Marshall Horn - Russian Truck Makers Boom Thanks to Sanctions, Cheap Ruble

Marshall Horn,

This article originally appeared  in Russian at Politrussia, translated by South Front

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Everyone knows that the Russian automotive market today is struggling through the crisis. Nevertheless the term “import-replacement” is most applicable to the Russian automotive world despite its complicated situation.

At least when it comes to trucks – Russian GAZs and “Urals” are steadily stealing the show. It’s important to note that from the beginning of the year, Russian truck market that’s most sensitive during a crisis fell by 60% during the 1st half of this year. Overseas truck brands were hit the hardest, some of which were forced to stop production in Russia. 

Brotherly Belorussian industry is not experiencing the best times either. The demand for Belorussian MAZ somewhat decreased as well. What we are witnessing is a substantial decrease in controlling share of the Russian market by western truck producers. Meanwhile the share of market control by Russian producers has significantly increased. Today “KamAz” and “Ural” together control nearly 70% of the market! 

The Rouble devaluation in 2014 and the continuous wreaking of the Rouble forced western automotive companies to leave the Russian market, meanwhile the Russian producers filled the lacuna the crisis created. Russian producers always created serious competition in price/quality ratio when it came to trucks. Russian trucks have always been famous for their ease of use, ease of exploitation and being easy to fix all for a low price.

The government played a big role in helping KamAz gaining a large share of the automotive market, at least according to KamAz representatives. At the end of March, Prime Minister Medvedev noted poor state of affairs in the Russian automotive industry during the government general assembly. He noted that the government will provide automotive industry funds to support it, including the industry in Tatarstan, Samara region (AvtoVaz) and in other regions. “Naturally, larger industries will receive greater support as that’s where economic crisis hit the most. That’s where the situation is almost critical. I am referring to the automotive industry… it is because of this these subjects were selected and so the respective targets will receive greater support. These are “KamAz”, “AvtoVaz”, “Altaivagon”, “Tverskoi train-carriage factory” – Dmitrii Medvedev noted.

Now lets crunch some numbers. “KamAz” and “Ural” took up a greater portion of the Russian market because their sales did not suffer as much as those of their Western counter-parts. “KamAz” reduced its sales by 50% to 7,7 thousand units. In terms of its profit, “KamAz” received more than 30 billion roubles in revenue, that’s one and a half times less than what the company received last year.

“Ural” truck production has been reduced by 8%, to 2,4 thousand units. Meanwhile the production of western truck brands in Russia has been decreased by 76%. Companies such as Volvo, Scania, MAN, Mercedes-Benz and others have nearly disappeared from the Russian market. Experts predict that in the next 5 years, it is very likely that western companies, if they do not disappear from the Russian market, they will occupy only around 20-25% of the Russian market. It is predicted that Western brands are very unlikely to gain higher market share than that.

However its not the western brands that are hitting rock bottom at the Russian market, it’s the Belorussian “MAZ” who’s sales have slumped by 84%. “MAZ” sold only around 600 trucks on the Russian market, that’s around than 4% of the market. Russian industry has taken over around 70% of the Russian market, as mentioned above – “KamAz” has increased its share by 10% to 54,3% of the market, “Ural” from “GAZ” group increased its presence by 9.7% of the market. Thus “Ural” controls nearly 17% of the Russian market.

GAZ group explains its high share of the automotive market by the fact that the Russian automotive market shrank more than the actuall decrease in “Ural” sales. Moreover GAZ group released new “Ural” model, “Ural-M” its release has already been realised in first half of 2015.

In terms of western producers, their market share has decrease to 24%, even worse their share is expected to decrease due to Rouble and further financial instability in the Russian Federation and on top of that domestic consumers prefer national products. A number of international companies have stopped production by this time. Like Volvo factory in Kaluga, paused production of its 15,000 planned trucks in February 2015. Its very likely that the production in this factory is unlikely to continue. Mitsubishi productions we halted in Naberezhye Chelnye, a bit later in April. The companies announced that their productions are likely to resume in September. At the same time the factories in Saint-Petersburg belonging to Scania, MAN and Daimler in Naberezhye Chelnye continue their production.

Modernised bonnet version “Ural-M”

KamAz productions are not slowing down either; infact the company increases its capabilities for the upcoming years, irrespective of the tough financial times. There is a high demand in the Kamsk factory. Demand is high in the government sector as much as in the commercial one. Fairly recently, the shores of Kamsk have released fresh 46 specially outfitted trucks for the emergency services. Kamsk truck production has exceeded all expectations, instead of trucks expecting to aid the emergency services in October this year; they fulfilled their ranks already this month. Its nice to know that our industry can still impress us. That’s not all; the enterprise has increased its minimal wage by 2.5% to 6120 Roubles. It’s not that much, but the trend is more than welcome.

