Russian Cracks Appear as Sanctions Bite and Unemployment Rises

Oil prices have risen since the December lows on hopes the Russians cut production,despite Russia at new production highs and despite promises in the past. Sanctions are biting and even official unemployment rates are rising, Russia needs income to sate it’s huge poor population.

Oil prices have risen since the December lows on hopes the Russians cut production,despite Russia at new production highs and despite promises in the past. Sanctions are biting and even official unemployment rates are rising, Russia needs income to sate it’s huge poor population.

Russia Unemployment Rate

Unemployment in Russia edged up to 4.9 percent in January 2019 from 4.8 percent the previous month. This was in line with market expectations and perhaps seems relatively benign but it was the highest jobless rate since last April. It is also important to grasp that this number is the number of what the Russian call from a economically active population. In September 2018 that was 76.2 mln people, or just 52% of the total population of the country, Rosstat said. 

Further to that it is frowned upon, even shamed if you classify yourself as unemployed, the psychological impact from previous communist and now totalitarian governments has been well documented. Whatever the reason, the number is much higher, With sanctions biting, a trade war impacting and a weak European economy nearby Russia needs to keep it’s population happy, President Putin is well aware. How do they do that in an increasingky isolated scenario?

Well firstly they need income and despite previous Russian pronouncents that the oil price doesnt matter, it does. Furthermore this was when the ruble was higher, it has senice fallen with all emerging currencies.

The unemployment rate in Russia officially averaged 7.52 percent from 1992 until 2019, reaching an all time high of 14.10 percent in February of 1999 and a record low of 4.50 percent in September of 2018. So in this sense we are ‘officially’ coming off the best of times. If you have been to Russia, you know there are massive desolate areas and populations.

The oil companies produced record profits last year and provided record taxes crucial to Putin’s plan, that has gone away with oil prices falling and costs rising. Russian oil companies have been loud in their objection to cutting production. Throw in the collapse of Venezuela and the losses to Russia and Rosneft in particular, Moscow we have a problem.

Russian Oil Companies Profits

What Oil Profits Were, Now With Tougher Sanctions and Lower Prices, Memories.

Much of Russia’s internal government revolves around ‘mind control’ and last year amongst unrest Russia stating a goal of halving poverty to 6.6% by 2024. The World Bank has said this can be achieved, even under a modest annual growth scenario. Growth prospects for 2018-2020 remain modest, forecast at 1.5% to 1.8%. There is not much room for failure here.

Indeed it all banks on higher-than-expected oil prices to favorably affect the growth forecast, this has the bullish oil speculator punting ont hat ebing achieved. Last year’s collpase in oil should highlight the risk there and is Putin willing to risk it all on such a gamble? History has shown no, they have increased oil to record levels and in a sanction environment want and need every oil rubel they can get. Risk that and trust your, up until now one of your sworn adversaries, Saudi Arabia?

Russia Oil Tax Burden 

Russia does have relatively high levels of international reserves ($461 billion), and low external debt levels (about 29% of GDP) withcomfortable import cover (15.9 months), This suggests Russia should be able to absorb external shocks according to the World Bank.

Russia Wealth Fund

The Bank also finds that global growth  is broadly stable, but does acknowledge that downside risks from rising trade tensions are increasing. Oil prices have risen this year and remain volatile as Russia’s oil production reached an all-time high but are well off last year’s highs.

Oil prices (Brent) averaged $70/bbl in 2018 so far (up 33% from their 2017 average) and despite WTI being around $55, (Brent has been $6-8 higher for the last 6 months),  the bank and still expects them to average $71/bbl over the next three years. This is a big bet, growth momentum in Russia increased in the first half of 2018, supported by robust global growth, rising oil prices and a macro policy framework that has promoted stability. Real GDP growth totaled 1.3% y/y in the first quarter of 2018 and 1.9% y/y in the second. What happens as oil prices don’t meet that average or should Russian productions fall?

MW WTI W 2 15 19

According to this rosy scenario from the World Bank Russia’s growth prospects for 2018-2020 remain modest, forecast at 1.5% to 1.8%. Higher-than-expected oil prices could favorably affect the growth forecast. However export diversification is limited. Since 2014, Russia’s non-energy export volume growth has been outpacing that of energy and contributing to export diversification.

Yet Russia’s progress in export diversification is limited, with the share of oil/gas products still totaling a high 59% in exports of goods in 2017; about 25% of fiscal revenue; and with diversification happening mainly through active (as opposed to new) lines of products.

The May Decree goal of halving poverty by 2024 could be within reach the Bank says. Driven by a rebound in real wages and disposable incomes on the back of low inflation, the number of poor people decreased by 1.1 million in the first half of 2018. The poverty rate in Russia remains over 13% and is projected to average 12% over the next three years, notably still above the pre-crisis rate of 10.8% in 2013.

However, the Bank summises the poverty rate target of 6.6% by 2024 could be achieved even under a modest growth scenario of 1.5% annual growth. Taking a longer perspective, various government initiatives could double Russia’s potential growth rate to 3% by 2028, while the trinity of maintaining stability, doubling growth, and halving poverty can be completed:

Maintaining stability will require a high level of skill to navigate an increasingly uncertain external environment, and mobilizing additional revenues. Doubling growth will require, in addition to expanding the labor force through higher retirement age, the implementation of reforms that increase inward migration, boost investment, and increase TFP growth. Increasing competition and targeted interventions in human capital that specifically build socioemotional skills and skills of the 21st century would help boost TFP growth.

Halving poverty will require additional – but modest – redistribution of 0.39% to 0.45% of GDP annually, through social assistance and transfers. This estimated additional redistribution assumes improving targeting from the current 20% to around 60 to 70% (in line with other countries). All this with a dependance on oil flows and increasing isolation.

Source: TASS; World Bank

Leave a Reply

Your email address will not be published. Required fields are marked *