January 21, 24 Russia s Balance of Payments Performance in 24 A record high current account surplus and a greater private capital outflow The trade surplus hit a new record high, well compensating the services deficit Energy supplies, above all oil, sustained the domination in the exports Soaring oil prices helped export growth to outpace that of the imports. In the long run the imports to rise faster. Outflow of the net investment income stabilized, its further rise is likely due to increasing private capital inflow The FDI declined after a revision CBR s reserves soared to a historical high Private capital outflow rose nominally, but reduced relative to the total private inflow. Private capital inflow fell slightly. The population continued purchases of foreign currencies. The capital flows were affected by the monetary authorities, who discouraged an inflow of speculative money. Net private capital outflow rose, although remained at a reasonable level Current account and foreign trade surpluses to decrease in The balance of payments to change its shape A record high current account surplus and a greater private capital outflow The Central Bank of the Russian Federation has published its preliminary estimates of the country s balance of payments in 24. The balance performance further strengthened. However, along with a dramatic increase of the current account surplus, the net private capital outflow also intensified. The current account surplus rose 64% to a new record high of $58.2 bn or 1.2% of the GDP. In 23 Russia enjoyed current account surplus of $35.4 bn or 8.3% of the GDP. In 22 the surplus level to GDP was 8.7%, in 21 1.9% and in 2 18.7% (see chart 1 and table 1). RUSSIA'S CURRENT ACCOUNT BALANCE IN 1998-1998 1999 2 21 22 23 24 est. f. 23 24 Table 1 I II III IV I II III IV CURRENT ACCOUNT BALANCE.2 24.6 46.8 33.6 29.9 35.4 58.3 37. 11.4 8.1 7.3 8.6 12.6 13.4 14.7 17.5 TRADE BALANCE 12.3 31.7 53.5 38.3 36. 49. 73.2 52. 13.1 11.4 11.9 12.6 15.2 17.3 19.6 21.1 Goods 16.4 36. 6.2 48.1 46.6 59.9 87.2 67. 15.1 13.5 15.4 15.8 17.7 2.5 24..1 Exports 74.4 75.6 15.11.917.6135.9182. 172. 31.1 31.7.9 38.2 37.3 43.2 48.7 52.9 Imports -58. -39.5-44.9-53.8-61. -76.1-94.8-15.-16.-18.2-19.6-22.3-19.6-22.7-24.7-27.8 Services -4.1-4.3-6.7-9.8-1.6-1.9-14. -15. -2. -2.2-3.5-3.2-2.5-3.1-4.4-4. NET INVESTMENT INCOME -11.6-7.9-7. -4.1-6.3-13. -13. -15. -1.5-3.2-4.3-4. -2.5-3.4-4.2-2.9 FOREIGN DIRECT INVESTMENT 2.8 3.3 2.7 2.5 3. 8. 6.6 12. 3.8 2.8 2. -.6 4.7.7.6.6 FX RESERVES CHANGE (+) decrease, (-) increase 5.3-1.8-16. -8.2-11.4-26.4-45.2-17. -7.6-8.1 2.6-13.3-6.8-5. -6.5-26.9 NET PRIVATE CAPITAL FLOW -22.6-21.1 -.4-13.3-9.2-1.7-6.5-3. -.2 4.3-7.6 1.7-4. -6.1-6.7 1.4 Increase of banks' foreign obligations -6.3 -.9 1.5 4.6 2.4 11.2 7. 1..6 2.7 1.9 6..4-1. 1.4 6.2 Increase of non-financial companies' foreign 8.3 2.1 1.8 3.4 13.9 22.1 24. 28. 6.3 5.6 6. 4.1 9. 5.4 3.8 5.8 obligations Increase of banks' foreign assets.3-3.4-3.5-1.6 -.5-1. -4. -6..2.6-4.2 2.4-3.6-2.3 -.5 2.4 Increase of non-financial companies' foreign assets -15.1-1.4-16.1-1.8-19. -.9 -.9-27. -5.9-3.2-8. -8.8-6.5-7.9-8.1-3.4 Net errors and omissions -9.8-8.6-9.2-8.8-6.1-8.2-7.6-8. -1.5-1.6-3.2-1.9-3.4 -.4-3.3 -.5 Increase of overdue export receivables and nonrepatriated import -8. -5.1-5.3-6.4-12.2-15.4-23.6-17. -3.4-4. -3.6-4.5-5.9-6.8-5.9-5. advances NET PRIVATE CAPITAL FLOW RELATIVE TO CURRENT ACCOUNT SURPLUS, % -1316-85.8-54.3-39.6-3.9-4.9-11.1-8.1-1.4 52.5-14.4 2.2-32.1-45.7-45.5 59.1 1
The main reason for this impressive performance was the same as in 1999-23--strong foreign trade balance. However, in contrast to 1999-22, when we pointed to a relatively low net investment income outflow as another reason, contributing to strong current account surplus, in 24 the net investment income outflow remained relatively high at the level of 23 (see table 1). Another important trend of the balance of payments weaker private capital inflow to the country, was accompanied with a more intensive outflow. Chart 1 Chart 2 2 15 1 Formation of Russia's Current Account Balance, $ bn 5-5 Q1-98 Q1-99 Q1- Q1-1 Q1-2 Q1-3 Q1-4 Current account balance Balance of goods and services Investment income net $ bn 2 15 1 5-5 Russia's Foreign Trade in 1998-24 -1 Jan-98 Jan-99 Jan- Jan-1 Jan-2 Jan-3 Jan-4 Jan-5 Trade balance--goods Exports Imports The trade surplus hit a new record high, compensating the services deficit Energy supplies, above all oil, sustained the domination in the exports In 24 the trade surplus in goods and services increased by 65% compared with 23 to $73.2 bn: Foreign trade surplus (goods) of $87.2 bn was 46% higher than a year ago. Deficit of the trade balance in services increased by 29% YOY to $14. bn. The Russian foreign trade continued to benefit from favorable export prices on energy supplies (chart 6). In 24 in the world market, the average price on Urals blend crude oil rose to $.7 p/b compared with $27.2 p/b on average in 23. As a result, the share of the energy supplies in the total Russian exports of goods rose from 4% in 1998, 42% in 1999, around 5% in 2-2, to 55% in 23-4 (charts 3-4). The crude oil share amounted to 32.4%, oil products 1.3% and natural gas 12.3% of the total exports. Chart 3 Chart 4 Structure of the Russian Exports in 2, % Others 27% Structure of the Russian Exports in 24, % Others 2% Machines and equipment 9% Metallurgy 14% Energy supplies 5% Machines and equipment 8% Metallurgy 17% Energy supplies 55% Soaring oil prices helped export growth to outpace that of the imports In 24 export growth slightly outpaced import growth (35% vs. 26% YOY), continuing the trend of 23 and being a result of skyrocketing oil prices. The latter helped to reverse the tendency of the faster growth rates of imports, which emerged in 21 and extended in 22. 2
