Russian Economy General News: #1

Russia’s deputy finance minister has expressed concern about companies’ rising foreign-currency debt levels amid recent emerging market turmoil.

The issue of foreign-currency corporate debt is a sensitive one for Russia, given its companies needed a $200bn government bailout during the 2008-2009 financial crisis after the rouble and stock markets plummeted.

“The level of indebtedness in the corporate sector has become quite large – it is already bigger than the international reserves of the central bank,” Sergei Storchak told the Financial Times in an interview at the G20 in St Petersburg. The situation, he said, “required monitoring”.

Russian companies’ foreign debt reached $628.4bn at the end of the first half, an amount equal to 30 per cent of Russia’s economic output, according to Interfax’s Centre for Economic Analysis. That is not much lower than the 35.4 per cent level at the peak of the global financial crisis in 2009.

However, Mr Storchak said that the situation for Russian corporate borrowers was significantly better now than in 2009, given that deposits of companies and households dwarfed the debt levels of both. He added that Russian companies also appeared to be in a good position to renegotiate the terms of their debt with creditors.

“We are not saying that the indebtedness has reached a critical level yet,” he said. “We need to follow and monitor the situation. But it is too early to sound the bell that the situation is totally dangerous.”

Mr Storchak said Russian markets were unlikely to be significantly affected by any reduction in monthly asset purchases by the US Federal Reserve that had rattled emerging market peers such as India and Indonesia, and had not experienced any worrying volatility recently.

“The financial market of Russia is too small to be largely affected . . . That is my evaluation. It of course is integrated in the global financial system but only to a certain extent. It’s like a tsunami. The further you are from the centre the smaller the waves are.”

While currencies such as India’s rupee and Indonesia’s rupiah have tumbled more than 10 per cent since the US Fed first indicated that it might start tapering its monthly asset purchases in late May, the rouble has dropped just 6.5 per cent because Russia runs a large trade surplus.

But Mr Storchak admitted that market volatility had forced Russia to hold back a long-awaited $7bn Eurobond placement. “We only want to go to the markets when we know we’ll get a result that is not worse than [our current borrowing conditions],” he said.

In a sign that Russia is not immune to market woes, the economy ministry recently more than doubled its forecast for net capital outflows this year from $30bn to $75bn. However, Mr Storchak said he was not concerned about the situation, saying that capital outflows did not necessarily signify capital flight.

“Maybe it is movements from one financial instrument to another, maybe it’s moving money from one bank account to another,” he said. “I don’t see any particular connection here with the political situation.”

He added: “That’s what it seems to me. Although maybe in the future the problem will appear deeper.”Russia’s deputy finance minister has expressed concern about companies’ rising foreign-currency debt levels amid recent emerging market turmoil.

Costs to the federal budget of the Russian Federation may be reduced by 5 percent, except compulsory social security costs. The proposal was made by Finance Minister Anton Siluanov in an interview to "Russia 24".

"Spending a whole will not be trimmed, because, according to the budget rule, the expenses approved by the three-year budget, and this is particularly true for 2014-2015, not decrease. Therefore, taking into account the new goals and objectives, we propose a budget maneuver - primarily due to uniform reduction of all expenses, except for regulatory-related costs, those costs which are mandatory - such as pensions, scholarships, etc., "- he said.

"We propose to cut spending by 5 percent for almost all, without exception, the ministries and departments. Such a unified approach will build a pool of funds, which will then be directed to the priorities set by the government in the near future" - said Siluanov.

- What, in your opinion, will be able to achieve a reduction in military spending or the Ministry of Defense will defend?

- That the king is going - to fund guns or butter to buy. All there. And at every stage of historical development is dominated by either one view or the other. Who dominates the view that if you do not feed your army will feed someone else. It is an objective reality. At the same time there are times when excessive military spending led to the collapse of the economic development model. It is necessary to understand what is happening now, because sometimes military spending, on the contrary, give a stimulus to economic growth. Everything is priced in dynamics.

collegeboy16 wrote:Can someone here give me an idea about how profitable is arms exports, ie is it like selling 10$ nikes for 200$ kind of profit margins?

