Top of the Pops
Before the New Year, I caught this chart from Tatiana Evdokimova and it struck me as an instructive reminder of what's wrong with a lot of Russian macro watching. The following indicators only go through 3Q 2021, but have been cited as evidence of "overheating" demand in the Russian economy, a term that's been equally applied in the US (though not so much Europe where inflation levels shot up year-end thanks to the energy crunch):
The argument is pretty straightforward: household consumption and imports are 6% and 7.3% higher than pre-pandemic levels recorded at the beginning of 2020, which shows that demand is 'hot' and that produces inflation. But that reverses that likelier chain of events in this case based on what actually qualifies as household consumption and import demand. At the macro level, these figures are measuring levels of expenditure i.e. the monetary value of consumption and imports. They're not measuring the actual volume of what's being consumed. Take food. It and similar staples account for nearly 40% of the average Russian household's consumption in monetary terms as of 3Q last year, and the price for many staples rose 15-30%. Home purchases exploded through a household borrowing expansion worth, at minimum, somewhere in the range of 5 trillion rubles ($67.32 billion) since the start of 2020. Housing doesn't account for all of that borrowing, but the mortgage market has shot up to be worth around that much in total if not more by year end. These aren't indicators of "overheating" demand. They're indicators of price increases from supply chain disruptions and private borrowing directed towards either maintaining standards of living or else directed into housing by state policy. The fact that investment was falling in 3Q 2021 shows that businesses don't buy that narrative, or rather don't see any way of actually meeting that demand if it's really there. No wonder Russians were technically more pessimistic about their economic future in 2021 than 2020. If things are overheating, the question is "compared to what?" Pre-crisis demand was weak to begin with...
Before year end, reporting from Vedomosti shows that the relationship between the billionaire asset & business managing class and the state deepened over the course of the pandemic. At some level, this is the classic approach of making everything seem calm and orderly on the outside while everyone fights it out under the rug, but I think there's something more serious to consider here given the political response to COVID inspired attempts to formalize inflation controls. The world "socialism" creeps in as a criticism of ongoing state interventions, which makes sense. Russian businesses want the state out of their lives and fought tooth and nail to make interventions work for them as best they could. No wonder Finance minister Anton Siluanov is promising not to raise VAT, personal income taxes, and corporate income taxes in the next three years.
The transit of Russian gas through Ukraine to Slovakia has fallen two days in a row and is now down to 35.5 million cubic meters from 49.5 mcm. The issue, as always for Gazprom, is securing long-term contracts intended to help it pay off its inflated repair and operational costs in Russia through its more efficient foreign export operations. That flies in the face of the EU's latest move to ban long-term contracts past 2049, imposing a functional cut-off on negotiations for 25-year contracts (the long-preferred time horizon). US LNG has brought European prices down in line with warmer weather of late, so I'd watch to see if spot purchases of US volumes eventually lead to standing supply contracts.
November mortality data related to COVID showed a 16% jump in deaths over October. That's 87,000 official deaths linked to the pandemic, which we know always represents an undercount. Over 257,000 people died in November per Rosstat data. Cases have since come down dramatically – just 16,343 cases in the last day. Good to see that coming down, but I'm waiting to see end of year excess mortality data. That's also contributing significantly to disruptions for household spending, inflation, everything you can think of.
The Higher School of Economics is forecasting 2.5% GDP growth for 2022 followed by 2% pre-crisis trend growth annually. Alfa Bank's Natalia Orlova is projecting 1.5% growth, and I think she's right. Her argument is that financial instability is the major drag or "mood music" affecting the outlook, which is most certainly the case at the household level. The huge spike in borrowing is paralleled by a large drawdown of deposits in banks and people being forced to spend the cash they had squirreled away at home not readily measured through any financial institutions. But financial volatility isn't the only thing to watch for. Broadly observed deflation in commodity prices from slower growth in China, Europe, the US, really anywhere is one thing. Higher natural gas prices we're seeing now also slow down global growth. The real lesson is that exports aren't enough to drive Russian growth above pre-trend, especially not in conditions of uncertainty. Everyone knows it, even if they can't quite say it outright.
Food for Thought
People bearish on future oil demand growth like myself have to contend with a major problem: SUV sales exploded after 2014 when oil prices started crashing. In model year 2020, SUVs and trucks represented over half of sales on the US market for instance. Here's a graph from the EPA's automotive trend report back in November:
The IEA estimates that SUVs created an additional 3+ million barrels of oil demand daily between 2010 and 2019, about 30% of the global increase between 2010 and 2019 (11ish million barrels a day). They're still selling and lots of these cars would normally last around a decade before getting traded in. On the flipside of that equation, it's a huge deal that US automanufacturers are going all in on electric SUVs and trucks:
Biden's play to lead an industrial renaissance in the US faces tons of obstacles, but American manufacturers now have every reason to demand more public investment into infrastructure if they want the massive commitments of capital they're making to pay off in full. SUVs are the last automotive trend from the cheap oil era leading net increases in road transport oil demand outside of perhaps long-haul trucking.
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