Greece’s future is its past

Why trade holds the key to debt renegotiation  |  A deal was done at the last minute: Greece’s €172bn debt bailout was extended for a further four months after a turbulent week of bluff and counterbluff. Even now, there are no formal agreements on the required reform process ahead and without these agreements the deal will not be ratified. It appears that the Greek government is keen to demonstrate its willingness to reform by focusing on tax evasion and civil service reform, but it is unlikely that this will be sufficient for either Germany or the ECB.

By letting its focus continue to be on austerity, debt renegotiation, and structural reform, Syriza and now the Greek government, seem intent on playing by the same rules as the Troika, the ECB and Germany. For an economy that has shrunk by 25% since the beginning of the financial crisis, this is extraordinary. Instead it should be looking at debt re-payment over the longer term. If an economy is growing, then its debt is affordable; if the debt is extended for four months, then growth should be made central to subsequent discussions.

At present the outlook does not look good for several reasons: first, Greece is a service economy yet, despite the improving external position represented by the declining euro, its service sector trade is set to decline sharply over the next three years and pick up only gradually into 2019 (Figure 1). Given Greece’s already weak domestic demand, the decline in service exports, which includes tourism, is worrying.




Figure 1  |  Outlook for Greek service sector trade to 2020
Source  |  DeltaMetrics 2015


Second, Greece’s goods trade to GDP ratio is 0.4. In other words, there is a fairly strong pull of trade on Greece’s GDP. Oil is a critical part of this: the correlation between Greece’s trade and the oil price is 0.80 – largely because of the importance of oil in Greece’s total trade structure. For example, Greece’s exports of refined oil are twice as high as the second-largest export sector: medicines.




Figure 2  |  Greece’s debt and the challenge of trade
Source  |  DeltaMetrics 2015


The importance of oil to Greece’s trade explains its resistance to the EU’s extension of sanctions against Russia in January and is the third reason why Greece’s situation more broadly looks vulnerable. Turkey is Greece’s largest trading partner and its import/export portfolio is dominated by oil, gas, cars and infrastructural products. Russia is a growing trade partner for Greece but Russia predominantly exports oil and commodities while Greece exports clothes and fresh or stoned fruit to Russia. Greece’s growth in exports since the financial crisis has been because of its role as an oil and infrastructure distributor with a heavy reliance on Turkey, its largest trading partner and, increasingly, Russia (Figure 3).




Figure 3  |  Greek imports from Turkey and Greece (% annual change) 2010-2016
Source  |  DeltaMetrics 2015


Imports from both countries have been volatile, but two things are clear: First, Greece has been attempting to switch its imports of oil from Turkey to Russia, evidenced by the steep increase in imports in 2010 from a small base. Second, and arguably more interestingly, imports from Turkey and Russia have been inverse to one another: when Russian imports have increased, Turkish imports have declined and vice versa. Even in the forecast period, from 2015 to 2016, Greece’s imports from Russia are falling at a slower rate than those from Turkey.

If Greece is to have a path to debt repayment then it must do two things: First it must seek to restore its greatness as a trading nation, both in services and goods, through reforms that focus on skills development, innovation, inward investment and port redevelopment. Supply side reforms alongside structural reform may make debt serviceable more quickly than just one in isolation since both are necessary and neither is alone sufficient.

But second, and in spite of history, Turkey may yet hold the key to Greece’s growth through trade and this is a bullet that should be bitten quickly. Europe’s geopolitical relationship with Russia is difficult at present to say the least and while this continues, it is unlikely that Greece will be able to restore its role as an energy and infrastructure distributor in the near future. Greece’s trade relationship with Turkey reflects mutual trade interests.

Market nervousness about the possibility of a “Grexit” heightened by the rhetoric of the past week may yet prove to be unfounded, however. The Greek public voted for Europe but against austerity. This is as much about politics as it is about economics. Greece, in trade and geopolitical terms, sits on an emerging fault-line between Russia and Europe. As sanctions build against Russia, Greece’s position is arguably more secure within Europe than it is, say, aligned with two of its major and more volatile trading partners, Turkey and Russia. And let’s not forget, the history defined by the Stability and Growth Pact and monetary union means Germany’s banks are exposed to the risks of Greece’s sovereign default and of a Grexit more than any other nations. “Necessity is the mother of invention”: let us hope that the Realpolitik of a Grexit is the driver for the resolution of the crisis.


Greece’s future is its past  |  Author  |  Rebecca Harding  |  CEO

Dragons and Eagles and Bears, oh my! Geopolitics among global powers

Dragons and Eagles and Bears, oh my! Geopolitics among global powers in 2015  |  Tensions between the world’s major powers are expected to continue in 2015 but are unlikely to develop beyond sabre-rattling. At this stage, we expect potential crises (for example, in the South China Seas in Asia and Moldova and Ukraine in Europe) to have greater regional, rather than global, significance. However, oil prices are a potential flashpoint with global repercussions.