TR1 wrote:Very profitable.

TR1 wrote:
However the question is how much do you spend on having a domestic military complex that can even produce top tier export gear. At that point profitability goes out the window. If you want an independent weapons complex (and Russia is really pretty much the only one outside of the US who has this ability) for policy reasons however that doesn't matter, and the export income is the icing on top of the cake.
Government pays big money on factory modernizations, pays for development, all that good stuff.

MOSCOW, September 18 (RIA Novosti) – Russia’s gross domestic product (GDP) is growing too slowly to pull the country out of its worst economic situation since the 2008 global financial crisis, the country’s economic development minister said Wednesday, and the stagnation is unlikely to improve in 2014.

Alexei Ulyukayev said during a “government hour” meeting in the State Duma – the lower chamber of the national parliament – that the revised estimate of 1.8 percent year-on-year GDP growth for this year, which was announced last month, is “unsatisfactory.”

“It seems to me that we haven’t had such an unfavorable situation in the last five years, since the crisis,” he said. “This year, for the first time, we have a level of economic development that’s below the world average… Unfortunately, we don’t see opportunities in 2014 to get up to the world average.”

Ulyukayev noted that the economic slowdown began at the end of last year, and attributed the stagnation to “strong demand constraints” and lack of investment. According to the Economic Development Ministry, Russia will suffer $70 billion in capital flight this year, indicating a critical lack of demand for major investment projects, he said.

As a result, Russia will continue to trail the other BRICS emerging economies – Brazil, India, China and South Africa – in terms of growth.

“We’re going to have nearly the same rate as the United States, which is coming out of recession,” Ulyukayev said.

Russia downgraded its 2013 growth forecast for the second time this year in August, when it slashed its estimate from 2.4 percent to 1.8 percent. April’s prediction of 2.4 percent was itself a revision of an earlier estimate of 3.6 percent growth.

MOSCOW, September 18. / ITAR-TASS /. The total public debt in 2013 will amount to 12 trillion rubles, of which domestic debt - 6.052 trillion rubles. This is stated in the materials of the Ministry of Finance of the Russian Federation for the meeting of the Russian tripartite commission for the regulation of social and labor relations. "In 2014, the amount of debt you plan to 13.1 trillion rubles, including internal - 7, 245 trillion rubles, in 2015 - 14 trillion rubles / inside - 8, 466 trillion rubles /, in 2016 - 14.3 trillion rubles / inside - 9335000000000 rubles / - explained in the document.  

Budget receipts

According to the materials, budget revenues in 2013 will amount to 12.898 trillion rubles, expenses - 13.387 trillion rubles.

In 2014, budget revenues are expected to reach 13.604 trillion rubles, expenses - 13.977 trillion rubles. In 2015, revenues are planned at 14.535 trillion rubles, expenses - 15.361 trillion rubles. At 2016 revenues are planned at 15.905 trillion rubles, expenses - 16.391 trillion rubles, according to the documents.  

Russia's budget deficit up to 2013 could reach 0.7% of GDP , or 489.2 billion rubles. This is stated in the materials of the Ministry of Finance for the meeting of the Russian tripartite commission for the regulation of social and labor relations.

The paper notes that in 2014, the federal budget deficit could reach 0.5% of GDP, or 373.1 billion rubles. In 2015, this figure is planned in the amount of 1% of GDP / 826,300,000,000 rubles /. At the same time, in 2016 the budget deficit could reach 485.7 billion rubles, or 0.6% of GDP.

Finance Ministry is waiting for reducing non-oil revenues

The Ministry of Finance expects a decline in non-oil revenues of the budget of the Russian Federation in 2013 to 494.5 billion rubles to 6.446 trillion rubles. In 2014, the decline is expected to reach 724.8 billion rubles, compared with the approved budget for 2013-2015 to 7.059 trillion rubles in 2015, non-oil revenues will decrease by 952.7 billion rubles to 7.729 trillion rubles. In 2016, the volume of non-oil revenues expected to reach 9.041 trillion rubles.

