Global Insight Perspective

Significance

Russia's external financial position has been fortified again in 2005 by burgeoning energy export revenues. The current-account surplus and the dwindling of capital exports have financed a startling build-up of official international reserve assets.

Implications

The continuing surge of foreign exchange earnings is putting further upward pressure on the rouble and on domestic prices, particularly given the central bank's dual focus on the exchange rate and inflation. It is also helping to fuel domestic demand, which in turn is generating rapidly growing imports.

Outlook

World market oil prices are unlikely to recede substantially from 2005 record highs any time soon. While imports will continue to surge and export growth will slow due to dwindling increases in oil exports in physical terms, imports are growing from a relatively low base and Russia will continue to enjoy huge current-account surpluses in the next several years.

The Central Bank of Russia (CBR) released its estimate of Russia's balance of payments in 2005. The CBR puts the current-account surplus for the full year at US$86.6 billion, up US$28.0 billion from the result in the same period a year earlier. A US$34.4 billion increase in the merchandise-trade surplus relative to 2004, to US$120.2 billion, was slightly offset by larger net outflows on non-factor services and on income items. Estimated exports reached US$245.3 billion, an increase of US$62.1 billion or 33.9% year-on–year (y/y), while estimated imports climbed US$27.7 billion or 28.4% y/y, to US$125.1 billion. The bank estimated that US$25.7 billion in incremental export revenues relative to a year earlier were due to higher receipts for crude oil, US$14.0 billion to additional revenue from refined petroleum products, and US$9.7 billion in extra revenue from natural gas exports.

The deficit on non-factor services of US$14.6 billion represented an additional net outflow of US$1.2 billion relative to 2004. Net current transfers in 2005 of -US$1.0 billion can be compared with a figure of -US$0.7 billion a year earlier. The deficit on income items swelled by US$5.0 billion in 2005 relative to a year earlier, to US$18.1 billion. Of that increased net outflow on investment income, US$6.2 billion was due to an excess of payments by Russian non-financial enterprises to non-resident investors over their receipts of income on Russian investment abroad, partly offset by an increase in net receipts of interest by the Central Bank. Net interest payments abroad by non-financial enterprises rose to US$16.1 billion in 2005 compared with US$9.7 billion a year earlier.

The net outflow on the capital and financial account (which does not include the change in reserve assets in the 'analytical' presentation used by the CBR in its estimate) increased by a mere US$8.1 billion, from US$6.3 billion a year earlier. In contrast, reserve assets ballooned. The change in reserve assets in 2005 was estimated by the CBR at a staggering US$61.5 billion, compared with US$45.2 billion in the same period of 2004. Additionally, the net errors and omissions term in this estimate rose modestly from -US$7.1 billion in the latest statistics for 2004 to -US$10.7 billion. The CBR considers that the errors and omissions term largely represents capital flows abroad from the non-financial enterprise and household sectors. This is because the bank encounters the greatest difficulties in accurately tracking financial operations of those sectors.

The CBR's estimate of the net outflow of capital on the part of the private sector excluding banks in 2005 in conjunction with the publication of the estimated balance of payment for the full year is put at only US$4.9 billion, down substantially from the estimated US$11.5 billion a year earlier. The 2005 estimate represents a change in the net asset position of the non-financial private sector of +US$5.9 billion together with the -US$10.7 billion errors and omissions term (note that a positive number in this accounting denotes an increase in net liabilities vis-à-vis non-residents). Adding to this a US$3.5 billion increment in net foreign liabilities of the bank sector, the CBR estimates that the private sector actually imported capital on a net basis to the tune of about US$300 million in 2005, the first net capital inflow on the part of the private sector since the CBR began to estimate these developments in 1994. The CBR estimates that the Russian private sector was responsible for net capital export of US$8.0 billion in 2004.

Outlook and Implications

Russia's external financial position has been fortified again in 2005 by burgeoning energy export revenues. The current-account surplus and the dwindling of capital exports have financed a startling build-up of official international reserve assets. The Russian sovereign is now a net creditor vis-à-vis the rest of the world by a very substantial sum.

The continuing surge of foreign exchange earnings is putting further upward pressure on the rouble and on domestic prices, particularly given the central bank's dual focus on the exchange rate and inflation. As the bank weighs in against the rouble on local foreign exchange markets in an effort to mitigate the impact on the competitiveness of domestic manufactures, it has little capacity to sterilise the resulting injections of roubles. The slack must be picked up on the fiscal side, by sequestering windfall revenues in the Stabilisation Fund. The windfall is also being tapped to pay down official external debt ahead of schedule, further propping up Russia's external financial position.

Surging export earnings are also helping to fuel domestic demand, which in turn is generating rapidly growing imports. World market oil prices are unlikely to recede substantially from 2005 record highs anytime soon. While imports will continue to surge and export growth will slow due to lesser increases in oil exports in physical terms, imports are growing from a relatively low base and Russia will continue to enjoy huge merchandise trade and current-account surpluses in the next several years.

Contact: Raul Dary

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Lexington, MA 02421, USA
Tel: 781.301.9314
Cel: 857.222.0556
Fax: 781.301.9416
raul.dary@globalinsight.com

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