Oil and gas in the capitals

Could Russia’s current account run a deficit and not a surplus in the coming months? This question has to be raised, given the trade and current account statistics, and also in light of Brent oil prices oscillating between $62/bbl and $66/bbl.

Actually, Russia’s current account surplus came in at $45.8 billion during first-half 2019, implying a very weak $12.1-billion surplus for the second half. The Central Bank of Russia has just released new estimates for the January-April surplus. According to that entity, the current account has shown considerable weakness for the last two months. If the trend were solid, this would imply a possibility that in June, Russia would run a nearly balanced current account or, even worse, an account deficit. Remember, since the August 1998 crash, Russia has never shown a current account surplus.

Of course, there is no risk of a new financial collapse, as Central Bank foreign reserves have increased more than 10%, from $468 billion to $518 billion, since the beginning of the year. This increase is even more spectacular when compared to January 2017, at which time the foreign reserve amount was “only” $377 billion.

Nevertheless, this trend is both politically and economically important. It highlights a constant dilemma of Russian economic policy and the necessity for Russia to keep its current account positive.

Politically, this surplus is seen as a major factor strengthening sovereignty and enabling the country to free itself from foreign interference and act decisively on the world arena. Economically, the current account surplus is a crucial item in the country’s long-term development strategy, enabling the government to invest abroad, as well as at home, and to fund some important economic programs. It also is important to remember that the surplus was maintained despite wild fluctuations in oil prices. A key factor since 2014 was the exchange rate policy adopted by the Central Bank. By deleting, since early 2014, any exchange rate stability target, it allowed the ruble to be widely depreciated when oil prices fell, thus lowering internal enterprise costs and maximizing the U.S. dollar return of exports in rubles.

Why did this change come? The dynamics of non-fuel exports could, in some ways, explain this situation. In a year-to-year comparison, they dropped 5.1% for the second quarter after declining 1.5% during the first quarter. Of course, results from fuel exports are even worse, with declines of 7.9% and 8.0% for the second quarter and first half, respectively. The fuel exports decline can be explained easily by a combination of relatively stagnant prices and the effect of production reductions agreed with OPEC+ countries for the sake of avoiding a price collapse.

It is the reduction in non-fuel exports that is more disturbing. Non-fuel exports have been touted as the ultimate proof that Russia was slowly drifting away from its dependency on hydrocarbon prices. In fact, the share of non-fuel exports within Russian global exports has increased regularly, from 28.5% in 2013 to 40% in 2018. This share could increase further with a faster decrease for fuel exports than for non-fuel exports. Nevertheless, this evolution upsets the Russian government.

A broader explanation could be the evolution of the exchange rate. Since the beginning of the year, the exchange rate has risen nearly 9.3% (from 69.5 RR/US$ to approximately 63 RR/US$). Since Russia has a higher inflation rate than most industrialized countries (around 4.7%/year by last June), the actual exchange rate probably rose 11% to 12% during first-half 2019. This would explain why non-fuel exports are contracting.

International trade slowing down is also a factor in this contraction, as the elasticity of non-fuel exports to the economic climate is far greater than for fuel exports. And this is putting a greater stress on fuel exports, themselves, constrained by the OPEC+ agreement. With the amount of money coming from fuel exports constrained, the future could look gloomy for the Russian government.

One has to add that company investment payments have increased during second-quarter 2019, reaching $22.4 billion against only $12.6 billion for the first quarter. This, too, has hurt the current account.

We also must look at capital inflow and outflow. Figures from the Central Bank indicate a pretty high outflow during the first quarter and a fairly low outflow during the second ($27.3 billion vs. $3.4 billion). Quite interestingly, the behavior of companies largely differed from that of banks. Russian banks have been massive capital exporters, while companies imported capital. This difference highlights the nature of Russian capitalism, with its high internal profits (attracting investors despite sanctions), but also with its outward bias, linked both to massive acquisitions in foreign countries and to the continuing defiance of some oligarchs.

A decline is likely. Keeping that in mind, it is now obvious that the exchange rate cannot continue to rise and is probably bound to again decrease during second-half 2019. This would both maximize ruble income for fuel exporters—helping them to partially recover from continuing limitations on the oil and gas markets—and increase the competitiveness of non-fuel exports in front of a higher inflation rate than for other countries. The government would be reluctant to accept this, as it sees exchange rate stability as a proxy of social stability and exchange rate appreciation as a powerful anti-inflation tool.

But facts are facts, and the trade-off will, most probably, favor ruble depreciation. If the government opts for maximizing Russian economic competitiveness, the target for the end-year will be 67–70 RR/US$. If Russia opts to continue fighting inflation, the target could be 64-66 RR/US$.  WO

About the Authors

Jacques Sapir

Contributing Editor

Jacques Sapir is a professor of economics at the School for Advanced Studies in the Social Sciences (EHESS) in Paris, and at the Higher School of Economics in Moscow. An expert on Russian economic policy, he graduated from the Institute of Political Studies in Paris in 1976, and earned a PhD in economics from EHESS in 1980.