting a decline in GDP of 14% y/y in Q4 2014. 2015 is expected to be a 'walk in the park' compared to that with FY projected GDP drop of around 8.5% for a third straight year!

Country Forex ratings are down at CCC- with negative outlook (S&P). These are a couple of months old. Still, no one in the rantings agencies is rushing to deal with any new data to revise these. Russia, for comparison, is rated BB+ with negative outlook and has been hammered by downgrades by the agencies seemingly racing to join that coveted 'Get Vlad!' club. Is kicking the Russian economy just a plat du jour when the agencies are trying to prove objectivity in analysis after all those ABS/MBS misfires of the last 15 years?

Also, note, the above debt figures, bad as they might be, are assuming that Ukraine's USD3 billion debt to Russia is repaid when it matures in September 2015. So far, Russia showed no indication it is willing to restructure this debt. But this debt alone is now (coupon attached) ca 50% of the entire Forex reserves held by Ukraine that amount to USD6.5 billion. Which means it will possibly have to be extended - raising the above debt profiles even higher. Or IMF dosh will have to go to pay it down. Assuming there is IMF dosh… September is a far, far away.

Meanwhile, you never hear much about Ukrainian external debt redemptions (aside from Government ones), while Russian debt redemptions (backed by ca USD370 billion worth of reserves) are at the forefront of the 'default' rumour mill. Ukrainian official forex reserves shrunk by roughly 62% in 14 months from January 2014. Russian ones are down 28.3% over the same period. But, you read of a reserves crisis in Russia, whilst you never hear much about the reserves crisis in Ukraine.

Inflation is now hitting 28.5% in January - double the Russian rate. And that is before full increases in energy prices are factored in per IMF 'reforms'. Ukraine, so far has gone through roughly 1/5 to 1/4 of these in 2014. More to come.

The point of the above comparatives between Russian and Ukrainian economies is not to argue that Russia is in an easy spot (it is not - there are structural and crisis-linked problems all over the shop), nor to argue that Ukrainian situation is somehow altering the geopolitical crisis developments in favour of Russia (it does not: Ukraine needs peace and respect for its territorial integrity and democracy, with or without economic reforms). The point is that the situation in the Ukrainian economy is so grave, that lending Kiev money cannot be an answer to the problems of stabilising the economy and getting economic recovery on a sustainable footing.

With all of this, the IMF 'plan' begs two questions:

1. Least important: Where's the European money coming from?
2. More important: Why would anyone lend funds to a country with fundamentals that make Greece look like Norway?
3. Most important: How on earth can this be a sustainable package for the country that really needs at least 50% of the total funding in the form of grants, not loans? That needs real investment, not debt? That needs serious reconstruction and such deep reforms, it should reasonably be given a decade to put them in place, not 4 years that IMF is prepared to hold off on repayment of debts owed to it under the new programme?

Note: here is the debt/GDP chart adjusting for the latest current and forward (12 months) exchange rates under the same scenarios as above, as opposed to the IMF dreamt up 2014 and 2015 estimates from back October 2014:

Do note in the above - declines in debt/GDP ratio in 2016-2018 are simply a technical carry over from the IMF assumptions on growth and exchange rates. Not a 'hard' forecast.

12/1/2015: Euro Area vs US Banks and Monetary Policy: The Weakest Link

Cukierman, Alex, "Euro-Area and US Banks Behavior, and ECB-Fed Monetary Policies During the Global Financial Crisis: A Comparison" (December 2014, CEPR Discussion Paper No. DP10289: http://ssrn.com/abstract=2535426) compared "…the behavior of Euro-Area (EA) banks' credit and reserves with those of US banks following respective major crisis triggers (Lehman's collapse in the US and the 2009 [Greek crisis])".

The paper shows that, "although the behavior of banks' credit following those widely observed crisis triggers is similar in the EA and in the US, the behavior of their reserves is quite different":

• "US banks' reserves have been on an uninterrupted upward trend since Lehman's collapse"
• EA banks reserves "fluctuated markedly in both directions". 

Per authors, "the source, this is due to differences in the liquidity injections procedures between the Eurosystem and the Fed. Those different procedures are traced, in turn, to differences in the relative importance of banking credit within the total amount of credit intermediated through banks and bond issues in the EA and the US as well as to the higher institutional aversion of the ECB to inflation relatively to that of the Fed."

Couple of charts to illustrate.

As the charts above illustrate, US banking system much more robustly links deposits and credit issuance than the European system. In plain terms, traditional banking (despite all the securitisation innovations of the past) is much better represented in the US than in Europe.

So much for the European meme of the century:

1. The EA banking system was not a victim of the US-induced crisis, but rather an over-leveraged, less deposits-focused banking structure that operates in the economies much more reliant on bank debt than on other forms of corporate funding; and
2. The solution to the European growth problem is not to channel more debt into the corporate sector, thus only depressing further the reserves to credit ratio line (red line) in the second chart above, but to assist deleveraging of the intermediated debt pile in the short run, increasing bank system reserves to credit ratio in the medium term (by increasing households' capacity to fund deposits) and decreasing overall share of intermediated (banks-issued) debt in the system of corporate funding in the long run.

7/9/2014: What do PMIs Signal on Global Growth?..

Here's an interesting point raised recently by @phil_waechter: the global growth that is supposed to accelerate in H2 2014 is really not happening and worse, compositionally, the prospect of such growth is heavily reliant on one country's fortunes: the U.S.

Things are not pretty, but they are not as ugly as the above chart shows, at least in the short run of the last 2 months. Here are the summaries for global growth by index:

In Services, there is weakening growth, but still levels are relatively robust, with New Business accelerating, marginally, while Future Activity expectations moderating.

And in Manufacturing, there is marginally stronger growth, with new orders slipping by just 0.1 points.

Composite indicator shows some pressures to the upside in growth forward: backlogs indicator showing a rise, new orders similarly showing some very modest support up.

Emerging markets are generally improving in August, with exception of Brazil. Russia breaking downward trend, but this remains to be confirmed in September-October before any serious turnaround can be called. South Africa is weak, Brazil weak, although net is still more positive than in May-July:

So the longer term trends are weak, when it comes to the likes of the euro area, but are reasonably ok. The real weakness is in the euro area. Here is the summary of just how much the euro area performance across all PMIs is weighing down on the global growth:

Just another reminder, this is supposedly the European Century...

28/7/2014: Double Down or Stay Course in Ukraine: the Only Rational Alternatives for Moscow?

The latest reports from the U.S. strongly suggest that Russia is perceived as an un-yielding adversary in Ukraine and that Moscow is about to 'double-down' on its gambit in Ukraine (see here).

The point is that if so, then why and then what?

Why? Russia has currently no exit strategy from the conflict in Ukraine. Forcing complete and total closure of the separatists operations is

1. Infeasible for Moscow (the separatists are not directly controlled troops that can be withdrawn on orders and indications are, they are not all too well coordinated and organised to be following any orders);
2. Were it even theoretically feasible, will be immediately visible to the external observers. Note that, for Moscow, (1) means political benefits of such an action will not be immediately apparent, while (2) means political costs of such an action will materialise overnight.
3. As sanctions escalate, the marginal returns of domestic political support become more important, since external economic benefits from cooperation vanish, but marginal costs remain (see below).