A recent report released by the Eurasia Group wrote that 2015 will herald the return of geopolitics; in reality, geopolitics never went away. At Delta Economics we identify trends and patterns in world trade so the implications of political events for markets have long been evident in our forecasts. Indeed, in the run-up to a geopolitical crisis we often see a noticeable impact on trade.

For example, analysis of the historical trade data in the years before the 2008 Georgia conflict shows an unprecedented increase in Russian trade with Georgia (Figure 1). Interestingly, this increase began almost immediately after Putin’s State of the Nation Address during which he declared that ‘the collapse of the Soviet Union was the greatest geopolitical catastrophe of the century’.



Figure 1  | Russia-Georgia Total Trade, 2001-2008
Source | DeltaMetrics 2015


In fact, trade may even anticipate social and political upheaval in a timely manner. For example, in the months preceding the revolution in Ukraine last year we noted a substantial year-on-year spike in Ukraine’s imports of riot gear and ammunition from Russia at 20.1% and 13.6%, respectively. This was compared with just 1.8% growth in Ukraine’s imports generally.

So what do we think will happen in 2015? Relations between the major global powers have not been this strained for decades and China, Russia and the US are likely to continue to dominate the headlines. Our trade data reflects this suggesting ever-strengthening trade patterns on clearly delineated East-West lines: for example, Russia’s trade is set to spike in 2015 according to our latest estimates prompted by at 14.5% increase in trade with China and an 8.8% increase in trade with Iran. This compares with growth in trade with the US which we expect to fall from nearly 12% growth in 2014 to 4% growth in 2015.


In spite of a weakening economy, Russia is still a threat to European stability |  The crisis in Ukraine has not been resolved. Russia is certain to continue to support separatists in the Donbas, while the West is also likely to keep sanctions in place. This will leave the Ukrainian economy in precarious position. We expect Ukrainian exports to continue to suffer, contracting from 0.5% in 2014 to -0.2% in 2015.

Another region to keep an eye on in 2015 is Moldova. The country is politically significant to both the EU and Russia. It has been a “frozen conflict” since violence broke out in the breakaway region of Transnistria in 1992. Russia responded by stationing a small number of troops and a large arms stockpile. Russia also continues to offer the region substantial financial support.

However, an election in late 2014 saw Moldova deepen ties with Europe, with pro-European voters gaining 45.5% of the vote. This unlikely to sit well with Russia or the 370,000 ethnic Russians of Transnistria who accused Moldova of rigging the vote. Figure 2 shows that we expect a substantial increase in both imports and exports to Moldova to 2017. Worryingly, the trade pattern seems to reflect the spike in trade seen before the Georgia Conflict (Figure 1).



Figure 2  | Russia-Moldova Total Trade, 2013-2017
Source | DeltaMetrics 2015


We expect China to continue to challenge US hegemony, but tensions may flare with neighbours in the South China Seas  |  Our forecasts show a return to healthy levels of import and export growth at 8.9% and 7.2%, respectively. This growth is largely a result of Xi Jinping’s political reforms: there has been a formal recalibration of China’s economic priorities away from traditional export-led growth towards greater domestic consumption. While crackdowns on corruption will reduce factional power struggles and ensure party policy is more consistent – crucially in the area of foreign and security policy.

However, Xi’s pivot away from the notion of individual prosperity towards a collective sense of Chinese greatness has been characterised by growing economic and political nationalism. This manifests itself in regular military posturing – particularly in the South China Seas. Some regional powers see China’s behaviour, specifically the construction of factories across the Nine-Dash line, as an attempt at a land grab. Last year Vietnamese and Chinese vessels came to blows and there is an ongoing arbitration dispute with the Philippines. Sino-Japanese relations are also strained over the Senkaku/Diaoyu island dispute. There will be no easy solution to these problem and we expect it to rumble on throughout 2015.

The biggest risk to China is perhaps that it is alienating itself in the region and therefore inadvertently aiding their main rival: the US. At Delta we are already seeing evidence of this trend in our forecasts with rates of US total trade growth to the Asia Pacific region set to jump from 2.7% in 2014 to 4.2% in 2015.


Russia and China may emerge as strong economic partners  |  It is unlikely that China will curb its military spending or industrial production in the near future. Chinese demand for energy is huge in China and, after the Ukraine crisis, it appears China has found a key partner to meet its burgeoning demand for oil.

We expect a significant increase in trade between the two nations. Bilateral trade growth was a paltry 0.7% in 2013 but 9% in 2014; this is clearly indicative of a booming relationship. This has been epitomised by recent deals such as the Gazprom-CNPC contract which is worth an estimated $400 billion. As well as the recent Vankor pipeline deal, referred to by Putin as “the biggest construction project in the world”. The Vankor oil project is estimated to be completed in 2019; a sign of Russia’s long-term commitment to trade with China.

So, although 2015 is unlikely to see any catastrophic bust-ups between the world’s major powers, tensions are certainly simmering. If there is one factor which has the potential to be the proverbial “straw that breaks the camel’s back” it is oil. Russia is also deepening ties with oil-producing Latin American countries. Russia, of course, has little need of oil itself and is clearly attempting to undermine US interests. Oil trade may well turn out to be a metaphorical battleground as the year progresses.


