Russia Frets about Risk of “Recession” in China

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”

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  40 comments for “Russia Frets about Risk of “Recession” in China

  1. OutLookingIn says:

    The “folks” in Russia also worry about security.

    The US continues to poke not only the Russian Bear, but the Chinese Dragon with a sharp stick. Militarizing the east European/Russian border with missiles, aircraft, tanks, etc. While continuing to press a naval presence against China’s claims in the China Sea, will have a very negative effect on global security. To say nothing of global trade markets.

    After Hillary Clinton recently compared Vladimir Putin to Hitler, the Russian leader made a comment on French television:
    “When people push boundaries too far, it’s not because they are strong but because they are weak. But maybe weakness is not the worst quality for a woman”.

    Russia may “fret about financial risk” in the short term but overall, they with their close partners have a parallel global financial system that will eventually freeze out the old Anglo/American hegemony. This is what has the western elites frightened and when all else fails – take the nation to war.
    They had best be VERY careful what they wish for – for all our sake’s.

    • Nicko says:

      Oh no, Russian trolls are invading.

      But seriously, Australia just bought 20 subs from France in huge, multi-billion dollar deal. US is lowing sanctions on Vietnam and Myanmar…no doubt to open the trade/security floodgates. Business for western allies will be very good in the East for the foreseeable future, so long as China pursues it’s militarist expansionist policies.

      • Chicken says:

        I love the handcrafted quality of French submarine fasteners!

        • d says:

          French design

          Built in Australia, by Australian workers, with Australian steel.

          Lets seek how long after the election, the french, keep this deal for.

          Australia and its politicians, have a way of doing things.

          Before and after elections, I guarantee you, the french deal is not “set in stone”

      • noSpy says:

        That lead off post you responded to Nicko — a “Russian Troll”?

        I don’t think so. In fact, as I was reading OutLookingIn’s 1:06 pm post, it stuck me as one of the most astute thumbnail analysis I’ve come across.

        • OutLookingIn says:

          Thank you.

          It has been said that when trade across borders is not allowed, then armies often do.

      • James says:

        @Nicko — If there’s a troll here it’s most likely yourself.

        As an Australian I’m spewing (being sick) that our lousy a$$ licking (to the Yanks) Govt has the hide to buy 20 subs just to satisfy the Yank demand that we spend X on defence. This at a time when we are on the border line of a recession if not a coming depression.

        What total BS about China pursuing militarist expansionist policies!

        America currently spends 10s of Billions more on so called Defence than China, Russia, UK, India, France, Japan and Saudi Arabia combined !

        • OutLookingIn says:

          James –

          The US spends more on “defence” than the next 25 countries combined, 24 of whom are US allies! The American’s maintain over 700 foreign military bases, along with 8-10 complete aircraft carrier groups, that also have an amphibious assault capability.

          When viewing “militarist expansionist policy” the US should first look in the nearest mirror!

      • 5.56 says:

        These sub’s are yet to be built

    • nick kelly says:

      How many tanks does Nato deploy on the ‘east European/Russian border?
      Germany’s tank park is down to a few hundred down from thousands during the Soviet era- dangerously low if anything.
      People seem to confuse NATO membership with an ability to threaten Russia- Nato’s rapid reaction force of what, twenty thousand, is a threat to Russia?
      The only thing Nato membership does for these weak states like the Baltic nations is to create a trip wire- to prevent another Crimea, or land grab in the rest of Ukraine.
      The big question is why all Russia’s neighbors fear Russia- although after decades of rule by Russia ( via the Soviet Union) it shouldn’t be hard to answer.

      • Unit472 says:

        Maybe Germany, like the U.S. military, sees the tank as obsolete. Too heavy, too slow and requiring an enormous logistical tail. Toss in the reality that a main battle tanks firepower and gun range remain stuck at levels attained 60 years ago while the per unit cost has increased 10 fold and there is little to recommend heavy armor in a world of drones, over the horizon precision guided munitions and counter battery radars.

