Top of the Pops
Same problem as earlier, apologies. The platform keeps bugging when sending this out, I’ll figure a better way tonight to make sure it doesn’t duplicate for sends again.
Oil lends itself to pompous market prognostication. It’s an emotional commodity, something that trades a lot on momentum and perception and can make or break fortunes in a matter of days. The oil market, large oil firms, and the investment banks that want to soak up earnings off of the dumb money chasing yield are now singing a song about oil potentially reaching $100 a barrel this year or early next:
Shale output is about 80% back online already, with most of the rest to come most likely within the next week or two. US crude stocks showed a surprise rise, tamping down price rises early today — this will be a little tricky to use as an indicator until all refining capacity in Texas is back online since a higher proportion of imported refined products will be needed and domestic stocks can’t be used up without high/normal refinery utilization levels. The result is downward pressure on crude prices since domestic output is back online, but mixed effects on refined products. Argus is selling the narrative that COVID will end up having little effect on the underlying oil demand trends coming out of 2019: slowly declining marginal demand growth, but demand growth all the same. Demand by 2040 will still be nearly 100 million barrels a day.
In reality, oil demand levels aren’t yet recovered close to where they were at the end of 2019, and while supply is constrained, there’s still more supplies in storage to be unwound and little reason to believe that drillers operating in shale, with its short investment/return horizon, are sincerely planning on refraining from fracking if oil shoots up to $75 a barrel or more. The oil market is pretty good at pricing in the effect of a concrete policy or event that affects equity valuations and output in the immediate term — a fracking ban, extreme weather, a change in tax regimes for extraction. It’s terrible, however, at factoring in the larger structural policy or political economy questions that require a great deal of assumptions to be made in order to function. Measuring potential economic output at the national level is insanely difficult to do in a meaningful fashion, yet government estimates are put out to justify this or that policy and have a huge effect on end demand in the long run. Consumers need money to consume, after all, and inequality is a huge net drag on demand.
The current rally is more akin to the euphoria of seeing a lifeboat when you’ve been floating adrift after your ship wrecked, praying for help. It’s a lifeboat, but you’re still stuck in the middle of nowhere with no radio and have to hope you either find land or help’s on the way. I increasingly think demand may rise slightly vs. 2019 in 2022-2023, driven mostly by a more redistributive economic policy in the US and stronger US recovery lifting up demand for poorer consumers as well as a weaker dollar offering a short-run boost. But the good times end there. Road transport consumes as much as 40% of oil demand and plastics demand growth is much slower in marginal terms for the amount produced by a barrel than automotive fuel. The current semiconductor shortage on the market has jolted Biden and the US Congress to begin considering some sort of industrial policy in response while Biden tries to accelerate EV adoption using the executive branch. Prices are likely to hang north of $60 a barrel, but $100 a barrel is premature and more about groping for yield and profits than fundamentals. The real reason Novak and Russia’s oil sector want to get pumping now is the hope that they can further squeeze US shale drillers during the recovery. Alas, it remains fool’s gold. And don’t forget that Biden’s still going to wield sanctions (and trade) instruments for policy aims. Wintershall Dea just suspended financing for Nord Stream 2 due to US sanctions. Washington can’t kill the pipeline. It can begin to use these coercive economic instruments to try and pressure states to make greener investments. We may well get climate hawks in Washington soon enough.
What’s going on?
- Russian engineering company Drive Electro is launching production of electric engines for transport this year, reportedly signing a deal with retail giant Magnit for 200 trucks. The company is working out what models it will offer, aiming to provide a range from heavy, long-haul trucks to light vehicles. The initial plant is expected to have a production capacity of 1,000 vehicles a year, with the plan being to buy the non-core parts as needed, even including motors (presumably into which they’d install their own batteries). As of now, their battery can only power a loaded truck for about 120 km, which means it’d work for local distribution from, say, a railhead or other depot — this is par for the course for other markets as well, just more salient in a country as reliant on internal long-distance supply chains as Russia. The first production site is being built in the Tekhnopolis Moskva special economic zone (SEZ), which suggests the company founders are banking on tax breaks during the initial launch to buy them space while they sort out the buyers. The article claims some in Latin America are interested, but I’m quite skeptical Drive Electro is going to be exporting much anytime soon. Seems that electric trucks may be rolled out in Moscow and St. Petersburg relatively soon, driven by the relative strength of Russia’s large retailers who can afford the initial costs of adoption. We’re several years from wider-scale adoption on other markets for trucking, but it’s coming hard and fast. Russia Inc. better keep up.