On marginal external benefits: it is absolutely uncertain what exact conditions Russia must fulfil to completely reverse the sanctions: is it

• (a) compel the rebels to surrender unconditionally to Kiev troops? 
• (b) compel them to surrender to either official troops or pro-Kiev militias, unconditionally? 
• (c) compel them to surrender conditionally - without any conditions set and without any mechanism to enforce these in place? 
• (d) compel them to declare a ceasefire - without any conditions set and without any guarantees of enforcement by the opposite side? 
• (e) compel the separatists to engage in peace talks - not on offer by Kiev? 
• (f) compel the separatists to stand down - in some fashion - and enter into negotiations with Kiev on Crimea? 
• (g) Is Crimea at all on the table? and so on...

On marginal costs: the costs of sanctions are tied to Russia delivering some sort of compliance with Western demands. Can someone, please, point to me a website where these demands are listed in full and the states that imposed sanctions have signed off on a pledge that once these conditions are satisfied, sanctions will be lifted?

Thus, in simple terms, current Western position leaves little room for Moscow not to double down in Ukraine. The only other viable alternative for Moscow currently is not to escalate. De-escalation, as much as I would like to see it take place, is not within rational choice alternatives. The core reason for this is that when one constantly increasing pressure in forcing their opponent into the corner without providing a feasible exit route for de-escalation, the opponent's rationally preferred response, at certain point in time, becomes to strike back and double down.

Update: interestingly, Reuters editorial today (29/7/2014: http://www.reuters.com/article/2014/07/29/us-ukraine-crisis-putin-analysis-idUSKBN0FY1AC20140729?feedType=RSS&feedName=topNews&utm_source=twitter) provides very similar lines of argument on costs and incentives for Moscow to de-escalate the situation in Eastern Ukraine.

17/7/2014: More Russia Sanctions, Same Pains, Same Strategies

Another set of sanctions and another tumble in Russian shares. This time around, sanctions have impacted major Russian companies with significant ties to the global economy. However, no broad sectoral sanctions were introduced.

The following companies are hit:

• Rosneft - largest oil producer in Russia
• Gazprombank - largest bank in Russia outside retail sector
• VEB - Vnesheconombank 
• Novatek - largest independent natural gas producer
• Federal State Unitary Enterprise State Research And Production Enterprise Bazalt, 
• Feodosia Oil Products Supply Company (in Crimea)
• Radio-Electronic Technologies Concern KRET 
• Concern Sozvezdie
• Military-Industrial Corporation NPO Mashinostroyenia  
• Defense Consortium Almaz-Antey
• Kalashnikov Concern
• KBP Instrument Design Bureau
• Research and Production Corporation Uralvagonzavod 

Full list here: http://www.treasury.gov/ofac/downloads/ssinew14.pdf

The U.S. Treasury Department said that under new sanctions, the U.S. companies are only prohibited from dealing in "new debt of longer than 90 days maturity or new equity" with the listed non-defence firms. There are no asset freezes, no prohibitions or restrictions on export/import transactions. The sanctions do not impact U.S. and other multinationals' work in Russia, unless Moscow retaliates with such measures (which is unlikely).

This contrasts with previous sanctions under which sanctioned companies were prevented from conducting any transactions, including export/import and clearing with the U.S. firms.

So we are having a clear attempt to undercut some Russian companies' access to the U.S. debt and equity markets, while preserving their ability to trade.

VEB will unlikely feel the pinch. The bank converted the National Wealth Fund deposits into capital recently, so it can offset the shortfall on foreign funding.

Gazprombank is a different issue. Last month, Gazprombank raised EUR1 billion at 4% pa in the foreign markets via a bond sale on the Irish Stock Exchange. Gazprombank has one of the largest exposures to international funding markets of all other Russian financial institutions - it has 78 outstanding eurobond issues demented in a number of currencies. So the real problem with the sanctions is that they may open the way for EU to follow, which can shut Gazprombank from the Euro-denominated debt markets too.

When it comes to Rosneft, sanctions are weak. The U.S. simply cannot afford shutting flows of Russian gas and oil to global markets. Reason? Imagine what oil price will be at, if Rosneft was restricted from trading. The company is responsible for roughly 40% of the total Russian oil production which runs at around 10.5-10.9 million barrels per day. Get Rosneft supply access cut and you have an equivalent of entire Iraq's 2013 output (that's right - total output of Iraq is lower than that of Rosneft alone) drained from the global production. Rosneft pumps more oil than Canada and more than double the output of Norway.

You can read on geopolitics of Russian oil & gas here: http://trueeconomics.blogspot.ie/2014/07/1772014-geopolitics-of-russian-gas-oil.html

The real target of the sanctions are pre-paid contracts that Rosneft and Novatek have on future supplies of oil and gas. These are de facto forward loans, repayable with future oil and gas supplies. Rosneft exposure to these currently sits at around USD15 billion. Another target: long term funding for energy companies. Rosneft raised USD30 billion in two loans in 2012 and 2013, in part to co-fund buyout of TNK-BP which cost Rosneft USD55 billion in 2013.

In reality, while short- and medium-term borrowing costs for two Russian energy companies is likely to rise, the effect in the longer term will be to push more and more trade and finance away from the U.S. dollar and U.S. markets. Plenty of potential substitutes are open: Hong Kong and Singapore being the most obvious ones. London is a less likely target. For example, in June partially state-owned UK Lloyds Bank cancelled a USD2 billion prepayment facility with Rosneft. The loser is, of course, Lloyds as it foregoes substantial revenues, while Rosneft can secure (albeit also at a price) similar funding from any number of larger trading companies it deals with, e.g. Glencore, Vitol or Trafigura.

Bloomberg covers some of the immediate reactions in corporate debt markets here: http://www.bloomberg.com/news/2014-07-17/rosneft-bonds-sink-most-on-record-as-sanctions-shut-debt-markets.html

All in, there is still ca USD60 billion worth of maturing corporate debt that Russian companies need to roll over before the end of 2014. This is a bit of a tight spot for Russian economy going forward, but it can be offset by releasing some of the liquidity accumulated on Russian banks balance sheets in 2013.


There is a bit of a silver lining for Russia from the U.S. sanctions too. To-date, higher oil prices worldwide (primarily driven by the Middle East mess, but now also with a support from the latest Russia sanctions) pushed up Federal Budget surplus to 1.4% of GDP (see latest arithmetic here: http://trueeconomics.blogspot.ie/2014/07/1772014-geopolitics-of-russian-gas-oil.html) over January-May 2014. This means Moscow can afford a bit more of a stimulus this year, offsetting any sanctions-related adverse effects on its economy in the short run.

On another positive side, sanctions have triggered renewed interest in Moscow in developing domestic enterprises with a view of creating a buffer for imports risks (http://en.itar-tass.com/world/741073). Imports substitution is a norm for Russian economy during strong devaluations of the ruble. This time around, we can expect a push toward more domestic investment and enterprise development to drive imports substitution growth to compensate not for Forex changes, but for the risks of deeper and broader sanctions in the future.


So I would re-iterate my previously made call: 

1. Russian economy is in a short- medium-term decline in terms of growth
2. Growth slowdown is compounded by rising borrowing costs and adverse news flow
3. With correct course of actions (monetary & fiscal policies and potentially some regulatory changes), Moscow can steer the economy into recovery in 2015
4. Ukraine crisis abating during the rest of 2014 is likely to support (3) above

All of the above suggest the markets will be oversold by the time Russian equities corrections hit 8-10% mark, assuming, of course, no further escalation in Ukraine (both with and without Russian influence, Ukraine's internal problems have now been firmly pushed by the EU into Russian domain).

There has been no cardinal change in the Western strategy with respect to Ukraine (support at any cost of Poroshenko push East) and with respect to Russia (blame at any opportunity for anything happening in Ukraine). The latest sanctions are simply a replay of the previous ones, which means that the U.S. is relatively satisfied with the progress in Ukraine, while the EU has moved to the back seat, having finalised the association agreement and unwilling to expand on this.