        • nick kelly says:

          The balance and composition required is too complicated to answer briefly- but briefly, it is one thing to attack territory and another to hold it. For the latter you actually need ‘the leg, the grunt’, the infantryman.
          Re: the tank and the airplane-the plane flies home- the tank stays.
          You need new stuff and old stuff.
          And in Ukraine you need a whole bunch of anti-tank mines, especially in the region of Mariopol.
          The US has several million
          in stock.

        • EVENT HORIZON says:

          A 10 Million Dollar tank can be taken out with a $650 RPG

        • nick kelly says:

          Re: ten million dollar tank versus 600 missile: absolutely true, although for the more likely TOW missile you are probably looking at more like 10,000 but still…
          People have been proclaiming tanks obsolete since WWII. In fact when the concept of an ‘armored tractor’ was first proposed to Haig in WWI, he replied: it would be shot up by guns.
          In 1974 Yom Kippur attack the Egyptians knocked out hundreds of Israeli tanks with the Sager infantry missile. But in the end the issue was decided by surviving tanks.

          The mass of tanks as used in blitzkrieg is prepared to accept huge losses if a breakthrough can be achieved.
          BTW: the nemesis of the tank is the aircraft. The A-10 is a tank buster.
          So why do nations still have tanks? Much the same question can be asked of the surface warship including the aircraft carrier. The excellent Ballantine book on the ACC proclaimed them obsolescent in 1975!
          One answer re: tanks; if only 10 % can get through to the enemies rear he has problems.
          Your point about the economy and effectiveness of the defense is true and highlights why it is absurd for Russia to pretend that the puny ground forces near Russia are a threat to Russia.
          What they do ‘threaten’ is Russia’s sphere of influence. Russia would like to obtain by intimidation what it can’t obtain in the market.

        • d says:

          This is a finance blog not a military history and Tactics blog.

          As a Military Historian,

          The tank replaced the heavy Calvary, it still fills part of that extended rear zone interdiction role.

          The tank is as obsolete, as the Samurai sword.

          Smart officers, dont engage in wide area, open warfare, mobile assaults, without either.

          Battle ships, are as obsolete, as seaborne invasions.

          The next time somebody tries a seaborne invasion (By definition, a. Major frontal assault) on a defended coast, in bad weather, without heavy naval artillery support, they will discover this.

          Put your US army issue bayonet, on the end of your out of ammunition M16, and go up against somebody with a Samurai sword, who knows how to use it.

          They will cut you in half, so fast you, will not even feel it happen.

          The samurai Sword is the most devastating close combat weapon ever devised by man.

          Like. The Tank, and the heavy gun (Battle) Ship, It is not Obsolete and never will be. It is simply no longer the primary weapon of choice and supremacy on the modern battle field.

          In Yom Kippur the Israelis slaughterer the muslim tank forces.

          Colin Powell studied their tank victory’s on the ground when the track marks were still fresh in the sand.

          “This is the way wars will-be fought, in the Future.”

          Colin Powell, on the Still smoking, Yom Kippur Battle Field.

          The Kornett is a fearsome Anti-tank weapon, You may have observed the Armouring on the Merkava is getting heavier, as is the Armouring on the Merkava APC which is a Merkava MK IV chassis.

          The British, American and Russian Handheld Anti tank weapons were useless against Panzerkampfwagen VI Tiger Ausf.E and Panzerkampfwagen VI Tiger Ausf.B even at very close range.

          These things go in cycles, New Laminated combination Armoring for PKW is evolving, and being fitted to Merkava to work in concert with reactive Armour and counter Kornet, as we speak.

          The Kornet is also not a true Hand held Anti-tank Weapon. As it does not have the mobility of a true hand held.

          But we are far away from wher we should be in that a continuing downturn in china is going to harm russia as much if not motre tahn it harms teh west.

          Russia and china have had several love affairs, none have lasted long, or ended amicably.