Dragons and Eagles and Bears, oh my! Geopolitics among global powers  |  Author  |  Jack Harding  |  Analyst and Publications Manager

Pour Oil on Troubled Waters

There is no reason to think the oil prices will not go down further given the current state of affairs. We are entering unchartered territory and, looking at our estimates, it is very likely that the price of crude will bottom out at $40. Indeed, most commentators point squarely at supply (or over supply) rather than demand deficiency as a main driver for the spiralling prices.

Whilst the US remains the largest producer (and consumer) of crude, in terms of international trade, Saudi Arabia was the largest exporter of crude in 2014 and is forecast to reign at the top spot in 2015. Delta Economics forecasts world crude exports to take a hit in 2015 with a -1.28% reduction in exports on the previous year (2014). As global demand continues to dampen because of weak economic activity, oil exporters such as Saudi Arabia are responding by slashing prices to the EU and US yet increasing them to Asia. This is understandable given the inelastic nature of crude. Indeed it seems Saudi Arabia is more willing (and able) to absorb potential losses because it accumulated a generous buffer when prices were high. Qatar and Kuwait, too, are better poised than producers such as Venezuela, Iran and Russia, all of whom are experiencing budgetary strains – some small (Russia), some large (Iran), with one, Venezuela, facing imminent default unless China, the largest crude importer, steps in to negotiate some kind of agreement. OPEC nations agreed last month to maintain production at their usual level, whilst non-OPEC producing nations have stoked up their capabilities, which helps drive down the price of crude even further.

The Shale Revolution on the other hand is helping the US wean itself off its dependency on international crude. However, as reports have shown, the extraction of Shale is only viable if oil prices remain high: lower prices are only adding pressure to Shale producers’ business model. But let’s not forget that lower oil prices are also great news for the largest importers of oil such as US, India, China and the EU, all of whom are experiencing an unintended windfall that is likely to be passed on to the consumer in the months to come.



Figure 1
 |  Pour Oil on Troubled Waters
Source  |  DeltaMetrics 2015


Pour Oil on Troubled Waters  |  Author  |  Shefali Enaker  |  Economist

Total Trade growth in 2015



Figure 1 |  Global and Regional Trade growth in 2014 and expected growth in 2015
Source  |  DeltaMetrics, November 2014


Delta Economics is keeping modest estimates for total trade growth this year, with world trade expected to increase from 1.25% in 2014 to a minimally higher 1.94% in 2015. This is a result of slight a slowing of trade growth in Latin America and MENA (Figure 1) which is the result of geo-political tensions and economics uncertainly, amongst other things.

Tumbling oil prices combined with impending recession in Russia are creating a particularly prickly environment for trade in Europe, which struggled to pick up momentum throughout 2014 due to economic turbulence and low consumer demand in the Eurozone. Importantly, this year, Delta expects a decline in European trade from 0.27% in 2014 to -3.36%. A major contributing factor to this is lower levels of trade in major European economies such as Germany, whose trade is expected to decline by -5.23% over the year. Levels of German exports are set to fall considerably as demand from some of its major partners declines. Russia, for example, is expected to import 5% less from Germany as its economy responds to the falling value of the Ruble and weak oil prices. Other European countries, such as Austria, France and Italy, who have large corporations that trade heavily with Russia are also expected to see exports suffer as a consequence of the countries troubles.

Delta Economics is considerable more optimistic about trade in Asia than any other region, with forecasts suggesting that trade growth will increase from 5.62% in 2014, to 6.45% in 2015. This being the case, Asia will be the main contributor to the expected growth in World trade this year. Non-crude oil will remain the largest export sector, with growth of this commodity expected at around 7.6% this year. Asian trade growth will also be driven by a significant increase in exports of Gold, which is expected to increase by 15%.

As China continues to transition from an export-led economy to one that is primarily demand and domestic consumption-driven, 2015 will also be an opportunity for Asian countries to grow as global trading hubs. There is evidence of this in our forecast. Indian total trade, for example, is expected to increase by a substantial 14.25% this year. Intra-regional trade will have some bearing on this, with exports to Indonesia, Bangladesh and Vietnam to increase by over 17% each in 2015. Extra regional trade, particularly to the MENA region will also be a critical factor, with exports to the UAE, Saudi Arabia, Israel and Iran expected to increase by over 15%.


Total Trade growth in 2015  |  Author  |  Nayani Bandara  |  Analyst and Project Manager

Economic Sanctions in 2015

The reciprocity between geopolitics and the global economy was at the heart of events in 2014; the prime example of which being the use of economic and trade sanctions to deal with political issues. Sanctions have long been used as a foreign policy tool and in my opinion, 2015 will be no different. While North Korea, Venezuela and Syria continue to be affected by these restrictions, Delta Economics predicts that in the coming year, sanctions (or their elimination) will have a profound effect particularly on Cuba, Iran and Russia.

