MacroI.

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Macro focus December 19, 2014

Falling Russian rouble and its impact on the Baltics

With the sharp rouble depreciation and ensuing

financial squeeze, Russia will fall into deeper
recession than previously forecast. In the most
likely scenario we pencil in a mid-to-high single
digit GDP contraction in 2015, but risks are tilted
towards a downside and more negative
outcomes are possible.
Exports (and possibly investments) of the Baltic
economies will suffer from the recent rouble
depreciation, but household consumption and
GDP will continue to grow in the most likely
scenario. In this case, GDP growth in the Baltics
will be somewhat slower than forecast before,
but it will still be growth and not recession.

The Russian rouble has been falling quite steeply since

mid-year, driven by (i) the overall structural and cyclical
weakness of the Russian economy, (ii) Western sanctions
due to the Russian incursion into Ukraine, and most visibly
(iii) due to the falling oil price. To calm the market
sentiment, the Bank of Russia raised its policy rate from
th
th
10.5% to 17% on the night from December 15 to 16 , but
it did little to quell the panic. It was too little, too late. The
th
panic so far culminated on December 16 as the rouble
touched 78 per USD. If judged by the oil price drop, it was
an overshoot and with some support from the Russian
authorities, the rouble rebounded, but the intraday volatility
still remains extremely high. In the evening of December
th
17 the rouble was trading at about 60 per USD. This
means that year-to-date the rouble is down 45% vis--vis
USD, which is about the same as the Brent oil price drop.
Oil price and USD/RUB
130

20
30

110

40
90
50
70
60
Brent, USD

50

30
Jan-13

70

USD/RUB, close (rs, reversed)

80
May-13

Sep-13

Jan-14

May-14

There are many drivers for renewed market volatility and a

further fall in the rouble. Most importantly, is oil price to
weaken further? Will Russia retain its investment grade
rating? Will it spill over into a fully-fledged run on banks by
residents? Are sovereign reserves sufficient to roll over
corporate debt and defend the rouble (e.g., Anders slund
estimates that only ca USD 200bn is accessible rather
than the headline statistics of ca USD 416bn)? Will explicit
capital controls be introduced? Will Russia scale down its
geopolitical ambitions and what is the chance to sanctions
being gradually lifted rather than raised? Many questions
and high uncertainty, but the weekend (which is often
when surprises take place) is approaching it is certainly
not yet over.
What does it mean for the Russian economy?
At the moment, we see two major scenarios for the short
term:
A. Russia manages to stabilize the rouble along the oil
price developments, which will most likely include
some further depreciation. Also further interventions
and much steeper interest rate increases. Limited
bank runs. Certain limited and mainly implicit capital
controls to reduce ability to build up speculative
attacks and curtail residents ability to withdraw forex,
but no explicit widespread capital controls. This
would also require Russia to signal a change of
attitude towards Ukraine. It is a scenario of a
massive financial squeeze. Investments will fall
dramatically, inflation will rise into double digits,
unemployment will rise and consumption will fall. No
major social unrest. Risk of abandoning the fiscal
rule. GDP in 2015 to shrink by single digits but more
than 4-5% that Russian authorities have indicated as
their stress scenario.
B. It gets worse than that.
The probability of these scenarios is closely matched, but
the first one, we think, is somewhat more likely. The
overall impression from the annual press conference of
th
Russian President Mr. Putin on December 18 is that
there will be no major shift in policy responses so far. No
specific additional policy measures to address financial
meltdown except for what the central bank is already doing
have been mentioned. No much new has been said also
on Ukraine no change in existing rhetoric.

Sep-14

Source: Reuters EcoWin

Swedbank

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Macro focus the Baltics

It is important to note that the Russian rouble weakening

can pull down currencies of other countries that have
Russia as their major trade partner. For instance, about
45% of goods exports from Belarus go to Russia, but the
developments of its currency have been less dramatic this
far (see the chart below).
Exchange rates vis--vis EUR, annual
growth
10%

and thus its total goods exports to Russia have still been
rising. All three countries have seen a smaller amount of
tourists from Russia. Total exports however have fared
much better as Baltic companies have raised their exports
to other markets, which has compensated for the Russian
weakness.