    • sartre says:

      Interesting how conservatives have become apologists/cheerleaders for Russia and China. Zero hedge reads like Pravda now a days….

  2. Yoshua says:

    The price of oil is tending towards zero.

    The production price at the well head is rising… the producers need a higher price on oil to continue the production.

    The quality of the oil that the refiners are receiving is falling with an ever higher water cut in the oil… the refiners are paying less and less for the oil to be able to realize a profit margin.

    When the cost to produce 1 unit of energy costs 1 unit of energy then that energy source has lost its value to the economy.

    The price is tending towards zero.

    • Nicko says:

      Also important to remember, most of Russian oil and gas production is of the high cost type.

      • nick kelly says:

        Actually it is mostly low-medium cost- most Russian oil production is from Soviet era wells. Then you have the ruble collapse which means they can pay in rubles and get paid in dollars.
        Of course no one has as low a cost as Saudi and Emirates, whose well head cost for light sweet crude is a dollar or two.

      • Stavros Hadjiyiannis says:

        If Russia were a high-cost producer, they would be totally destroyed by now. Forget the figures you see about break even prices in the Russian oil sector. They are far lower than that. Russian oil and gas reserves are far greater than anyone is willing to admit (including the Russians themselves) and they are one of the main (not the only) reasons why this Hybrid War between NATO-GCC and Russia is currently ongoing.

    • OutLookingIn says:

      One-to-one is wrong. EROI = energy returned on investment

      When the EROI reaches 3:1 the bank has been busted. Some say when it reaches 5:1 as costs escalate, the well head is abandoned.

      Getting it to the surface costs, transporting it costs, refining it costs, re-transporting it costs, retailing it costs. By the time the “invested” portion is “returned” the ratio on the absolute low end is 3:1

      • Yoshua says:

        I have heard that when that EROEI is 7:1 at the well head and when the water cut is 40:1 then the well head is plugged. Since that is the moment when it costs 1 barrel of crude to produce (extract, process and distribute) 1 barrel of crude (1:1).

        I meant the total energy production cost and return.

        The only name for the total I know of is ETP (Total Production Energy).

    • nick kelly says:

      The value of a grade of oil is not based on how much water it has- it is whether it is ‘sweet or sour’ i.e., low or high sulphur and ‘light or heavy’,
      i.e., roughly how much light distillates like gasoline it contains.
      North Dakota Heavy, pretty much tar, can be bought for around 1-2 $ a barrel.

      • Yoshua says:

        The value is of course based on many aspects of the oil. But in crude the water cut increases with time as the well is depleted. Every barrel becomes ever more expensive to produce (extract, process and deliver).

    • Chicken says:

      “Price is trending to zero”

      Free energy?

      • Yoshua says:

        It is very simple: The are basically just pumping up water. The oil wells are being depleted.

        When Saudi Arabia is forced to borrow money to survive then it’s getting really tough out there.

        How much do you think that the “water with a crude cut” is worth ?

        The refiners think that it’s worth 50 USD today.

        When it costs 1 barrel of crude to produce 1 barrel of crude then we have reached the Zero Sum Game.

        • nick kelly says:

          A water well in Saudi would be valuable: water has been known to trade one for one in that part of the world but that was in a emergency.
          I’m not sure about this but I don’t think the refiner will accept any water in the barrel he’s paying for. It would have to be removed before being shipped, which shouldn’t be hard physically.

        • Yoshua says:

          Schlumberger Oilfield glossary

          Water Cut

          The ratio of water produced compared to the volume of total liquids produced. The water cut in waterdrive reservoirs can reach very high values.

        • Yoshua says:

          According to Schlumberger the global average water cut is 75 percent.

          They separate water from the crude before they lift the crude to the surface and then separate it again at surface before they transport it.