On the one hand, Iran and Cuba can be optimistic about their futures. The Cuban economy, adversely affected by sanctions since 1959, might open up now that the US has promised to normalise bilateral relations. An end to sanctions would reduce the burden on public finance, decrease the reliance on traditional export commodities (cigars, rum and sugar), jumpstart possible membership to the International Monetary Fund (IMF) and the World Trade Organisation (WTO), and allow foreign investment in industries such as tourism. The negotiation process is sure to take a couple of years but once the Cuban economy is open, Delta Economics sees exports growing in 2017 with higher year-on-year increases of 9.8% and 15% in 2018 and 2019 respectively.

Similarly, riding on moderate president Hassan Rouhani’s promises of renewed ties with the West, the Rial has appreciated and oil exports have increased. There has already been some sanction relief in Iran’s major industries – automobile, gold and precious metals and petrochemical. For example, sanctions were imposed on gold and precious metals in 2013 and lifted in early 2014. Since then, total trade in gold and precious metals has risen by 19.72%. Delta Economics forecasts a further increase of 15% from $4.7 billion to $5.4 billion in 2015 (Figure 1). With negotiations on Iran’s nuclear programme commencing in mid-January, the P5+1 (United States, United Kingdom, China, Germany, France, Russia) and Iran could strike a deal that could eliminate sanctions completely. Iran would benefit by way of its unique geographic position and its untapped market of the middle class.



Figure 1 |  Iran’s total trade in Pearls, Stones and Precious Metals pre- and post-sanctions (2012-2018)
Source  |  DeltaMetrics 2014

On the other hand, Russia faces increasing sanctions over its annexation of Crimea. Since March 2014, the US and European Union have imposed sanctions targeted at individuals in President Putin’s inner circle, banks, and arms and industrial manufacturers. Russia’s economy, heavily reliant on energy exports, has been hit by falling oil prices and Western sanctions. The Rouble lost half its value against the Dollar in 2014 and the Russian economy contracted by 0.5% in November, the first fall in its Gross Domestic Product (GDP) since October 2009. President Putin blamed sanctions for about 25% of the Rouble’s fall and Finance Minister Anton Siluanov said that the economy could contract by 4% in 2015 if oil prices average $60 a barrel and Western sanctions continue. However, China has signalled its desire to bail Russia out of its economic woes. China is arguably Russia’s largest trade partner with trade totalling $100 billion in 2014 and here at Delta Economics, we see that bilateral trade will see a year-on-year increase of 14.52% this year. China’s move to act as a lender of last resort will have lasting effects on the global economic system. It would not only question the efficacy of sanctions and the Western-led Bretton Woods system of international institutions but could also end the United States’ role as hegemon and linchpin in the global system.


Economic Sanctions in 2015  |  Author  |  Dipali Anumol  |  Research Analyst

Outlook 2015

A small increase in World trade in 2015 | World trade grew at around 1.2% during 2014. This is still a forecast but is based on the actual data from the International Monetary Fund for the first three quarters of 2014 and the Delta Economics forecast for Q4 2014. The Delta Economics forecast aligns with the CPB Netherlands Bureau Trade Monitor for the first three quarters of 2014 but is divergent from the IMF and WTO’s trade forecast for 2014 by some margin (Figure 1).

Delta Economics is predicting that World trade will grow in value terms slightly during 2015 from 1.2% to just below 2% by the end of 2015. Because this is a forecast in constant values, it represents likely increases in World trade volumes during the course of the year.

Care should be taken in interpreting this growth, however. While it is the first forecast of slightly faster growth that we have made since 2011, it is still too slow to suggest that there is any major resurgence of trade as a driver of economic growth or, indeed, a return to the multiples of trade growth versus GDP that was evident in the immediate aftermath of the financial crisis.



Figure 1  | Delta Economics, WTO forecasts versus actual trade growth, 2011-14
Source | Delta Economics, WTO and CPB Netherlands Bureau 2011-14


The growth in 2015 will be led by two regions, Asia and North America (Figure 2). Asia’s growth, to a large extent will be driven by:

  • China’s recovery from slow trade growth (at just 4%) in 2014 to above 7% in 2015, although this is still a long way below post-crisis peaks
  • Re-distribution of trade around the region away from China, we expect particularly rapid trade growth in Indonesia and Malaysia at over 10% and 7% respectively in 2015

North America’s growth is driven by exports which, following a sustained period of re-shoring, are forecast to grow by nearly 4.5% in 2015.

However, every other region’s trade is forecast to decline or grow at a slower rate in 2015 with Europe’s trade set to shrink in current prices by 3.5%. Much of this is due to declining intra-European trade: trade within the Eurozone is forecast to drop by 3.7% this year reflecting weak demand conditions within the Eurozone.



Figure 2  | World and regional trade growth (% constant prices), 2014 and 2015 compared
Source | DeltaMetrics 2014


Disinflation, oil prices and the risks of contagion | MENA’s trade is forecast to drop to 1.9% in 2015 from an already disappointing 3.6% growth in 2014. At the beginning of 2014 the Delta Economics forecast was for above 4% growth. On paper at least, oil producing nations are net losers in export terms as the oil price drops while oil importers are net winners in that it reduces costs for producers and exporters.

