Transcript Russian Economy Today: Major Risks and

CAUSES AND CONSEQUENCES OF
THE RUSSIA-UKRAINE CONFLICT
Alexandre Repkine
KIEVAN RUS
• Kiev originally the
center of Rus, a
federation of East Slavic
tribes, ca 882-1240
• 1223: invasion of the
Mongols
• 1240: Total destruction
of Kiev, end of Kievan
Rus
• 1480: end of the
Mongolian domination
GRAND MOSCOW DUCHY
• Late medieval state centered on
Moscow, 1283-1547
• Moscow first mentioned in a 1147
chronicle
• In 1547 Ivan the Terrible
proclaimed the Tsardom of Russia
• Ukrainian lands dominated by
Polish and Lithuanians from the
end of Mongol rule in 1480
• Crimean Khanate established in
1449, existed until 1783: neither
Russian nor Ukrainian
TSARDOM OF RUSSIA
• 1547-1721
• Grew 35000 sq.km.
a year
• 1654: Bogdan
Khmelnitsky, a
Ukrainian leader,
offered the Tsar to
make Ukraine part
of Russia to avoid
Polish domination
NEW RUSSIA
• 1764: Russia conquers
the lands to the North
of Black Sea from the
Ottoman Empire
• The new region is
called New Russia,
active migration by
Slavs: Russians and
Ukrainians
• 1783: Russia annexes
Crimea after defeating
Crimean Khanate
THE SOVIET TIME
• 1917: Communist revolution in Russia
• 1918: Ukraine proclaims an independent Ukrainian Socialist
Republic
• 1922: the USSR formed that included Russian Federation,
Ukrainian Socialist Republic (formed in 1918), Belarussian
Socialist republic, and Transcaucasian Socialist republic
• Ukraine becomes an autonomous republic within the Soviet
Union
• 1954: Crimea transferred from the Russian Federation to
Ukraine
• 1991: Collapse of the Soviet Union, Ukraine’s independence
UKRAINIAN CRISIS

21 November 2013: President Yanukovitch backs out of signing
the Association Agreement with the EU, accepts $15bn loan
from Russia

22 November 2013: Protests break out in Kiev, the capital

20 February 2014: large-scale clashes between police an
protesters

21 February 2014: Peace agreement signed between opposition
leaders and Yanukovitch, also signed by Foreign Affairs
ministers of Germany and Poland

22 February 2014: Radical opposition leaders refuse to
recognize the peace agreement, make Yanukovitch leave Kiev

23 February 2014: Turchinov proclaimed enacted
President of Ukraine

23 February 2014: Law granting Russian the regional
status language abolished

27 February 2014: Crimean parliament decides to
declare independence

16 March 2014: referendum in Crimea on
independence

18 March 2014: President Putin signs a decree on
Crimea re-joining Russia
SANCTIONS: HISTORY

First Round:



Second Round:



Immediately after March 16, 2014 following on Crimea’s joining
Russia
Target: individuals banned from visiting EU, Canada, the US;
doing business is also prohibited with them.
April 28, 2014
Further visa bans, 17 Russian companies
Third Round:



July 17, 2014: Malaysian MH17 crash
Government-owned Russian banks, trade restrictions on defense
industry, additional visa bans
Inability to borrow for more than 30 days
RUBLE DEPRECIATION
• Depreciation by 23% (RUB/USD),
14% (RUB/EUR)
RUB/EUR
• Most depreciation occurred after
the third (sector) round of
sanctions
• Capital flight due to increased
geopolitical uncertainty
RUB/USD
• Exports did not grow
proportionately to ruble’s
depreciation due to global
economic slowdown
• Ability to borrow abroad restricted
by sanctions, limiting supply of
foreign currency
INFLATION ACCELERATION
OCT
NOV
DE
C
0,21
0,57
0,56
0,51
0,10
0,55
0,46
0,34
0,54
0,36
0,80
0,91
0,83
0,6
9
JAN
FEB
MAR
APR
MAY
JUN
JUL
AUG
SEP
2014
0,59
0,70
1,02
0,90
0,90
0,62
0,49
0,24
0,65
2013
0,97
0,56
0,34
0,51
0,66
0,42
0,82
0,14
2012
0,50
0,37
0,58
0,31
0,52
0,89
1,23
2008
2,31
1,20
1,20
1,42
1,35
0,97
0,51
• Inflation picked up significantly shortly after the first round of sanctions
• Inflation rate kept roughly at or below the similar inflation level of 2008, the
year of the global crisis
• January--September 2014: 6.27%
• January—September 2008: 10.57%; January-September 2013: 4.72%
CAPITAL FLIGHT
• Sharp increase in capital outflow in January 2014 was attributed to looming
Western sanctions.
• Capital outflow is not much different relative to the average of previous years.
• Capital outflow does not increase dramatically as sanctions mount.
• Capital outflow is probably more the result of Russia’s structural problems rather
than sanctions.
RUSSIAN STOCK MARKET RESPONSE
• RTSI (Russian
Trading System
Cash Index)
grew after
the first
round of
sanctions
March 2014
Sanctions
3 November
2014
March 2014
Sanctions
September
1995
Source: RBK quote.rbc.ru
Marc
h
2004
August
2008
• Market as a
whole
appears to be
ranging
• 2008 crisis
had much
larger
negative
effect
RUSSIA’S FOOD IMPORTS BAN

Import ban on food imports from the EU, US, Canada, and
Australia seems most important response so far (7 August,
2014)

In August alone




Moscow food prices up by 7%
St. Petersburg, 10%
Pork and chicken prices up by about 25%
Poland, Finland and Lithuania most affected by the Russian
food ban.
ABOLISHING BILATERAL CORRIDOR ON
NOVEMBER 10, 2014
• The Ruble was allowed to
move within bounds for a
bilateral currency basket
prior to the sanctions
• Corridor bounds were
adjusted tens of times since
the start of 2014
• Discount rates increased
three times since January
2014
Source: Roskomstat
• Interventions until 2015 only
at the bounds
• Floating exchange rate
introduced in 2015
WHAT MEASURES WOULD REALLY HURT
THE RUSSIAN ECONOMY?

