Tuesday, October 21, 2014

21/10/2014: Two Articles on Ukrainian Conflict

Two items relating to Ukrainian crisis worth noting today.

First an English version of the earlier De Spiegel article on German federal authorities concluding that it was likely that MH17 was shot down by the Eastern Ukrainian separatists using the BUK launcher they obtained from the seized Ukrainian military base: https://uk.news.yahoo.com/malaysia-airlines-mh17-rebels-shot-down-plane-seized-111727238.html#vzXgemW Note: this is still speculative, in so far as we do not have conclusive evidence as to where the BUK came from, nor in fact do we have full evidence on the rest of the event.

Second, Human Rights Watch issued a report: http://www.hrw.org/news/2014/10/20/ukraine-widespread-use-cluster-munitions that provides evidence that Ukrainian Government used cluster munitions against civilians in East Ukraine. The report also references on several occasions the potential use of such munitions by the separatists, although in all cases, HRW does qualify such references as not being confirmed. What is confirmed, however, is that Kiev forces used cluster munitions.

21/10/2014: Of Statistics: Ireland and ESA2010

Eurostat released a handy note showing revisions to euro area debt and deficit figures that arose as the result of conversion to ESA2010 methodology (yes, yes, that infamous inclusion of illicit trade and re-classification of R&D spending as investment, and much more).

You can read the full note here: http://epp.eurostat.ec.europa.eu/portal/page/portal/government_finance_statistics/documents/Revisions-gov-deficit-debt-2010-2013.pdf

And the effects are:

Government deficit revisions:
Click on chart to enlarge

One clear outlier in the entire EU28 is... Ireland. We had the largest, by far, downward revision in our deficit/GDP ratio of some 1.5 percentage points, pushing our deficit down from 7.2% of GDP (ESA95) to 5.7% of GDP (ESA2010) overnight. No austerity, just accounting.

We were similarly 'fortunate' on the debt calculations side:
Click on chart to enlarge

While revised actual debt levels rose, under new rules, the revised debt/GDP ratio fell due to GDP push up under the new rules. Lucky charms...

Per note, relating to deficit revisions: "Ireland (-3.1pp for 2010, -0.1pp for 2011, -0.1pp for 2012 and +1.0pp for 2013): the 2010 and 2011 deficits were  revised mainly for other reasons (than ESA 2010 introduction) and the 2012 and 2013 deficits mainly due to  introduction of ESA 2010. The deficit for 2010 was increased mainly due to reclassification of the capital injection  to AIB and the deficit for 2011 due to various reasons such as an adjustment to accrual calculation for PRSI,  health contribution and National Training Levy. The revisions in the deficit for 2012 and 2013 are mainly due to  the classification of the Irish Bank Resolution Corporation Limited (IBRC) to the central government. " 

Per note, relating to debt revisions: "Ireland (+12.2pp for 2011, +10.3pp for 2012 and +7.2pp for 2013): the revisions in the debt are mainly due to  introduction of ESA 2010: the classification of the Irish Bank Resolution Corporation Limited (IBRC) to the central  government as it became a government controlled financial defeasance structure in 2011."

So our actual debt rose. But our debt/GDP and deficit/GDP ratios fell:

Enron would be proud...

21/10/2014: Russian Gas, European Deliveries, Ukrainian Blackmail?

Over recent days there have been plenty of statements about the winter supplies of Russian gas to Europe. Majority of these fall to one side of the argument, alleging that Russia is likely to cut off gas shipments to Europe via Ukraine.

Here are the facts, strongly indicating an entirely different possibility.

Fact 1: Allegations. At the end of August, Euractive reported that "Europe faces the increasing threat of a disruption to gas supplies from its main provider Russia this winter due to the crisis in Ukraine." (link)

But when you read beyond the headline, you get something entirely different. "Ukrainian Prime Minister Arseny Yatseniuk said today (27 August) Kyiv knew of Russian plans to halt gas flows this winter to Europe. "We know of Russia's plans to block [gas] transit even to European Union countries this winter, and that's why their [EU's] companies were given an order to pump gas into storage in Europe as fully as possible," he told a government meeting, without disclosing how he knew about the Russian plans."