At the end of July, KamAz stated that it will extend its working days in August. They explained this with a significant increase in orders for their products. “First working week will be a 5 day working week, from 3 to 7th August. Afterwards, most of our workers will take their planned paid leave as was planned last year. Leave taken by our workers, from 10th to 23rd August will be used to modernise our equipment use in our 24hr production schedule. Last week of August is planned to have 4 working days only from 24th to 27th August.” – Company announced.

Experts explain the success of Russian producers by the fact that Rouble devaluation and its repercussions force consumers to buy less expensive machinery. The government support influences high demand in Russian producers, government programmes make Russian producers price 10% cheaper along with other loans the government provides. Also the government orders play an important part in the high demand. On top of that the government is subsidising the acquisition of motor vehicles.

Our truck giants are experimenting on remote-controlled trucks; they are researching these monsters in their respective experimental departments. The leader in this field is KamAz is working on these systems jointly with “VIST Group”. In May, KamAz saw its first model of the remote controlled prototype based on KamAz 5350, its saw it’s first testing in Naberezhnye Chelny and on a special site in Moscow emergency services. It was first planned to start releasing this model in 2025, however circumstances are such that it’s very likely this model will be produced earlier. Now the machines are expected to be released by 2020. More than 17 billion Roubles are invested into the project. AvtoVAZ and GAZ are following KamAZ’s footsteps in developing autonomous trucks. Only time will tell how successful their developments have been.

The first Russian remote-controlled truck model is based on KamAZ 5350

Despite devaluation and other market related hardships, Russian heavy automotive industry is not going to surrender. Instead, it avoids any drama and tragedy in its course, it stands firm and endures the hardships. It is important to note that the government has been swift to provide the necessary support for Russian heavy industry. The Russian industry has shown itself in a bright light by taking the initiative and taking a respective share of the market in difficult circumstances. The western producers suffered greately in the Russian market because of the western sanctions, however this gives the Russian industry a once in a lifetime opportunity to become the dominant automotive industry in the post-USSR territory. The Russian industry is making a comeback!

via Marshall Horn, CFTC Russian Truck Makers Boom Thanks to Sanctions, Cheap Ruble

Marshall Horn - Russia's First Stock Exchange Now 20 Years Old: It's Been a Crazy Ride

Marshall Horn,

On September 1 traders celebrated the birthday of Russia's dollar-denominated stock exchange, the Russian Trading System (RTS), which was established exactly 20 years ago on September 1, 1995 with 100 listed shares and the index set at 100.

In 2006 the ruble-denomincated MICEX exchange was added to the mix – the home of the all-important Gazprom local shares – but the RTS remains the key index for most foreign investors, who used to make up half the market’s capitalisation, mainly as deals could be settled in safer domiciles like Cyprus.

The exchange, with just under 200 listed stocks, has often been the best performing index in the world or the worst, so it has been hard to make money consistently. Certainly with valuations depressed to rock bottom at the moment, few portfolio investors believe in Russian stocks and the market has suffered some of the heaviest outflows amongst the emerging markets in recent months.

The index set an all-time low in the wake of Russia’s first big financial crisis on August 17, 1998. The index bottomed out at 38.53 on 5 October 1998 after Russia defaulted on its sovereign debt.

Timing, rather than stock picking, has been the key to making money on the RTS and investors brave enough to plonk some money into the market at the end of 1999 would have enjoyed a ride to the market's all time high of 2,488 on 19 May 2008. That’s a hefty 6,357% price return in less than 10 years, or 54% annualized, according to VTB.

“The longest bull market lasted for eight consecutive months, ending in May 2002. The longest decline (also eight months) ended in January 2009, when the all-time low of 498 was posted on 23 January 2009,” VTB said in a note celebrating the birthday. “The sharpest daily moves in both directions were both achieved in the autumn of 2008, with a 22% increase on 19 September followed by a 19% drop on 6 October. The biggest monthly moves, though, were seen in the index’s early years: it was down 56% in August 1998, but grew the same 56% in December 1999. The most recent lows were achieved during December’s currency crisis (bottoming at 629 on 16 December). The index now trades at 834 points.”

 

via Marshall Horn, CFTC Russia's First Stock Exchange Now 20 Years Old: It's Been a Crazy Ride

Marshall Horn - Market Volatility - US Federal Reserve Dithers: Russia Stays Calm

Marshall Horn,

The thesis that it is US dithering about interest rates and not events in China that is behind the recent market volatility has received strong confirmation from the events of the last week.

