Sunday, January 25, 2015

25/1/15: Russian Current Account Improved in 2014

I have remarked on a number of occasions just how rapidly Russian current account can adjust to an external shock. This time around, the adjustment is via decreasing imports to compensate for both - the ruble devaluation effects and the sanctions/counter-sanctions effects, as well as the traditional economic recession pressures.

Based on the preliminary data from the Central Bank of Russia, Russian exports of goods and services fell 19% in dollar terms in Q4 2014 and were down 12% in euros. Russian imports of goods and services fell at the same rate.

Full year 2014 preliminary estimates show exports down 6% and imports down 9% in both dollar and euro terms. In 2013, exports of goods and services run USD593 billion or 28.3% of GDP. In 2014 exports of goods and services slipped to USD560 billion, but stood at 29.4% of GDP (these are dollar-denominated GDP figures). Trade balance in goods stood at USD182 billion (8.7% of GDP) in 2013 and this rose to USD186 billion (9.7% of GDP) in 2014. Trade balance in services also improved, from a deficit of USD55 billion in 2013 (-2.8% of GDP) to a deficit of USD55 billion (-2.9% of GDP) in 2014.

While goods imports contracted 10% over full year 2014, in Q4 2014, goods exports fell a whooping 19% in USD terms. Q4 2014 imports of tourism services (travel by Russian residents abroad) fell 20% compered to Q4 2013.

On the Financial Account side, State accounts excluding the Central Bank were in a healthy surplus of USD30 billion for the full year 2014, up on USD 5 billion in 2013.

Private sector accounts, however, were abysmal. Total Private Sector financial accounts finished 2014 with a deficit of USD150 billion (-7.9% of GDP) which is far worse than USD62 billion (-3.0% of GDP) in 2013. The USD150 billion figures is what we usually attribute to capital flight from Russia. This figure consisted of USD50 billion of financial deficit in the banking sector (against USD7 billion deficit in 2013) and USD 100 billion deficit on ex-banks private sector accounts (against USD55 billion in 2013).

Good news is: fictitious transactions (basically a shell-game with company money involving foreign offshore holding firms) shrunk dramatically in 2014: falling from the net outflow of capital via such transactions of USD27 billion in 2013 to net outflow USD 9 billion in 2014.

Another interesting note: as noted by me on numerous occasions, part of capital outflows was down to aggressive dollarisation of the economy at the end of 2014, which saw build up of private sector forex cash deposits held in Russia. Based on CBR data, in 2013 such deposits shrunk by USD0.3 billion, while in 2014 they rose by USD34 billion (USD18 billion of that increase took place in Q4 2014 alone).

Overall, Russian current account surplus improved significantly in 2014 despite all the cash outflows and decline in exports. In 2013, Russian current account surplus stood at USD34 billion (1.6% of GDP), and in 2014 this increased to USD57 billion (3.0% of GDP), with USD11 billion of that accruing in Q4 2014 alone.

We can expect more dramatic declines in both, oil and gas revenues on exports side and imports of goods and services in 2015. One key parameter to look at is exports and imports of services. The reasons for this are simple, albeit not easy to gauge or forecast.

Firstly, significant share of Russian exports of services (and also some associated imports) is down to effectively Russian companies producing services using (in accounting and also contracting sense) off-shore affiliates. We might see some of this activity being on-shored in Russia, with resulting decrease in imports and a rise in exports.

Secondly, Russian enterprises and investors are likely to cut back on imports of key financial, ICT and business consultancy services as the Russian economy suffers from downward pressures on investment and growth.

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