The Audit Chamber’s 2020 review for spending amid the crisis offers a helpful snapshot to make sense of just how deep the hole the economy is in coming out of COVID. The following is part of a larger graphic measuring from reference points in December 2017, November 2018, December 2019, March 2020, and the Jan.-Dec. data for 2020:
Descending: GDP (blns rubles), Inflation %, Revenues (blns rubles), Revenues % of GDP
- In ruble terms, Russia’s domestic output has been virtually unchanged since late 2017 while state revenues’ share of GDP has risen roughly 3%. Spending, by comparison, was only up about 1.6% in GDP terms until 2020 — averaging 17.2% for pre-crisis figures, thus leaving Russia to run a consistent 1% GDP budget surplus regardless of the oil price. Aggregate spending in an economy is interchangeable i.e. it doesn’t matter if the state or households spend on certain things to generate activity so long as money’s spent (though the quality of said spending as well as its institutional and financial impacts may vary as a result). Just as importantly, a state’s fiscal surplus can drive up household debt if the economy isn’t booming — the imposition of higher taxes vs. a lower relative increase in spending cuts down growth and, especially in the Russian case, the persistent decline of disposable income vs. 2013 levels means debt has to finance a greater proportion of consumption for any marginal increase in consumer demand against the levels last seen then. At the same time, oil & gas revenues in a normal year with oil above $50 a barrel still account for 40ish% of all revenues, a figure that climbs higher with prices. The topline GDP figures in rubles are terrible and the Audit Chamber estimates a 6.2% GDP decline between March and December 2020, way worse than the official numbers put out by multilaterals that Moscow used to puff itself up as a success story last year. In short, the scarring at play is probably much worse than the official data the Kremlin cites would suggest unless disposable incomes rise this year.
- Sova Capital estimates that rising oil prices and a weaker ruble will bring in an additional $33 billion in revenues for the consolidated budget this year, an effective increase equivalent to 2.3% of GDP so long as there’s no looming fall in prices. As the Audit Chamber notes, the correlation between the ruble-US$ exchange rate and the oil price has declined significantly since a floating rate regime was introduced at the end of 2014, changing the transmission effects of monetary policy and other measures on its value. What’s interesting per the Chamber’s reflections is that while the oil price had a much lower correlation during the worst of the price crash in March-April 2020, some though not all of the correlation returns in the $40-50 price range before easing off again as oil prices climb higher. Basically, oil prices mostly correlate negatively with prices rather with the positive upside much diminished. The current budget deficit forecast from MinFin for 2021 shows a deficit worth 2.4% of GDP, likely to be over the actual deficit if the oil price rally sticks above $70 a barrel for any sustained period this year. Overall, though, the official analysis of the impact of the oil price on the ruble — and budget — confirms that oil’s role is primarily a function of the current account and how oil sector earnings are then spent across the broader economy rather than its specific attachment to the US$ since exchange rate management via currency interventions has been softened so much. That means a rising oil price won’t help the budget or the ruble as much as it would have in the past while also not generating additional growth domestically. The budget wins, of course, but spending continues to fail to crowd in investment.
- The property boom is on. New data out from Knight Frank shows that roughly 26% of multimillionaires in Russia want to buy homes as an investment this year. There are somewhere in the range of 240,000+ millionaires in Russia, presumably a huge chunk of them multimillionaires given the general concentration of wealth once successful. Traditionally, this segment of the population has primarily bought property when moving abroad, but in recent years for Russia’s rich, that’s shifted towards a focus on better quality of life and for their children’s education. This is a trend to watch globally as the combination of lockdowns, exacerbated inequality, and domestic housing bubbles make second homes or else new permanent first homes a better investment on paper. Portugal has taken the top spot, but interestingly, London and the UK remain no. 2 for Russian elites apparently. The question is how much money leaves Russia. The capital outflow data for 1-2Q will be curious as wealthy Russians try to grab deals of all kinds and get their money out. There’s no wealth tax coming to Russia, assuredly, but a weaker recovery in Russia means lower returns on investment while the property market starts running out of steam and borrowing costs rise.