At the start of the week financial markets - Wall Street included - plunged on fears of a September rate increase.

An article however had appeared in the Financial Times over the preceding weekend, written by the former US Treasury Secretary Larry Summers (a contender for the post of Chair of the Federal Reserve Board before Janet Yellen’s appointment last year).

In the article Summers said raising interest rates would be a dangerous mistake.

On Twitter Summers went further still - calling for more quantitative easing (ie. electronic money printing).

As news of Summers’s comments spread, the markets recovered.  

They got a further boost when on Tuesday William Dudley, a member of the Board of the Federal Reserve, also appeared to damp down prospects of a rate increase in September.

The markets responded with a spectacular recovery. In the last two days of the week oil prices surged by 15%.

Come the weekend and the pendulum in the policy debate in Washington swung back again. The monetary hardliners (who probably include Yellen) reasserted themselves, and the signals from the Federal Reserve Board went into reverse.

Comments made on Friday by Stanley Fischer, the Federal Reserve Board’s Vice Chair, suggested that an interest rate increase in September had not been ruled out after all.

This happened in conjunction with the publication of revised statistics of the performance of the US economy in the second quarter. These appeared to show the US achieving much higher growth than previously assumed.

Those who follow such things closely will know that there is a longstanding debate in the US about the reliability of US statistics.  

I am not qualified to comment on this debate. All I will say is that because the reliability of the statistics is widely doubted, when a revision of the sort we have just seen comes along there is inevitably suspicion that it has appeared for some purpose - in this case to justify a rate increase in September. Whether true or not, it is what many people believe, and it has an effect on what they do. 

Renewed concern the Federal Reserve Board will raise rates in September has had the predictable effect on the markets: they are all down, including oil which as I write this has fallen by 2.7% on the day.

The market volatility is causing concern around the world, including of course in Russia.

At the end of the last week the Russian government convened a meeting to discuss the volatility.  

The calm comments by the participants - in particular of Finance Minister Anton Siluanov and Central Bank Chair Elvira Nabiullina, which we reproduce below - show confidence that the situation is in hand.  

Siluanov said that he expects oil prices to remain low for some time. He also said Russia may have to adjust part of its budget spending to take account of this. There is no hint here of panic or crisis, just a calm acknowledgement of reality, and of steps being taken to deal with it.

As for Nabiullina, she appears to have no doubts about the underlying stability of the banking system, or of Russian banks’ and companies’ abilities to meet their foreign loan payments.  

Nor is she concerned with defending the rouble at any particular level. Her goal remains what it has always been: reducing inflation.

Achievement of this goal obviously requires the Russian authorities to take steps to insulate the economy as far as possible from the price effects of the rouble’s fall.  Nabiullina says as much.  

The sharp fall in imports already caused by last year’s devaluation, and the ban on food imports from the EU, means that to a great extent this has already been done.

At this point it is possible to make one further important point.

The rouble’s value is closely connected to the oil price, and the rouble’s fall last year was caused by the fall in the oil price.

Whilst this has also been true of the fall the rouble experienced this summer, it is important to say that because Russia is an emerging market economy the rouble would have fallen this summer anyway, even if Russia had not been an energy exporter.

The currencies of all emerging market economies, including ones that are major manufacturing exporters such as Vietnam and South Korea, have fallen this summer.  

Countries like Vietnam and South Korea are not energy exporters, so the fall in the oil prices is not the reason their currencies fell. The reason their currencies fell is because money has shifted from emerging market economies to the US in the expectation of a rate increase there.

It is the expectations of a US rate increase that is also behind the fall in the price of oil.  

It was also the trigger for the fall of China’s admittedly overvalued stock market, as money left China for the US causing the stock market to crash.

When it comes to currency depreciations, China is the big exception that proves the rule. 

Apart from a fractional and tightly managed devaluation, the value of the Chinese currency has held steady, not because China is any less affected by money flows to the US than other emerging market economies, but because China's currency is managed, and the Chinese with £3 trillion of reserves have the financial fire power to manage it.  

In the absence of such management the Chinese currency would have depreciated along with the others - according to some estimates by between 10-15% against the dollar. 

As it is China is believed to have spent around $200 billion to prop up its currency over the last few weeks - a figure that dwarfs the amounts Russia spent to support the rouble during any comparable period last year.

Russia’s currency is volatile not because Russia’s economy is insufficiently diversified. It is volatile because like other emerging market economies whose currencies have experienced similar volatility this summer, Russia’s financial system is small and immature causing Russian companies to look abroad for financing and loans.

