Tuesday, December 16, 2014

PUTIN'S KLEPTOCRATIC REGIME COLLAPSES: here's what you need to know

Well, everyone's still piddling their pants about Russia (and remember, I said the rate hike would work for maybe an hour tops), so here's all the Russia news I can find for you:

Tim Duy - on Russia. Quote:
Meanwhile, the international fallout from the oil price drop continues. Russia is a classic emerging market crisis story. The decline in energy prices reveals a currency mismatch between assets and liabilities. The decline in oil dries up the dollars needed to support those liabilities, so the value of the ruble is bid down as market participants scramble for dollars. One suspects that capital flight from Russia only aggravates the problem; those oligarchs are seeing their fortunes whither. Currency plummets, aggravating the cycle. The sanctions were the beginning of this crisis, the oil price shock the culmination.

The Central Bank of Russia is forced into defending its currency via either depleting reserves or hiking interest rates. Both are losing games in a full blown crisis. The Central Bank of Russia has tried both, upping the ante by jacking up rates to 17% this afternoon, a hike of 650bp. That, however, is no guarantee of stability. Tight policy will crush the financial sector and the economy with it, triggering further net capital outflows that my guess will swamp the net inflows the rate hike was intended to create. Everything heads into free-fall until a new, lower equilibrium is established.

It is all appears really quite textbook. At this point, an IMF program would be on the horizon. But that's where the textbook changes. Hard to see the IMF just handing out a lifeline to an economy probably viewed by most as currently invading its neighbor (that's the point of the sanctions after all). And I am guessing that Russian Premier Vladimir Putin is not going to easily acquiesce to an IMF program in any event. At the moment, looks like Russia is toast.
Well, North Korea's economy also sucks, yet they haven't been toast for a long time. The question is, how pathetic does Pooty-poot want to look in order to stay in power?

FT Alphaville - the research after the rate hike. Here's Standard Bank's Timothy Ash:
The question is why the CBR did not hike rates more than 100bps last week, or indeed last month when it moved to free float the rouble. And why has the CBR been unprepared to deploy its more than ample FX reserve stock (over USD400bn). This was a move reflecting just how far the CBR had got behind the curve. In a situation where a central bank allows its currency to depreciate by 10 per cent in a day, the message is that they have lost control, and their very credibility is at stake.

The CBR’s lack of action had left the stability of the very financial system at stake. I am not sure whether Nabuillina can survive this. She has now had the worst of all worlds, allowing the rouble to crash, having lost close to USD100bn in FX reserves and having hiked policy rates by more than 1000bps now this year. I am asking myself who has been running monetary and exchange rate policy in Russia in recent weeks, was it the CBR or the Kremlin, as why the CBr did not initially come in with big size intervention (USD10bn) last month when they moved to free float is beyond me. It would likely have worked then.

Instead the CBR sat on its hands and did very little – and appeared like a rabbit in the headlights. As is we have this huge move now, which will impart a big price on the economy – deep recession is now likely. I thought the CBR did a decent job managing the currency weaker earlier in the year – until the free float last month. But since the free float, they get very low marks in crisis management. I have been really surprised how they let all this blow up in their faces.
Well, it's obvious that it's Pooty-poot calling the shots in Russia - after all, he's their glorious leader, right? Unfortunately, he was trained in espionage and propaganda, not economics. This is economic war, and he's outgunned.

Streetwise Perfesser - ruble collapse. Quote:
As I noted, the effect of the rate rise will be highly contractionary. The government had already been predicting a recession. That is now a certainty, and it is likely to be a severe one. Especially if oil continues doing the limbo.

The RCB action reminds me of a fox chewing off its snared leg. The best of some very bad options.

The situation is obviously volatile, with many things going on (including pronounced weakening in other emerging market currencies and stock markets as well as the oil situation). Moreover, it will no doubt engender a political response, which will feed back onto the markets. How it will affect the increasingly paranoid Putin is hard to know. A climbdown (if credible) in Ukraine would do wonders for the Ruble, but methinks Putin is more likely to double down than climb down.
Who knows? When will Putin realize he's been fighting the last war?

That's the key, I think. Like I was saying, Pooty's been acting like it's 1938 and his opponent is a war-weary France (Merkel) and an appeasing Chamberlain (Cameron, who wouldn't surprise me if it turned out he was a Russian collaborator with a few million in Tambov gang money in a Virgin Islands account). Pooty hasn't figured out that this is an economic war, and the USA has all the ammunition.

So what next? He invades Poland? Well, that's bad for Poland. But it's still 180 degrees from the path to survival. The US now knows how to fight economic war (having done a decent job against Iran), and against the American economic war's stealth fighters Russia can muster nothing but pointed sticks. He brought a knife to a gunfight.

His only trump right now is nuclear blackmail. And I don't think he's crazy enough.

The Guardian - more on the ruble collapse. More from Timothy Ash:
What options do Russian policymakers have now?

Only bad ones. The central bank can continue to defend the rouble, by spending its foreign exchange reserves to support the currency. Although Russia sits on some of the largest foreign exchange reserves in the world because of its oil and gas earnings, its cash pile is shrinking fast. In 2014, it spent $80bn supporting the rouble, around one-fifth of the value of its reserves.

