27/1/16: Russian Capital Outflows 2015: Abating, but Still High

In two recent posts, I covered Russian External Debt dynamics and drawdowns on Russian Sovereign Wealth Funds. Last, but not least, I am yet to cover capital inflows/outflows for 2015. So, as promised, here is a post covering these.

Based on data that includes preliminary reporting for 4Q 2015, full year 2015 net capital outflows from Russia amounted to USD56.9 billion, composed of USD33.4 billion outflows in the Banking Sector and USD23.5 billion outflows in ‘Other Sectors’. In the banking sector there were simultaneous disposals of some USD28.2 billion of assets and reduction of USD61.6 in liabilities (repayment of maturing debts and deposits).

Thus, 2015 marked the second lowest year in the last 5 in terms of net capital outflows. In comparison, 2014 net capital outflows stood at a whooping USD153 billion and 2013 saw outflows of USD61.6 billion. Net banks’ position improved from outflows of USD86.0 billion in 2014 to outflows of USD33.4 billion in 2015. Other Sectors outflows also improved in 2015. In 2015, this category of outflows amounted to USD23.5 billion, against USD67 billion in 2014. 2015 marked the slowest outflows year in this sector in 8 years.

Chart to illustrate dynamics:

On a quarterly basis, net capital outflows from Russia in 4Q 2015 are estimated at USD9.2 billion, down from USD76.2 billion in 4Q 2014. Capital outflows were lower in every quarter of 2015 compared to corresponding quarter of 2014 and in 3Q 2015 there was a net capital inflow of USD3.4 billion - the first net inflow in any quarter since 2Q 2010.

So on balance, Russian capital outflows remain strong, but are abating rapidly. Most of the outflows is accounted for by the deleveraging of the Banks followed by shallower deleveraging of the ‘Other Sectors’.

18/4/15: Fitch Postpones Russian Ratings Review on Improved Data

As noted yesterday, both Fitch and S&P came out with (well, sort of came out in Fitch case) updated ratings for Russia. I covered S&P ratings here: http://trueeconomics.blogspot.ie/2015/04/17415-conservative-to-surprising-degree.html

Now onto Fitch.

According to the Russian Finance Minister, Anton Siluanov, Fitch postponed formal ratings review and held Russian ratings at BBB- - just a notch above junk grade. Fitch, thus, retains the only non-junk rating for Russia amongst the Big 3 agencies, with S&P at BB+ and Moody's at Ba1. According to Siluanov, the postponement reflects improved data outlook for the Russian economy.

Fitch was the first of the Big 3 to cut Russia’s rating back on January 9 (see http://www.reuters.com/article/2015/01/09/fitch-downgrades-russia-to-bbb-outlook-n-idUSFit89012120150109). Since then, Russian eurobond issue, maturing 2030 posted a 13 percent plus rise. In part, this reflects firming up of the ruble, and to a larger extent - the unprecedented levels of liquidity flowing into sovereign bonds markets worldwide. But in part, improved yields are also reflective of adjusting expectations concerning Russian economy. For example, alongside their February downgrade, Moody's estimated Russian capital outflows for 205-2016 at USD400 billion and Russian GDP was forecast to fall by 8.5%. Current consensus in the markets is that outflows will be closer to USD150-170 billion (on expected debt maturities) and the economy is likely to contract by closer to 4-4.5%.

Capital outflows figures stabilisation has been rather significant, especially given the level of debt redemptions in 1Q 2015 (see here: http://trueeconomics.blogspot.ie/2015/04/14415-russian-external-debt-redemptions.html). In 1Q 2015, estimated outflows totalled just USD32.6 billion, compared to USD77.4 billion in 4Q 2014 and with USD48 billion outflows in 1Q 2014. While banks continued to deleverage, non-financial sector was able to roll over much of maturing debt and were repatriating assets into Russia. The net result was inflow of forex into the Ruble market.

Deleveraging in the Russian economy is going at a breakneck pace: in mid-2014 Russian external debt (over 90% accounted for by private sector) stood at just over USD730 billion. By the end of 1Q 2015 estimated external debt has fallen to USD560 billion, implying net debt reductions of USD170 billion over the span of 9 months, well above my earlier estimate of net repayment of USD96.5 billion that excluded Ruble devaluation effects. The USD170 billion estimate includes devaluation of the Ruble and roll-overs when these involved conversion from forex-denominated inter-company loans and equity into Ruble-denominated ones. It is worth remembering that roughly 1/4 of Russian external debt is denominated in Rubles.

When it comes to sovereign ratings, it is also worth remembering that Russian public sector external liabilities amount to less than 10 percent of the total external debt.

Overall, Fitch decision to hold Russian ratings under review is a reflection of the recent improvements in the economic outlook, but also the fragile and early nature of these. As I noted on numerous occasions before, the situation is fragile and the risks to the downside are prominent, so Fitch's more cautious approach to ratings is probably better justified by the current environment.

18/3/15: Russian Deposits Dollarisation and Capital Flight

I have written before about the nature of capital outflows from Russia. One aspect of capital outflows is how the aggregate reflects deposits shifts into forex, known as 'dollarisation' of deposits. When Russian residents withdraw foreign currency from the banks (either via drawing down existent currency deposits or by converting their Ruble deposits into forex), the transaction is registered as capital outflow from Russia, even if they park this currency in safety deposit boxes and in their coffee tins. In other words, capital outflow out of Russia is registered even if cash remains in Russia.