Until this changes the rouble will remain volatile however “diversified” the economy becomes.  For this to change Russia needs to strengthen its financial system - something which is happening, but which takes time.

In the meantime, the Russian government has taken the precautions needed to protect the economy from the volatility, and it has every reason to remain calm.

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The following report is taken from the Russian Presidential Website:

“Vladimir Putin: ……….

We are aware of the situation on the Asian stock markets and the international financial currency markets, and the situation with oil prices. All of this has its effect one way or another on our financial market. I would like Mr Siluanov to comment on these developments and give his assessments.

Finance Minister Anton Siluanov: Indeed, Mr President, in the past days we have seen greater volatility on the world financial and commodities markets. We see that stock markets have gone down by about 10 percent, prices of raw materials have also gone down, there has been a weakening of currencies, especially those of the developing countries and especially those that export primarily raw materials. The national currencies of those countries have lost 5 to 15 percent.

The reason, of course, is the increasing unpredictability of the Chinese economy’s growth. The Chinese economy is currently one of the major economies influencing world demand, including demand for raw materials. Among such reasons, we also see the overproduction of oil; there are constant excessive volumes of oil being produced, while demand is not growing at the rate that was expected earlier. We are also witnessing pressure on financial markets, expectations of increased rates from the Federal Reserve System, which, as we know, may lead to a withdrawal of capital from developing markets.

The drop in oil prices is undoubtedly having the greatest effect on the Russian financial market. During the past month, the prices went down by some 20 percent, about 10 percent in the past week alone. This inevitably had an impact on the financial market of the Russian Federation: the ruble lost about 10 percent, just as many other currencies in countries, as I have said, with developing economies; the stock market here has dropped by about 15 percent since early August.

We have already witnessed a similar situation with the exchange rate early this year, but a rise in oil prices then led to a strengthening of the ruble. We should not rule out a repeat of this development. However, analysts dealing with the oil market say the oil price drop may be long term and we need to prepare for such a possibility and work to ensure financial and budget stability.

Of course, Mr President, we will comply with all our budget commitments for this year. This year we will need to use the reserves that we have accumulated, but these reserves are not unlimited, and for next year and the following budget cycle we have to align our commitments with the new macroeconomic situation. The Government is currently working on such proposals and we will present them for your consideration.

Vladimir Putin: Ms Nabiullina, would you like to add anything?

Central Bank Governor Elvira Nabiullina: Overall, I agree with the assessment provided by Mr Siluanov, but I would like to say that the key factor affecting the ruble, which is the price of oil, is volatile. We have already seen this year that it can go up and down: this year alone there was a period when it grew by 23 percent and then dropped by 38 percent. Therefore, we can expect change any minute.

True, our financial system is part of the global system and is not protected from all the existing risks. However, we modelled various scenarios well in advance, knowing that a pessimistic one is possible, so that we could prepare. Thus, for instance, whenever possible we increased our gold and currency reserves to create a long-term basis for our financial stability and to strengthen our safety net.

We have introduced currency refinancing mechanisms. We envisaged a $50 billion limit on loans to banks to avoid excessive pressure on the currency market. We have spent $34 billion of that reserve, and we believe that the remaining $16 billion would be enough. At the same time, we decided that we would not refinance these amounts for banks that have used up their annual limits so they feel more comfortable.

Moreover, we have decided to loosen bank regulation to allow our banking system to adapt. We have curtailed a number of measures because the banks did not need them, and were planning to discontinue more as of October 1. However, now, depending on how the situation is going to develop, we are ready to retain those measures with certain modifications.

The main thing now is for the exchange rate fluctuations to have a minimal effect on prices. I mean that after the drop in the exchange rate early this year we managed to get inflation under control. For 16 weeks, weekly inflation was about 0.01 percent, with the exception of the week when we had our traditional rate increase. Therefore, we will continue in the same way to ensure a further drop in inflation.

via Marshall Horn, CFTC Market Volatility - US Federal Reserve Dithers: Russia Stays Calm

Marshall Horn - Russia Continues to Orbit British Satellites

Marshall Horn,

MOSCOW - Russia on Friday successfully launched a Proton rocket with a British satellite in the first such launch since an engine failure in May resulted in a Mexican satellite being destroyed.

A Proton-M rocket carrying an Inmarsat-5 F3 communications satellite has been launched from Baikonur cosmodrome in Kazakhstan at 1144 GMT as scheduled, Russia's space agency Roscosmos said in a statement.

