Trump's Impact On Russia Is A Non-Event
Summary
- President Trump's sanctions on Russia have little or no impact on GDP growth. The price of oil has the largest influence over the Russian economy.
- Sanctions have most likely made the Russian economy stronger and more self-reliant and cut out the impact of foreign loans that sank Russia in the 1990s.
- The private sector balance is positive and it looks like the current account, and thus the economy is likely to get a big boost from rising oil prices.
- One blot on the landscape is selling of assets by world global banks that will make for heavy weather even for the most robust economies.
Russian relations have dogged the new Presidency. Any rapprochement with Russia would have been a plus given its nuclear arsenal and the threat it has to organized human life on this planet. Despite a promising beginning, relations have become frosty and a threat to the President's time in office due to the Mueller investigation and what it might unearth whether true or false.
To be seen not to be too friendly to Russia, it is likely that Russia will be treated more harshly than otherwise might have been the case
The purpose of this article is to look at the macro sectoral flows and assess whether Russia is a good place for investment.
President Putin met with President Erdogan of Turkey in late 2016. At the meeting, President Erdogan passed onto President Putin his theory that he suspected that Turkey's "independent" central bank was responsible for the inflation in his country through rate hikes. Cost-push inflation. A higher cost of credit inflates prices throughout the economy.
President Putin took this lesson home and began lowering the interest rate in Russia and lo and behold, inflation fell with it.
Russian inflation is moving with central bank rate movements, downwards. There is a lesson there for other countries to learn from.
Ruble fluctuations influence GDP as measured in USD in the chart below:
Russia's GDP, expressed in USD, appears to fall. However, in reality, GDP has been growing, as the above chart shows. Apart from the dip in 2015 and into 2016, when the war in Donbass was in full swing, and international sanctions from the 2014 Crimea operation were also taking effect. The biggest hit though came from the decline in oil price. Oil accounts for roughly half of Russia's export income.
Expressed in Rubles, Russia's GDP has grown steadily.
A balance of sectoral flows model was used after the work of British economist Professor Wynne Godley to assess Russia.
Sectoral Flow Analysis
In 1970, Professor Wynne Godley moved to Cambridge, where, with Francis Cripps, he founded the Cambridge Economic Policy Group (CEPG). In early 1974, Godley first apprehended the strategic importance of the accounting identity - which says that measured at current prices, the government's budget balance, less the current account balance, is by definition equal to the private sector balance.
GDP = Federal Spending + Non-federal Spending + Net Exports
As a percentage of GDP, all three sectors sum to zero.
GDP = GDI
By definition, the stronger the private sector balance is, the stronger the private domestic economy and markets within it.
The following formula can express a nation's balance of accounts:
Private Sector [P] = Government Sector [G] + External Sector [X]
The community, business, and the stock market are located in P. For P to expand, it needs the balance of inputs from G and X to be positive. A negative balance causes P to contract.
When one adds all three sectors together, it equals the GDP for that year. One sector's loss is the other's gain, and if they all go down, so does GDP.
When one does a sectoral analysis, one finds the following...
The charts below show the key information required to calculate the sectoral balances:
One can calculate the private sector balance by adding the current account balance and the government budget and expressing it as a percentage of GDP. As an accounting identity, this must sum to zero overall as a percentage of GDP.
Recent, current and projected annual sector balances are shown in the table below:
| Private Sector [P] | External Sector [X] | Government Sector [G] | |
2016 | 5.2% | 1.8 % | 3.4% |
2017* | 3.96% | 2.46% | 1.5% |
2018 # | 7.68% | 7.68% | 0% |
(Source: Trading Economics, FRED and author calculations based on the same)
* Estimate as actual numbers not yet officially released.
# Forecast based on existing flow rates and plans.
The private sector balance fell from 2016 to 2017 due largely to national government cutbacks and despite an improvement in the current account.
The picture for 2018 looks to be better despite contractive national government fiscal policy because the current account looks to be much stronger if the last two quarters can be repeated to round out the year.
A low to negative national government input shows that there is very likely going to be long-term productivity losses from a lack of investment in public services such as infrastructure, healthcare, and infrastructure.