In this case, oil and gas revenues in 2013 and 2014 will grow at a slower rate, what will the volume of non-oil revenues decline. At the end of 2013 the Ministry of Finance expects that this figure will reach 6.452 trillion rubles / increase of 526.7 billion rubles in comparison with the approved plan / in 2014 - 6.545 trillion rubles / increase of 265.5 billion rubles /. In 2015, expects to reduce this figure by 127.5 billion rubles to 6.806 trillion rubles. In 2016 the figure will be at the level of 6.865 trillion rubles.

The prices of Urals oil is projected Ministry of Finance in 2014 amounted to 101 dollars per barrel in 2015 - $ 100, in 2016 - $ 100

The Office also predicts that the increase in the basic rate of mineral extraction tax on oil in 2014 may provide budget 89.1 billion rubles, in 2015 - 197.1 billion rubles, in 2016 - 331, 8 billion.

Additional federal revenues from higher severance tax (a tax on mining) in 2014 from 216 the year will amount to 619.3 billion rubles, said the Ministry of Finance. Changes in the revenue base associated with plans to increase the severance tax rate in 2014 from 470 rubles per ton to 491 rubles per ton, with a consequent increase in 2015 - to 515 rubles per ton, and in 2016 - to 545 rubles per ton.

Excise revenues

Budget revenues of the Russian Federation on the indexation of excise taxes on tobacco products in 2016 will amount to 88.5 billion rubles, Finance Ministry predicts. Also, according to the forecast office, gains from changes in excise taxes on alcoholic beverages by volume of ethyl alcohol of more than 9% in 2016 will amount to 5.7 billion rubles.

Proceeds from privatization

The Finance Ministry expects to gain from privatization in the years 2014-2016 455.2 billion rubles.

In 2014, privatization, according to the Ministry of Finance of the project, which was presented today in the Government, will receive 196.8 billion rubles, / in the budget for the 2013-2015 income from privatization in 2014 was estimated at 330 billion rubles / in 2015 - 158.5 billion rubles compared to the previously approved amount of 595 billion rubles, in 2016 - 99.9 billion rubles.

MOSCOW, September 20 (RIA Novosti) – The Russian government on Thursday approved the draft budget for 2014-2016, Russian Prime Minister Dmitry Medvedev said.

The budget is based on the Urals oil price of $93 per barrel in 2014 and $95 per barrel in 2015 and 2016.

According to previously announced figures, the 2014 budget deficit will stand at 391.4 billion rubles ($12.4 billion, 0.5 percent of GDP), with incomes of 13.569 trillion rubles ($428.6 billion) and expenditures of 13.96 trillion rubles ($440.1 billion).

In 2015, the deficit will more than double and stand at 817 billion rubles ($25.8 billion, 1 percent of GDP), with incomes of 14.545 trillion rubles ($459.3 billion) and expenditures of 15.362 trillion rubles ($485.2 billion).

The deficit will drop to 485.8 billion rubles ($15.3 billion, 0.6 percent of GDP) in 2016, with incomes at 15.906 trillion rubles ($502.4 billion) and expenditures at 16.392 trillion rubles ($517.7 billion).

The premier said the budget was quite austere, because it is based on the real economic situation in Russia and global markets.

“We will have to cut our expenditures, but not to the detriment of our main plans. Well-thought-out use of funds, a kind of budget rationalism should become obligatory for the whole budget system,” he said.

In what had to be one of the most eagerly-awaited announcements of the year, US Fed Chairman Ben Bernanke announced his decision not to taper his bond purchases for now. In my thoughts on this topic written a couple of months ago, QE or no QE, I had said that Bernanke cannot taper “meaningfully” – not only at the September meeting, but ever. No drug addict can give up drugs without first experiencing withdrawal symptoms – which can be painful. It is easier to continue imbibing drugs even if they ultimately kill you. Bernanke won’t do a meaningful taper unless he does a U-turn in terms of his economic beliefs and accepts a collapse of the bond market and a deep recession as a solution to the US’s problems of excessive debt and excessive consumption – which seems unlikely.