A zero-sum game in trade terms as the oil price drops is over-simplistic, however. Trade and oil are 94% correlated. This means that trade can effectively be a mechanism through which disinflation is spread through the global economic system. Emerging markets are the largest oil producers and, as they lose export revenues, their aggregate demand falls back meaning that they demand less by way of imports from other countries. Lower oil prices reduce producer costs, but if there is little demand either within or outside of a region then export prices will also have to drop.

Against this backdrop the forecast for World trade becomes important as a predictor of when we might see oil prices increasing again (Figure 3).

The monthly predictions of trade growth suggest that there will not be any major pick-up in the oil price until the end of Q1 2015. Even then, any increase will be erratic and relatively small based on how we are predicting global trade will grow.



Figure 3  | Monthly value of World trade vs. NYSE Arca oil spot, Last Price Monthly, June 2001-Nov 2011
Source | DeltaMetrics 2014, Bloomberg


Geopolitics, geoeconomics and “febrile stability” | 2014 was dominated by geo-political and geo-economic risks from the outset: starting with the Emerging Markets in January, Russia and Ukraine in late February, the Iraq crisis in June 2014 and subsequent crises in August to the end of tapering, with China and Japan’s economic slowdowns at the end of the year. Until the major fall in oil prices at the end of 2014, markets appeared to be pricing these in. Equity markets continue their bull run with the role of central banks increasingly seeming to be to provide reassurance to markets that nothing precipitous is likely to happen to interest rates in the immediate future.

This creates what Delta Economics terms, “febrile stability”: markets are behaving as if there are no underlying geo-political or geo-economic concerns, yet watching for one incident that will trigger a major sell-off.

The case of Germany’s car trade with China and Russia illustrates the interplay between geo-politics and geo-economics and its dampening effect on trade (Figure 4). The DAX is 86% correlated with Germany’s trade overall, 73% correlated with its car trade to China and 84% correlated with its car trade to Russia. Figure 4 shows:

  • German car exports to China are forecast to grow during 2015 but it will not be until the end of Q2 that exports really pick up again, this suggests that China’s demand for luxury goods, while growing, is not growing at the pace that might be expected
  • German car exports to Russia are forecast to slow during 2015 and have dropped substantially since the beginning of the Russia-Ukraine crisis, this is partly a reflection of Russia’s weakening economy but in the first instance was the result of punitive reciprocal trade restrictions

The tipping point in 2015 is likely to be an increase in interest rates in the USA. If this is early in 2015 while oil prices are still falling, this will further strengthen the US Dollar, reducing further the export revenues for emerging economies in particular and placing at risk of default any sovereign debt or bonds denominated in US Dollars. As Russia, Argentina and Venezuela are close to default this could be the catalyst that sparks a global correction.




Figure 4  | Monthly value of German car exports to Russia and China, USDm vs. DAX, Last Price Monthly (June 2001-Dec 2015)
Source | DeltaMetrics 2014, Bloomberg

Global equity markets long overdue a correction | Delta Economics modelling continues to suggest that equity markets are long overdue a correction. The correlation between World trade and the S&P 500 has weakened from 68% in January to 62% now and this reflects its long bull run that has extended to the end of 2014. It has become increasingly detached from real macroeconomic indicators and increasingly determined by central bank monetary policy and short-term sentiment indicators.

Delta Economics considers the bull run to be unsustainable given the pressures of disinflationary contagion and geo-political and geo-economic risk that spread through the global trade system. Economies do not operate in isolation in the same way as they did pre-crisis and a hike in interest rates in one country, particularly the USA, will impact others through trade and debt dependencies. Against this fragile backdrop, it is likely that a major correction in asset prices will take place during 2015.



Figure 5  | Monthly value of World trade (USDbn) vs. S&P 500, Last Price Monthly, June 2001-Dec 2015
Source | DeltaMetrics 2014, Bloomberg

Outlook 2015: a small increase in World trade in 2015  |  Trade View Author  |  Rebecca Harding  |  CEO

Webcast 026 | Trade and economic outlook 2015: the Delta Economics view

Delta Economics CEO Rebecca Harding examines some of the main trade trends and challenges expected in 2015. Looking at issues such as disinflation that continue through from 2014, this Webcast discusses how much trade may grow this year and looks at some of the key countries and sectors that will be driving trade. The impact of continuing instability from geo-political tensions in the Ukraine and Russia as well as Syria and Iraq is also outlined with a view to understanding their likely impact on the global trade environment.



Webcast 026 Author  |  Rebecca Harding  |  CEO

From Russia with love

Why the collapse of the Rouble matters  |  It might well be that President Vladimir Putin needed more sleep, as he said, and therefore left the G20 Summit early in order to rest on the long plane flight home. The Russian economy’s growth in the third quarter of 2014 was just 0.7% and the Delta Economics forecast for trade growth in 2015 is 3.5% – half the level seen in 2014. Some of the drop in trade values may well be due to lower oil prices but this does not explain the fact that imports are forecast to fall from over 9% growth to 4% growth in 2015. If this were not enough, imports of cars have been flat this year and are likely to shrink by 3.5% next. For so long car imports were a proxy for demand for luxury from a burgeoning middle class; so now, even a long plane flight may be too short to recover from the sleepless nights that President Putin may be facing (Figure 1).