As a side note: there are implications building up for Western companies, relating to the U.S. and EU sanctions:

• Bloomberg reports (http://www.bloomberg.com/news/2014-07-16/as-ukraine-heats-up-exxon-to-airbus-eye-growing-risks.html) on Exxon Mobil Corp, Airbus Group NV and Daimler AG risks;
• ITAR-Tass covers the cases of Caterpillar and Bombardier: http://en.itar-tass.com/world/741083

On political front, here is an interesting report on President Putin approval ratings: http://en.itar-tass.com/russia/740817. I have not seen the original study cited in the report, yet.

17/7/2014: Geopolitics of Russian Gas & Oil: BRICS, US, EU and more

Let's put together three areas on the geopolitical and economic map:
- Ukraine
- Latin America
- Central Asia

What do we have?

A conflict theatre that pitches against each other: Russia, Europe, China and the US. This conflict is drawn across both geopolitical and economic spheres and is, largely, fought via PR and finance. It is, however, a conflict that continues to shift the global balance of power East and South, away from its traditional focus on the West and North.

Let's take a look at all three theatres of the conflict. Keep in mind that in 2013, Russian total energy output grew by 1.5% y/y to rise to 15% of the global output. This represents the largest combined oil & gas output in the world. In natural gas, Russia supplies 22% of the world total. But… and there is a proverbial 'but'… US gas output is growing and US exports of LNG are growing too.


Ukraine: Europe's Push Point

Ukraine is a clear battlefield relating to the energy supply security for EU and gas (less so oil) exports for Russia. We have been here before: most recently in 2006 and 2009, but back then Ukraine was much more independent of the EU and thus Russian-Ukrainian gas price conflict at the time did threaten to disrupt supplies of gas to Europe. This time around, Ukraine has no teeth and Russia needs gas flows, so no one West of the Uzhgorod is losing much of sleep. This sense of security is reinforced by the fact that Moscow needs sales, as Russian economy is running in the red, as opposed to 2006. 2009 was, of course, different in this sense. Another footnote to this is that in the medium term, Europe has plentiful stored reserves of gas: some 65% of its gas storage capacity into early summer is full. This is a record high, allowing EU to do some sabre-rattling vis-a-vis Russia.

In addition, EU currently holds the trump cards when it comes to completion of the South Stream pipeline. This point is very significant. South Stream can provide meaningful diversification for transit of gas into Southern European markets, currently being serviced via Ukraine. South Stream capacity is set at 63 billion cubic meters (bcm) per annum, in excess of 55 bcm capacity of Nord Stream 1 & 2 which is up and running. There are problems with capacity utilisation on Nord Stream which are down to EU regulations. The same is threatening the South Stream plans (although the EU has exempted from the said regulations the Turkish pipeline, while it is unwilling to grant an exemption to Russians).

Source: Expert.ru

EU gas imports from Russia currently run at around 1/3 of total european demand, and cost ca USD53 billion per annum. Total volume of gas sales to EU from Russia was 138 bcm in 2013 at an average price of USD387 per thousand cubic meters (mcm) or USD10.50 per million British thermal units (therm). Currently, around 15% of Russia's Federal budget comes from gas exports and Europe is by far the largest market for Russian gas. This underpins medium-term Russian dependency on Europe. But it also underpins medium-term dependency of Europe on Russia: replacing Russian gas in any meaningful quantities will be costly. According to Bloomberg report (here) from earlier this year, "Benchmark U.K. prices would need to rise 127 percent to attract liquefied natural gas if Europe had to replace all its Russian fuel for two summer months". That is only for summer months. Furthermore, "The EU would need to pay as much as 50 percent more to replace that with a combination of LNG, Norwegian gas and coal, according to Bruegel, a research group in Brussels."

Source: Bank of Finland, 2014.

So with power to block South Stream (primarily by pressuring EU member states through which it will pass), the EU holds some serious tramp cards against Russia. These states are: Bulgaria (which was the first signatory to South Stream construction project back in January 2008, just 5 months after South Stream MoU was signed between Eni and Gazprom; Hungary (which signed an inter-governmental agreement on South Stream at the end of February 2008), Slovenia (in South Stream partnership since November 2009) and Croatia (since March 2010). Interestingly, Austria signed a legally binding agreement to build South Stream section (50km) via its territory on June 30th (Russian version here). The EU Commission has engaged in very heavy-handed 'diplomacy' bordering on bullying when it comes to those countries (namely Hungary, Austria, Bulgaria and Slovenia) which have been at the forefront of progressing the South Stream project. But their position is reinforced by both necessity and expedience. Neither the South Stream countries, nor Germany and Italy want to see continued EU dependence on Ukraine as transit route. Despite all the Ukrainian claims to the contrary, this transit has been less than reliable both due to Russian position vis-a-vis Ukraine and Ukraine's position vis-a-vis Russia. On expedience side, transit fees for Russian gas are lucrative to many Balkan countries and South Stream involves partnership with Italian Eni and French EDF - both of which have massive political and economic clout.

Still, Ukraine is clearly attempting to drive a wedge between EU and Russia when it comes to gas transit. Kyev has offered to construct own pipelines to transport Russian gas, in a JV with European countries (who, presumably, will fund this programme). See a report on this idea here. And Russia considered (albeit did not follow through with it) responding in-kind: South Stream economics would significantly improve if it were to go sea-route from Crimean land mass. However, to-date Russia has not indicated officially it is interested in this re-routing).

Russia has another, albeit more limited alternative. In April 2013, Gazprom was instructed to restart the Yamal-Europe-2 gas pipeline bypassing Ukraine, via Belarusian border to Poland and Slovakia. This was scheduled to be completed by 2019, but we can expect some acceleration in the project later this year. This will add only 15 bcm to Yamal-Europe-1 pipe that currently has capacity of 33 bcm. Beefing shipments via Belarus in the future is an alternative. It involves added costs and uncertainty for Russia too. On costs side, Belarus is heavily dependent on Russian energy subsidies and this dependency can be amplified if it serves as a more important gas transit conduit. Russia, weary of its Ukrainian experience - the never ending double-play by transit countries of EU against Russia in gas politics - is not too keen on switching Ukrainian routes to Belorussian. And on risks side, there is Poland with staunchly Russo-sceptic politics and insistence on ownership of transit infrastructure that potentially makes Russian gas hostage to Warsaw.

Source: American Enterprise Institute, 2013

On to Central Asia

All of which means that Russia is looking for diversification away from the European markets for its gas. Earlier this year, China provided a convenient outlet. China accounts for 22.4% of world's energy consumption and it signed a Chinese-Russian 30 year, USD400 billion (plus options) gas deal this May (I covered the deal here). China is also engaged in Bazhenov super-field exploration development (see my earlier note on this here). Both are mega-deals, beyond any doubt. But China will be buying (in first stages) only 38 bcm of gas from Russia.

The reason for this is that China has been also gradually diversifying its sources of supply. This year, China will purchase over 45% of its imports of natural gas directly from Central Asia, according to BP. Turkmenistan ships around 25 bcm of gas to China, Kazakhstan and Uzbekistan ship 2.9 bcm and 0.1 bcm. The latter has capacity to increase these shipments by 50 fold by 2015-2016. Turkmenistan holds a 65 bcm supply deal (by 2020) with China. And China is completing two pipelines linking it to Central Asia this year (see here). Combined Central Asian pipeline capacity by 2015 will be running at 55 bcm - same as South Stream. And in December, China will launch construction of line D which is expected to be in full operation by 2020.