The bank could raise rates again, but this would be painful for borrowers, worsening the country’s economic slowdown.

The other option is currency controls – stopping people from taking money out of the country. But this could turn a crisis into a full-blown panic.

How bad is the situation?

It’s bad - Timothy Ash at Standard Bank says Russian authorities now have “a full-blown rouble crisis on their hands”.

The dread scenario for Russian policymakers is a re-run of the 1998 financial crisis, a currency panic that plunged Russia into a deep and painful recession, sending shockwaves through financial markets around the world.

In August of that year, fears of a rouble devaluation led to the collapse of Russia’s stock, bond and currency markets. The central bank unveiled emergency measures, but were unable to beat the markets. The rouble lost three-quarters of its value in three weeks. The bank eventually hiked rates to 100% and Russia defaulted on its debts. The following year inflation spiked at 85% and people were demonstrating in the streets about high food prices.
That's a taste of what everyone's worries sound like right now.

BBC - wait, now it's 71 to the dollar. Yeah, don't bother with the hourly currency updates; it all becomes meaningless at this speed. It's enough to say "Ruble remains in freefall" for now. And here's how the story is playing in Russia:
Bulletins on the three main channels on 15 December led with a health scare for a famous poet and the aftermath of the siege in Sydney. Official channel Rossiya 1 ignored the rouble completely, while state-controlled Channel One and Gazprom-Media's NTV both dedicated around a minute to the story - in NTV's case close to the end of the hour-long bulletin.

Channel One used a somewhat misleading screen graphic that understated the currency's collapse. It also warned that shops displaying prices in any other currency than the rouble could face stiff fines.

The rouble had fallen by more than 10% on the day.

The last time state TV tried to hush up such a dramatic and nationally important event was when all three main channels completely blanked the protests that followed the disputed parliamentary election in 2011.
Again, there's Pooty fighting the last war. Does he think Russians can't access, say, blogs like mine? Cos they're showing up in my stats, Pooty.

WSJ - how cheap oil complicates investing. All the ways in which outlooks are changing right now. Oil dropping by $50 leaves a lot of people on the wrong foot, and Shaoul notes mostly everyone had already rebalanced for the next year during the October market drop.

Reuters - the deeper truth about EM capital outflows.The deeper truth being this:
In its annual estimate of illegal capital flows, Washington-based think-tank Global Financial Integrity (GFI) said it a record $991 billion was siphoned in 2012 from the world's developing economies, an increase of almost 5 percent from 2011.

Illicit capital incorporates such things as misinvoicing of trade whereby exports and imports are booked at different values to avoid taxes or to hide large transfers of money

The report said that between 2003 and 2012, $6.6 trillion was moved by crooked means out of emerging economies, finding its way to bank accounts in the developed world or far-flung tax havens.

Of that total, about $3 trillion or almost half was diverted from the BRICS group -- Brazil, Russia, India, China and South Africa. China, the world's second biggest economy, lead the way with an estimated $1.25 trillion leaving its borders illegally over the course of the decade.

Russia is the second biggest exporter of illicit money, India is fourth, Brazil seventh and South Africa is 12th, according to the report.
As I said, in a secular EM bull market, a big chunk of GDP gets siphoned off by the kleptocratic elite without damage (as China is addressing right now); in a secular EM bear market, that same corruption drag combines with capital outflows to screw everything up.
The BRICS group is trying to assert itself on the global stage as a counterweight to the traditional economic power blocks of North America, western Europe and Japan.
Ha ha good luck with that! Try again in 20 years when the next EM cycle begins.

And meanwhile,

BBC - Russia's gay community in fear as homophobic attacks increase. This is indicative of the human capital that Pooty has built within his own party:
But Vitaly Milonov is no political extremist - he represents the United Russia party of President Vladimir Putin.

"I want to protect my kids and my family from this dirt going from the homosexuals," the politician told the BBC.

"They can do whatever they want in their homes, in the special 'garbage' places called gay night clubs. They can kill themselves with their viruses as fast as possible. But they're not allowed to do it in the streets. Because it is not polite and it's uncomfortable for people."

Such is the mood of intolerance that even a giant model iPhone was removed from the streets of St Petersburg after Apple boss Tim Cook revealed he was gay. A few trailing cables are all that remain at the spot the statue once occupied, in the yard of an IT university.

Vitaly Milonov claims he got rid of his own iPhone 6 following Tim Cook's announcement, because it was "smelling with gay stuff", although he still has a Mac laptop on his desk.
Yup, the future for Russia depends on people like these figuring out how to combat capital outflows and promoting productivity improvements and diversification in the broader Russian economy.


  1. "smelling with gay stuff"

    I don't usually approve of the deliberately crass literal translation taken out of context (because you see it done too many times in LatAm-thingies) but in this case let's make an exception. Milanov can certainly go fuck himself. Happy days.

  2. He probably did say something like "гей пахнел". The verb's going to have to have at least two syllables anyway, nothing you can do about that in Russian.