So Yatsenyuk presented a conjecture - that incidentally boost his own agenda. Media reported it with zero questioning. Meanwhile, Russian officials denied the possibility of such disruption: "It's unlikely that Russia would cut gas supplies. Ukraine will start siphon off it itself, as it has been the case in the past," a senior source at the Russian Energy Ministry said."

We have set the stage: Ukraine says Russia may disrupt supplies. Russia says Ukraine may siphon off gas destined for other buyers in order to satisfy its own needs.

Fact 2: Historical Precedents. As Euractive reports: "Russian gas flows to Ukraine have now been halted three times in the past decade, in 2006, 2009 and 2014, due to price disputes between Moscow and Kyiv, and flows to the EU were disrupted in 2006 and 2009 after Ukraine took some of the gas intended for the EU to meet its own winter demand."

In other words, Ukraine stole (as in appropriated without a payment and beyond its contracted power) Russian gas destined for European customers. This, presumably is Russian fault, as it is Russia that is being blamed for the disruptions.

So we have it: Ukraine steals, Russia gets blamed.

Fact 3: Counter-accusations. Official Russian position on supplies of gas to Europe: "Russian Energy Minister Alexander Novak refuted the claim by Ukrainian Prime Minister Arseniy Yatsenyuk that Russia is planning to halt gas transit to EU member states. “Specific comments by Ukrainian politicians on alleged Russian intentions to stop gas transit to EU countries are puzzling. We can qualify them only as absolutely baseless speculations aimed at confusing or deliberately misinforming of European consumers of Russian gas”, said Alexander Novak."

Now, you can possibly say there is risk of Novak lying. Or you can say there is risk PM Yatsenyuk is lying. Remember: Yatsenyuk made a statement of claim unbacked by any evidence (Fact 1 above). Novak made an official statement on the record. Yatsenyuk has an incentive to push European member states to take a tough stance on Russia in brokering a gas deal between Russian and Ukraine. Russia does not have such an incentive. Yatsenyuk is actively campaigning for an outright re-writing of Russian-European contracts for gas supply to suit Kiev interests (read below). Russia does not have such an incentive.

So who is the beneficiary of all these conjectures about Russia 'cutting gas supplies to Europe'? Why, it is Ukraine.

Fact 4: In his own words. On October 17 Itar Tass (link) claimed: "Europe should respond to a statement by Ukrainian Prime Minister Arseniy Yatsenyuk that Ukraine can give no guarantees for safe Russian natural gas transit to Europe, Gazprom Deputy CEO Alexander Medvedev said on Friday. “Yatsenyuk said yesterday that Ukraine will not be able to ensure the safety of gas supplies from Russia to Europe,” he said."

So did Yatsenyuk say this? He did. His statement is supported by his own actions tracing back to end of July / beginning of August.

Fact 5: In his own deeds. Let's go back to August 8th, when Yatsenyuk threatened sanctions to cut off all transit of Russian gas: "Ukraine may impose sanctions against any transit via its territory, including air flights and gas supplies to Europe, Prime Minister Arseniy Yatsenyuk said Friday." (link confirmed by Bloomberg here and the Wire here).

So real was this threat, Germany had to step in to put PM Yatsenyuk back into his place (link). And European buyers continued to pump up storage facilities not because of a Russian threat, but because of the Ukrainian actions.

Things got comical: Naftogas - a Ukrainian state-owned gas company - said back in August it was prepared to bypass its own Government-imposed restrictions on transit (link). So even Naftogas was aware that it was Kiev, not Moscow, who planned the cut off.

20 days after Yatsenyuk backed out the first threat, "Ukrainian Prime Minister Yatsenyuk pushed a bill through the Verkhovna Rada that …would permit the transit of natural gas to be blocked." Source (link). In other words, on August 28, Yatsenyuk pushed through a law that legalises Ukraine's power to shut down transit.

Ukraine was no longer speaking about shutting down Russian gas transit. It actually set legal grounds for acting on doing so.

On September 23rd, Kiev backed out of the month-old stand and committed itself to allowing transit (link). Strangely, the article does not really try to explain why PM Yatsenyuk had to commit to such an act, if it was Russia that was a threat of disrupting gas flows.