        • nick kelly says:

          Thanks for info on water in wells- informative

  3. Dan Romig says:

    Russia has been pushed by the US military, NATO and Victoria “F@#K the EU” Nuland. Putin’s pivot to the east in a predictable response to the Neo-Con State Department’s vilification of him and Russia.

    OutLookingIn is quite accurate in his/her assessment, and the Putin’s end game is the destruction of the almighty petrodollar. Saudi Arabia has also threatened to sell oil on contracts not tied to the dollar.

    With China, who knows what is real and what is an illusion. The Bank of Russia is wise to worry about China’s economy, and I believe they’ve handled the events of the last few years quite well.

    • Chicken says:

      L guess if SA and USSR work to keep the dollar high. they sell more oil. But, I suspect they also must reciprocate b/c trade cannot move only one direction.

    • nick kelly says:

      I think Putin’s mind is becoming very focused these days. I see he has greatly expanded his special personal guard- an SS in addition to the regular army.
      There is no doubt that the oligarchs (as well as those wanting democracy, rule of law etc.) are beginning to wonder about this guy.
      I agree the cute little lady at the head of Russia’s central bank is very capable. A good lawyer with a bad brief (client)

  4. alexaisback says:

    “more flexible yuan” = devalue yuan

    which is apparently all they have left
    (see US tax on steel and apparently EU is doing same)

    the NPL’s are incredible
    even the Chinese Gov is now admitting it

    this was an incredible article:

    ” According to the authoritative figure, the country should make deleveraging a priority, and the “fantasy” of stimulating the economy through monetary easing should be dropped. The country needs to be proactive in dealing with rising bad loans, rather than hiding them. ”

  5. Clemenson says:

    It would seem that Russia sees the same kind of freight slow-down from Europe to China along its transcontinental railroads as we see here in the USA.

    Anyone know if there are freight trains from Germany to Beijing?

    Part-way? Half way? All the way?

    • Wolf Richter says:

      Yes. Launched last summer. First train from Harbin in northeastern China, to Hamburg, Germany took 15 days. About 6,000 miles, via Mongolia, Russia, Belarus, and Poland. Once a week, designed for shipping electronics, auto parts, etc. that were manufactured in northeastern China.

      Change of the bogies at the Chinese-Mongolian border because the track size changes (I went through this on a passenger train in 1996). What a sight! Took hours! It might take a day for a long freight train.

      Another change of the bogies at the Belarusian-Polish border.

      There are other freight trains from different cities in China to Europe via the Tran-Siberian Railway.

      So Russia would have a good idea about trade volume via these trains since they all pass through Russia. But I think it’s relatively small, compared to ocean freight.

      • d says:

        Another old problem with this rail link, that is part of the old “Europa Trans Siberian RR”.the number of European rail wagons that disappear into Belarus and are never seen again is large.

        Was not that Busan Pyongyang, Harbin, Mongolia link, originally laid by the Japanese

  6. Mike Earussi says:

    I’ve never seen so much unnecessary hand wringing over the fact that China is finally becoming a mature economy with a more normal approx. annual 2-3% growth rate along with the also normal up and down business cycles to match. The financial world will just have to adapt to that new reality and quit fretting that they can’t get abnormally high returns from investing in China anymore.

    It’s also perfectly natural that China and Russia would seek to form a more symbiotic economic relationship given that geographically they are right next to each other and also because China needs the raw materials that Russia needs to sell in order to support its economy.

    Also the entire world will benefit (especially the U.S. West coast) when China replaces its dirty coal fired electrical plants with ones burning Russia’s natural gas.

    • d says:

      “I’ve never seen so much unnecessary hand wringing over the fact that China is finally becoming a mature economy with a more normal approx. ”

      IF china was becoming, a mature, freely open economy, with a 2 – 3% Growth rate there would be no problem..

      china, is a trade cheat, and a currency manipulator, out to destroy anybody who competes with it, by state supported dumping.

      That intends to dominate the planet by force.

      One world government one day, maybe.

      Not on this planet thank you.

Comments are closed.