The Parallax Brief


Unrepentant Subjectivity on Economics, Politics, Defence, Foreign Policy, and Russia

Stagflation in Russia Now

The last week saw a barrage of apocalyptic news and data releases for the Russian economy. First, on January 30, Alexei Kudrin, the Russian Finance Minister, admitted that Russian budget revenue might this year tumble by an almost unimaginable 40%.

On the same day, while the rest of the G8 central banks engaged in frantic monetary easing to boost ailing economies, the Central Bank of Russia enjoyed no such luxury, and was forced to raise two of its key interest rates as part of a desperate rearguard action against capital outflows and a deteriorating ruble.

Shortly after, on February 2, news emerged that the Russian economy grew only 5.6% in 2008, the lowest since 2002, and undershooting the Bloomberg analysts’ consensus of 6%. Considering the blistering start to the year, it is clear that the fourth quarter was disastrous for Russia: Russian industrial output, for example, was savaged, plunging 10.3% in December, its worst monthly performance since at least 2003.

Further, VTB’s Manufacturing Purchasing Managers’ Index, in which a figure over 50 indicates growth and under 50 denotes contraction, was at a petrifying 34.4 for January, a touch over it’s alltime low of 33.8 – from December. Both months were lower than at any time during the ’98 crisis.

“The degree and pace of decline,” an S&P analyst told Bloomberg, “has exceeded historical precedents.” Quite. And just think of the kind of historical precedents there are in Russia.

The Russian government expects the economy contract by 0.2% this year. Most analysts fear at least 3% — the hardest of hard landings for an economy skimming along at over 6% growth for the best part of a decade. So given that CPI for January alone stood at around 2.5%, and some analysts believe the devaluation of the ruble will lead to inflation at 20% this year, could I venture to offer another piece of good news for the Russian economy? Stagflation is here.

Stagflation is one of the great nightmares of capitalist economies. The mighty pain of economic stagnation is compounded by inflation, which taxes the poor by eating into their already meager income, and prohibits the efficient allocation of capital and debt. But stagflation also lingers with the persistence of a lodging mother-in-law by putting central banks and governments between a rock and a hard place. Loosening monetary policy to boost the economy merely stokes inflation; tightening to crush inflation exasperates economic woes.

It is this test the Russian government now faces.

Stagflation has not been mentioned in relation to Russia in the media yet, but the Parallax Brief believes that the evidence strongly suggests it has already gripped Russia and that it is a word that will feature prominently before long.

You heard it here first.


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Ruble Halts Slide

The precipitous fall of the ruble after the Central Bank of Russia (CBR) ended its managed devaluation program halted this morning.

It had been feared that the CBR would be so alarmed by the nose-bleed drop in ruble value over the last week it might not defend the ruble at the lower limit it set of RUB41 against the bi-currency basket. Financial and Russian media outlets also seemed spooked yesterday when the ruble breached 36 against the dollar, a mark mentioned by the CBR when it drew its ‘line in the snow’ at 41.

However, the Parallax Brief was surprised that outlets like Bloomberg made such a fuss about the 36 mark, which was set as an approximation of the ruble dollar exchange rate (the most important for Russians) if the basket was at 41. The figure did not (and could not) account for a strengthening of the dollar against the euro, which is why yesterday the ruble was able to break the 36 mark while staying within its limit of 41 against the basket.

As the Parallax Brief predicted it would do, the CBR is squeezing ruble liquidity in order to bolster the defense of the ruble. Last week, the Central Bank literally throttled a banking system already gasping for air in order to extrude from the market short positions against the ruble: it provided only RUB389 bn at its repo auctions (against demand of over RUB630 bn), announced that this week only RUB50bn would be offered at its unsecured auction facility, and raised key interest rates by over 100bp. There are even reports that some CBR officials have publicly discussed punishing those banks involved in using money earmarked for bailing out the banking system to short the ruble.

The message was clear: we will defend the ruble, no matter what the effect on you, so get off your short positions and move back to your core business of lending.

The result this morning has been startling, as the CBR has not even had to intervene in the market to sustain the ruble’s position above the 41 mark. Traders have obviously realized, for now, that the CBR is willing to defend its line in the snow.

What next for the ruble?

Of course, a plethora of factors will affect the movement of the ruble in coming months. Russia’s current account, economic growth, budget deficit (or lack thereof), industrial output, capital flows, etc will all impact the ruble. However, for Russia, oil prices have such a pervasive influence the economy that we can mark the ruble’s likely path for given prices of Urals crude oil, Russia’s export blend.

While the CBR has widened the band considerably as part of its switch to a dirty float, the ruble is likely to sit on or near its lower band boundary for the foreseeable future. The current lower mark of RUB41 against the basket correlates to a price of Urals crude of USD40-45 per barrel. Equally, RUB26 against the basket – the top end – correlates to the prices of USD140 we saw in spring last year.