Conclusions: Now, we can think of a straight logic implying that actually it is Ukraine that is a threat point replete with threat --> act --> deny chain of events. But the Western media continues to insist that it is all down to Russia's bad politics.

This week (link) Ukraine is again refusing to guarantee uninterrupted transit to Europe unless it gets all Russian-European contracts renegotiated on its own terms. These terms are: Ukraine gets full control over actual gas transiting over its territory and gains a de facto veto power on any contract any European buyer signs with a Russian supplier.

Again, who is the attempting to hold European gas supplies hostage to its own political agendas?

Monday, October 20, 2014

20/10/2014: Ruble: Poisoned, a Touch Less Than Real or NZ Dollar?

Two days ago I wrote about the pains of Ruble devaluations (http://trueeconomics.blogspot.ie/2014/10/18102014-latest-news-on-russian-economy.html) and here is an interesting new set of data courtesy of @ReutersJamie which shows positioning in the FX markets. All bearish, except USD, and bearish on Ruble too, but what is interesting is that Brazil Real and NZ Dollar are more bearish... And Ruble, for all its problems is positioned pretty close in line with Euro, which, apparently has no problems (remember, ECB refuses to call this a currency crisis, insisting first it was a debt crisis, now a structural growth crisis, next probably a milk quota crisis):

20/10/2014: Jean Tirole: Master Of Incentives, Risks and Contracts

Last week's Nobel Memorial Prize award in economics went to Jean Tirole. Here are some of my thoughts on his tremendous legacy: http://blog.learnsignal.com/?p=90

Sunday, October 19, 2014

19/10/2014: IFSC: Down, Down and Down It Goes...

This data has been crowding my desktop for some time now, so might as well post it. In September this year, the new rankings of Global Financial Centres (http://www.longfinance.net/images/GFCI16_22September2014.pdf) came out for the second half of 2014. Dublin slipped to a rather less than honourable 70th place, down 4 ranks from march 2014 and 14 ranks from September 2013.

Here's the chart showing the sorry state of decline in Irish Financial Services prime centre in global position (these are primarily IFSC-linked):

So may be, just may be, having the chair of IFSC going around talking about everything political and EU is not exactly what drives excellence in the international financial services? Any ideas?..

19/10/2014: Dublin: Just 24th in the Global Centres for Talent Rankings

You know the mythology: despite 55% upper marginal tax rate in exchange for nearly zilch in public services, despite the need to pay consultants' fees and private insurance just to get basic medical care, and despite the fact that childcare runs a cost of the second mortgage, Dublin (nay, rest of Ireland too) is a great location for human capital-rich expats, especially if they command high salaries...

And now, we have:

Dublin ranks 24th in the world amongst the locations 'most appealing' for expats.

Never mind, we already have the best educated workforce in the world, so be jealous you London, NYC, Paris, and all the rest of ye in the 23-losers lot.

Source: http://www.citylab.com/work/2014/10/the-new-global-centers-for-talent/381487/

19/10/2014: Chart of the Week: Japanising Europe

A chart of the week, courtesy of @Schuldensuehner

10 year benchmark bonds: Japan for 1987-2004 period of decline and stagnation and Germany for 2004-present period of decline and ... oh, well... Japanisation of Europe is still ongoing, but it goes without saying: lower yields are not conducive to economic recovery. Or as @Schuldensuehner  noted:

Everything is going according to script...

Now, check out why Germany's lower borrowing costs mean preciously nothing when it comes to the hopes of Keynesianistas around the world for more German borrowing: http://trueeconomics.blogspot.ie/2014/10/13102014-germany-too-old-to-read-paul.html

19/10/2014: A New Cold War is a Bilateral Culpability

A well-balanced review of history that has led Russia and the West to the current confrontation: http://www.ecfr.eu/content/entry/commentary_the_origins_of_russias_new_conflict_with_the_west330

Select quotes:

"In Putin’s world national “sovereignty” is a central principle – but just a few countries can claim sovereignty and, therefore, have the right to a sphere of influence. Russia is one of those chosen few – historically, and because Putin stands ready to fight for his nation’s sovereignty in a world where Might means Right."

