Published January 10, 2024
-A+
To hear the words of the master of the Kremlin, the Russian economic situation in 2023 is practically better than in 2021. The international sanctions decided by Western countries to make Russia pay for the invasion of Ukraine would have no effect. The strategic alliance with Beijing and the Indian partnership would make it possible to address the decline in energy exports to Europe. But beyond words, ideas and incantations, what are the numerical realities of the Russian economy?
In the ideological war that Russia has decided to wage against Western democracies, all weapons can be used and, among them, influence communication. The BA-BA of this is to convey to the opponent that the weapons he uses are ineffective. This is the rhetorical strategy implemented by the Kremlin towards economic sanctions.
A very structured discussion was put in place. It revolves around global evasion of economic sanctions. It consists of two components: one concerns outlets in the energy sector and the other concerns new supply channels.
Unfortunately the transport infrastructure is fixed
China, presented as a privileged strategic ally, would thus become the new outlet for Russian gas and oil. But in the industrial and infrastructure sector there is nothing magical. Both gas and oil require pipelines. Some are certainly connected to Chinese infrastructure, but most of the Russian networks are directed towards Europe. It will take time and a lot of money to build an equivalent in Asia. Given the thousands of kilometers to be covered, no project can be completed in 12 months. Energy imports into China by land and sea have failed to replace the huge European market. Of course the same applies to the Indian partner.
Exports to China and India have only partially replaced the volumes of gas and oil sold on the European market. Furthermore, Western countries have established a maximum price, $60, above which shipping brokers cannot insure Russian oil cargoes. Adding logistical constraints to transportation and limiting the value of shipping have led to declining Russian energy revenues. The 30% figure was proposed for early 2023 by the International Energy Agency.
Added to this is the effect of the price of the barrel. The latter in fact varied between 80 dollars and 120 dollars in 2022, but this price was between 70 dollars and 95 dollars in the entire year of 2023, creating, with the same volume sold, lower revenues.
This value setting is important and leads to considering the evolution of the value of the ruble.
Currency depreciation
By cunningly deciding to demand payment in rubles for its energy exports, the Russian government has created a surge in demand for its currency in 2022, mechanically causing a revaluation of the latter. In 2022 the ruble went from 0.8 cents to 1.6 cents. But the situation in 2023 unfolded according to a reverse cycle with a significant decline of the Russian currency against the euro, as the ruble returned to the value of a cent (100 rubles for one euro, as shown in the graph below), i.e. say a drop of 27% compared to a year…
Source and graph: Strategic advice
(Source and graph: Strategy Tips)
This significant weakening of the currency naturally led to an increase in the cost of imports by the same percentage. The consequence was an acceleration in the increase in prices of all imported products, therefore imported inflation accompanied by internal inflation linked to the decline in manpower in civilian production, linked to the army’s manpower needs.
The government and the Central Bank therefore decided to establish a policy to fight inflation.
The increase in the Central Bank rate
As part of a very classic monetary policy (already used during previous ruble crises), the president of the Russian Central Bank, Elvira Nabiulina, decided to double the reference rate, in six months, bringing it from 7.5% to 16%…!
The graph below (blue line) describes this acceleration, in the second part of the year, compared to the level and weak variation in 2023 of the European Central Bank’s reference rate.
The Russian Central Bank’s interest rate hike to 16% means that the real inflation rate is in fact much higher than the 7% rate announced by the authorities. The rationality of a central bank’s monetary policy consists in placing the reference rate around the level of the inflation rate it has decided to fight. These were the policies of the ECB, the FED and the Bank of England…
The Russian real inflation rate is therefore above 10% in 2023.
This significant increase in the reference rate also aims to support the ruble exchange rate, attempting to slow down capital flight through high remuneration. The collapse in the value of the ruble by more than 25% in 2023 is the driving force behind the increase in prices of all imports… and therefore inflation…
But this key rate level also causes a slowdown in the economy, drastically reducing the investment capacity of families and businesses. This consideration of the global economy leads us to look at the evolution of the Moscow Stock Exchange since the beginning of the war in Ukraine.
A structural decline in the Moscow Stock Exchange
By summarizing the price performance of 50 companies, the RTS benchmark index is comparable to our CAC 40 index. The comparison with Paris and New York is instructive. First we see that the Moscow Stock Exchange began to “unscrew” 5 months before the start of the invasion of Ukraine. The economic circles of the large companies close to power knew this. The outbreak of war caused the RTS index to collapse by 60%; it remained, on average over the course of the year 2023, at -45% of its October 2021 value. Compared to Western stock markets, Moscow is therefore facing a substantial devaluation of its large companies, information never communicated or commented on.
On the other hand, this drastic decline in valuation affects the ability of these large companies to borrow, as the decline in their valuation symmetrically increases their debt-to-GDP ratio.
Inflation linked to the surge in energy prices has stabilized and started to slow. Western stock markets are therefore bullish during 2023, with an acceleration at the end of the year linked to the prospect of the start of a reduction in central bank rates in the coming months.
Nothing similar in Russia, the RTS index (blue line) remains low and flat.
Russian companies therefore expect a gloomy 2024, reflecting the decline in global oil and gas prices.
Unpromising prospects
Russia remains a prisoner of the primacy given to raw materials, to the detriment of the creation of value-added sectors. The recent decision by TotalEnergies and Chinese and Japanese co-investors to suspend their participation in the Artic LNG-2 gas project indicates that increasing Russian energy resources is not on the agenda. No improvement in this area can therefore be expected as long as the war in Ukraine lasts.
Economic sanctions continue to accumulate, such as those from the European Union on the cessation of purchases of Russian diamonds from January 1, 2024.
Added to these external elements is the internal parameter of significant labor restrictions related specifically to the war in Ukraine. More than 300,000 working Russians were killed or wounded there. Hundreds of thousands of others, employed in service professions, mainly IT, have left the country and taken refuge in Kazakhstan, Turkey, Georgia and Dubai. Immigrants from Asian countries prefer to leave so as not to be forcibly conscripted into the Russian army. Many skills and added value that the Russian economy will continue to lack in 2024.
The government can boast a 5% GDP increase in the third quarter of 2023, with a currency that has lost more than 25% of its value in the year…
There is the speech, intended to give the best possible economic image to the Russian population, to support their morale. It is also a communication weapon used by “Russia’s enemies”. But these enemies are less subject to the Kremlin’s incessant propaganda and are able to identify the real economic data the Kremlin is facing.
If the war continues, so will economic decline.
2024-01-10 15:16:34
#Kremlin #speech #shocked #financial #reality