The other situation in which he may taper is if there is a full-blown US dollar currency crisis. I am not saying that the chances of a mild taper to the tune of $5-10billion a month is very low. In fact, I thought that Bernanke would taper a bit and the revolt in the bond market, with its cascading effects on the housing market as well as government finances, would have made him reverse course. With the Fed being almost the only buyer in the treasury market, any taper would have caused the rates to rise substantially. Even talk of a taper has caused rates to almost double from slightly over 1.5 percent a few months back to nearly 3 percent today. (It was 2.69 percent for 10-year bonds yesterday after the Fed announcement). The media would have portrayed the taper, if it had happened, as a tightening exercise. That’s how low the expectations of the media have been set by central banks – not only by the US Fed, but also by its counterparts in other parts of the world. Most central banks, including our own RBI, are running massively accommodative policies whose deleterious effects have only just started playing out. And yet, all that we can hear in terms of expectations from the government, industry bodies and the media channels are requests for further easing.

So what should Bernanke have done? Bernanke should never have lowered the rates to zero in the first place and indulged in this exercise of bond buying. It was the monetary easing by the previous Fed Chairman, Alan Greenspan, that led to the housing bubble with all the accompanying imbalances in the US economy. This round of easing has been greater, by a wide margin at that, and so the consequences are going to be that much worse than in 2008 when the current bubble in treasuries/ bonds, fiat currencies and “confidence in governments” bursts. Given where we are at, the best course for Bernanke would be to wind down the bond buying programme, do a Paul Volcker on rates, and raise them substantially to generate savings. At the same time, he should force the government to cut back on its expenses. Given the near $20 trillion acknowledged national debt, even a 5 percent rate would put the interest outgo at $1 trillion, forcing the US government to massively scale down its unfettered spending programme. Ofcourse, there is zero chance that Bernanke will do that and so we will continue to witness the train wreck in motion, as has been the case for the last several years. The action in the treasury market is likely to be interesting in the months ahead. While most participants would expect the yields to fall over the short to medium term, I think the opposite is likely to happen. The initial reaction that we have witnessed in bonds all over the world is merely a “head fake”. After all, continued quantitative easing (QE) should logically imply a lower purchasing power for each existing unit of the currency and it’s quite natural for the markets to expect a higher return for holding onto something that is likely to lose its value over a period of time. So this is what is likely to happen: yields, after softening for the next few days, are likely to begin to rise and Bernanke or his successor would be forced to increase the bond buying programme to $100 billion a month from the current $85 billion to buy more treasuries to decrease the yields. As I wrote in the previous article, $100 billion a month will happen before $50 billion a month – and with this continued stimulus distorting the markets to a greater degree, a sustained improvement in the economy or the labour markets is never going to happen. As Ludwig von Mises of the Austrian School would love to compare, any economy on a central bank-induced cheap credit binge is like a drug addict… with time, one needs greater and greater dosages to even maintain the status quo. Any cleansing process of this addiction has to start with the rather painful, but much needed, withdrawal symptoms. In the case of the US economy, these symptoms would include substantially higher bond yields, resulting in a very deep recession, a massive reduction of government expenditure, a cleansing of malinvestment in the bubble sectors and reallocation of freed up resources on a market-driven basis. The path that Bernanke has put the US on is very different. He has taken the route of greater doses of stimuli that would allow him to temporarily postpone the withdrawal symptoms, but would ultimately cause the death of the patient. That has been the case for the last several years, but this time it indeed is going to be different. The patient under question is not only the US economy, but the US dollar as well. Shanmuganathan “Shan” Nagasundaram is the founding director of Benchmark Advisory Services – an economic consulting firm. He is also the India Economist for the World Money Analyst, a monthly publication of International Man. He can be contacted at shanmuganathan.sundaram@gmail.com