"In the twenty-first century, the West responded, all nations are equal and each country is sovereign. This sounds like a wonderful world – except that this does not seem to be the world of the US-led policy of humanitarian intervention, peace enforcement, taking sides in other nations’ domestic conflicts, and killing the forces for evil on behalf of the forces for good. Putin saw this as an argument that his world of Might means Right was real: America could pursue such policies because it was powerful and sovereign."

"The current confrontation between Russia and the West is a move back to a cold war design: Russia as “another world” isolated by the US-led West. Russia’s world today is limited to just itself with no socialist camp around it, and the West has the potential of pushing Russia deeper into a crisis, both economic and political. Unlike the Soviet meltdown that had numerous internal causes, but is blamed on the West by Russian conspiracy theorists, this crisis will truly be precipitated by the West."

19/10/2014: Of National Accounts and Ministerial Declarations

Here's an interesting take on the role of ESA2010 reclassifications on Euro area growth: http://euobserver.com/news/126110. Strangely, this topic is rarely discussed in Ireland which switched to ESA2010 standards ahead of majority of other countries.

And here's an illustration of the claim by Minister Noonan (made in his Budget 2015 speech) that Irish farming is a EUR26 billion sector:

Somewhere else, someone is producing EUR20 billion worth of 'farming' activity that Minister Noonan knows of... Maybe he or they can point us in that direction. But the above figures include much more than 'farming':

And the above figures include double-counting too, since they come from two different sides of the National Accounts (some of exports are in the Sector Output at factor cost). And they include net subsidies of some EUR1.5 billion (see http://trueeconomics.blogspot.ie/2014/10/7102014-subsidies-rained-on-irish.html) which no one, save possibly an Irish Minister, can describe as 'activity'. 

Saturday, October 18, 2014

18/10/2014: Irish Economy: The State of Recovery

Yesterday I had a chance to speak about the state of the Irish economy at a breakfast briefing hosted by Invesco. Here are my speaking notes (slightly edited).

Where Ireland is today?

  1. There is a recovery
  2. The recovery is still fragile & highly uneven
  3. Risks to the downside of the recovery continue to weigh heavily: external (international risks) and internal (domestic and structural risks)

There are three ‘Irelands’ today co-sharing this economy.

Ireland of ‘haves’ 

  • Demographically old       
  • Benefited from asset bubble of the 2000s
  • Debt-free and secure in income
  • This Ireland is growing in numbers, but not in terms of value added in the economy: 52,200 more in retirement today than in H1 2011 (+17.9% on H1 2011)
  • This generation no longer saves to invest and is consuming lower value-added goods and services, which are lower in growth intensity

Ireland of ‘hopes’

  • Demographically young (20-29 years of age)
  • Unencumbered by debt, but assets and credit-poor
  • Income is low, generating little surplus savings to invest, but
  • Generating economic growth and value added, as well as strong consumption in entertainment and non-durable consumables
  • Held back by ageing workforce at the top of career ladders and by lack of jobs in the 'normal' (ex-ICT and specialist skills) economy
  • Emigrating for better career opportunities: population of this cohort in Ireland has declined 112,200 since 2011.

Ireland of ‘left-outs’

  • Encumbered by legacy debt, 
  • Unemployed or in low jobs security and 
  • Hit by high taxes and cost of living
  • Hit by pensions insecurity and investments values collapse
  • Demographically in their prime productive age: 35-49 years
  • This cohort is growing over time even if immediate arrears on mortgages are declining

What do we see on the ground in this economy? 


  • GDP at constant factor cost is up 5.37% y/y in H 2014, but only 3.72% on H1 2011.
  • Due to a number of factors impacting changes in the ways that MNCs book profits into and out of Ireland, GNP rose 6% y/y in H1 2014 and is up 8.2% on H1 2011. Again, very strong.
  • Taxes in the economy are up 11.5% on H1 2011 and 8.1% on H1 2013. The Governments took EUR11.7 billion in income-related taxes increases since Budget 2009.
  • Much of recorded growth in 2014 is coming from the sources that have little tangible connection to reality: reclassifications of R&D activities, MNCs, etc.

