Outlook on the Russian economy
RT: The economic data from January February shows an economy still struggling to get traction on a rebound, with the central bank continuing to cut rates. When do you think we will start to see clearer signs of an economic upswing? Do you think the central bank will lower rates further? Is there a limit to how far the central bank can go? What is your outlook for inflation?
NK: “In fact, the economic data has become partly irrelevant recently as Goskomstat started some recalculations for its indices. However, despite all statistical haziness, it has been rather clear that the recovery looks uneven in Russia. Being well noticeable in some corporate showings, especially in financials, metallurgy, chemistry and energy sectors, it obviously lags in areas linked directly to the final demand, like, for instance, automotive. Bank lending outside state-controlled banks has been sluggish. There may be also little progress in housing – similar to the USA. On the other hand, in my own perception, employment data in Russia is unreliable due to ineffective insurance practices, underreporting etc.
It's really hard to paint a complete and detailed picture of what's going on in the Russian economy. Given official figures it's really a shaky and uneven recovery based A. in the real sector – mainly on external demand which looks to be so much related to China consuming extraordinary amount of raw materials in the course of its evidently bubbly recovery, and b. in the financial sector – to the emergency stimulus programs that have drained a good deal the Reserve Fund in 2009.
Given inflation being probably subdued for at least two or three quarters in Russia (in the fact it has stayed low since February, and there's still a chance for it to remain a one-digit figure this year) the CBR might reduce its key rate by another 25 points, with a further cut from here looking optional. That becomes even more possible as the exporter pressure for a lower Real Effective Exchange Rate (REER) is evidently going harder, while the CBR keeps desperately fighting the carry trade – yet in vain. But the CBR hardly would dare to go lower than mentioned, as this is the first time in history that it has applied such a soft policy anyway.”
RT: There have been some claims that bank lending is due to rebound, but recent reports by larger banks have indicated still growing non performing loans? Are you seeing signs a rebound in bank lending? If not when do you expect to see a rebound? When do you expect NPLs to peak? How is the level of NPLs affecting bank lending?
NK: “The Russian banking system is not homogeneous and highly segmented not only in terms of banks' size, but also in terms of banks' market behaviour. This also implies somewhat different rules of the game for some banks compared to others. The state-owned banks under certain circumstances serve macroeconomic levers for the government, as they are deemed to channel the stimulus to the rest economy. A similar situation looks typical for China also, where state owned organizations are playing an immense role in the recovery there, inspiring some, and increasing, criticism from a good number of market-oriented economists.
While TARP in the USA has been available for a wide variety of institutions, large banks in Russia have been undeniably the main beneficiaries of state funds. This does not mean that they once were among the most distressed ones, the reason has been quite different: the largest banks serve the predominant channels for governmental aid to the economy. One may not say that this has been an outright success. This way or another, the largest banks evidently managed to keep credit to corporations at least flat over 2009, while the retail segment suffered a noticeable deleverage: loans to households dropped by 11%, or RUB 480 billion over the year, while credit extended to corporates grows 6% in nominal terms.
Form the point of view of NPLs, mid-sized banks suffered the most. As of year end 2009, NPLs amounted to 5.4% of total loans at the top 20 largest banks, and to 8% at banks ranked 21st to 50th by gross assets. NPLs are generally expected to peak in 2010 (partly due to accounting peculiarities) and then decline, and forecast figures vary widely between 9% and 15% of total loans on the average. As to the NPL effect on the lending, bankers recently polled by certain professional media pointed at corporate credit risks as the undeniably largest obstacle for a credit recovery.
For Russia, it is very hard to measure numerically the overall risk, as there are neither VIX-style volatility indicators, nor domestic MarkIt-style CDS indices. There is not even any meaningful local CDS market. There are no generally-accepted reliable Case-Shiller style indices of real estate prices, also. So, the true current condition of the credit market might be only evaluated, based corporate bond performance (spreads), which has also been irrelevant due to a drastic misbalance of supply and demand, the demand overshooting supply by large figures and the junk segment still almost non-functional. Anecdotal evidence says, however, that banks probably will turn back to credit expansion, although cautiously, in the coming quarters.”
RT: The Russian rouble has strengthened considerably over the last year, including in recent months. There is considerable volatility in currency markets affecting the dollar and the euro. What is your outlook for the rouble? The successive rate cuts have had little impact on its appreciation, with capital inflows. Is the upcoming Eurobond issue likely to have any noticeable affect on the currency?
NK: “Capital inflows into the rouble actually are exceptionally hard to tame. Zero Interest Rate Policy (ZIRP) in the USA and an ‘almost ZIRP’ in EMU makes the RUB attractive, not only for carry traders, but pushes Russian exporters out of any other currency as well. While carry traders were once held back by a high cost of hedging, the RUB kept relatively steady. But as soon as oil prices had crossed the USD 65 threshold no one could stop the carry trade anymore, including the CBR. Actually, the carry trade was tame for a couple of months as oil prices had entered a trading range, but still the RUB climbed on exporter revenue with a trade surplus steadily in sight.
Exporters have been selling dollars for RUB heavily as rouble assets, whatever they are, pay more than any USD or EUR asset of investable quality. The irony consists in that the same exporters seem far from happy with REER at such heights: over a two-month timespan REER went up by 5%, a figure that was attributable to the whole year of 2007! Seems like they can do nothing about it but stop selling USD, or just wait for the oil price to retreat. Anyhow, the dollar has been massively shorted vs. the RUB, and at some point the greenback will become oversold as happened during 4Q2009.
In fact, the dollar bears in Russia are already much more cautious than a month ago as they watch the USD climbing vis-a-vis the EUR, still, they play their own game of shorting the dual currency basket which looks understandable based on the current fundamentals. I don’t believe the Eurobond issue might influence the domestic currency market substantially, maybe only temporarily: to do more, it must be heavier in size.”