Based on the latest data from the Institute for Foreign Trade, The Gaidar Institute for Economic Policy and the Russian Presidential Academy of National Economy and Public Administration, as of February 1, 2015, share of forex deposits in Russian banks rose to 35.7% of total monetary base excluding cash, up on 19.4% a year ago. The degree of 'dollarisation' (conversion to forex) was higher in 2014 than during the 2009 crisis, when the share of forex deposits stood at 35.3% and is second highest after 1998 crisis peak.

In 2014, Russian residents directly withdrew USD28.6 billion in forex from the banks. A large figure, but significantly less than in 2008 when this figure stood at USD51.4 billion. Over 2014, Russian banking system lost, in total, USD40 billion of forex to cash conversions and deposits withdrawals - all of which was registered as capital outflow from Russia.

The research note can be accessed (in Russian) here: http://www.ranepa.ru/news/item/6869-monitoring-4.html.

Interestingly, it tells the story of banks running out of deposit boxes storage capacity around November-December 2014 as households rushed to convert to forex holdings (mistrusting the Ruble) and switched to holding this forex in cash (mistrusting the banks).

February data showed significant moderation in dollarisation. Forex deposits held by the Russian banks fell 10.7% to RUB5.1 trillion, while Ruble denominated deposits those 2.7% to RUB13.8 trillion, with changes driven predominantly by the strengthening of the Ruble (in February, Ruble gained 14% relative to the basket of USD and EUR).

Over the last 12 months, corporate forex deposits rose substantially, with 41.3% of all corporate sector deposits now held in forex - a sign that Russian companies are continuing to build forex reserves to counter existent and potential future sanctions. In effect, Russian companies are cutting back on exporting forex out of Russia in fear of losing control over these funds in the future. At the same time, household forex deposits fell by USD5 billion and Ruble-denominated deposits rose on improved Ruble exchange rate.

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.

15/1/2013: Some data and ideas on Russian economy

Russian economy quick summary of some latest stats and some disconnected ideas:

• Q3 2012 real GDP +2.9% y/y down from +4% in Q2 and +4.9% in Q1 2012.
• Expected Q4 2012 GDP growth +2.5%
• November 2012 GDP growth of +1.9% y/y inflation-adjusted
• Q1-Q3 2012 GDP +3.5% y/y
• Q3 2012 consumption +5.1% y/y down from +6.9% in Q2
• Expected full year consumption growth +4% y/y.
• Consumer confidence down to lowest in 18 months (since Q2 2011) in Q4 2012 at -8, Q3 2012 reading was -6.
• Industrial production is up +1.9% y/y in November, manufacturing activity +4%, manufacturing PMI at lowest level in 14 months in December at 50.0
• Services PMI down to 56.1, from 57.1 in November
• Composite PMI at 54.1 - a 4 months low.

Inflation is still a major headache for the Central Bank Rossii, with the level above the target, despite being close to historical lows:

• Headline inflation at 6.6% in December against 6.1% y/y in 2011, making 2012 the second best year in terms of inflation in over 20 years.
• Food inflation is 4.4% for 2012, tobacco up 21.2%. 6% crops failure due to drought in 2012 is taking the blame. Non-food inflation was 5.6% and services inflation at 5.4%.
• Meat and poultry led food inflation (+8.3%), brad and eggs prices up 6.2%.
• Alcoholic beverages prices were up 10.1%

Some consumption trends - food:

• 2012 per capita food consumption (local currency) = +8.7%; forecast compound annual growth rate (CAGR) to 2016 = +10.2%
• 2012 beer volume sales = +2.8%; forecast CAGR to 2016 = +2.9%
• 2012 mass grocery retail sales (local currency) = +24.4%; forecast CAGR to 2016 = +28%

All good news for Irish exporters as food represents a strong component of our exports to Russia (see latest data here).

Central Bank raised inflation target for 2013 from 2012-set 4.5-5.5% for 2013 to 5-6% set on December 29th. 2012 target set in December 2011 was 5-6% range.

Capital outflows remain a problem in 2012:

• 2012 capital outflow stood at $56.8bn - the fourth highest yearly outflow since collapse of the USSR, with $9.4 billion outflows in Q4 2012, up on Q3 outflows of $7.6bn and Q2 outflows of $6.4bn, but down on massive $33.3bn outflows in Q1 2012.
• Net outflows were now recorded every year since 2007.
• Banks recorded an inflow of $23.6bn in 2012, in part pushed up by privatization of Sberbank ($5.2bn)
• Net outflows in non-banking sectors of economy amounted to $80.4bn in 2012.

I do expect moderating capital outflows from Russia in 2013 and still expect strong capex in Russia. Ruble valuations are likely to remain strong despite the Central Bank interventions. At any rate, the CB is likely to moderate interventions in the currency markets as it moves to inflation targeting by 2015 from current FX targets.

On the net, I am still bullish long-term on Russian Government (and corporate) bonds:

• Recent decisions to open rubles-denominated bonds sales to foreign investors via Euroclear Bank and Clearstream International will continue pushing yields down. Renaissance Capital estimated recently that OFZs (ruble-denominated state bonds) yields can fall 50-80bps in 2013
• In 2012, OFZs returned 1.12% against 0.38% for Brazil, 1.36% for India and 0.03% for China.