Year on year, growth is concentrated in:

  • Agriculture (at 11.9% y/y or 2.2 times the rate of overall growth). Large part of this is down to price effects;
  • Distribution, Transport, Communications and Software (+10.9% y/y or double the rate of growth overall);
  • Building and Construction (+8.3% y/y growth or 1.5 times rate of overall expansion); much of this is down to timing of tax incentives, as well as changes in regulations;
  • Public Administration & Defense (+3.7% y/y) as we are witnessing massive shift toward charging for public services and paying interest on debt. In 2015, Interest on Government debt will amount to EUR8.5 billion, more than 1.8 times greater than the projected Corporation Tax take.
  • ‘Other Services, including Rent’ (+3.3% y/y)

Much weaker growth was recorded in

  • Industry overall (+0.6% y/y) and especially in Transportable Goods Industries and Utilities (+0.16% y/y)

In terms of demand side of the economy:

  • Fabled return of consumers is quite overhyped for now: Personal Consumption is up only 1.2% y/y in H1 2014 and is still down 2.7% on H1 2011. Value of core retail sales rose only 0.28% in 3mo through August 2014 compared to 3mo through May 2014. Volume rose 0.29%. This is hardly a ‘boom’.
  • Meanwhile, net current expenditure by the Government is up 5.2% y/y in H1 2014 and is basically flat (-0.2%) on H1 2011. Austerity on the spending side of Government has been a transfer of payments from services to national debt funding.
  • Gross Fixed Capital Formation is up massive 11.3% y/y in H1 2014 and is up 2.3% on H1 2011, but most of the uplift is down to resale of properties. This also includes buying activities by the vulture funds. 

External Trade is booming – despite tough external economic conditions:

  • Exports of goods were up 13.2% y/y in H1 2014 and are up 9.6% on H1 2011
  • Exports of services up 7.1% y/y in H1 2014 and 24.6% on H1 2011
  • Problem is: national accounts data is now in a total disconnect from the actual trade data. In the past, average discrepancy was around EUR1 billion per quarter. Now we are witnessing National Accounts exceeding trade data statistics by 7 billion. So quality of data is starting to look wobbly.
  • Strong support for our exports is provided by our traditional exposure to the US and UK markets. But we are also seeing encouragingly strong performance in some new markets, e.g. Russia and China, again against the general trend toward slower demand in these economies.

What we do know about the domestic economy is still quite troubling:

  1. Debt: 165,674 accounts in arrears in Q2 2014 – EUR33.6 billion in balances. Restructured: 125,763 accounts of which 48,862 are still in arrears. Total mortgages at risk of arrears or in default: 256,146 with balances of EUR46.06 billion. Over 50% of all ‘permanently restructured’ mortgages involve same or higher levels of life-cycle debt. 39% of all ‘permanently restructured’ mortgages are back in arrears, absent any significant shocks to interest rates, inflation or incomes.
  2. Income: In real (inflation-adjusted) terms, Irish GDP per capita in 2014 is expected to be 11.9% lower than pre-crisis peak. This is the third worst performance in the Euro Area (after Cyprus and Greece). Lack of income uplift means that households’ deposits are trending slightly down in recent months. Labour force participation rate fell in Q2 2014 and at 60% is below the historical average of 60.8%. Which suggests that a large part of declines in unemployment is accounted for by people simply dropping out of the labour force.
  3. Tax system: In 2006, Income tax and levies accounted for 27.2% of our total tax burden, while Corporation Tax accounted for 14.7%. This year, Income Tax + Levies will account for 41.9% and Corporation Tax for 11%. In 2015, based on Budget 2015 estimates, Income Tax burden of funding the state will be 42.5% and Corporation Tax burden will be 10.8%. In simple terms, at the peak of the 1980s crisis, Income Tax and Levies burden was 41.8% average for 1984-1989 period. Budget 2015-costed income tax and USC changes total EUR478 million in ‘stimulus’ to the economy. Yet, Budget 2015 for HSE includes EUR330 million of undefined “one-off revenue enhancements” (aka tax on services) and Irish Water is expected to extract EUR175-190 million out of economy net  of tax credits. Which implies that Budget 2015 will still draw money out households.
  4. Entrepreneurship and investment: There is no significant growth in entrepreneurship, despite the claims of rising number of companies registrations. In reality, companies registrations numbers tell us little about entrepreneurship as we do not know if these are new enterprises or old ones that were forced to shut down by the crisis re-registering once again. We do not know how many of the new companies are being registered by spinning off existent companies functions to avail of 3-year tax exemption. In a number of sectors, there are now multiple enterprises trading from the same business platform. What we do know, however, is that Budget 2015 contained virtually zero cost-linked measures for business development or entrepreneurship supports. 3 year relief for start-up companies is costed in the Budget at EUR2 million for the Full Year, which, applying 12.5% tax rate implies profit run rate of EUR16 million or revenues / turnover of around EUR64-80 million for start ups launched 2013-2015. This is ridiculously low for an allegedly thriving ‘Entrepreneurial Culture’. Meanwhile, on supports side, Budget 2015 contained 11 measures to support agriculture, with largest measures aimed at supporting incomes from leases on unproductive land ownership. Worse, the starting point for much of entrepreneurship is self-employment. Budget 2015 literally pushed higher earning self-employed (those with higher investments in human capital, skills, knowledge, etc) over the cliff with new USC changes. The Government policy is now to actively pursue, hunt down and kill off anyone who is standing on their own, takes risks and creates own value added.
  5. Innovation and R&D: Just three MNCs operating from Ireland account for 70% of all R&D activity here measured by patent filings: Accenture – 31%, Covidien – 24% and Seagate – 15%. In more recent data, foreign companies filings in Ireland have continued to outstrip Irish companies filings by a factor of 3:1. Ireland operates a large number of public intervention and support schemes to increase R&D and Innovation share of our economy. Yet there is not a single, coherent, comprehensive data reporting channel on what these schemes achieve on the ground. It appears that in this country, more knowledge and innovation is a pursuit best managed in the fog of obscured accountability.