Private Credit Creation
The private sector balance, and therefore asset markets, is also reinforced by private credit creation from private banks. One can say that aggregate demand in any period is GDP + Credit. The chart below shows the private credit trend:
The table below provides a summary of net money creation in Russia from bank credit creation and national government spending.
| Year | Bank credit [C] | Government [G] | Total [M] |
| 2016 | 0.25% | 3.4% | 3.65% |
| 2017* | 3.08% | 1.5% | 4.58% |
| 2018# | 1% | 0 | 1% |
* Estimate as actual numbers not yet officially released
# Forecast based on existing flow rates and plans.
Private credit creation by banks was weak in 2016, however in 2017, rose sharply and added over 3% to GDP or about US$39B to the economy.
So far, credit growth in 2018 has been milder.
Overall the net money supply has been expanded and if not backed by an enlargement in productive capacity would be inflationary. We have seen from the chart above that inflation is low in Russia so there must have been some productive capacity expansion to meet the enlargement of the money supply.
Or the central bank, the currency monopolist, simply set the inflation rate where it wanted it.
What has changed though is that the exchange rate has fallen and this could be due to the increase in the number of Rubles on issue after the quantity theory of money.
Being a net exporter, the supply of Rubles overseas should be falling due to foreigners using them to pay for Russian oil. Repatriated Rubles add to the domestic supply but are not causing inflation.
The flow of credit adds to the stock of private debt shown in the chart below:
(Source: Professor Steve Keen)
Private debt is about 70% of GDP, which is low by developed world standards.
Professor Steve Keen, an expert on private debt, says that 150% of private debt-to-GDP is the point at which most economies tend not to take on any more debt. It is a natural barrier.
Russia could add a further 80% of GDP to its private debt before meeting this natural barrier. Russia could sustain a big and long credit-fueled boom and then bust.
Conclusion, Summary, And Recommendation
Russia has a positive private sector balance, and this allows assets in the private sector such as stocks, bonds, and real estate to rise in value.
President Trump has no effect on Russia one way or the other. What does impact Russia is the price of oil.
Further, Russia is enjoying a resurgence in its current account balance. The national government is stepping back from investing in its nation, which will have long-term negative productivity impacts in the future. One cannot nation build using austerity anymore than a person can gain weight by not eating.
One large dark cloud on the horizon that affects all markets is documented in this recent article.
This was brought to my attention by Seeking Alpha Marketplace Contributor Mr. Robert P Balan and his PAM team. Mr. Balan's latest public article on this subject is located here. And this very important chart is reproduced from it below:
The simple takeaway is that when the Monetary Base of the big global Central Banks falls, so do asset markets and it is going to fall into the future like nothing we have seen before.
A single country with a robust economy, like Russia, may be doing well however, will be carried along by the wave of central bank selling. The black dotted line on the chart above is falling in line with central bank balances as assets are sold. This line can be projected into the future due to announced buying and selling rates by the central banks.
Every recession is different from the one before and catches most by surprise. If that were not so, mainstream economists could recognize them a long way off. The fact is they cannot because their models and paradigm are still stuck in the days of the gold standard that ended back in the 1970s and no longer apply.
It has never occurred before that the world's central banks have unloaded their balance sheets all at the same time. QE has never occurred before on a global scale. QT has never occurred before. This is new territory. The way the politicians and central bankers are mishandling this is a guarantee of a recession and stock market panic "that no one could foresee." They have to be different each time; otherwise, they would not occur. It will be glibly termed a "Black Swan" event, an external shock that no model could predict except for Professor Steve Keen's Minsky Model.
There will be three broad effects:
1. Paper asset prices will generally fall as global central bank support is withdrawn.
2. Bond yields will rise and face values fall. The yield rises only because the face value has fallen.
3. The US dollar will soar as liquidity gets soaked up by the bond buying despite the "twin deficits."
This article was written by
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Comments (31)
by Rodger Malcolm Mitchell
There are many reasons why Putin might have put so much energy into electing Donald Trump as President.Oh sure, Putin knew Trump is a vainglorious fool who would be no match for Putin in the competition between nations.And sure, Putin was afraid of Hillary Clinton's toughness, brains, and experience, a far more worthy opponent than the ignorant, inexperienced, feckless Trump.But the real reason, the big one, is money, the same reason Trump why is so obsequious when in the company of Putin. It is why Trump, after promising to reveal his tax returns, as previous Presidents had done, he invented excuses ("I'm under audit." "The people don't care." ) and finally refused altogether.Trump and his family have borrowed billions, of dollars from Putin's Russian oligarch pals.Following Trump's Money Trail: Why Collusion Is Just An IllusionThe Trump Organization borrowed billions of dollars to finance its real estate operations but subsequently defaulted on many of its loans.Nevertheless, the Trumps were inexplicably able to continue borrowing millions more from the very banks still owed money.Around the same time, Russian entities linked to the Kremlin quietly moved $10 billion dollars from global locations into the United States using the same banks.Government inspectors independently uncovered the suspicious Russian transactions, known as “mirror trades” (stock purchases in overseas branches and identical immediate sales in the United States).Democratic legislators have demanded banking information for identifying links; Republicans controlling Congressional committees refuse to cooperate.If Putin's pals demand their money back, Trump could be in serious financial trouble -- maybe broke.ERIC TRUMP: “WE HAVE ALL THE FUNDING WE NEED OUT OF RUSSIA”In 2008, Donald Jr. told investors in Moscow that “Russians make up a pretty disproportionate cross-section of a lot of our assets,” while Eric reportedly said in 2014 that the Trump Organization was able to expand during the financial crisis because “We don’t rely on American banks. We have all the funding we need out of Russia.”Trump has the slimy reputation of declaring bankruptcy every time the creditors close in, and that is the last thing Putin and his cronies want.Trump can't "rely" on American banks because they won't lend to him.Here is the gist of all conversations that may have happened, over time:Putin: "Here's the deal, Donald. We'll help you to become President of the United States. You not only will become rich using the U.S. Treasury as your personal piggy bank, but we'll let you build Trump Tower Moscow and get in on a bunch of other lucrative real estate deals here in Russia. We also will treat you to some beautiful hookers."Trump: "Money plus women. Sounds good to me."Putin: "In return, you will use the billions you'll make to repay my friends for those loans, and never go bankrupt on us. And of course, you'll see to it that those sanctions against Russia kind of fade away."Trump: "I'm in. But this has to be kept secret. I've done lots of sh*t in business, but being revealed as a traitor . . . on second thought hey, if the money is good and the women are beautiful . . . "Putin: "We'll open back channels for communication, and you and I can have meetings that no one else but interpreters attends. I'll tell you just what to do. You can toss in a couple of stern comments and act, so it's not too obvious that I own your butt. Just don't release your tax returns. That would scatter the grain."Trump: "Huh?"Putin: "Spill the beans."Trump: "I promise I won't go bankrupt on you. Have I ever lied?"Putin: "You better not. Remember what happened to Alexander Litvinenko, Yuri Shchekochikhin, Viktor Yushchenko, and Anna Politkovskaya. And of course, there's Sergei Skripal and his daughter. You do like your daughter, don't you, Donald?"Trump: "Of course, as I've said, in public and on many occasions, 'My daughter is hot. She's voluptuous. It's O.K. to call her a piece of ass. If she wasn't my daughter, perhaps I'd be dating her.' Don't hurt my daughter. Just tell me what you want me to do."Putin: "And if necessary, you will send me your former ambassador to Russia, Michael McFaul, so I can grill him the Russian way."Trump: "I'll try."Putin: "And accept our annexation of Crimea."Trump: "Sure, why not?Putin: "And finally, I don't like NATO. It keeps me from getting back all those Soviet nations we used to own.Trump: "I'll break up NATO. It might take some time, but I'll do it."Putin: "Or you will find yourself to be the innermost of a Russian matryoshka nesting doll set."Trump: "Yes, Vlad. May I get up, now? My knees hurt."And the rest is history. In total, there are many reasons why Putin would want Trump to be President, there are none favoring Clinton.And as for Trump, the big reason is money. The man is notorious for cheating creditors, cheating employees, not giving to charity, using his charitable foundation for private use, keeping conflict-of-interest ownership and control over his properties while President, and encouraging the usage of his properties by foreign dignitaries.Trump is all about money, money, money. He would do anything for money, including sell out his own country. And that explains everything.Next, Mueller will explain it even better.Rodger Malcolm Mitchell
Monetary Sovereignty
If there is proof please show it.