On the surface, this looks like China is aggressively shifting toward increasing its share of imports from Central Asia, but even with line D fully running, the target is for Central Asia to ship about 40% of China's overall imports demand for natural gas - a small decline on current share of Chinese imports. Still, China's aggressive move into Central Asia puts a bit of a chill into Russia's regional power base there. And it happened over the last 7-8 years, just at the time as Russia has been focusing increasing attention on its European border. In fact, Russian global position can be described as being under double-pressure: in the West by the EU and Nato and in the East by China - all actively moving into Russian 'near-abroad' and both actively pushing Russia into defensive position with respect to its traditional or historical economic and political allies.

This is best exemplified by Turkmenistan which used to depend almost entirely on Russian gas infrastructure and sales capacity to export its gas. The country has the sixth largest proven natural gas reserves in the world (at 7.5 trillion cubic meters) and is the second largest dry natural gas producer in Eurasia. Turkmenistan is continuously increasing its proven reserves: between 2009 and 2011 these rose 2.8 times. Since 2006, the Government has focused on diversifying its exports outside the markets supplied by Russian infrastructure. Turkmenistan exported some 42.48 bcm of natural gas in 2012, of which 52% went to China, 24% to Russia and 22% to Iran.

Crucially, from China's point of view, Beijing owns the Turkmen infrastructure: it has effectively full ownership of the pipelines and it built the USD600 million gas processing facility at the Bagtyyarlyk gas field (plant capacity is 8.7 bcm per annum). China also built the first plant at the field back in December 2009 and Chinese investment in the field runs around USD4 billion and rising. In June, the Government launched construction of another processing plant at the super-giant Galkynysh field (world's second largest gas field). Turkmenistan is also heavily pushing for a Trans-Caspian pipeline with a link to Trans-Anatolian pipe which would give it access to European markets. The EU has indicated already that the pipeline will be exempt from the European regulations relating to the Third Energy package, the same regulations that are effectively cutting Russia's Nord Stream capacity by a half and are threatening the derailment of the South Stream.

Russia's response to the Central Asian challenge is to push for more business on its Western and Eastern flanks. Azerbaijan is currently in negotiations with Moscow to join the Eurasian Economic Union. Based on economic analysis (see here) the EEU offers significant trade and trade diversification opportunities for Azerbaijan, but it will also harmonise energy policy, reducing Azerbaijan's clout in terms of accessing the EU markets. The major sticking point, however, is Azerbaijan's ongoing 'cold' war with Armenia in which Russia backs Yerevan and Turkey backs Baku. However, there are rumours that Russia is trying to bypass this issue by negotiating simultaneous accession of Armenia and Azerbaijan into EEU. Although these are just rumours. Officially, Azerbaijan was not (yet) invited to join. For now, Azerbaijan is playing both sides of the Russia-West divide but how long this game can go on is a huge question. The country is pivotal for transit routes for Trans-Caspian gas to Europe and it is a major player in Central Asian developing links to Turkey. Europe is keen on incentivising (or de facto geopolitically bribing) Azerbaijan to shift toward its orbit and Turkey is keen to play the leadership role in this game. Georgia - the dealing of the West in the region - is also keen on drawing Azerbaijan into Western orbit, as it hopes to act as a bridge between oil and gas rich Caspian and cash rich Europe via the Black Sea routes.

In recent months, EU and US both stressed the importance of Azerbaijan to energy security in Europe. In April, US Secretary of State, John Kerry, declared Azerbaijan to be "the future of European energy" despite the obvious fact that even if Azerbaijan gains access to European markets via TANAP and TAP pipes linking it (via Turkey) to Austria and Italy the combined pipelines capacity will be around 30 bcm per annum. EU consumes roughly 460 bcm of natural gas annually. The 'future of European energy' is a source of no more than just 6% of the European demand. Not that absurdity of exaggerated claims ever stopped Mr. Kerry from making them in the past. Incidentally, the EU and US both have brushed aside significant security concerns relating to putting two major gas pipes through the region that is ripe with risks of terrorist threats.

Source: http://www.tagesschau.de/wirtschaft/nabucco-aus100~magnifier_pos-1.html

From Central Asia to Broader Asia

So Russia is forced into a defensive position in Central Asia, just as it is being forced into a defensive position o its Western borders. Russian response to-date has been two-pronged:

1. Engage China into broader cooperative inter-links via BRICS; and
2. Find new geopolitically strategic markets.

In terms of new geopolitically and economically lucrative markets, Russia has been looking both at the BRICS and elsewhere.

On the latter front, recent move (April 2014) to cancel 90% of the Soviet-era North Korean debt and engagement with the country in trying to open transit routes to Korea show Moscow's interest in driving gas and oil exports out to the wealthier Southern Korean markets, currently reliant on excruciatingly expensive LNG shipments (97% of total energy needs of the country are imported). Russia is planning to invest some USD1 billion in North Korea, amongst other things, building a gas pipeline to South Korea.

Beyond this, there is Japan. Per Bloomberg report a group of 33 Japanese lawmakers have backed a 1,350 kilometer USD5.9 billion (estimated cost) pipeline connecting Russia’s Sakhalin Island and Japan’s Ibaraki prefecture. Pipe capacity: 20 bcm or just over half the Chinese deal Russia signed. This pipeline, if completed, would supply up to 17% of Japan’s imports, but more importantly, open up Sakhalin fields access to a huge market. Cost savings for Japan and Korea can be sizeable. Russia-China deal was priced at around USD10.50-11 per therm, as opposed to the LNG priced at USD13.3 at around end of May (down from USD19.7 back in the winter 2014).

And then there is India, the 3rd-largest oil importer in the world after the US and China, with forecasts showing the country becoming world's largest importer by 2020. Worse, with prices sky-high and its economic growth heavily dependent on energy-intensive services sectors, India is now facing an energy crunch.

Russia has been negotiating with India the most expensive pipeline deal in history: a USD30 billion oil pipe linking Russia’s Altai Mountains to the Xinjiang province of China and northern India. Oil is a different equation for Russia (the country exports 70% of oil output against 30% of gas output and Federal revenues are more dependent on oil than on gas.

In 2012, 52% of Federal revenues came from exports of energy carriers, with gas supplying around 1/3rd of this. Still, pressure is rising. Russia's 2014 budget is balanced at around USD115-117 per barrel, which more than 5-times higher than 2006 when its budget balanced at around USD21-22 per barrel. In its revised Budget plan for 2014, based on performance over January-April 2014, Russia expects federal budget revenue of 14.238 trillion rubles (an increase of 668.3 billion rubles compared to the previously published budgetary estimates). This includes additional oil and gas revenue of 1.567 trillion rubles, up 952.1 billion rubles on previous. Moscow expects a federal budget surplus of 278.6 billion rubles in 2014. On the other hand, Russian Government actual revenues rose 10 % y/y in Q1 2014, primarily due to foreign exchange effects of ruble devaluation (dollar up, dollar revenues from exports translate into more ruble revenues). Which means that, assuming the price of Urals-grade crude stays at USD104 per barrel and if ruble/dollar exchange rate stays at around 35.5 rubles to the dollar (ca 10 % devaluation on 2013), then Russian federal budget is likely to show a forecast surplus despite lower economic activity.