“The launch went as planned as all the systems operated remarkably well,” Roscosmos spokesman Igor Burenkov told reporters.

The launch is crucial for Inmarsat, Britain's biggest satellite operator, which said that together with two other satellites, it will create “the world's first globally available, high-speed mobile broadband service, delivered through a single provider.”

 

via Marshall Horn, CFTC Russia Continues to Orbit British Satellites

Marshall Horn - Weak Ruble Drives Russian Car Production Boom

Marshall Horn,

August 26th (Sputnik) - Volkswagen and Hyundai are planning to take advantage of the weak ruble and boost production in their Russian factories of vehicles for export markets in the Middle East and Far East, company representatives announced this week.

In the coming weeks, Hyundai will begin delivering the Solaris, produced in its Russian factory, overseas to Egypt and Lebanon, the company's Russian head office stated on August 25. 

By the end of August, the carmaker's Russian factory will have produced a pilot batch of 550 cars, and has plans to deliver around 4,000 cars to countries in the Middle East by the end of the year. 

“We have carried out a lot of work in order to be ready for the beginning of our cars' exports to the Middle East, and we consider that the recourse to new markets is our contribution to the development of Russian-produced export goods,” said Choi Dong El, general director of Hyundai's Russian factory, which is located on the outskirts of St. Petersburg and employs more than 2,200 people, who produce 200,000 cars a year. 

Sergey Tselikov, head of Russian automobile analytical agency Autostat, told Izvestiya that foreign producers in Russia are able to take advantage of the greater capacity of Russian car factories:

“The real capacity of Russian car production is three million cars per year, and I estimate that this year around 1.2 million will be built. The factories are working at 50 percent of their total capacity, so it's logical to look to replace the falling demand in our country with demand from other markets,” said Tselikov, who estimated the potential export volume at 150,000 – 200,000 cars a year.

1026213003.jpg

On Tuesday, Marcus Ozegovich, general director of Volkswagen Group Russia, told Izvestiya that along with Hyundai, his company has plans to take advantage of the weakness of the Russian currency and boost exports to countries that share a border with Russia. 

“I'm not talking about exports to the Commonwealth of Independent States [CIS], which we have been doing for a long time, I have global exports in mind.”

“It's not that simple: there are global export currents, agreements, logistical expenses, tax and customs nuances of different countries, and so on.”

“It's quite a significant challenge for us, which eventually will allow us to improve our quality here.”

The plan to increase production for exports to wider markets is an unprecedented step for foreign car manufacturers based in Russia, where production has traditionally focused on the car market in Russia and the CIS.

Cars for the export market have instead been largely produced by Russian carmakers such as AvtoVAZ, which manufactures the Lada, as well as UAZ, manufacturer of off-road vehicles, and GAZ and KAMAZ, which make trucks.

Car expert Igor Morzheretto told Izvestiya that exports from Russia could even end up in the Western European car market:

“Western Europe could be among the regions which import such budget cars. For example, when Renault developed the Romanian Dacia brand, in the beginning it was also supposed that these cars are only for developing countries, and now you can see them anywhere in the European Union,” explained Morzheretto, who named the Volkswagen Polo sedan, which is produced only in Russia at the Volkswagen factory in Kaluga, as one such possible export. 

via Marshall Horn, CFTC Weak Ruble Drives Russian Car Production Boom

Marshall Horn - Ukraine Reaches Agreement With Creditors - But the Figures Don't Add Up

Marshall Horn,

An announcement on 27th August 2015 has confirmed that Ukraine has reached a restructuring deal with its private creditors.

However, as the article from the Financial Times attached below makes clear, it is far from certain that the deal comes anywhere close to meeting Ukraine's needs.  

On the face of it the agreement looks like a bad deal for Ukraine.

Ukraine was demanding a 40% haircut. It got only 20%. 

Ukraine's creditors have also agreed to delay bond (ie capital) payments on the remaining debt for four years, though Ukraine will have to continue to make coupon (interest) payments at a slightly higher rate during this period.  

In return Ukraine has agreed to a GDP linked security that will pay its creditors a percentage of its economic growth after the debt repayment holiday ends in 2019.  It seems 40% of any economic growth over 4% will have to be used to pay off debt. This will be on top of any regular capital and interest payments that fall due.

That suggests a very heavy period of debt repayments after 2019, after the four year bond payment holiday ends, and when the IMF programme also ends.  

Not surprisingly the Financial Times reports worries amongst financial analysts that this may be too heavy a burder for Ukraine to bear.

Judging from the last paragraph of the Financial Times's article, Ukraine may be hoping to overcome this problem by further borrowing in the capital markets.

