Friday, October 24, 2014

24/10/2014: Weekly Russian Economy Update

Bofit released some latest data on Russian economy, so here is the summary, with some of additional points by myself.

September economic activity acceleration came as a bit of a surprise.

  • Manufacturing output was up 4% y/y, driven in part by devaluation of the ruble and in part by increased oil refining activity.
  • Defense spending is up 33% y/y in January-September, which also is helping manufacturing orders.
  • Agricultural output is sharply up as harvest hits near-record levels.
  • Consumption is up as retail sales rose 1.7% y/y with non-food sales up 3.5%. Some observers suggest that households are taking out savings to prepare for higher inflation (inflation hit 8.3% in September, sharply up on 8% in August). Since incomes declined in real terms (down to devaluation and inflation), we can assume that this is to some extent true, although banks are not reporting declines in deposits.
  • New car sales shrank 20% y/y in September from 0% y/y in Q1 2014. 
  • But consumption is most likely showing lags relative to the rest of the economy, so we can expect continued deterioration in retail sales into Q1 2015.
  • Decline in fixed capital investment shallowed out by about 2 percentage points, as Bofit notes "thanks to distinctly better development in investment of large energy and transport enterprises than other investment".
  • Meanwhile, construction activity is slowing down from the H1 2014 boom.

Net outcome: the Economy Ministry estimates GDP growth at +0.7 % y-o-y in January–September 2014, with only slight deceleration in the July-September.

This is strong reading, considering some forecasts (e.g. World Bank at 0.5% for 2014). That said, as I noted earlier today, with Central Bank heading into October 31 decision on rates with expected 50-100 bps hike, we might see a sharp decline in the economy in Q4 2014. It would take 0.2% drop in Q4 to get us to WB outlook.

On the other front, everyone who grew tired of focusing on ruble collapse have switched into prognosticating federal budget meltdown on foot of falling oil prices. Yes, Brent fell by a quarter compared to 2014 highs. And Urals followed the trend with prices around USD85/barrel. The chart below (via Bofit) illustrates.

But no, this is not a letdown yet on fiscal side. Here's Bofit analysis: "If the price of crude oil holds at the $85–95 level for a longer time, Russian growth will be much slower than current consensus forecasts predict… Russia’s 2015 federal budget also assumes an average oil price of $100 next year, producing a budget deficit of 0.5 % of GDP. The impact of a lower oil price on Russia’s fiscal balance will still be manageable; the nominal increase in budget revenues from ruble depreciation will in part off-set losses. Prof. Sergei Guriyev estimates public sector finances could withstand an oil price of $80–90 for a couple of years thanks to reserve funds and the weak ruble. Sberbank’s research department has calculated that the current account will remain in surplus next year even if the oil price holds at $85. Export revenues will fall, but also imports will decline substantially on e.g. the weak ruble and impacts from economic sanctions."

How fast Russian imports fall relative to exports? Tough guess, but here's IMF data showing 2009 crisis period:

One thing is clear: the above forecasts by the IMF for 2015 show pretty small reaction in imports. If Russian demand for imports goes negative, it will be down to a number of factors:

  1. Lower ruble leading to imports substitution - which is GDP-enhancing;
  2. Russian sanctions leading to imports substitution - which is GDP-enhancing;
  3. Government contracts shifting to imports substitution (including those with Ukraine, relating to military equipment) - which is GDP-enhancing.

And as 2009 shows, the room for contracting imports is massive: 28.7% y/y in one shot. And IMF is forecasting 2015 decline to be just 0.3% y/y.

24/10/2014: One Ugly with some Ugly Spice... EURO STOXX EPS

It's Friday... ECB is coming up with the banks tests on Sunday... And before then, if you want 'ugly', here's 'ugly':

The above chart plots Earnings per Share, in euro, for S&P500 and for EURO STOXX. It comes via @johnauthers

Now, despite this, you wouldn't believe it, but roughly 68% of European companies reporting earnings this quarterly cycle to-date have been outperforming analysts expectations.

And for some real 'ugly' spice on top of this pizza, the sub-trend decline in the EPS for European stocks has set on roughly H2 2011... something we shall remember when we re-read all the European 'recovery' tripe from 2011 and 2012 and a good part of 2013.

