What do they see that we don’t?
Russia’s economy has been shrinking five quarters in a row, though in the first quarter of 2016, it contracted at an annual rate of “only” 1.2%, after having contracted 3.7% in 2015, the longest recession in two decades. The budget deficit has swollen to 8.6% of GDP in April – way beyond the 3% the government is projecting for the year. It might require additional and unpopular budget cuts.
So the jump in oil prices recently, while not nearly enough, is a huge economic relief for the world’s largest oil & gas exporter.
The surge in oil prices has boosted the ruble, which had plunged late last year and early January. Now it’s back at 69 rubles to the dollar, where it had been in November, and there’s a sense that a currency crisis has been averted.
Putin’s pivot to the east with his energy policy has led to mega-contracts and projects with China, largely to supply oil and gas to the energy-hungry nation. Already, exports of crude oil to China soared 28% in 2015, which elevated Russia to China’s second largest supplier, behind only Saudi Arabia. China has become Russia’s biggest trade partner, accounting for 12.8% of Russia’s total trade.
The ties are also growing in the financial realm. Russian oil and gas companies have bought yuan-denominated bonds last year. And in 2014, the Central Bank of Russia signed a 150-billion-yuan ($23 billion) swap agreement with People’s Bank of China to allow both countries to directly settle their trade in rubles and yuan, without having to resort to the dollar.
So Russia is increasingly joined at the hip to China, and will be even more so as the new projects mature. But now Russia is fretting about the slowdown in China and a further devaluation of the yuan.
These worries percolated to the top on Wednesday at a Credit Suisse conference on emerging markets in Moscow.
Bank of Russia First Deputy Governor Ksenia Yudaeva warned that the global economy wasn’t prepared for a “more flexible yuan,” as Bloomberg, which reported on the conference, paraphrased her words. It warrants further discussion, she said.
Volatility in China will have global repercussions, she warned. She was worried about Russia. For every percentage point that the Chinese economy slows down, Russia’s economy, linked as it is to China, would slow down by about half a percentage point, she said. This is how shock waves from China would spread to Russia.
So the Bank of Russia would keep an eye on the situation in China and, if necessary, take measures to maintain “financial stability” – the key phrase in central-bank jargon for averting a financial crisis.
At the same conference, Deputy Finance Minister Maxim Oreshkin warned that any “problems” in China will ricochet into Russia through the commodities markets. He was worried about the price of oil, and how a slowdown in China could re-crush it.
“Serious problems in the Chinese economy can easily lead to a repeat of the oil prices we saw at the very start of this year,” he said. For economic policy in general, it’s very important to be aware of the risks that stem from China.”
Then he warned of risks in China that even hard-landing gurus hesitate to voice.
Risks in China “can’t just be waved away,” he said. “The entire economic policy must be shaped to take into account the possibility of worse growth than the market expects now or even effectively a recession in China. Such a risk cannot be ruled out.”
From his perch, what is he seeing in the Chinese economy that the rest of the world and in particular the official data coming out of China are not seeing?
What he is seeing is an economy that is very much at risk, and that “growth” in China might disappoint the markets, and that the markets might react sharply once they figure it out.
He’s not only seeing a slowdown in China from super-hot growth to just-hot growth, which is the official story coming out of China, but the risk of an actual contraction, the risk of a recession, which would slam China’s demand for oil and other commodities. And that sort of economic development would not only send shock waves through Russia but the global economy. That’s what these folks in Russia are worried about.
There are already repercussions in the US. Money from Chinese investors “has dried up,” a real-estate broker in San Francisco said, as he was fretting about the local housing market. And brokers in Silicon Valley are chiming in. Read… Silicon Valley Housing Market Hit as Chinese Money “Dried up”