If oil drops into the thirties, and looks like staying there, the Parallax Brief believes the CBR will act quickly and move down the band again. Perhaps the parlous state of key economies for setting oil prices (particularly Chimerica) suggests such a move by Spring, but in the short term, the Parallax Brief is sticking its virtual neck on the line to predict that RUB41 against the basket is here to stay.

Anything else would smash the credibility of the Central Bank. And the ruble.

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Managed Ruble Devaluation Officially Over

Two days after the Parallax Brief predicted that the devaluation of the ruble was approaching its endgame, the Central Bank of Russia has distributed a statement to reporters that the process is ‘finished’.

From Bloomberg:

“‘Bank Rossii has finished with the major gradual correction of the borders of the technical corridor that determines the permissible fluctuations of the value of the dual-currency basket,”.

The weakest level the ruble will be allowed to fall to against the dollar is 36 per dollar and the bank won’t change the size of the trading corridor in the coming months, Chairman Sergey Ignatiev said in a separate statement.”

The ruble is managed against a bi-currency basket of 55% dollars and 45% euros. The lower boundary for the ruble against the basket will be set at 41, according to the statement.

According to Bloomberg, by 1:03 pm Moscow time today (January 22) the ruble had reached 32.7852 per dollar, 42.7814 per euro, and 37.3102 against the basket.

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Currency Update: the Pound and the Ruble

Pound Sterling

No sooner had the Parallax Brief written to defend a weak pound as counter-intuitively desirable for the UK economy, than sterling took a savage mauling on the forex markets. The pound plunged today (Wednesday, January 21) to as low as USD1.3713, only a whisker above the 23-year low of USD1.3682 of June 2001.

Ambrose Evans-Pritchard, in his now regularly terrifying blog, argues:

“For the first time since this crisis began eighteen months ago, I am seriously worried that [the] British government is losing control. The danger is blindingly obvious. The $4.4 trillion of foreign liabilities accumulated by UK banks are twice the size of the British economy. UK foreign reserves are virtually nothing at $60.6bn…

If the Government is forced to nationalise RBS and perhaps Barclays with their vast exposure in dollars, euros, and yen, it risks being submerged… Yes, the banks have foreign assets as well to match the debts. But how much are these assets really worth?”


Prichard points out soberingly that sterling is now teetering on its twenty-year support line, and another fall could send it crashing through the line toward dollar parity. Should this happen, Britain would very likely be faced with a full blown financial crisis, and perhaps even the first British default in modern history.

If omens are anything to go by, the presence of Jim Rogers does not bode well. The Bank of England must have groaned when it read his interview in the Financial Times, arguing that the euro is a far better bet than sterling. Some of you may remember that it was the Quantum Fund, then co-owned by Rogers and George Soros, which broke the Bank of England on Black Wednesday in 1992.

For what it’s worth, I’m not sure I agree with Rogers. First, he only seems to ever talk these days about how truly wonderful Asia is as an investment opportunity, and again in his interview today he appears to making a point not against the British economy, but against the British economy compared to Asia: “The City of London is finished, the financial centre of the world is moving east. All the money is in Asia. Why would it go back to the west?” 

Second, his argument regarding the euro is debatable. If Britain is compared to the euro’s strongest member, Germany, Rogers has a point, but what about Britain compared with Greece, Italy, Spain, or Ireland? There are many who would argue that a currency is only as strong as its weakest link.

Finally, Britain isn’t the only country in dire states at the moment. European banks are just as heavily indebted and leveraged as American or British banks, and the eurozone economy isn’t exactly moving along at warp factor eight at the moment. Sooner rather than later, the hawkish ECB is going to have to face facts, swallow its pride, put a pommander under its nose, get down to the zero rate lower bound and crank up those printing presses.

The equally parlous state of the rest of the world might just be sterling’s saving grace.

The Ruble

Yesterday, the Parallax Brief argued that the step-by-step, managed devaluation of the ruble was approaching its endgame, and today we received further confirmation. First, the ruble held steady against the basket for the third straight day, and second, according to Russian business daily Kommersant, the Central Bank of Russia (CBR) yesterday hosted a meeting in which it informed bankers that the devaluation process was over.

The more wonkish among you can read this article from Bloomberg, in which MDM Bank’s Nikolai Kashcheev argues the CBR may now employ a dirty float.

CORRECTION: I mistakenly wrote that “the Quantum Fund, then co-owned by Rogers and George Soros, which broke the Bank of England on Black Wednesday in 1992.”

It has been pointed out to me that Rogers was long gone from Quantum by the time it broke the BofE. Shame on me. 

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