Russian Recovery Appears Even Closer
Text and graphics by John Cavan
Economic data shows that the Russian economic downturn is drawing to a close. Although imports continue to fall, a sign that internal demand is weak, the money supply continues to increase, on both a monthly and six-month annualised basis. The PMI survey indicates both the manufacturing and services sectors are starting to increase, with both sectors reporting PMI levels greater than 50. Indeed, the manufacturing PMI is at the highest level that it has been since May 2008. Oil prices remain around $70 a barrel, and have not fallen below $60 since early July.
Globally the situation seems similarly upbeat. Most of the major world equity markets have surged and talk about the global financial system collapsing (always overblown in my mind) has been replaced by stories about record bonuses. PMI surveys in most over countries show a similar story to those in Russia and the talk is about the exact date when recovery can be judged to have begun. Does this mean that Russia can look forward to a period of export led growth – or even a repeat of the commodity surge that sustained the economic boom that ended last summer?
Unfortunately, my view is that any optimism needs to be tempered by some uncomfortable reality. The historical trend price of oil, always the key indicators when looking at the Russian economy, is nearer to $50 than the current level of $70. Given that the experience of $140 oil still lingers in the memory of policymakers, we can expect any upsurge in energy demand from the US and Western Europe to be muted by the effects of conservation measures, and investments in alternative energy sources. At the same time, the huge amount of money that flowed into commodities in the belief that it was a genuine asset class, will not return – at least in the short to medium term.
It should also be noted that the current level of monetary growth is not sufficient to ensure trend growth. Ideally, it needs to be closer to 15%, rather than the 9% it is currently. The Central Bank of Russia also hasn’t learnt the key lesson from this experience, which is that a semi-fixed currency and high interest rates are not a good idea when going through a monetary shock. Therefore if a further fall in fall in the oil price does cause another monetary downturn, then we could see a partial repeat of last winter’s experience.