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Wednesday, January 17, 2018

In the new year Russia will either rise or continue to fall


What awaits the Russian economy in the next year: increase by 0.3–1%, or recurrence slow downs as in the past? What to prepare for Russian businesses and Russians? A lot depends on whether 2016 a crucial year in the oil market, but not only.

The situation in the first months of 2016 is more than understandable. Market participants believe that after the New year the dollar will continue its March upward, cutting down on its path of oil prices and, as a result, the Russian ruble. On the last trading day of 2015, December 30, the dollar crossed the mark of 73 rubles, and the Euro was worth almost 80 rubles. For the year Brent crude oil fell by 34%, dropping to 37.3 per barrel.

“In the middle of 2016 may begin the reversal in the oil market, only if there is the geopolitical factor is the active phase of the military conflict”

What further destiny of the Russian economy – the decline or growth? The Russian government has prepared the budget for 2016 based on average oil prices of $ 50. The Ministry is waiting for the 0.7 per cent growth at the price of a barrel. The forecast of the Central Bank, however, is more pessimistic. They believe that the Russian GDP will be released in a stable is a plus, but only in 2017.

Economists in General is also divided into two camps. In order to clearly understand what will happen next, it is necessary to speak with confidence about how much a year will cost the barrel. And this is the main surprise of this year. Almost the same situation was observed at the end of 2014. But there is a difference: then it was more difficult to assess how strong the Russian economy under the external shock. Now she has an experience in 2015 that surprised many Western experts. Russia adapted a twofold drop in oil prices and fell into the abyss, as some had thought. Even there were reasons to talk about growth in 2016. But here, as always out of place, said the oil rally is now below $ 40 per barrel.

We can distinguish three scenarios for the Russian economy next year. If oil prices for the year will be still 50 dollars per barrel, as laid down in the Russian budget. It is now quite comfortable price for the commodity sector and overall economy. If oil is below $ 40 is a pessimistic scenario, then Russia again, as in 2015, will have to adjust and re-learn to live in less comfortable conditions. Last year was adjusted to $ 50, in the new have to get used to 35-40. Finally, there is an optimistic scenario in which oil takes an unexpected turn and for the year goes to 60 dollars per barrel or even more. But now it looks too far-fetched.

Where does the oil

All four factors affecting the oil, they say one thing – the price of a barrel in the next year will not grow, says Deputy Director of the national energy security Fund Alexander Pasechnik. Care of oil prices of 25-30 dollars per barrel are possible, but only short term. The annual average oil will cost $ 45 per barrel, experts predict. Recovery quotes more likely in 2017.

The oil is influenced by four factors: fundamental – balancing of supply and demand, monetary market futures, which is on the order exceeds the physical volumes of oil, geopolitical – military conflicts in the countries – exporters of oil and political factors – the desire of the U.S. to strangle Russia, the budget of nettavisen.

The main role in 2016 will play a fundamental factor. “It will be a slower than expected growth in energy demand from China. Plus the key players of OPEC will deviate from the discipline. The Saudis will continue to increase the production and export of oil, while actively applying damping. Their share in Europe could increase, which is understandable, as China takes less. In China, Russia is already not the first year ramping up oil exports. The arrival of Saudi Arabia in Europe – and this is the result of our work in the East. Iran and a number of other players in OPEC will increase volumes,” – said the expert of the NESF.

Oil production in the U.S. declined, but not as much as was hoped. “Shale, according to experts’ forecasts, were supposed to die. Now, however, experts push back the bar of profitability, citing the growth of technology research in America that allow you to produce shale oil at low oil prices. A number of technologies can operate at levels of $ 20,” adds beekeeper.

Monetary and political factors at the moment, also on the side of cheap oil. “Speculators at the time, dispersed the oil to 100 dollars, and now we come to an objective estimate of the market, I think. For many years the oil industry has lived excess profits, and now invited to live in the market not a bubble, but in reality. About 100 dollars could only dream about,” says Alexander Pasechnik.

Speculative capital, which could come and rock the market are in the USA, and the American economy benefits of low oil prices, so they can deter speculators. “On slates by and large America doesn’t care, because the share of oil shale in the economy is minimal. The main thing is cheap energy overall economy wins. The only thing that is a plus for China, as it is their main competitor,” adds the expert. “Besides, the Americans, and we benefit from a little choked up. Therefore, even on political grounds the oil to rise in price now makes no sense, as it is seen in Washington,” – said the interlocutor of the newspaper VIEW.