COVID Status Report
Cases fell below the 12,000 threshold to 11,749 with reported deaths at 383. The trend continues — Moscow is stagnant, decline is coming from elsewhere. Things remain stable with a very positive outlook despite the concerning gaps in the data:
Dig into the news over the last day with the holiday, all that’s left are drips and drabs about various regions getting new doses of Sputnik-V and issuing them, but still at levels that seem far too low for comfort. Google’s launching a massive database to create open access to data on individual infections that’ll help track mutations and variants as we hope nothing new emerges that existing vaccines are ineffective at fighting. Russia and China are now competing over how much supply they can place in the developing countries that will take the longest to recover economically without significant aid. It’s good they are. The US and UK, for instance, adopted what are effectively hoarding strategies and won’t be playing a major role coordinating efforts until their own populations are vaccinated, as is the case in the EU which is finally beginning to improve its vaccination rates. US producers, however, are telling Congress that production is about to surge. Moscow may have locked in supply agreements, aided by the weak domestic take-up of its own vaccine supply, but in the next few months, we may start to see a shift in the balance of ‘vaccine' diplomacy’ as rates in the OECD fall and supply bottlenecks vanish.
Deep Dish Mish
The White House, at PM Mishustin’s request, is apparently launching a coordination center as of April. It’s intended to improve coordination and cooperation between different organs and agencies within the executive branch to respond to urgent problems and incidents. By creating the new center, Mishustin is effectively rewriting the structure of the executive and the role of the cabinet and his team in making executive decisions. Mishustin’s proposal seems to be giving responsibility over the center to a deputy minister with its general executive team compromised of various representatives from within the executive branch. It’s a codification of the crisis management team and system that emerged last May built out of the Analytical Center to deal with COVID. The new center is effectively being tasked with “priority matters” and “allocated projects” kicked its way. Despite the formality, it’s clearly just another variant of the obsession with ‘personal responsibility’ that pervades late Putinism’s governing MO — pick an adequate head, find technocrats and middlemen to discard as needed when crises go pear-shaped, and emphasize individual responsibility to avoid structural or systemic changes/challenges with the public.
It’s striking to see the government reshape itself on a permanent basis as a result of COVID, especially because the new structure gives Mishustin a new platform from which to force not just federal authorities together to resolve issues, but to show a united front when dealing with regional or local authorities depending on the issue. One of the biggest component of the proposed reform is to create a unified system to combine the data being collected by different ministries, preventing the frequent divide and conquer bureaucratic politics of withholding, sharing, or leaking data as needed to serve agendas every unhappy government struggles with in its own way. Theoretically the new center is a sort of analytic/strategic clearinghouse for decision-making when in actual fact, it looks a lot more like the Delivery Unit operating under Blair in the UK as of 2001 — a mechanism meant to gather relevant policy heads and ensure the realization of targets set out by the prime minister. This suggests the latitude to operate on domestic policy for Mishustin is massive, even if he still has to coordinate with the presidential administration on any matters that affect the Kremlin’s elite and business bases of support, with the public interest left more or less up to the government and Mishustin.
Issues like the food price control fiasco or deficits of road fuels on the domestic market are the level it seems the Center will be working at. That means Mishustin’s now the flak catcher extraordinaire since being the guy who has to say no to various interest groups who, given the weak power of formal institutions, will be vying for influence on the staff that will comprise the new platform. Perhaps more importantly, the Center belies the sense that economic and social policy are now a non-stop crisis requiring new fast-action governing instruments to address. The institutionalization of a temporary working measure meant to ensure that public health measures (and data) were coherent and emergency economic policy was executed effectively is a near perfect reflection of the underlying health of the Russian economy and the fragile socioeconomic balance it has to maintain for the sake of Putin’s ‘silent majority’ intended to power the regime through the next electoral cycle. The system that Putinomics built is more brittle than ever for households. Yet it’s more stable than ever for the state — and the state is inexplicably doing less given its greater relative resources.