Figure 1  |  President Putin’s sleeplessness explained
Source  |  Delta Economics


The collapse in the value of the Rouble cannot be helping Russian policy makers with their insomnia either. The correlation between trade and the value of the Rouble is very low at just 12% suggesting that the currency’s value is unrelated to trade and economic fundamentals but instead has a strong speculative component. When the Rouble was allowed to free-float in November, the result was an immediate devaluation – suddenly connecting it both with the real economy and with the fact that sanctions are making investors nervous.

In contrast, the value of the Moscow MICEX is highly correlated with trade (Figure 2), which helps explain its relative resilience to the battering that the Rouble is currently receiving. Russian export growth, this year at least, remains relatively strong and while this is the case, it can be expected that the MICEX will remain strong too.



Figure 2  |  Monthly value of Russian exports (USDm) vs MICEX,
June 2001-October 2014, Last Price Monthly
Source  |  DeltaMetrics 2014, Bloomberg


Unsurprisingly, Russian exports are 94% correlated with the price of oil (Figure 3). This fact points to two dangers for the world economy.



Figure 3  |  Monthly value of Russian exports (USDm) vs NYSE Arca Oil Spot,
June 2001-October 2014, Last Price Monthly
Source  |  DeltaMetrics 2014, Bloomberg


First, the decline in oil prices itself will cause the value of Russian exports to fall further which at least in part explains our lower trade forecast for 2015. This is bound to have a weakening effect on the Russian economy. Even the effects of strong oil and gas deals with China, which amount to a doubling of trade over the next five years cannot negate lower prices. More than this, China’s growth in mineral fuel imports is forecast to slow from above 11% in 2014 to just above 8% in 2015 and 2016. Russia’s trade growth is increasingly dependent on Chinese imports of fuels – and if these are growing more slowly, then this does not augur well for Russia.

Second, if Russia’s demand for luxury goods is declining then it is bound to have a negative effect on Europe. Figure 4 shows the effects of the fall in Russia’s demand for cars generally on Germany’s exports of cars in particular.



Figure 4  |  Monthly value of German exports of cars to Russia, USDm, vs DAX Index,
June 2001-Oct 2014, Last Price Monthly
Source  |  DeltaMetrics 2014, Bloomberg


So any demand crisis in Russia comes back to affect Europe: the fall in German exports is forecast to continue after a brief respite at the end of Q1 2015 well into Q2 and Q3 of 2015 and, as German car exports to Russia are more than 83% correlated with the value of the DAX Index, this has the potential to create greater instability on European, indeed global, markets The Euro may also experience some fallout as well: German car exports to Russia are 60% correlated with its value.

From a Russian perspective it made sense to form deals with China given the vulnerability both of its own economy and of its relationship with Europe in the wake of the Ukraine crisis. However, there is a perfect storm brewing: a drop in oil prices and a drop in Chinese demand for mineral fuels which could threaten the Russian economy even further than it is currently threatened by sanctions.

There was very little panic on markets around the drop in the value of the Rouble. This is not surprising –the rouble has not been connected with economic fundamentals and it is now so some correction could be expected. But a weaker Russia matters for Europe because of the risks of contagion: the German export engine is being damaged by lower demand for cars and this has a compounded effect both on the value of the Euro and on the value of key European markets, specifically the DAX.

BRIC through a window

Why Russia’s attempt to decouple from the dollar is a defensive strategy  |  Gazprom’s decision to price oil trade with China in Roubles or Yuan rather than US Dollars effectively demonstrated the power that the BRIC countries want to exert over world trade. It has profound implications for trade finance, not least because a cry for decoupling emerging currencies from their dollar-dependency resounded across emerging Asia, and France, last week. The issue is that, as global pressure on interest rates in the US build and as tapering continues, the threats to Emerging Economies of US Dollar-denominated debt increases. It has not been a great year so far for Emerging Market currencies and the signals for a stellar recovery in the second part of 2014 are not strong.

France worries about this because of its increasing reliance on countries like Brazil for oil, and perhaps because it wants to bang the drum for the Euro. But Russia’s decision is arguably a defensive one – it is protecting its own oil trade interests with China as its relationships with Europe and the US become more strained. The value of the Rouble against the US Dollar is barely correlated with world trade, Chinese trade or even the oil price and, as a result, it is seeking to integrate itself into the world trade system through closer ties with China. The effect will be the strengthening of the Yuan, and ironically the Euro, as trade finance currencies and while it might serve to weaken the hegemony of the US Dollar in trade terms, it will have little impact on the value of the Rouble.

The reason for this is simple. There are two currencies that are very strongly correlated with world trade: the Yuan and the Euro, as shown in Figure 1.