On the net, the state of play in the Irish economy is that of a gentle uplift in the domestic economy with risks weighted to the downside.

  • This is a fragile (due to risks) recovery on the ground, despite the fact that aggregate numbers are trumpeting the rise of the Celtic Phoenix. For now, there’s a lot of smoke, some strong wings flapping, but not a hell of a lot of flying, yet.
  • Global risks are weighting growth prospects to the downside too, but Ireland is clearly benefiting from three idiosyncratic sources of strength:

    1. We are benefitting from stronger demand in the US and the UK; and
    2. Our indigenous exports, small as they might be, are performing well – a testament to longer-term relationships built by Irish exporters around the world.
    3. Finally, the sheer scale of collapse in the economy during the crisis means we should expect a more robust bounce up. 

We can expect:

  • Robust aggregate growth figures in 2014 (ca 4.1% on GDP side and 4.7% on GDP side or higher, depending on what and how is going to be booked into Ireland by the MNCs) and weaker, but still substantial growth of 3.0-3.6% on GNP side and 3.5-3.9% on GDP side in 2015.
  • Slower growth is expected to result in continued weakening in employment growth: in 2011 we posted 2.3% growth, in 2014 we are likely to post 1.8% growth and in 2015 – closer to 1.5-1.6%. The risk here is to the downside.
  • Consumption growth is probably going to be around 2-2.5% in 2015 after 1.5-1.7% rise in 2014.
  • Investment will slowdown from 2014 estimated growth of 14.5-15% to 10-12% in 2015. Again, risk here is to the downside, should Budget 2015 changes on property side induce early purchases rush in the remaining months of 2014. Big unknown for 2015 is the rate of foreclosures on arrears-ridden properties. This can derail the recovery altogether and significantly depress sentiment in the economy. 

All in, 2015 is expected to be another year of recovery, amidst risky trading environments.  And 2015 recovery is going to be a bit more balanced.

The key risks, however, are now being shifted to 2016 – the year of more aggressive tapering by the Fed and the expected start of the monetary tightening cycle in the euro area.  Before then, accommodative policies by the ECB will keep rolling in, although their effects on growth will be most felt probably in H1 2015.

Still, for now at least, the theme of ‘fighting for survival’ that characterised the Irish economy in 2008-2013 is over and we have some hopes that the new theme of ‘fighting for growth’ is commencing.

18/10/2014: Latest news on Russian economy

In the week this was, much of my attention was on Irish economy (given the Budget 2015 shower of news), so here's a quick catch up on Russian economy news.

