2024-01-10 15:16:34
Published on January 10, 2024
–
A
+
Listening to 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 in order to make Russia pay for its invasion of Ukraine would have no effect. The strategic alliance with Beijing and the Indian partnership would make it possible to cope with the fall 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 these, influence communication. The BA-BA of this is to broadcast, to the adversary, that the weapons he uses are ineffective. This is the rhetorical strategy put in place by the Kremlin vis-à-vis economic sanctions.
A very structured speech was put in place. It revolves around the global circumvention of economic sanctions. It has two components, one concerns outlets in the energy sector, and the other concerns new supply channels.
Transport infrastructure is unfortunately fixed
China, presented as the privileged strategic ally, would thus have become the new outlet for Russian gas and oil. But in the industrial and infrastructure sector, there is nothing magical. For both gas and oil, it is necessary to have gas pipelines. Some are certainly connected to Chinese infrastructure, but the majority of Russian networks are directed towards Europe. It will take time and a lot of money to build the equivalent in Asia. Given the thousands of kilometers to be implemented, no project can be completed in 12 months. Energy imports to China by land and sea have not been able to replace the immense European market. It is naturally the same for the Indian partner.
Exports to China and India were only able to partially replace the volumes of gas and oil sold on the European market. In addition, Western countries have established a maximum price, $60, beyond which ship brokers cannot insure Russian oil cargoes. The addition of logistical transport constraints and the limitation of value for maritime transport have led Russian energy revenues to decline. The figure of 30% has been put forward for the first months of 2023 by the International Energy Agency.
Added to this is the barrel price effect. The latter in fact varied between 80 dollars and 120 dollars in 2022, but this price was between 70 dollars and 95 dollars over the entire year 2023, creating, for the same volume sold, less revenue.
This value setting is important, and leads to considering the evolution of the value of the ruble.
Currency depreciation
By cleverly deciding to demand payment for its energy exports in rubles, 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 increased from 0.8 cents to 1.6 cents. But the 2023 situation unfolded according to a reverse cycle with a significant drop in the Russian currency compared to the euro, since the ruble returned to one cent (100 rubles for one euro as illustrated in the graph below ) i.e. a drop of 27% over one year…
Source and graph: Strategic Conseils
(Source and graphic: Strategic Conseils)
This significant weakening of the currency naturally led to an increase in the cost of imports of the same percentage. The consequence was an acceleration in the increase in the prices of all imported products, therefore imported inflation accompanied by domestic inflation linked to the drop in labor in civilian production, linked to the workforce needs of the army.
The government and the Central Bank have therefore decided to establish a policy to combat inflation.
The rise 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 key rate, in six months, by increasing it from 7.5% to 16%…!
The graph below (blue line) describes this acceleration, in the second part of the year, in comparison with the level and the weak change in 2023 of the key rate of the European Central Bank.
This surge in the Russian Central Bank’s interest rate 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 of placing its key rate around the level of the inflation rate that it has decided to combat. These were the policies of the ECB, the FED and the Bank of England…
The real Russian inflation rate is therefore above 10% during the year 2023.
This significant increase in the key rate also aims to support the ruble exchange rate, by attempting to slow down the outflow of capital through high remuneration. The fall of more than 25% in the value of the ruble in 2023 is the driving force behind the rise in prices of all imports… and therefore inflation…
But this key rate level also causes a slowdown in the economy by drastically reducing the investment capacities of households and businesses. This consideration of the global economy leads us to look at the evolution of the Moscow Stock Exchange since the start of the war in Ukraine.
A structural decline in the Moscow stock market
By summarizing the price developments of 50 companies, the RTS reference index is comparable to our CAC 40 index. The comparison with Paris and New York is instructive. First of all we see that the Moscow Stock Exchange began to “unscrew” 5 months before the start of the invasion of Ukraine. The economic circles of large companies close to power knew. The outbreak of war caused the RTS index to fall by 60%; it remained, on average over 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 drop in valuation impacts the ability of these large companies to borrow, since the drop in their valuation symmetrically increases their debt ratio.
Inflation linked to soaring 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 like this in Russia, the RTS index (blue line) remains low and flat.
Russian companies are therefore anticipating a gloomy 2024, reflecting the fall in global oil and gas prices.
Unpromising prospects
Russia remains prisoner of the primacy given to its 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. There is therefore no improvement to be expected in this area as long as the war in Ukraine lasts.
Economic sanctions continue to accumulate, like those of 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 specifically linked to the war in Ukraine. More than 300,000 Russians in full working capacity were killed or injured there. Hundreds of thousands of others, in service professions, mainly IT, left the country and took 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. So many skills and added value which will continue to be lacking in the Russian economy in 2024.
The government can boast of an increase in GDP of 5% in the third quarter of 2023, with a currency which 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, in order to support their morale. It is also a communication weapon for use by “enemies of Russia”. But these enemies are less subject to the Kremlin’s incessant propaganda, and are capable of identifying the real economic data facing the Kremlin.
If the war continues, so will economic decline.
1704902199
#Kremlins #speech #shattered #financial #realities