Back in October 2013, India and Russia reiterated that they will continue collaborating on developing direct ground links for oil and gas transports. Indications are, the issue was mentioned at the latest BRICS summit. India imports ca 35% of its gas consumption. Interestingly, in this area, Russia can squeeze out Turkmenistan. The proposal for a USD9 billion Turkmenistan-Afghanistan-Pakistan-India gas pipeline is currently finding it difficult to raise funding and sign a consortium lead. The project ran pitches in London, Singapore and New York but failed to attract an international major to join. India is now looking to Russia for developing a gas pipeline, similar to the oil pipeline, via China. India is already linked into Russian oil and gas industry. Back in 2011, Indian FDI into Russian energy sector totalled USD6.5 billion, with USD2.8 billion invested in Sakhalin-1 and is seeking a stake in Sakhalin-3. India is also looking to invest some USD1.5 billion in the Russian Yamal peninsula. Yamal holds one-fifth of global natural gas reserves. Last, but not least, India is trying to get off the ground gas liquefaction offshore projects in Russia for shipments to Indian market.

Source: http://www.dailykos.com/story/2009/10/29/798609/-Building-A-Pipeline-Energy-Politics-In-Afghanistan

Here is a far-reaching possibility: India, Russia and China creating a joint/shared infrastructure system that links Russian and Central Asian oil and gas to India and China. The net losers in such a scenario will be the US (due to lower cost of LNG in Asia-Pacific), Australia (major supplier of LNG to Korea and China) and Europe. Azerbaijan, on the other hand, is likely to link up with the BRICS-led transport network, although it might require the country to sign up to the EEU.


BRICS: The Flavour of the Month

Which, naturally brings us to BRICS. This week, we had a BRICS summit and Vladimir Putin's visit to Latin America. Both played a central role in shaping the evolving Russian geopolitical strategy. Firstly, the trip and the summit shows that Russia is not a regional power (as President Obama claims), but a global player (as Russia claims). Via twin track approach: BRICS + disenfranchised states provide exactly this platform. Hence we saw Cuban visit and cancelation of 90% of the (completely un-recoverable) Cuban debts. We also saw Argentina talks, which yielded major nuclear power contract: Rosatom will build two new power generation units. There were also talks about development of Argentinian shale gas deposits.

Secondly, BRICS summit is now set to remain neutral on the issue of Ukraine. With BRIC leaders abstaining from criticising Russian position, President Putin achieves two goals:

1. puts Russia into a major international decision making arena without having to deal with the issue of Ukraine; and 
2. shows to the West that US and EU cannot automatically count on emerging economies falling into their orbit on geopolitical issues.

Thirdly, Putin's initiative for creating a BRICS-based development bank strengthens the BRICS cooperation and moves it toward a tangible financial and policy commitment. The same goes for a reserve fund.

On geopolitical side of things, Russia, India and China are already facing common security considerations (as well as some growing economic interests) in Afghanistan. The countries have raised a possibility of setting up a trilateral framework of cooperation there and this is also likely to feature in their discussions in Brazil, although don't expect to see it in the official reports. And BRICS are getting more active in the Latin American neighbourhood. BRICS held a meeting with Unasur organisation and leaders of a number of Lat AM countries.

On trade side, President Putin and Brazil president Dilma Rousseff have confirmed their objective of doubling the bilateral trade between the two countries to USD10 billion dollars per annum from current (2013) USD5.56 billion. The original target was set three years ago.

Elsewhere, in June, Russia and Nicaragua confirmed Russian engagement with the Chinese-led plan for Interoceanic Grand Canal. Construction is expected to start by the end of 2014. The IGC will be 286 km long (Panama Canal is 81.5 km), have width of 83 meters and depth of 27.5 meters. This will make it suitable for long-range ships with a deadweight of up to 270,000 tons. The cost of which is estimated at USD30-40 billion.

Source: http://www.qcostarica.com/wp-content/uploads/2014/02/Canal-Nicaragua.jpg


Conclusions:

The last point ties in the BRICS dynamics with Russia's economic push East. China is becoming a major partner in a number of Russia-linked initiatives, including those that are of greater benefit to Beijing than to Moscow (e.g. the IGC). In effect, Russia is gradually building up mutual inter-dependency with China in Latin America, Central Asia and, via the Northern Passage (the sea route to Europe via Russia's Arctic waters) in Europe. This process is in its early stages, but it is a part of the emerging long-term strategy that can lead to significant re-orientation of global politics and, to a lesser extent, economics. Further ahead, beyond the bilateral agreements, Russia, India and China are sitting at the centre of the vast and rapidly growing infrastructure-light markets for energy and transport. Joint co-development of this infrastructure, especially pairing transport of energy with transport of goods and other commodities, suits all regional powers well. This is similar in nature to, but more massive in scale than the ongoing emerging cooperation between China and Russia in Central and Latin America. It does not suit the West.

So Ukraine is a flashing point of the old battlefields. It is still 'hot' but it no longer matters as much as Kiev and Brussels want it to matter. From here on, keep an eye on Latin America, Central Asia and Asia-Pacific for the places where Russian strategy is going to play out next, this time around with BRICS most likely alongside Moscow. The core driver for this change is not Russian 'nationalist revival' or Kremlin's 'aggressive aspirations'. Instead it is the force of the pince-nez squeeze of Western geopolitical pressures on Russia on its Western flank and Chinese demand for natural resources on the Eastern flank that is driving Russia to a reactive, not pro-active strategy. That this strategy is defensive is clear from its reactive and lagged nature. That this strategy is getting now active is clear from the geographic reach it assumed in recent months.

15/7/2014: Covenant-lite Debt Mountain & the Great Unwinding...

Recently, I wrote about IMF findings that the corporate and household debt mountains in the euro area remain unaddressed. Here is the World Gold Council chart on issuance of new covenant-lite corporate debt in the US:

The new age of complacency is emerging, defined by the ease of debt raising and low volatility:

Which, of course, can mean only two things:

1. There will be reversals out of status quo.
2. Low volatility implies reduced returns on investment and capital. This, in turn, implies lower investment and capital, which means lower growth and higher inflation into the future

With a caveat that we do not know the timing of the above changes, one has to keep in mind that the longer the status quo pre-1&2 remains in place, the worse 1&2 will be.

So there it is, a set up for gradual, painfully stagnant and prolonged unwinding of the extraordinarily accommodative monetary policies of the recent past...

14/6/2014: BlackRock Institute Survey: N. America & W. Europe, June 2014

In the previous post (http://trueeconomics.blogspot.ie/2014/06/1462014-blackrock-institute-survey-emea.html) I covered EMEA results from the BlackRock Investment Institute latest Economic Cycle Survey. Here, a quick snapshot of results for North America and Western Europe

Per BI:

"This month’s North America and Western Europe Economic Cycle Survey presented a positive outlook on global growth, with a net of 67% of 86 economists expecting the world economy will get stronger over the next year, compared to net 84% figure in last month’s report. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy.

Note: Note: Red dot denotes Austria, Canada, Germany, Norway and Switzerland.

At the 12 month horizon, the positive theme continued with the consensus expecting all economies spanned by the survey to strengthen with exception of Switzerland which is expected to stay the same.

Eurozone is described to be in an expansionary phase of the cycle and expected to remain so over the next 2 quarters. Within the bloc, most respondents described Greece and Italy to be in a recessionary state, with the even split between contraction or recession for Portugal, Belgium and Ireland.

Over the next 6 months, the consensus shifts toward expansion for Greece and Italy.

Over the Atlantic, the consensus view is firmly that North America as a whole is in mid-cycle expansion and is to remain so over the next 6 months."


Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

14/2/2014: BlackRock Institute Survey: N. America & W. Europe, February

BlackRock Investment Institute released its latest Economic Cycle Survey for EMEA region was covered here http://trueeconomics.blogspot.ie/2014/02/822014-blackrock-institute-survey-emea.html

Now, on to survey results for North America and Western Europe region. Emphasis is, as always, mine.