Fresh off the printing press, Moody's downgraded Russia credit ratings from Baa1 to Baa2. Per Moody's moody grumblings: "The first driver for the downgrade ...relates to the longer term damage the already weak Russian economy is likely to incur as a result of the ongoing crisis in Ukraine and, relatedly, the additional sanctions imposed against Russia." More bad news: the agency is maintaining Russia's outlook at "negative".

Let's face the music: so far in October, Russian Central Bank spent some USD13.5 billion in a futile attempt to hold ruble from sliding against USD and the euro. This is not good news as it signals three things:

  1. Flood of capital out of Russia continues and seems to have resumed with renewed strength in last 30-45 days after a brief slowdown in May-August.
  2. The combined effects of (a) general outflow of funds from Emerging Markets, (b) falling exports revenues on foot of collapsing prices of oil, © building of arrears against some importers of Russian gas (actually that would be Ukraine alone), (d) general volatility in the global markets, and (e) rumours of capital controls and deteriorating business climate in Russia, including in the shadow of the Russian banks facing pressures from the EU and US funding markets shutdown and talks of SWIFT disconnection, all are now acting to reinforce the adverse effects of the geopolitical mess in the Ukraine. [Note: here's the latest on SWIFT saga: http://www.themoscowtimes.com/business/article/sanctioned-russian-banks-seek-alternative-to-swift/509345.html]
  3. There is now political economy kicking into high gear when it comes to ruble valuations: after  continued depreciation of the ruble against all major currencies stretching over some 12 months, we are starting to see some serious concerns in both the Central Bank and the Kremlin that more devaluations will be translating into serious pain on the ground for ordinary consumers.

Chart below (via Bofit) to illustrate the degree of interventions and associated exchange rates:

On the above point (2): Bofit reports that "Russian banks repatriated a record high amount of their assets from abroad in order to balance their forex positions as Russian firms and households reduced their domestic forex deposit accounts with Russian banks. ...Russia’s large state banks repatriated assets from abroad also in case there was an as-set freeze. Net borrowing of banks from abroad was strongly, and to an unusual degree, negative." In other words, banks were repaying foreign loans much more aggressively than rolling them over. Corporate capital outflows rose big time in Q3. This was driven by liabilities flows, which became negative in Q3 as companies aggressively paid down foreign debt and received virtually no new debt from abroad. It is worth noting that official capital outflows include not only funds expatriated abroad, but also private (corporate and household) funds converted into foreign currency, even if these funds never leave Russia.

And on the above point (2)(d), two weeks ago the rumours were so strong that the Central Bank of Russia had to issue a note denying the capital controls were under consideration.

The general sentiment in the EM asset markets is that of a heavy risk-reweighting in the mature economies pushing massive outflows of funds from the EMs. Risk-off sentiment is certainly on this week across global markets. Ongoing volatility is high and rising and signals general nervousness in the global markets. This is fuelling a strong sell-off in risky assets, especially in the EMs. Addicted to endless increases in liquidity supply, the markets are clearly waiting for the Central Banks to open the taps once again. Absent such action, there is no fundamental reason for current asset valuations in any region in the world.

Ruble is getting hammered, with the largest catalyst for change being oil prices. Currently RUB/EUR is at 52.3 and RUB/USD is at 40.8. Two weeks ago, we had RUB/EUR at 50.5 and RUB/USD at 39.6. Month ago: RUB/EUR at 48.4 and RUB/USD at 36.8. Ugly!

In the short run, I can see both rates rise by around 5 percent (3mo outlook) and at 12 months horizon, my expectation would be for RUB/EUR is at 54.0-55.0 and RUB/USD is at 43.0-44.2.

With ruble plunging, imports are also falling off the cliff. Latest data from the Central Bank show Q3 2014 current account surplus hitting another 2 year high. Over 12 months through September 2014, Russian current account surplus averaged almost 3% of GDP. Goods trade surplus has been running at nearly 10% of GDP. This is despite a small decline in exports of goods and services in Q1 and Q3 2014 and virtually zero growth in exports in over 2 years. In contrast, imports fell 6-7% y/y in the first 9 months of 2014 and in Q3 2014. Goods imports declined 8%. Chart below (courtesy of Bofit) illustrates:

On the net, current account position is still strong, but trending around post-crisis levels. Lower oil prices should significantly harm this, especially as supports from imports declines start to wear out over time.