The Russian Economy Is Entering the Phase of Short-Term Risks

According to the preliminary estimation of the 2017 balance of payments, the current account surplus amounted to $40.2bn (a 58% increase on the relevant index of the previous year) and contributed to the appreciation of the rouble. Growth in the current account surplus was driven largely by the trade commodity balance which amounted to $115.8bn, a 28% increased on the index of 2016.

It is noteworthy that growth in prices of primary products had a positive effect on that index. The effect on the pattern of the current account balance is the minimum because it is formed primarily at the expense of the trade commodity balance, the balance of trade in services and the investment income balance. So, if one takes, for instance, the trade commodity balance, it is measured mostly by the value of Russian exports, which depend entirely on global prices that in no way can be influenced by Russia. The volumes of Russia’s supplies by the main export groups are quite stable, while exports in value terms are determined by prices which increased on all the main Russian export commodities in 2017. Note that it concerns not only oil and gas, but also ferrous and nonferrous metals, fertilizers, timber, wheat and other. The volume of imports is adjusting to the exchange rate of the rouble. Appreciation of the rouble exchange rate leads to growth in imports on the back of relative depreciation of import supplies, while the depreciation of the exchange rate, to their shrinkage. The analysis of the dynamics of these indicators from 2013 has revealed a strong correlation between these two things. The same can be said about trade in services.

As regards the financial part of the balance of payments, both positive and negative trends can be identified. The positive trends include modification of the pattern of net capital exports. Last year, capital exports were carried out by banks and a larger portion of such exports was spent on repayment of the earlier taken debts to western credit institutions. In 2017, the value of net capital exports by banks amounted to $28.6bn, while in 2016 the capital influx of $1.1bn was observed.

As regards the real sector of the economy, the net capital outflow decreased considerably from $20.9bn to $2.7bn in 2017. According to the preliminary data, the net capital outflow amounted to $31.3bn.

Also, it is worth mentioning that in 2017 the gold and foreign-currency reserves increased on the back of repayment by Russian banks of loans to the Central Bank of Russia and purchasing of foreign currency by the RF Ministry of Finance on the foreign exchange market.

Among the negative trends, one can see a decrease in foreign direct investments during the last months of 2017. If in the beginning of the year there was a surge of investment activities, in Q4 the foreign capital decreased by $1.6bn (In Q4 2017 foreign direct investments amounted to $1.6bn). According to the 2017 results, foreign direct investments fell by a quarter as compared to 2016.

Though fairly high interest rates spurred the influx of foreign portfolio investments in government bonds, as early as Q4 2017 it declined due to a decrease in nominal interest rates and reassessment by foreign investors of Russian economic risks.
Taking into account the negative dynamics seen in Q4 2017, it can be said that Russia is facing some challenges. Growth in oil prices yields the influx of foreign currency, but there are always risks that prices may go down. Also, there are uncertainties about the sanctions regime. Russia is entering the phase of short-term risks which are to be identified in the next few quarters.

Alexander Knobel, Head of the Foreign Trade Department, Gaidar Institute