Restrictions on gas and oil exports

Exclusion from financial networks: VISA,
Mastercard, SWIFT etc

Persuade OPEC to increase oil production.
OIL AND GAS IN THE RUSSIAN ECONOMY
Budget crucially depends on
the oil-gas revenues
30% of all Russian gas
production is meant for
exports
Non-oil deficits persisting
Rising energy prices increased
oil-gas revenue component of the
Russian budget without any
growth in the physical volumes
OIL PRICE EVOLUTION
If the trend
continues:
• Further
deterioration of
the government
budget
• Depreciation of
the ruble
• Further pressure
on the National
Welfare Fund to
finance budget
deficits  risk of
social unrest
(2018?)
EU’S DEPENDENCE ON
RUSSIAN ENERGY SUPPLIES
EU depends on about
1/3 of its energy
consumption on
imports from Russia:
• 34% crude oil
• 26% solid fuels
(mainly coal)
• 32% natural gas
Germany, Italy, and
Eastern European
countries are the most
vulnerable importers
EU AND RUSSIA’S DEPENDENCE ON
UKRAINIAN TRANSIT
• 42% of Russian gas
exports depends on
Ukrainian transit
North
Stream
• Ukraine’s inability to
pay the contracted
prices led to gas supply
shortages in 2006 and
2009
• Ukraine’s current debt
reached $5bn
South
Stream
• To avoid dependence on
Ukraine, Russia started
constructing the North
and South Stream pipe
routes
GAS DEPENDENCE AND SANCTIONS

One way to really hurt the Russian economy is to
limit her gas and oil exports

Cutting Russian gas and oil imports is:
Difficult since alternative suppliers are difficult to find
 Politically impossible since the voters will not welcome
electricity and heating shortages


Therefore, the most potent measure to ‘punish’
the Russian economy will not be taken in the
foreseeable future
OTHER POTENT SANCTIONS


Ban VISA, Mastercard etc. from doing business with
Russia

Private companies are unwilling to lose their business

Byron Pollitt, VISA’s CFO, in April 2014:
 "We are caught between the politics of the United States and the politics of Russia. We're
clearly seeing a drop-off in cross-border volume, and sanctions are expected to have some
impact on volume."
 "We have 100 million cards there and it is not in anyone's best interest, inclusive of the
Russians, to make those cards not available to their own citizens.”
Exclude Russia from financial networks e.g. SWIFT


Applied to Iran in 2012
May be difficult to apply to Russia since that would hurt
EU’s trade with Russia, including energy import deals
SWIFT STATEMENT
SWIFT Statement: http://www.swift.com/about_swift/shownews?param_dcr=news.data/en/swift_com/2014/PR_swift_sanctions_statement.xml
Brussels, 6 October 2014 - SWIFT and its stakeholders have received calls to
disconnect institutions and entire countries from its network – most recently Israel and
Russia.
SWIFT is a neutral global cooperative company set up under Belgian law. It was
established by and for its members to create a shared worldwide messaging service and
a common language for international transactions. SWIFT provides services to over
10,500 financial institutions and corporations in over 200 jurisdictions around the
world. SWIFT is a critical service provider to the financial industry and plays a pivotal
role in supporting international commerce and trade.
SWIFT services are designed to facilitate its customers’ compliance with sanctions and
other regulations, however SWIFT will not make unilateral decisions to disconnect
institutions from its network as a result of political pressure.
SWIFT regrets the pressure, as well as the surrounding media speculation, both of
which risk undermining the systemic character of the services that SWIFT provides its
customers around the world. As a utility with a systemic global character, it has no
authority to make sanctions decisions.
ECONOMY NEAR POTENTIAL OUTPUT

Growth rate of 7% prior to the crisis of 2008



Growth rate of ~1% during 2009-2013



~5% for similarly large emerging economies
~3% for resource-rich countries
Currently



High carbohydrates prices
Spare capacity
Weak credit growth
Slow rate of new business creation
Structural problems, not cyclical ones, mostly constrain the
expansion of potential output
RESOURCE RENTS AND RED TAPE

Resource-rich countries are prone to high resource
rents



Red tape restrictions



Short-termism
High extent of reliance on subsidies and transfers
Far Eastern tuna / sanctions
Incumbent bureaucracy has few incentives to promote
competition
Importance of performance-oriented public sector


Weaning bureaucracy off the resource exports revenues
Linking size of compensation to performance indicators
OIL/GAS AND HARD BUDGET CONSTRAINTS

Carbohydrates-based growth ensures persistence
of soft budget constraints



Bailing out loss-making state enterprises during the Soviet
time
Source of government transfers and subsidies to pay for
social obligations e.g. pensions currently
Hard budget constraints


Shown to increase aggregate production efficiency
Are spurred by
US/EU sanctions
 Dwindling oil prices


Russia’s chance to diversify its economy away from being a
carbohydrate-oriented one
DIVERSIFICATION

Tangible assets: not a major problem



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Intangible assets: institutional framework





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a wide range of industries
decent GFCF rates
Improving infrastructure
MAJOR problem
Contract law
Independent courts
Police corruption
Accountable public sector
Geographical



Decreasing extent of dependence on EU for hard currency flows
Reorientation to emerging Asian markets, specifically China
 “Power of Siberia”
 Transsiberian link to Korean railway networks
Payments in rubles/yuan