"This month’s North America and Western Europe Economic Cycle Survey presented a positive outlook on global growth, with a net of 65% of 110 economists expecting the world economy will get stronger over the next year, (18% lower than within January report).

The consensus of economists project mid-cycle expansion over the next 6 months for the global economy."

First, 12 months ahead outlook: "At the 12 month horizon, the positive theme continued with the consensus expecting all economies spanned by the survey to strengthen except Norway and Denmark, which are expected to remain the same."

Note that Ireland has moved closer to Eurozone average, away from 1st position in the chart it occupied in 2013.

Now, for 6 months outlook: "Eurozone is described to be in an expansionary phase of the cycle and expected to remain so over the next 2 quarters. Within the bloc, most respondents expect only Greece to remain in a recessionary phase at the 6 month horizon. Over the Atlantic, the consensus view is firmly that North America as a whole is in mid-cycle expansion and is to remain so over the next 6 months."

Note: Red dot denotes Austria, Norway and Switzerland.

Notable changes on previous: Greece position is much improved compared to 2013 when it occupied the North-Eastern most corner. Denmark is now in a weaker outlook position than Greece with higher expectations of a recessionary phase 6 months out. Ireland is bang-on on 10 percent assessing current state of economy as recessionary and same percentage of analysts expecting economy to be in a recession over the next 6 months. Coverage for Ireland is pretty solid in terms of number of analysts surveyed, so the above, in my opinion, shows that analysts consensus expects economy to strengthen over the next 6-12 months with strong support for a modest uplift.


Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

17/1/2014: BlackRock Institute Survey: N. America & W. Europe, January

BlackRock Investment Institute released its latest Economic Cycle Survey for EMEA region was covered here: http://trueeconomics.blogspot.ie/2014/01/1712014-blackrock-institute-survey-emea.html.

Now, on to survey results for North America and Western Europe region. emphasis is always, mine.

"This month’s North America and Western Europe Economic Cycle Survey presented a positive outlook on global growth, with a net of 83% of 109 economists expecting the world economy will get stronger over the next year, marginally higher than 81% reported in December. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy."

"At the 12 month horizon, the positive theme continued with the consensus expecting all economies spanned by the survey to strengthen except Portugal, which is expected to remain the same."

Of note:

• Ireland is now moved into the middle of 'growth distribution' from previous position firmly ahead of the entire region. Italy and Spain are now posting stronger expectations than Ireland.
• Eurozone expansion expectations are still lagging those of the UK and the US.
• Germany continues to lead the Eurozone expectations.

Out to 6 months horizon: "Eurozone is described to be in an expansionary phase of the cycle and expected to remain so over the next 2 quarters. Within the bloc, most respondents expect only Greece to remain in a recessionary phase at the 6 month horizon."

"Over the Atlantic, the consensus view is firmly that North America as a whole is in mid-cycle expansion and is to remain so over the next 6 months."

Red dot denotes Austria, Germany, Norway and Switzerland



Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

15/1/2014: Simple, but entertaining... a democratic elites 'score card'

Recently, I cam across the following highly simplified, but rather amusing graphic highlighting some differences between the US and Italy

It is, as I noted, a highly stylised and simplified sort of information. Nonetheless, it does make a valid point: why are European democracies top-heavier than other democracies?

And then I checked Ireland:

• Population 4.589 million (2012)
• Senators: 60 (76,483 persons per senator)
• Dail Eireann: 166 TDs (27,645 persons per TD)
• Ministers: 14 Ministers and 15 Ministers of State (158,241 persons per Minister)

Just for your bemusement, not for some scientific or even economic argument sake...

Note: Auto Blu references state cars and Carburante references cost of petrol per litre.

12/12/2013: BlackRock Institute Survey: N. America & W. Europe, December 2013

BlackRock Investment Institute released its latest Economic Cycle Survey for EMEA region was covered here: http://trueeconomics.blogspot.ie/2013/12/12122013-blackrock-institute-survey.html.

Now, on to survey results for North America and Western Europe region:

"This month’s North America and Western Europe Economic Cycle Survey presented a positive outlook on global growth, with a net of 71% of 115 economists expecting the world economy will get stronger over the next year, (6% higher than within the October report)."

Forward outlook:

• "The consensus of economists project a shift from early cycle to mid-cycle expansionary over the next 6 months."
• "At the 12 month horizon, the positive theme continued with the consensus expecting all economies spanned by the survey to strengthen except Norway, where we currently have a low participation rate."

Euro area: "The consensus outlook for the Eurozone continued to improve, where the 6 month forward outlook shifted from 87% to 90% expecting the currency-bloc to move to an expansionary phase. Within the bloc, most respondents expect only Greece to remain in a recessionary phase at the 6 month horizon."

North America: "Over the Atlantic, the consensus view is firmly that North America as a whole is in mid-cycle expansion and is to remain so over the next 6 months."

Note Ireland's position: vis-à-vis euro area (weaker) in the first chart and overall (strong) in the second chart.

 Note: Red dot denotes Austria, Canada, Germany, Norway and Switzerland.

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

11/10/2013: BlackRock Institute survey: N. America & W. Europe: October 2013

BlackRock Investment Institute Economic Cycle survey for North America and Western Europe is out and here are core results (emphasis is mine):

"This month’s North America and Western Europe Economic Cycle Survey presented a positive outlook on global growth, with a net of 65% of 113 economists expecting the global economy will get stronger over the next year. (6% lower than within the September report).

At the 12 month horizon, the positive theme continued with the consensus expecting all economies spanned by the survey to strengthen or remain the same except Sweden. 

The consensus outlook for the Eurozone was also strong, with 87% of economists expecting the currency-bloc to move to an expansionary phase over next six months. The picture within the bloc was not uniform however, with most respondents expecting only Greece to remain in a recessionary phase and an even mix of economists expecting Portugal and Belgium to be in an expansionary or recessionary phase at the 6 month horizon (and similarly so for Sweden, outside of the currency-bloc). 

With regards to North America, the consensus view was firmly that the USA and Canada are in mid-cycle expansion and are expected to remain so through H2 2013."

Note that this correlates well with my own outlook: http://trueeconomics.blogspot.ie/2013/10/9102014-businessinsider-most-important.html

Also note: the above views do not reflect BlackRock own views or advice. 

Two charts as usual:

Note that in the chart above, Ireland now firmly converged with the Euro area. This is a very strong move compared to September survey: http://trueeconomics.blogspot.ie/2013/09/1292013-blackrock-institute-survey-n.html And the above is confirmed by the overall comparative expectations forward:

So on the net - good result for Ireland and positive outlook for Euro area as a whole.

12/9/2013: BlackRock Institute survey: N. America & W. Europe: September 2013

BlackRock Investment Institute released its latest Economic Cycle Survey for North America and Western Europe region for September 2013.

Per summary: "This month’s North America and Western Europe Economic Cycle Survey presented a positive outlook on global growth, with a net of 71% of 119 economists expecting the global economy will get stronger over the next year. (1% higher than within the August report). 

At the 12 month horizon, the positive theme continued with the consensus expecting all economies spanned by the survey to strengthen or remain the same. 

The consensus outlook for the Eurozone continued to improve, where the 6 month forward outlook shifted from 75% to 86% expecting the currency-bloc to move to an expansionary phase. The picture within the bloc was not uniform however, with most respondents expecting Portugal, Greece, Belgium and the Netherlands to remain in a recessionary phase over the next 2 quarters. 

With regards to the US, the consensus view firmly that North America as a whole is in mid-cycle expansion and remaining so through H2 2013."