Thus, the Russian economy should prepare for two most likely scenarios: when the price of oil will be 50 and 40 dollars.

If oil is $ 50

Such prices will be quite comfortable for Russia, as it does not create problems for the country’s budget, based on the estimation of 50 dollars a barrel. The government is expecting GDP growth of 0.7% with an average oil price of $ 50. A number of economists believe that in this scenario, growth may reach 1%, but others expect continuation of falling GDP, even with such a good price. For example, in “the development Center” GU-VSHE rather pessimistic and predict the fall of the Russian economy by 2% even at 50 dollars per barrel.

“It will be connected with continuing stagnation in consumer revenues and expenditures,” – says the newspaper VIEW Deputy Director of the Institute “development Center” HSE Valery Mironov. He explains that in this year there was a second wave of devaluation that has not yet fully affected the prices. In the first months of 2015 at the Institute waiting for inflation at 13%, which will further reduce real wages and retail turnover, which is already experiencing not the best times.

Looks like the competition is between the “Big seven” and BRICKS the other hand, in 2016 is expected to increase domestic investment because of the lower debt load of companies. “Payments of the enterprises on the foreign debt next year will be less than this. This means that Russian companies will not have to divert all the profit on the payments. At least this year all the increase was to cover payments on external loans. In 2016, investment demand can be revived, there will be a little rusty,” says Valery Mironov.

Consumer spending and investments yield the main contribution to the country’s GDP. If they fall, the economy can not grow, and Vice versa. “Household consumption is 50% of GDP, while investment is 20% of GDP. Each percent of increase in household consumption brings 0,5% of GDP, and each percent growth of investments makes 0.2% of GDP”, – said Russian economist.

The fall in consumer demand is one of the main problems of the Russian economy that must be addressed. However, make it extremely difficult in the face of a deteriorating oil prices, which inevitably leads to devaluation and the compression of expenditure at all levels.

The economy is also an important indicator of net exports (exports minus imports). To revive the economy, need to lead an aggressive expansion of Russian goods to foreign markets. And now more important than ever to expand non-oil exports. Statistics show that Russia is slowly, but going that route. In 2014 the share of non-oil exports together with exports of services in monetary terms amounted to more than half of total exports accounted for 51.5%. For comparison: in 2013 the non-oil export amounted to 251 billion dollars, in 2014-m already 286 billion.

If in 2013 oil and gas revenues amounted to 53% of the budget, while oil and gas deficit reached almost 11% by mid-2015, these figures dropped to 43% and 9.5%. In export structure the share of crude oil and natural gas amounted to less than 40%, while in 2013 was 52%. Share of the total FEC in exports fell from 76% to 60%. This proves that besides oil Russia has other competitive goods and services.

And still Valery Mironov believes that the expansion of Russian export of goods the government does not pay enough attention. Plus this is obviously not conducive to the geopolitical tension between the former partners. “We need to bring back old partners and seek new trade partners. But don’t look for substitutes for sanctioned goods, but rather to look for buyers of Russian goods. This is a complicated process, but this way there is a majority of countries after the devaluation to accelerate GDP growth,” says Valery Mironov.

When the price of oil at $ 50 (and above), with a stable geopolitical situation (and improve) all these tasks run would be a lot easier. One of the main conditions to restore consumer demand, revival of investment and exports – is stability and confidence in what to expect in the short and long term. Unfortunately, the November and December events – the new falling barrel, the change in monetary policy the US, the disorder of trade relations with Ukraine and Turkey – once again plunged Russian businesses and Russians into the abyss of uncertainty. But if Russia, and in 2015, for the first six months would still be able to return to the island of stability, it will be a great achievement.

If oil at $ 35-40

If oil prices this year will remain at current levels – 35 to 37 dollars per barrel, Russian GDP could fall 3%, is expected in Economics. In other words, Russia will repeat the fall of last year (minus 3-4%). This scenario means another year of tests on the strength of the Russian economy.

With the price of oil, inflation will accelerate in the early months of the year, stop the fall in consumer demand is necessary to forget at least another year. The price of 40 dollars per barrel will provide challenges to the Federal budget been drawn up based on oil prices $ 10 higher.

With an average annual price of oil of 40 dollars per barrel and exchange rate of 70 rubles to the dollar amount of the drop in 2016 revenues will reach about 1 trillion rubles. This will be partially offset by revaluation of foreign currency resources of the Reserve Fund and national welfare Fund (reserves are growing due to strengthening currencies), which will amount to 600 billion roubles. However, the fall in oil prices gives rise to a new round of revision of the budgetary obligations, the Director of the Institute “development Center” HSE Natalia Akindinova.

