In a column earlier this year when the oil price was falling through the $30-level, quite a few people thought that Saudi Arabia, Venezuela and Russia would crumble. The Saudi’s are still standing, Venezuela is almost falling off a cliff (and only the continuous gold sales are avoiding a bankruptcy for the time being) but Russia? Russia is still there, and the economy which was in a slow-down modus earlier this year is picking up steam again.
Indeed, even though the Russian Central Bank hiked the key interest rates halfway 2014, it took appropriate action and immediately reduced the interest rates again to give the domestic economy more oxygen, as you can see on the next image.
Source: Danske Bank
The revival is obviously closely correlated with the oil price as the wellbeing of the Russian economy depends on the export of oil. This brings hard dollars into the country’s treasury to help the Central Bank to maintain a healthy ratio of foreign currency on the balance sheet (or to buy more gold, see later).
In the second quarter of the current calendar year, the economy shrank by just 0.6% which was a better performance than what the market analysts were expecting (-0.8%), and it looks like the stabilization in June (with a 0%-change in the Gross Domestic Product) was a positive surprise for most market watchers. However, if we pull up the chart with the oil price, you can indeed see oil was gaining strength in June which does explain the excellent performance during that month.
Does that mean the Russian economy is back in trouble after experiencing a weak July on the oil market? Not really. The export data will very likely come in strong, but the industrial production data from Russia seem to be still relatively weak despite a huge double-digit percentage increase in the production of machinery and equipment.
Source: Danske Bank
What’s even more interesting is that the policy of the Russian boycotts against western products as a counter-measure against the imposed sanctions is having a (very!) counter-productive effect. Not only did the agricultural output increase by in excess of 3% in the first seven months of the year, the YoY performance in July was exceptionally strong with a 4.9% increase in the total produce output.
Despite the temporary reduction in inflowing US Dollars in the first quarter (and first half), the Central Bank continued to purchase more physical gold. Granted, you can notice a certain slowdown in the gold purchases as the most recent date (up until May of this year) indicate the central bank has purchased less than 650,000 ounces of gold, but keep in mind that still represents an investment of almost one billion dollar in a quarter wherein the country’s economy was still shrinking.
If there’s one lesson to be learnt here, it’s the lesson you should not underestimate a wounded animal. The West thought Russia would collapse or would have to sell its gold to survive the oil glut, just like Venezuela. The West thought the Russian population would revolt against the current regime if it would notice the boycotts against western products, but nothing could be further from the truth as the agricultural output is increasing, and the increasing oil price will reduce the pressure on the economy and the country’s annual budget. The budget deficit is expected to be 3% this year, but will already improve to a deficit of just 1% next year, based on a price of less than $55 per barrel of Brent oil.
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