It remains to be seen whether lenders, once they have done the sums, will be prepared to lend it extra money.

The agreement still needs some creditors to agree. The pressure on them to do so will however be so great that it is a virtual certainty they will do so.

The agreement does not cover the $3 billion payment on the eurobond held by Russia, which matures in December.  

What are the implications of this agreement?

Firstly, though the IMF is backing the agreement (it has no other choice), it is far from obvious that the sums add up.  

The IMF’s latest programme assumes a reduction of Ukraine’s total debt repayments over the duration of the programme of $15 billion.  

The Financial Times says the total amount of debt at issue in the negotiations is $18 billion, and says the value of the haircut is $3.6 billion (20% of $18 billion).

TASS says the total amount of debt at issue in the negotiations is $19.2 billion, and says the value of the haircut is $3.8 billion (20% of $19.2 billion).  

TASS may be giving the more accurate figure.  The Financial Times also says the total value of the write off is “close to $4 billion” - which seems more consistent with TASS's $3.8 billion figure than the Financial Times's $3.6 billion.

There is no information on how much Ukraine will save as a result of the cancellation of the interest payments for the debt that is subject the haircut. Nor do we know how much relief it will get from the four year bond payment holiday.

However, on the face of it, whether the haircut is worth $3.6 billion or $3.8 billion, the sums look too small to come anywhere close to hitting the $15 billion debt reduction target the IMF was looking for.

Ukraine’s demand for a 40% haircut by contrast would have written off £7.2 billion if the debt is $18 billion, or $7.68 billion if it is $19.2 billion, which together with cancelled interest payments and the four year bond payment holiday might have brought the debt relief target of $15 billion within sight.

More clarity will be provided as more information becomes available. However the Financial’s Times’s pessimism about the sustainability of what has just been agreed tells its own story.

If the $15 billion debt reduction target is not being achieved, then unless the West provides more money or Ukraine's economy suddenly improves, the IMF programme will fail.

Why did this agreement take so long to agree - especially given the immense pressure from Western governments on the creditors to settle - and why is it so unfavourable to Ukraine?

Firstly, it is important to say that it was not because the creditors anticipated that in the absence of an agreement the IMF would pull the plug on Ukraine - forcing Ukraine to settle on their terms.  

As we have previously reported the IMF - under political pressure - has said it will support Ukraine regardless of whether it comes to an agreement with its creditors or not.

Nor is it likely that the creditors thought that if Ukraine defaulted they would get all their money back through credit default swaps. These were unlikely to come anywhere close to compensating the creditors fully for the money they would have lost.

The creditors held out because what Ukraine was demanding was completely unreasonable.

Ukraine's debt is not unsustainable. The Financial Times says the total amount Ukraine must pay on its debt (public and private) is $72 billion. 

This ought to be perfectly sustainable for a country that is the second biggest in Europe, has a well-educated population of more than 40 million people, and which is blessed with an abundance of natural resources, large industries, a lengthy coastline, and some of the most fertile agricultural land in the world.

By contrast Greece, with a total debt of $350 billion, is a small country, has a population of just 11 million people, has very few industries, and few natural resources.

Parallels people make between the situations of Greece and Ukraine are simply wrong. Greece’s debt is obviously unsustainable. Ukraine’s debt is not.

The reason Ukraine is failing to pay its debt is not because its debt is unsustainable. It is because Ukraine is chronically mismanaged and insists on waging war rather than restoring its economy by making peace.

The creditors therefore question why they should be asked to agree to huge haircuts when - provided Ukraine ends the war and sorts out its problems - it is perfectly capable of paying them the money it owes them.

The Financial Times explains the creditors’ position clearly:

“Bondholders had rejected Ukraine’s assertion that they must take a 40 per cent upfront loss, arguing that the country’s problems were mutable and that a temporary freeze in debt payments would be a better solution, delaying a final deal until political and economic problems calm.”

Ukraine did not help its case by acting as if the creditors were under some sort of moral duty to write off the debt; and by constantly complaining that it was spending more on debt payments than on defence - leading to the inevitable suspicion that it was intending to use any money saved on debt payments to fund the war.

The result is what looks like an unsatisfactory outcome both for Ukraine and the IMF.  Given the political pressure they will doubtless press on with their programme, but the sums do not look like they add up.

Recent news of the deterioration of Ukraine’s economy anyway calls the IMF's whole programme into question. Even if a much bigger haircut had been agreed it seems unlikely the sums offered are anywhere near enough to turn Ukraine's economy round. 