September improvement for the global outlook was much shallower than a 10 point jump in August. Ditto for Eurozone outlook: this rose from 57% in July to 75% in August to 87% in September. Italy outlook seemed to have improved quite markedly, however.

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

Two charts as usual:

Ireland continues to lead expectations, just as it did in previous 3 months.

In global expectations there were some notable movements in analysts' replies. 6% of analysts expected global economy to get a lot stronger over the next 12 months back in August, and this declined to 2% in the current survey. 69% expected it to get a little stronger in August and this proportion rose to 76% in September. 5% expected the global economy to get a little weaker in the next 12 months back in August, which in September rose to 6%. 

In Ireland's case, in August zero percent of analysts expected the economy to get a lot stronger over the next 12 months and this remained unchanged in September survey. All analysts (100%) expected the Irish economy to get a little stronger over the next 12 months in September survey - same as in August. 57% of analysts expected the economy to be in an early-cycle recovery over the next 6 months back in August, and this fell to 50% for September survey. There was significant rise (from 0% to 17% between August and September surveys) in the proportion of analysts expecting Irish economy to be in mid-cycle expansion over the next 6 months period. The number of analysts expecting the economy to be in a late-recession over the next 6 months dropped from 43% in August to 33% in September.

6/9/2013: BlackRock Institute survey: North America & Western Europe: August 2013

BlackRock Investment Institute released its latest Economic Cycle Survey for North America and Western Europe region.

Per summary: "This month’s North America and Western Europe Economic Cycle Survey presented an improvement in the outlook for global growth over the next 12 months – the net proportion of respondents with a positive outlook increased to 70% from 60% last month. 

The consensus outlook for the Eurozone was particularly positive, where the 6 month forward outlook shifted from 57% to 75% expecting the currency-bloc to move to an expansionary phase. 

The picture within the bloc was not uniform however, with most respondents expecting Portugal, Greece, Belgium and the Netherlands to remain in a recessionary phase, while the consensus has shifted to expect expansion for France, Spain, Finland and Ireland over the next 2 quarters. An even mix of economists expect Italy to be expansionary or recessionary at the 6 month horizon (and similarly so for Norway, outside of the currency-block). 

With regards to the US, the proportion of respondents expecting recession over the next 6 months remain low, with the consensus view firmly that North America as a whole is in mid-cycle expansion and remaining so through H2 2013."

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

Here are two summary charts:

16/6/2013: Euromoney Country Risk Scores Update

Some updates from Euromoney Country Risk (ECR) reports. First a summary of latest credit risk assessment scores moves:

And on foot of Russia's score move, a related story on Russian government delaying issuance of much expected sovereign bond. Via Euroweek:


"Russia is likely to wait until autumn before bringing its mandated sovereign bond, said analysts. Forcing through a $7bn bond in one deal might also be unwise, but demand is deep and the sovereign could spread its funding plan out across separate transactions, said bankers... Investors have already priced in a large sovereign issue and Russia would not struggle to drum up demand, he added. But the problem is price."Everything is 100bp wider than a month ago and so the sovereign will hope things calm down and allow them to issue closer to the historic tights they were looking at just a few weeks ago," said another syndicate banker."

28/4/2013: That German Miracle...

Germany... the miracle economy of Europe:

Let's do some growth facts. recall that G7 includes such powerhouses of negative growth as Japan and Italy, and the flagship of anemia France.

1) Germany vs G7 in real GDP growth:

From data illustrated above:

• In the G7 group, Germany ranked 6th in growth terms over the 1980s, rising to 5th in the 1990s and 2000s, and, based on the IMF forecasts, can be expected to rank 4th in the period 2010-2018. In simple terms - Germany ranked below average in every decade since 1980 through 2009 and exact average in 2010-2018 period.
• On a cumulated basis, starting from 100=1980, by the end of this year, judging by latests IMF forecast for 2013, Germany would end up with second slowest growth in G7, second only to Italy. 
• On a cumulated basis, starting from 100=1990, by the end of this year, judging by latests IMF forecast for 2013, Germany would end up with fourth fastest growth in G7. Ditto for the basis starting from 100=2000.

2) Germany vs G7 in annual growth rates in GDP based on Purchasing-power-parity adjustment (PPP) per capita to account for exchange rates and prices differentials:

From data illustrated above:

• In the G7 group, Germany ranked 5th - or below average - in PPP-adjusted per capita growth terms over the 1980s and the 1990s, rising to 4th - group average - in the 2000s, and, based on the IMF forecasts, can be expected to rank 3rd - slightly above average - in the period 2010-2018. In simple terms - Germany ranked below or at the average in every decade since 1980 through 2009 and one place ahead of the average in 2010-2018 period.
• Note: Germany is the only G7 country with shrinking overall population, that peaked in 2003 and has been declining since, thus helping its GDP (PPP) per capita performance.

Here's the chart summarising Germany's rankings in G7 in terms of two growth criteria discussed:

Germany might have been performing well in 2006 and 2011 (when it ranked 1st in real GDP growth terms) and really well in 2007-2008 and 2010 when it ranked 2nd, but other than that, it has been a lousy example for any sort of a miracle.

18/12/2012: 2013 Outlook: 1.0

Looking into 2013, three international media outlets recently asked me for my comments on the global economic outlook for the next year. Here is the latest iteration of my thoughts on the topic:

Euro Crisis:

In 2013, euro area crisis focus will remain on the peripheral countries, with Spain and Portugal taking the front seat from Greece in terms of potential risks in the first half of the year. In particular, Spanish and Portuguese budgetary dynamics, rising unemployment and continued economic recession are likely to act as destabilizing factors in relation to both the ECB OMT programme and the ESM funds. 

Italian political and budgetary dynamics are likely to show serious strains in the early part of 2013, with growth deterioration pushing Italian risks up in the second half of the year.

By the second half of the year, Greece also is likely to return to the top of the risk charts in Europe, posting continued deterioration in economic conditions, catastrophic upward creep in unemployment and new evidence of non-sustainable medium-term fiscal dynamics. 

Aside from the three weakest countries, Ireland will likely remain at the bottom of the peripheral risks ranks with stagnant economic activity and relatively stable unemployment. Latest credible headline forecasts on Ireland's performance for 2013 are here, and these (IMF's ones) are optimistic, in my view. Ireland's risk is likely to rise toward the end of 2013 as reformed personal insolvencies regime starts adversely impacting banking and household balancesheets on mortgages writedowns side. Budgetary performance in Ireland will also come under significant pressure as targets set out in Budget 2013 are likely to show signs of stress in the second half of 2013. Nonetheless, Irish situation will remain at the back burner of European attention as Italy and Spain (which together will have to raise some €500 billion in bonds in 2013) are likely to be the main drivers of risks.

In all peripheral countries, continued slowdown in the rate of unemployment growth will be consistent with massive exits from the workforce and rapid deterioration in employment. This will put more strain on the fiscal dynamics and growth.

On the core EA17 side, German political cycle is likely to introduce more uncertainty. Elevated levels of protectionist rhetoric during German elections campaigns of 2013 are likely to adversely impact euro area's capacity to continue kicking the proverbial can of 'peripheral solutions' down the road, potentially exposing internal divisions within the euro area and amplifying crisis impact on euro area economies and markets. Strong euro is likely to weigh on German exports and, although, I do not expect a full-blow recession in Germany in 2013, growth is likely to be subdued and labour markets pressures will start appearing.