24/10/2014: Behavioural Political Economy

A very interesting survey paper on the topic of behavioural drivers of political economy by Schnellenbach, Jan and Schubert, Christian, titled "Behavioral Political Economy: A Survey" (September 30, 2014. CESifo Working Paper Series No. 4988.

From the abstract:

"Explaining individual behavior in politics should rely on the same motivational assumptions as explaining behavior in the market: That’s what Political Economy, understood as the application of economics to the study of political processes, is all about." So far - fine.

However, there is a problem: "In its standard variant, those who played the game of politics should also be considered rational and self-interested, unlike the benevolent despot of earlier models. History repeats itself with the rise of behavioral economics: Assuming cognitive biases to be present in the market, but not in politics, behavioral economists often call for government to intervene in a “benevolent” way. Recently, however, political economists have started to apply behavioral economics insights to the study of political processes, thereby re-establishing a unified methodology. This paper surveys the current state of the emerging field of “Behavioral Political Economy” and considers the scope for further research."

It is a lengthy and solid review, covering some 41 pages. Dense. But absolutely a great read as an introduction into the subject. 

Thursday, October 23, 2014

23/10/2014: Irish Residential Property Prices: Q3 2014 data

Latest data for residential properties price index for Ireland is out, covering September. Instead of repeating all the analysis provided elsewhere, here is a look at quarterly data series and longer-term comparatives.

Firstly, on quarterly basis, Q3 2014 ended with index averaging at:

  • 79.1 in Dublin, up strongly on Q2 2014 reading of 72.0. This brings property prices to the levels of Q2 2010 or on pre-crisis comparative basis close to Q4 2002 (80.8).  Year on year prices in Q3 2014 stood 23.9% above Q3 2013 reading, which is a modest increase on Q2 2014 y/y increase of 21.2%.
  • Outside Dublin, index read 71.4 in Q3 2014, marking a rise of 5.8% y/y. In Q2 2014, y/y increase was 2.2%. Outside Dublin prices are currently trending at the levels comparable to Q1 2012 (71.2) and on pre-crisis basis - at the levels between Q2-Q3 2001
  • National prices index is at 76.9, up 14.4% y/y and this compares to a rise y/y of 10.6% in Q2 2014. National prices levels are around Q2-Q3 2011 averages and on pre-crisis basis these are up at the levels of Q2-Q3 2002.
Chart to illustrate:

Rates of growth in prices are worrying, as they were for some time now. Chart below shows y/y increases in price indices for quarterly averages:

The chart above clearly shows that Dublin price increases have been running well above the historical averages for the main periods since Q1 2000. Q3 2014 marks full year since price appreciation in Dublin market has risen above sub-period (2013-present) average and this now becoming a serious issue.

At the same time, long-term level indices suggest that prices remain below historical trends:

So once again, data is showing troubling developments in the rate of price increases in Dublin and below-trend price levels. Based on historical evidence, real price bubble concerns are still outside the scope of index readings by some 25-30 percent. But we are closing that gap very fast.

23/10/2014: BlackRock Institute Survey: EMEA, October 2014

BlackRock Investment Institute released the latest Economic Cycle Survey results for EMEA:

"The consensus of respondents describe Russia, Croatia, Egypt and the Ukraine in a recessionary state, with an even split of economists gauging Hungary and Turkey to be in a recessionary or contraction phase. Over the next two quarters, the consensus shifts toward expansion for Egypt and Turkey"

Red dot represents Czech Republic, Kazakhstan, Israel, Poland, Slovenia and Slovakia

"At the 12 month horizon, the consensus expecting all EMEA countries to strengthen or remain the same with the exception of Russia and the Ukraine."

Global: "respondents remain positive on the global growth cycle with a net 43% of 37 respondents expecting a strengthening world economy over the next 12 months – an 7% decrease from the net 50% figure last month. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy"

Previous month results are here:

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.

23/10/2014: Euromoney Country Risk survey results Q3 2014

Euromoney Country Risk survey for Q3 2014 is out:

Euro area risks are down, but starting to regain upward momentum in recent weeks. Meanwhile, BRICS are struggling, Russia risks deteriorating and overall global environment is not encouraging.

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: 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: 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:

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 ( 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:

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 ( 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?..