It seems only capital controls are preventing the Ukrainian currency’s complete crash, and without a political breakthrough leading to an end the war there must be a question over how long the situation can hold.

In the short term this unsatisfactory agreement must however increase the possibility that Ukraine will look for some way to default on the $3 billion eurobond it owes Russia, which matures in December.

The Russians have categorically ruled out any restructuring of this debt, a position they have just reiterated.  

Given the financial pressure they are under following an agreement that fails to meet their needs, there must now be strong pressure on the Ukrainians to default on this debt, and certain comments made by Yatsenyuk suggest as much.

As I have discussed previously, if Ukraine defaults on this debt bitter legal disputes will follow, with the Russians insisting that it is public debt and the Ukrainians arguing - implausibly - that it is not.  These disputes alone might suffice to derail the whole IMF programme.

Regardless of what happens to this particular debt, Ukraine’s position, following what looks like a deeply unsatisfactory agreement, looks grim. 

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From the Financial Times

Ukraine has secured an agreement to avert default and restructure billions of dollars of government debt in a deal that could see international investors write off close to $4bn.

Creditors, including San-Francisco based Franklin Templeton and Brazilian investment bank BTG Pactual, have accepted the proposal for a 20 per cent haircut on $18bn of the embattled country’s bonds as well as delaying debt repayment by four years.

In return they will receive a GDP-linked security that will pay holders a percentage of Ukraine’s economic growth from 2021.

However, questions remain over whether the hard-won deal, which is supported by the International Monetary Fund, will result in solvency for the country, as conflict with pro-Russian separatists imposes a heavier than expected toll on the economy.

“Ukraine could face further liquidity issues when the IMF programme is over so the extension of debt repayments is crucial,” says Vadim Khramov, strategist at Bank of America Merrill Lynch.

Under the plans agreed by Ukraine and creditors, bond repayments will be extended by four years while coupon payments will be slightly higher than the current 7.2 per cent average at 7.75 per cent. A GDP-linked warrant will be provided from 2021 to 2040 that will pay out up to 40 per cent of the value of annual economic growth above 4 per cent, although total payments will be capped at 1 per cent for the first four years.

The haircut on government bonds could mean immediate debt relief of up to $3.6bn. However holdouts on some bonds are expected by analysts, including Russia’s $3bn bond due to mature in December.

Kiev’s deal to restructure its $72bn government debt burden follows months of negotiations with investors who hold close to $9bn of Ukrainian bonds.

Although the creditor committee of Franklin Templeton, T Rowe Price, BTG Pactual and TCW have agreed to the plans with the Kiev government, other bondholders will need to be persuaded of a deal in order for a majority to agree relief on each bond.

Once the plans are submitted to Ukraine’s parliament, a prospectus will be published in mid-September and bondholders will vote on the restructuring proposal. The timing means that repayment of a $500m bond due on September 23 will be suspended while creditors consider the plans.

In August officials from Kiev, including US-born minister of finance Natalie Jaresko, flew to San Francisco, home city of Franklin Templeton, for emergency meetings as an upsurge of fighting with Russian-backed separatists controlling breakaway eastern regions of Ukraine focused attention on the deal.

Bondholders had rejected Ukraine’s assertion that they must take a 40 per cent upfront loss, arguing that the country’s problems were mutable and that a temporary freeze in debt payments would be a better solution, delaying a final deal until political and economic problems calm.

Relations with private sector creditors had soured since spring as the two sides clashed over the question of whether investors must write down their holdings in order for Ukraine to meet the terms of the IMF’s four-year $17.5bn bailout, designed to take the country’s debt below 71 per cent of GDP by 2020.

Earlier this year Ukraine took the highly unusual step of passing a bill in parliament that allows the government to halt payments on some foreign debts by declaring a moratorium, a term described by one international credit lawyer as “a polite word for default”.

The IMF alluded to the uncertainty in early August when it reiterated that although it expected Ukraine’s debt operation to be completed, it was willing to support the country even if debt discussions failed and a moratorium was imposed.

However, the repercussions of Ukraine defaulting on its debt would have been severe.

Ukrainian bonds, issued under English law, contain cross-default clauses that mean missed payments on one can trigger default on all, allowing bondholders to demand repayment, drag a country into lengthy legal battles and exacerbating existing economic problems.

S&P, the credit rating agency, said that a sovereign default would also worsen already tight liquidity in Ukraine’s banking sector, triggering panic-driven deposit withdrawals.

If Ukraine succeeds in a debt restructuring it could plausibly return to international debt markets within a year, said Yerlan Syzdykov, head of emerging markets debt at Pioneer Investments. The country has said that it plans to come back to the market by 2017.