However the outflow of capital in 2016 will be considerably less. According to the Institute, not more than $ 40 billion. As a result, the inflow of foreign currency on current transactions in 2016 may exceed net capital outflows, allowing the Central Bank to accumulate reserves, said Sergei Pukhov from the “Development Center” HSE.

Options to cover shortfall in income: reserves, borrowing, increase of the tax burden, privatization. To spend more reserves than planned, danger: then they will not last till 2019, they will end in 2017. But it is a certain safety cushion in a period of low oil prices, which in the worst case may take five years or more. The increase in debt is unsafe output, although low leverage allows Russia to do it. Privatization in low market is not always favorable, although small batches of shares in SOEs can be sacrificed in difficult times. The tax burden on the oil sector have increased.

As Russia overcame Smutov any case, if the decline of the economy in 2015 felt not all Russians, in 2016, most likely, these will be a little bit. “It will be a year of restructuring, because all will understand, including the government that need more serious measures to resume economic growth. The government while trying to persuade oligarchs not to fire people, to wait in the expectation that soon will start economic growth. But if it becomes clear that the recession is prolonged, we will begin the drawdown of employment,” expects Valery Mironov.

Russia actually manages to keep a very low unemployment rate of 5.8%, including thanks to the efforts of the government. However, next year may start not only growing unemployment, but freezing nominal wages.

The company can start to reduce expenses in its revenue, including reducing costs for wages. This means either the dismissal of the employees by maintaining the same salaries for retaining the employees, or reduce salaries for all employees.

“In 2015, the nominal wage in General is growing at 8-10%, but with inflation at 15% it drops, as real incomes of the population. But some can see and others may not notice,” says Mironov. If nominal wages freeze, the increase will not do, the negative effects on yourself can feel almost everything.

In addition, there is the threat of financial crisis in the country, which, most likely, Russia will not allow, says Mironov. But a certain instability in the financial system will be observed and to irritate.

Risks

Besides oil, however, there are other risks that can be that bad, but they may not work. Is the rise of geopolitical tensions, for example, if the West decides to strengthen the sanctions because of renewed conflict in the South-East of Ukraine again or remember the Crimea.

Risks also lie in the world economy. Among them – a hard landing of the Chinese economy and financial crisis that would have serious problems and the us economy. How closely they are related to each other that if will fall, that too together. The growth of the Chinese economy slowed to the level of 2009, and in the next three to six months, the trend may continue. In turn, if the fed decides to aggressively raise rates, it could even lead to recession of the American economy. The US Central Bank previously raised the rate only during the growth of the world economy, which is not observed. In the second half of 2015, on the contrary, in the USA, China and Japan growth rates are falling.

If you’re lucky,…

However, there are unexpected factors that can play into Russia’s favor. For example, to pleasant surprises include the lifting of sanctions in the summer, the probability of which still cannot be considered zero. Or play some factors that will cause the oil to rise in price. They are few, but these are also. The most banal is in the active phase of the middle East conflict, leading to the real limits of oil supplies, for example, through the Suez canal.

“In the middle of 2016 may begin the reversal in the oil market, only if there is the geopolitical factor is the active phase of the military conflict – the Syrian or Yemeni. If it involved Saudi Arabia, the Emirates, Kuwait, if there will be problems with oil supplies through the Suez canal, then it will affect the situation with oil prices. But while it can only be assumed. Libya, for example, quietly left the market. The awards have been presented, but remained invisible,” says the newspaper VIEW Alexander beekeeper of NESF.

There is also another factor that may positively affect oil prices. This influence rates by the fed on commodity currencies and commodity markets. Now no one doubts that the American regulator will continue to raise rates, but it remains unclear how fast and how aggressive. The first increase was played by the rising dollar and the weakening of logical oil. However, if we draw historical Parallels, in the next six months can occur in the reverse situation – the dollar will be weakened further by inertia it will lead to the strengthening of all dollar assets, as oil and other raw materials (including metals).

“If you look at the behavior of the dollar index after the start of monetary policy tightening (in February 1994 and June 2004), it can be noted that it showed a decrease within 6 months from the date of increase, losing about 6%”, – says the analyst of the Forex Club Irina Rogova. If this happens, and this time, in the middle of 2016 the oil will get support.

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