Going back to the Audit Chamber’s 2020 review, a strange pattern emerges after 2016. The % of the budget allocated to be spent that is actually spent in a given fiscal year declines a bit. It’s nothing drastic — a fall from about 98-98.5% on average to more in the range of 95% — but it makes little sense. If you adjust the spending figures based on the % execution of the budget from 2017-2020, the state is effectively foregoing 0.6-1.1% of its annual GDP in spending, which could raise growth and incomes. My guess is that part of the adjustment process from the shift to reduce dependence on oil revenues for the budget and insulate against sanctions risks has been a rising “risk premium” on budget expenditures that we can reasonably infer is somewhat related to rising sanctions concerns once Trump came into office. Couple that with the constant fight to prevent cost inflation and ineffective spending from MinFin and you have a state that’s hoarding more resources in relative terms to its population even now at the peak of the COVID crisis. The better the balance sheet is for the state — the 5.4 trillion ruble ($73.5 billion) increase in state debt last year is a non-story, only a concern because of the ideologically rigid obsession with external debt going back to the late Soviet period — the worse things are for households. An increase in the savings rate in response to the crisis doesn’t change that, at least if we break down who’s doing the saving and who’s most exposed to price inflation at the moment. And the worse things are for households, the more pressure there is on the government to ably react to anything that upsets the living standards of households in a significant manner that might affect political decision-making in Moscow.
The structures within the executive branch have to adapt to this dynamic and appear to be doing so built off of the experience of managing COVID-19. Boris Titov, Putin’s guy Friday for business, confirmed over the weekend that the government is considering a new packet of business support measures, which should trickle out to households. Presumably this will be another credit subsidy-driven program to avoid large amounts of direct spending. I don’t envy Mishustin. The only way to break the logjam and dead-end for growth out of COVID is to challenge the overwhelming consensus on economic governance he subscribes to, and he won’t do that. So instead, he’ll have to juggle more in the year or two ahead containing the damage done by the country’s supply-side economic response to COVID. At least he’s got a formal mechanism through which he can firefight now.
The split in public attitudes about the state of affairs underscores how important firefighting is as a matter of regime politics. Per Levada, the number of people who believe that protests making economic demands are possible is at a an all-time high under Putin, yet the number of people willing to take part per their polling has fallen off dramatically:
It’s easy to get overexcited about anti-regime sentiment in a political system as heavily managed as that in Russia. My sense, however, is that this polling gap is more indicative of a growing sense of disconnect between those who were struggling pre-COVID and those who were fine — a dynamic visible in the crisis measure responses used in Europe and the UK as well — alongside a shared sense that something is off, even if things are ostensibly on the right track, and that there is a growing desperation among those worst affected. There are other explanatory drivers to capture why some are willing to protest and others aren’t — a huge one is dependence on the regime for job and/or financial security — but the numbers for protests regarding political demands are slightly different:
About the same number of people are willing to protest on both economic and political issues. This is novel since the former has long garnered a broader coalition of support than the latter and both have fallen since late 2020. Willingness to protest also doesn’t necessarily correlate to how one might prefer to vote in September. But in both cases, more and more people expect unrest, which suggests that the fall in COVID cases and erstwhile ‘recovery’ may have reduced willingness to protest, but not the actual belief that things are bad enough or people fed up/crazy enough to do so. Diffusing that atmosphere requires a big fiscal spend. That’s clearly incoming. But Mishustin’s new coordination platform is another manifestation of the siege mentality that’s overtaken Russian elites since Crimea. In an environment where the public is concerned about political instability, every sudden crunch in a supply chain, surge in inflation, housing shortfall, protest over water quality, and so on is a threat. Earlier today, Mishustin appealed directly to the Federation Council to ensure they properly coordinated policy with him as he’s counting on them to help revive the economy and unleashing a flurry of executive activity on economic matters, including another land reform intended to provision land plots to farmers without bids, continue increasing acreage being utilized to sustain export increases and address domestic price issues, and recognize unused land as municipal property (thus clarifying some land rights issues). Optimization is taking on a clearer shape: a blitz of peripheral reforms, some spending measures, and a new, permanent forum to rapidly react to social and economic problems.
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