Market prices for Ukrainian bonds have recovered in recent weeks as hopes rose that the country would avoid default, with a Ukrainian $2.6bn bond due to mature in 2017 trading at 57.4 cents on the dollar ahead of talks, up from 39.5 cents in March.

via Marshall Horn, CFTC Ukraine Reaches Agreement With Creditors - But the Figures Don't Add Up

Marshall Horn - Brave (Miserable) New Normal World

Marshall Horn,

So what’s the real story behind the made in China Black Monday (followed by a Blue Tuesday)?

Shares in the Shanghai/Shenzhen soared a whopping 150 percent in the 12 months up to mid-June. Small investors – almost 80 percent of the market – believed in a never-ending party, and often borrowed heavily to be part of the “get rich is glorious” bonanza.

There had to be a correction. Those shares – which had hit a 7-year peak - were obviously overvalued. Couple it with a mountain of data showing essentially a Chinese economic slowdown, and the result was predictable; Shanghai and Shenzhen lost all their gains so far in 2015 – and engineered a massive global sell-off. Even notorious billionaires lost, well, billions in a flash.  

Welcome to China’s new normal; or our brave (miserable) new normal world.

The crisis of the Neoliberal Disorder

The sharp correction in the Shanghai/Shenzhen is part of the end of a cycle. Goodbye to China relying on investment rates of 45 percent of GDP. And goodbye to China’s unchecked thirst for commodities.

The problem is China’s tweaking of is economic model is directly linked to the persistent coma of the neoliberal disorder, in effect since 2007/2008.  

You don’t need to be Paul Krugman to know the new normal is anemic global trade; a severe crisis in most emerging markets; Europe’s absolute stagnation cum recession; and “factory of the world” China selling less to the rest of the world.    

Meanwhile, the hyper-valued US dollar is strangling US exports; up to 3 percent decline in the first semester alone. Imports also fell by 2.2 percent; and that ties in with the structural corrosion of America’s dwindling middle class spending power.

Everywhere we look, the whole structural landscape screams crisis of the neoliberal disorder. When the Chinese engine of turbo-capitalism faces (relative) trouble that glaringly reveals how the global financial casino enjoys no dynamic support anywhere else.

Over $5 trillion in paper money has been wiped out since Beijing (modestly) devalued the yuan on August 11 – triggering the global sell-off.  

Now the Fed may postpone raising interest rates for the first time in almost a decade until the end of 2015. Still, no one dares to predict a rosy growth scenario, considering an ultra-strong US dollar, a relatively devalued yuan and a steady fall in oil prices. 

No implosion, no panic

Contrary to Western forecasts/wishful thinking, China is not imploding. Credit Suisse has released some quite level headed analysis. Here are the highlights.

“China still has a very healthy current account surplus, its capital account is still partly closed and its major financial institutions are largely state-owned. These factors combined would allow the monetary authority a free hand to create liquidity in the system if it wants to do so.”

What will happen is that “China's structural growth will continue to decelerate in the next few years.”

There won’t be a “credit-crunch triggered hard landing and the financial system/ exchange rate regime could be maintained relatively stable.”

Hoping for Chinese corporate revenue/earnings growth to “bounce back to the level of few years ago is unrealistic.” But, crucially, “the fear of a repeat of the 1997 Asian financial crisis or a 2008 global financial crisis is not warranted.”

And to sum it all up, Credit Suisse recommends…no panic; “Investors [should] focus more on China/HK stocks that have strong micro fundamentals and are less susceptible to Chinese economic growth, but were dragged down by recent market weakness.”

A black hole in Jackson Hole

So, from Beijing’s point of view, everything is (relatively) under control.

Once again; in global terms, this latest casino bubble is not remotely comparable to the Asian financial crisis of 1997/1998. Rather, that’s yet one more intimation of non-stop, recurrent global weakness enshrined as the new normal, coupled with Wall Street’s absolute refusal of strong financial regulation.

The ball now is in the Fed’s court; what to do about the tsunami of foreign money driving the US dollar up, and driving US industry to become totally uncompetitive.

The era of central banks printing electronic cash in a QE free-for-all – cheap money directly boosting “market volatility” – may not be over, yet. Let’s see what happens this Thursday, when a symposium of central bankers in Jackson Hole, Wyoming, will be examining what to do about “market volatility”.

Central banks absolutely love to drive up stock market prices for the benefit of the 0.0001 percent. So expect more delusion ahead. But be sure everything that’s solid melts into air. Including the neoliberal dream.

via Marshall Horn, CFTC Brave (Miserable) New Normal World