Estimated Russian current-account surplus for H1 cut by nearly two-thirds y/y

The Central Bank of Russia has published an estimate of developments in the balance of payments in the second quarter and the first half of 2016. The current account surplus was reduced compared with a year earlier by USD13.1 billion or 79.4% for May and by USD30.6 billion or 65.8% in the first six months of 2016. The decline in the surplus was more than accounted for the drop in the merchandise trade surplus over the period as exports of goods declined more rapidly than imports and from a larger base. Overall goods exports in the second quarter were down 26.5% year on year (y/y) and in the first half of 2016 were down 29.7% y/y. At the same time, the reduction in imports amounted to 4.6% and 9.5%, respectively. While the world-market prices of Russia's key energy exports have fallen significantly over that period, the initial very steep decline in imports in 2015 due to the ongoing recession and the dramatic weakening of the rouble is not being repeated in 2016. As a result, the merchandise-trade surplus dipped y/y by USD22.0 billion in the second quarter and by USD45.2 billion in the first half of 2016. Among exports, the steepest y/y decline took place for oil products at -40.8% and -46.3% in the second quarter and the first half, respectively, followed by crude oil and natural gas. Exports of non-energy goods dropped by more moderate rates, -15% and -18.5%, respectively. Much of this component of exports is also composed of basic commodities, including metals and chemicals, which have also experienced softness on global markets. In fact, in the first quarter of 2016, energy plus metals accounted for almost three-quarters of export receipts.

Offsetting some of the deterioration of the merchandise-trade surplus, deficits on other components of the current account continued to recede. The deficit on trade in non-factor services declined from USD9.5 billion in the second quarter of 2015 to USD5.1 billion in the most recent quarter. The same comparison for the first half of the year produces a decline in the deficit on non-factor services y/y of USD7.9 billion. There was a similar improvement in the position on primary income items, which include interest, dividends and rent paid to non-resident investors. The deficit on primary income fell by USD4.9 billion y/y in the second quarter and USD7.3 billion in the first half of the year. There was, on the other hand, a modest deterioration on the small deficit on secondary income items, which include official and private transfers of USD0.5 billion in the second quarter and USD0.7 billion in the first half of 2016 y/y.

Turning to the financial account, there was a small net inflow of capital to the tune of USD2.0 billion in the second quarter but a net outflow of USD4.5 billion in the first half of the year. This can be compared with substantial net outflows of USD19.4 billion and USD56.9 billion, respectively, in 2015. Net foreign direct investment (FDI) remained in the outward direction in the first half of 2016 and dwarfed the figure for the same period of 2015. Net portfolio investment reflected a larger increase in net foreign assets than in net foreign liabilities in the first half of 2015 while the opposite was true a year earlier. Finally, there was small net borrowing abroad in the 2016 period compared with large-scale net declines in outstanding foreign liabilities in 2015 as these proved difficult to roll over in the face of financial sanctions levied by the US and European Union in the wake of Russia's annexation of Crimea and support for militant separatists in Eastern Ukraine. There were also small increases in reserve assets in the first half of 2016 compared with a decline of USD12.3 billion in the first half of 2015. The bank has also published an estimate of the net flow of capital with respect to the Russian private sector. In the first half of 2015, this amounted to USD51.6 billion. In the first half of 2016, this figure has dwindled to just USD10.5 billion with USD8.2 billion leaving Russia on net basis in the first quarter and only USD2.4 billion in the second.

Outlook and implications

The current-account surplus in the full year 2015 actually exceeded that a year earlier despite the sharp drop in receipts from energy exports. This was true both because imports of goods and services were cut back even more sharply as a result of the economic contraction and a weakened rouble and because there was a substantial improvement in the position on primary income as external debt was paid down and borrowing abroad became difficult. The estimated balance of payments for the first half of 2016, however, reveals a substantial decline in the surplus y/y as the decline in merchandise imports has slowed. Although the level of imports is beginning to stabilise somewhat, the fact that global energy prices fell further in the course of 2015 will mean that the comparison of export earnings y/y should show a much smaller relative contraction in the final quarters of 2016 as well. We nevertheless expect that the current-account surplus for the full year 2016 should amount to no more than half the achievement in 2015. On the other, net capital outflow has been sharply reduced, which will have a positive impact on reserve assets and the exchange rate of the rouble.