Credit Impulse Update: What’s next for Russia after the World Cup?  Credit Impulse Update: What’s next for Russia after the World Cup?  Credit Impulse Update: What’s next for Russia after the World Cup?

Credit Impulse Update: What’s next for Russia after the World Cup?

Macro
Christopher Dembik

Head of Macroeconomic Research

It’s always the same old story. Every four years, we wonder if winning the FIFA World Cup does have a positive economic impact. This year, France won the tournament but we can already say, due to the limited duration of the World Cup, that there will be very marginal economic effect at the national level. As a result, it is very unlikely to stop the economic slowdown observed in France since the beginning of the year. On the other hand, can we consider that Russia, as host country, will benefit from the tournament? A priori, calculating the economic impact is much easier. Usually, we know that investments in infrastructure are made, that there is a tourism boom etc. In the case of Russia, the country has made important investments to increase the flow of passengers at local international airports and many railway stations have been renovated.

However, there are already several clues that tend to relativise the potential economic effect of the World Cup.

Russia’s consumer confidence remains low and shows no signs of real improvement. The Public Mood Indices published by the Russian Public Opinion Research Center (graph below) cover various indicators related to economic and social topics, from the political situation to social optimism. We observe a slight increase of these indicators at the end of 2017 (especially for the variables “political situation” and “general vector of development of the country”) but the variable “economic situation in the country” remains sluggish, around 52%, which is way below its previous peak reached in 2014 at 68%, immediately after the military intervention in Ukraine.

In addition, leading indicators point to a slow recovery from the 2016 recession. The OECD Composite Leading Indicator is slightly above the 100 threshold and Saxo Bank’s credit impulse was evolving at 7.7% in Q4 2017 which corresponds to the second strongest quarterly impulse since the GFC. All these indicators tend to confirm a turning point in business cycle. However, the strong credit pulse is essentially a cyclical phenomenon that can be explained by the 2018 presidential election and certainly to a lesser extent by investments related to the World Cup. Such a level is not sustainable. We expect a decrease that would lead to slower GDP growth (around 1.6% next year) partially due to an unhealthy banking sector which remain the main black spot of the Russian economy. According to the latest official data, NPL loans ratio were at 19.80% in February 2018, the highest level since 2011. As long as credit does not irrigate the entire economy, it induces slow growth. 

The recent evolution of PMI is another negative signal. PMI indices have reached a high point in Q2 2017/Q1 2018 but since then they have sharply decreased to such a point that manufacturing PMI has gone into contraction in Q2 this year. 

There is little chance that the World Cup will kick-start the Russian economy which is facing a combination of major external headwinds: strong US dollar, risk-aversion that leads to outflow of capital from less liquid and less integrated markets, negative China credit impulse, international sanctions and the “Trump risk” that can cause geopolitical escalation between Russia and the USA from one time to another.

Contrary to what we could have supposed, the World Cup, through FX inflows and higher oil prices, hasn’t brought much support to the RUB.  Actually, we observe a decoupling relationship between the RUB and oil prices, which has been experienced previously in 2017 as a result of US sanctions against Russia. Since mid-April, the price of Brent has increased more than 20% while the RUB exchange rate has depreciated by about 10% against the USD. The current mismatch is likely to continue as the main force driving down the RUB is the EM currencies crisis resulting from the Fed's monetary policy and Trump’s fiscal policy (although the ongoing crisis is much more limited that the crisis resulting from the Fed tapering in 2013).

On the other hand, higher oil prices, even with a conservative Brent target between 70-75$ per barrel by the end of 2018, will bring undeniable and welcome support to growth. In a simplified way, crude oil explains more that 70% of the evolution of Russian constant GDP (graph below). This will certainly be the main driver of Russian growth in the coming quarters as it will not be able to count on a favorable external environment and easy access to credit at the domestic level. 

Disclaimer

The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.