Two countries with potential for generating unexpected newsflows are Belgium and the Netherlands. Belgian and Dutch economies are currently struggling with excessive debt levels - a struggle that is neither new, nor abating. In particular, Belgium can experience a twin shock of continued and deepening economic contraction and a political crisis, pushing the country into another period of political uncertainty. The Dutch economy is clearly open to the threats of prolonged economic recession, political instability and household debt crisis amplification. The Netherlands are currently on negative watch for the country Aaa ratings and this can easily translate into a ratings downgrade should negative growth persist well into 2013. This is consistent with projections of 20-25% decline in property prices in an economy that is a debt bubble that has been deflating relatively softly.

The US:

The US Fiscal Cliff is likely to remain a threat into Q1 2013, with only patchwork solutions emerging, supported by the Fed's QE4. I do not expect to see a structural bipartisan resolution of the underlying deficits and debt crises in 2013, which means that the Fed will retain accommodative monetary stance to support sub-trend yields on Government debt. The downside risk to the above 'muddle-through' scenario of Washington stalemate is the effect of the general upward tax creep during the first year of the second Presidential term. Expiration of tax breaks and tax increases at the federal, state and local levels will weigh on the economy, holding back recovery. Capex is likely to see a false start in H1 2013, with fiscal cliff and debt stalemate pushing domestic investment back down in H2 2013. This means that 2013 growth is likely to peak around Q2-Q3 2013 and slow once again in subsequent quarters. Still, owing to aggressive monetary stance and internal households' deleveraging dynamics, the US economy is likely to significantly outperform other G7 economies in 2013.

Global economy:

Globally, the BRIC economies are expected to outperform advanced economies in terms of economic growth and structural macroeconomic stability risk parameters both in 2012 and in 2013. In this sense, the BRICs overall position in the global economy in 2013 is likely to remain as the core centre for generating growth. However, within the BRIC group, at least three of the four economies, namely Brazil, China and India represent potential sources for 'grey swan' high-level macro risk events.

China represents the biggest 'grey swan' in the global growth risks context. Chinese economy is yet to embark on significant banks' and households' balancesheets repairs and this risk is coincident with the political dislocation created by the change of leadership. New, more conservative and less economically-capable leadership is likely to continue the course of attempting to prop-up insolvent banking and property markets. Military-industrial spending and funding for insolvent local authorities are likely to see gradual increases. Upside to this policy stance is that domestic demand is likely to remain relatively strong. Downside is the reduction in the rate of growth in private investment and crowding out of private investment with public spending. 

The greatest downside risk for China, the region and the global economy remains the Chinese property bubble (now firmly contaminating Hong Kong and Singapore, as well as spilling into Australia and New Zealand) and the levels of indebtedness in the corporate sector, with a knock on effect to the assets quality on Chinese banks' balancesheets. Repairing Chinese banking sector will require major restructuring of industrial enterprises-connected banks and smaller banking institutions. The Government might have some appetite for aggressively engaging with this, but the resources expanded on repairing banking sector will be wasted in a liquidity trap. 

The second downside risk is a long-term unravelling of the Chinese competitive advantage. Increased domestic demand and re-orientation of growth drivers toward internal markets imply upward pressure on wages and downward pressure on productivity. At the same time, current recovery in Chinese trade flows with the rest of the world is mainly concentrated in the cost-sensitive sectors of basic manufacturing. To regain trade-based growth momentum, China requires continuous move up the value chain in exports, a movement that is constrained by domestic refocusing of its economy. While 2013 is unlikely to be a catalyst year for Chinese economic crisis materialization, the imbalances continue to build up and it is only a matter of time before China is propelled to become the source of global risk rivaling in this role the euro area.

Brazil, currently the darling of the Latin American growth story, is severely exposed to two risks, both of which can materialise in 2013, although once again, the probability of these is relatively low. 

The first risk relates to the heavy dependence of Brazilian investment story on oil revenues potential. Structural moderation in oil prices is likely to make much of Brazil's oil reserves unviable from commercial exploration perspective before production begins on its offshore fields. This risk can materailize in 2013 if oil prices were to settle into a long-term trend around USD80 or lower. 

The risk of oil price shock to Brazil is likely to coincide with revaluation of the Brazilian economy's fundamentals. In simple terms, Brazil, traditionally driven by extraction and agri-food sectors, has experienced robust levels of growth in recent years based on aggressive, debt-financed public investments. Such investments are capable of producing ROI only in the environment of continued growth and, by them selves, are not growth-generative beyond the initial investment spending push. Brazil can surprise world economy by posting sub-expectations levels of growth (below 3.5% against currently forecast 4.2%) and above-expectations rates of inflation (above 5.5% against currently forecast 4.9%). Brazil's economy is heavily reliant on imports of capital and foreign investment with investment exceeding national savings by a factor of 2.5% of GDP in 2012 and the gap expecting to accelerate to 2.8% in 2013, while current accounts are posting sustained deficits since 2008. Current account deficits for Brazil are expected to rise in 2013 from 2.6% of GDP in 2012 to 2.8% in 2013 and are forecast to reach 3.3-3.4% of GDP in 2014 and 2015. All of this strongly suggests that Brazil is currently experiencing build up of external and internal imbalances, consistent with the fact that Brazil's government has managed to post both structural and ordinary fiscal deficits in every year since 1996

In terms of growth, I expect Russia to outperform Brazil in 2013, although the current gap in growth rates is likely to close substantially. In 2011-2012, Brazil average real growth rate of GDP is likely to reach 2.1% against Russia's 3.9%. In 2013, my forecasts suggest Russian growth of 3.7-3.8% against Brazil's 3.5-3.6%, against global growth of 3.6% projected by the IMF for 2013.

This is an impressive performance in the case of Russia, given that the country currently enjoys GDP per capita (adjusted for purchasing power parity differences) of D17,698 (as measured in International dollars) against ID12,038 for Brazil, ID9,146 for China and ID3,851 for India. Russia will continue closing its income gap with the euro area in 2013-2017. In 2010, Russian GDP per capita (adjusting for price difference and exchange rates variation) stood at 47.9% of the euro area. This is expected to rise to 54.1% in 2013, reaching 60.7% by 2017, according to the IMF projections. Russia's relative position as the wealthiest economy of all BRICs is further reinforced by the fact that aggregate investment and savings in the country are set to remain ahead of those in Brazil in 2013, continuing the trend established since the beginning of the Great Recession, and this trend remains independent of the Government sector. 

Strength of Russian public finances (with the country posting the only positive general government balance in 2012 and 2013 of all BRICs, while having the lowest overall gross government debt to GDP ratio at just under 9.9% of GDP) is further reinforced by a 3.4% current account surplus - the largest of all BRIC economies. The combination of these factors means that Russian economy will have sufficient internal surpluses to fund significant reforms of its domestic sectors, envisioned in the reforms programmes unveiled by the Government in 2011-2012 and stretching into 2020. These reforms include: 

• enhancing Russia's institutional capital by enacting deep reforms of tax codes, public administration and corruption, judiciary reforms and law enforcement reforms
• dramatically increasing the rate of technical, labour and TFP productivity growth
• facilitating transition of agriculture, modern manufacturing, telecommunications and financial services to post-WTO accession platforms

In the shorter run, 2013 developments are likely to benefit from recent improvements in financial instrumentation, namely the push by the Russian authorities to expand clearance systems access for Russian government and corporate bonds.

The risks to the above forecasts are to the downside and focus primarily on changing trends in world gas prices, alongside the risk of continued stagnation in major trading partners (euro area) or continued economic growth slowdown in China feeding through to moderation in prices for basic energy and industrial commodities. However, these risks are less likely to impact ver significantly the Russian economy in 2013 and are more present on the longer-term horizon of 2014-2015.