80

Baltic exports to Russia and Russian

nominal GDP, annual growth (%)

50

60

0%

40

-10%

25

20

-20%
0

-30%

-20

Belarusian ruble

-40%
-50%
jan.13

-40

Russian ruble
mai.13

sep.13

jan.14

-25
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
EE exports
LV exports

mai.14

sep.14

Source: Reuters EcoWin

What does it mean for the Baltics?

Depreciation of the rouble will hit the Baltic exports to

Russia and the negative impact is expected to be larger
than that from the embargo that Russia introduced on
th
August 7 . It will hit all exporters selling their goods and
services to Russia as opposed to the embargo that
influenced only a few industries/ companies. Compared to
the past, the Baltic export flows are now more diversified,
financial situation of companies is more robust following
the post-2008 crisis deleveraging, and companies have
lived through similar shocks previously and thus know how
to adjust. The impact will be negative, but we expect it to
be smaller than we have seen in the past.
The impact will definitely be less harsh than during the
Russian crisis of 1998, when the rouble lost 70% of its
value in a year and when Russia was a more important
trading partner to the Baltics. Russian GDP then shrunk by
5% in 1998. For instance, the share of Russia in total
Latvian goods exports stood at 21% in 1997, falling to 12%
in 1998 and further down to 7% in 1999 (in ten months of
2014 this share was at 11%). Value of goods exports to
Russia during 1997-1999 fell by two thirds while the total
goods exports value grew by nearly 4% during the same
period. During this crisis Latvia experienced a shallow
recession with only two consecutive quarters of negative
quarterly growth in 1998 and annual growth slipping into
negative territory (to -0.3%) only for a single quarter in
1999.
With the progressing weakening of the Russian economy
and the sanctions stand-off, the Baltic exports to Russia
have been falling this year already before the sharp
1
weakening of the rouble, see the chart above . This far
Estonia has seen mostly the decrease in goods exports to
Russia. Latvia has seen a decline in exports of both goods
and services to Russia but the overall fall is quite
contained so far. There is a fall in exports of Lithuanian
origin goods to Russia, while re-exports are still growing

LT goods' exports
Source: national statistics

RUS GDP in euros (rs)

As we noted earlier, with collapsing demand in Russia, we

expect exports to Russia to shrink further. Exports
elsewhere are expected to grow and compensate at least
for some of the drop in Russia related trade. With weaker
external environment, investment activity may be weaker
than expected (e.g., if confidence weakens), but it may
also turn out to be more lively as companies realize that
the Russian weakness will be prolonged and they thus
invest to find other markets. As long as recession in
Russia does not turn into a political turmoil and sharply
heightened geopolitical tensions (that would be a more
negative scenario than the scenario A, see above),
household consumption in the Baltics will remain quite
robust. All in all, for the Baltics we see a somewhat slower
growth than we had previously forecasted, but still growth
and not recession. Risks are on the downside though, and
a more negative scenario is quite likely. Those working
with Russia should not also underestimate political risks,
e.g., possible further constraints of trade flows, capital
controls, and additional sanctions. In short, the major
source of risks and uncertainty in Russia are political not
economic.
And finally a general note on foreign trade flows and
implications for Baltic companies. With the Russian
demand falling, recession deepening and the risks of
capital controls being high, it will be tough to sell to Russia
and get money out of Russia. Imports are a whole different
story with recession deepening, Russian willingness to
export will only rise, which together with cheaper rouble
implies cheaper imports from Russia. Given that Russia
lacks funding for investment, those will be to large extent
raw materials (mostly energy, but also non-energy
products). Baltic manufacturers and merchants can thus
benefit from it. In some areas (e.g., metals and machinery,
chemicals) where Russia is a competitor for us in other
markets, this would also imply harsher competition for
Baltic exporters though.
Mrti Kazks

For Lithuania there is export data split by countries available only for
goods exports; for Latvia and Estonia it is both for goods and services.

Swedbank

Lija Strauna

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Macro focus the Baltics

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