Figure 1 | World export trade values (USDbn) versus USD-Yuan, Last Price Monthly, June 2001-June 2014
Source | DeltaMetrics 2014, Bloomberg


The correlation between the value of the Yuan and world exports is -0.91: in other words, as it weakens against the US Dollar, world exports increase and vice versa. This is of little surprise to any observer of world trade: the Yuan is a managed currency and it has been a bone of contention in trade negotiations between the US and China that its artificial weakness has kept Chinese exports strong. Indeed, as the currency has been allowed to strengthen over the past couple of years, world trade has slowed. This is not just simply a reflection of the dominance of Chinese exports in world trade. China’s trade is highly currency elastic – it exports intermediate manufactured goods that are very price sensitive and so trade will also be highly influenced by the value of its currency.

But there is more than just global trade at stake from Russia’s point of view. Russia needs to secure markets for its oil exports if it is to undermine the effects of first, any sanctions that may arise from the continuing crisis in Ukraine and second, the reduced dependency of Europe on Russian oil and gas. Its obvious trade partner is China and, indeed, Russian exports of oil and gas to China are forecast to grow annually by around 9% each year to 2020. China is resource hungry and, as a result, its trade is highly correlated with the oil price as well as with the value of its currency, as illustrated in Figure 2.



Figure 2  |  Value of Chinese exports versus NYSE Arca Oil Spot Last Price Monthly, June 2001-June 2014
Source | DeltaMetrics 2014, Bloomberg


The Rouble-Yuan currency spot is highly correlated with Chinese trade (0.75) and this potentially helps to explain why Russia is so interested in building up the ties between the two currencies through oil trade in particular. It strengthens the likelihood of the Yuan increasing its importance as a currency for trade finance and protects Russian trade interests against the weakness of the Rouble-USD exchange rate in other markets.

The only other currency where the correlations with Chinese trade, world trade and oil are as strong is the Euro, as Figure 3 suggests.



Figure 3  |  Correlations of major currencies with world exports, Chinese exports and the NYSE Arca oil spot price. June 2001-June 2014
Source  |  Delta Economics analysis, 2014


Apart from the strong correlations with trade and oil prices of the Yuan-US dollar price, the table also shows how important the Euro is as a trade currency. Past trade views have commented on the fact that the Euro is a trading currency that responds to economic fundamentals and not a currency that is used for speculation. Russia’s move towards the Yuan and away from the dollar will not strengthen the rouble, since its value against the dollar is barely correlated with trade and only weakly correlated with oil prices. However, it could serve equally to serve the purpose of strengthening the Euro as a trade finance currency.

The reason for this is because of the strong correlation between the Real-USD value and both world trade and Chinese trade and the oil price. While not as strong as the Euro value alone, there is something important that is emerging in terms of Brazil’s role in the trade finance system. Brazil’s exports to China are forecast to grow at above 11% for the next four years, and much of this trade is commodity-based – soya and oil in particular. Similarly, France’s imports of oil and gas from Brazil, for example, are set to increase in double digits annually over the next five years and exports to Brazil from Europe are forecast to grow at similar rates to exports to China over the next five years.

This helps to explain, perhaps, why there was a call from France in the last week to loosen ties with the US Dollar as well. Figure 4 shows that France’s trade is, in comparison with German trade, weakly associated with the value of the Euro versus the USD.



Figure 4  |  Correlations of key currencies against French and German exports, June 2001-June 2014
Source  |  Delta Economics Analysis, 2014


Perhaps more importantly, French exports are more correlated with the value of the Yuan versus the US Dollar, albeit more weakly than German exports. A logical conclusion is that it is in the interests of all exporters from the Eurozone for the Yuan to be a more dominant trade finance currency as it will help their trade, and hence the value of the Euro.

Russia’s move away from the US Dollar has a deep resonance across the trade finance system. First, it will encourage the Chinese government to decouple the currency from the dollar and allow it to trade in currency markets more freely which, in and for itself has to be a good thing for the global trading system. Second, it means that trade, and hence trade finance, will increasingly be denominated in Yuan, and arguably Euros as well, reducing the importance of the Dollar as a trade finance currency. Again, this is welcome on the grounds that it supports free trade.

And third, given the fragile relationship geo-politically between Russia and the US at the moment, it also makes it more important that the US engages in trade talks with Asia. If the Yuan and the Euro become more important as a trade finance currencies, then the US cannot afford to be isolationist in the way it handles its trade negotiations. Whichever way this is looked at, Russia has just thrown a BRIC through the window of the US’s current trade stance.

Running out of energy

Why Europe needs Germany to sort out its energy policy  |  The last thing Europe needs right now is a crisis. With the ECB’s decision to take interest rates into negative territory last week, it rekindled the spectre of disinflation turning into deflation in the Eurozone. If this wasn’t enough, fears about Europe’s dependency on Russian oil as the crisis in Ukraine continues appeared to be abated slightly as Germany appeared to open up the potential for shale gas production and then shut it again saying that the exploratory work would stop well short of allowing fracking to resume.

This matters because Germany’s trade is 98% correlated with its imports of mineral fuels, including shale [Figure 1].



Figure 1  |   USDm value of Germany total exports and its imports of mineral fuels June 2001-Dec 2014
Source  |  DeltaMetrics 2014


Germany is undeniable the export engine of Europe and its energy consumption (measured through imports) is so tightly related to the value of its exports that its energy policy becomes vital, not just to the country itself but also to the rest of Europe. Eight of Germany’s 17 reactors were closed after the Fukushima disaster and a commitment to close the remainder by 2022 was made, leaving Germany without a major source of internally generated energy and a need to rapidly find an alternative. In addition, much of Germany’s energy is produced in its own coal and lignite mines making it arguably increasingly dependent on one of the most polluting types of fossil fuel, despite its reputation for being at the leading edge of environmental technologies.

So are there signs in Germany’s trade that it is becoming either more green in terms of its energy production or consumption or that it is reducing its dependence on Russia for oil?

The short answer to this is not really as Figures 2a and 2b show.




Figure 2a (top) and Figure 2b (bottom)  |
German imports or exports of mineral fuel products as a proportion of all mineral fuel imports or exports, 2014
Source  |  DeltaMetrics 2014


Although imports of crude oil are forecast to decline by 2014, imports of refined oil are set to increase by a similar amount. Imports of electrical energy, which is all energy produced from non fossil fuel sources and so includes nuclear and alternative sources of energy are forecast to increase slightly.

The picture for exports sheds some more light on why there is no real change in Germany’s energy consumption. Although imports of refined oil are set to increase, its exports are set to decrease suggesting that Germany will become more, not less, dependent on outside of its borders for refined oil. Even though exports of electrical energy are set to increase by nearly 3% between 2014 and 2020, suggesting greater production from non-nuclear and renewable sources, it is still insufficient to offset Germany’s greater demand for refined oil.

However, although the Netherlands is by far and away Germany’s largest import partner of refined oil, its oil comes from Belgium, the UK and Russia in almost equal proportions; Belgium gets its oil from the Netherlands, Russia and the UK. Figure 3 shows, the dependency of Germany on Russian oil is substantial.



Figure 3  |  Running out of energy suppliers;
Why Germany is likely to be dependent on Russian oil for some time to come
Source  |  DeltaMetrics 2014


Countries like the UAE, Mexico, Angola and Iraq are all fast-growing suppliers of crude oil into Germany. However, adding up the total import values for each of the five fastest growing economies yields a total of USD 1.7 billion which is just one seventeenth of the total value of Russian imports of crude oil into Germany alone. More than this, Russian imports of both crude and refined oil are more highly correlated with German trade that imports from the UK, the Netherlands (refined) or Norway (crude). While oil imports from the UK are highly correlated with German trade, they are also forecast to remain static in the case of UK imports of refined oil and to fall by over 6% in the case of UK imports of crude oil.

There is still a long way to go; renewable energy alone will not reduce the dependency that Germany, and therefore Europe, has on Russia. Figure 4 shows how, despite a brief drop in imports into Germany during 2014, as a consequence of the current geopolitical uncertainty, Russia’s imports into Germany will continue to grow into 2015 and 2016 in current prices.


Figure 4  |  USDm value of Germany’s crude oil imports from its top three import partners, June 2001-Dec 2015
Source  |  DeltaMetrics 2014


It is likely that the Netherlands will pick up the slack as imports drop from Russia during 2014 but as it is similarly reliant on Russian oil this simply shifts the fulcrum temporarily rather than generating a real change.

Over and above everything else this is important because Germany’s trade is 87% correlated with the value of the Euro against the dollar and 76% correlated with the value of the FTSE. Given the even higher correlation at the moment of Germany’s trade with oil, this renders the concerns over its energy security not just understandable but actually critical if Europe is to avoid an economic crisis caused by geo-political uncertainty.

This brings us back to the opening statement. What Europe needs least is another crisis. There is evidence of growth in demand and the Delta Economics forecast for trade, although flat, is a considerable improvement on the negative outlook of six months ago. Yet a closer examination of Figure 1 shows something worrying: in current prices, Germany’s trade growth is relatively flat too. In other words, the slow growth in value terms of trade over the past few years and into the next two years, is not just because of slow global demand conditions, especially in Asia. It is also because there is downward, disinflationary pressure on prices which is flattening the real value of trade as shown in Figure 5 which looks at German exports against gold prices.



Figure 5  |  German exports, USDm value June 2001-May 2015 versus Gold Spot, Last Price Monthly, June 2001-May 2014
Source  |  DeltaMetrics 2014, Bloomberg


The correlation between German exports and the Gold Spot price is high at 0.79 (compared to 0.78 and 0.77 for the EU 28 and the Eurozone exports respectively). Gold is a hedge against deflation and we are beginning to see strong disinflationary tendencies if not deflation itself. At present that correlation remains positive because deflation has been on the horizon for a while, so markets are pricing it in at present.

However, if the Ukraine crisis deepens and Russian oil to Europe is shut off, then this will have a profound effect on German trade, pushing its real current value down and, hence, adding to deflationary tendencies. There is a real danger that the European recovery may be threatened by Germany’s trade, quite literally, running out of energy.