The changes in 21-2 happened after a dramatic drop in the imports in the postcrisis months of 1998 and in 1999 and sharp growth in the exports in 2. On the one hand, the volume of the imports fell 3% in 1999 and increased by only 14% in 2 due to precipitous ruble devaluation in 1998. On the other hand, in 1999 the exports remained effectively at the level of 1998, and in 2 the exports jumped 41% YOY, as the energy supplies prices soared. In 23 growth of exports accelerated due to increasing world prices on traditional items of the Russian exports, as well as their export volumes for crude oil 15% and 21%, respectively, oil products -32% and 7-17%, natural gas 18% and 1%, metals 2-4% and 4-2% and timber 12% and 2%. These products made up around 65% of the total exports. The imports rose due to economic growth in Russia (7.3%) that was accompanied by real ruble appreciation against the USD (19%). Similar factors influenced the Russian foreign trade 24. Particularly, GDP growth is expected at 6.8-6.9%, while the ruble appreciated in real terms 13.5% against the USD and 5.5% against the euro. In the long run the imports to rise faster We expect that in the long run the imports will increase faster than exports (see below). Particularly, already this year the export volume can drop from the record high, if the average export price on crude oil falls compared with the previous year. Chart 5 Chart 6 Russia's Balance of Payments Performance in USD bn 1998-11 9 87 7 6 6 67 48 47 5 36 58 3 16 47 35 3 37 1-4 -7-8 -4-1 -1-11 -11-12 -7-4 -14-15 -6-13 -13-15 -3 1998 1999 2 21 22 23 24 e. f. CURRENT ACCOUNT BALANCE Goods Services NET INVESTMENT INCOME World Prices on Energy Supplies Exported Nat. by Russia, USD per ton/thous. cubic meters Crude Oil Gas 5 13 4 3 2 1 Jul-98 Jul-99 Jul- Jul-1 Jul-2 Jul-3 Jul-4 Crude oil Urals blend (world) Natural gas (export) 11 9 7 5 3 Outflow of the net investment income stabilized In 24 the outflow of net investment income sustained at $13 bn, still being noticeably higher than in 1998-22. The net investment income outflow dropped to $4.1 bn in 21 from $11.6 bn in 1998, but rose to $6.3 bn in 22 and $13. bn in 23 (see chart 5 and table 1). During the crisis of 1998 Russia announced that it would service only the post-soviet debts, while seeking restructuring former Soviet Union s debts. In 2 Russia succeeded to restructure its $32 bn debts to the London Club into $21.5 bn 1- and 3-year Eurobonds with a 7-year grace period. In 22, similarly, it restructured the first portion of the former Soviet commercial debts (total of $6. bn) and issued $159 million Eurobonds 21 and $1.155 bn Eurobonds 23. Currently Russia is paying all its foreign debts and is seeking a partial early repayment of its debts to the Paris Club ($44.4 bn including around $35 bn of the former Soviet debts). In 24 the government paid about $17 bn foreign debts including the $7 bn debt service. This year it should pay around $15 bn foreign debts, including the $7 bn debt service. 3
a further rise is likely due to increasing private capital inflow The FDI declined after a revision In the net investment income outflow is expected at $15 bn due to increasing interest payments of private borrowers, as their foreign debts have been rising intensively since 22, as well as dividend payments to non-residents. The foreign direct investments (FDI) were estimated at $6.6 bn ($1.5 bn down from the previous Q.1-3 estimate) compared with $8. bn in 23. We expected that the FDI could reach $12 bn in 24. Nevertheless, given the fact this was a preliminary estimate, there is a chance it will be revised up materially (as this happened with regard to the FDI 23). Overall, we see long-term prospects for a strong FDI inflow to Russia. CBR s reserves soared CBR further raised its FX and gold reserves by $45.2 bn, to a historical high of $124.5 bn. Private capital outflow rose nominally, but reduced relative to the total private inflow Private capital inflow fell slightly The population continued purchases of foreign currencies The private capital outflow (both legal and illegal) rose to a record high of $38 bn compared with $35 bn previous year. At the same time, in 24 the level of the private capital outflow relative to the total private inflow by means of the capital inflow and current account surplus reduced noticeably to 42% compared with 51% in 23 and 6% on average in 1999-23. The private capital inflow reduced to $31 bn compared with $33 bn a year ago, still being considerably greater than in 1998-22 $2-16 bn. The inflow reduction happened in the banking sector, while it continued to increase in the non-banking sector. The conversion of foreign cash, held mostly by the population, into the rubles, which was one of the major sources of the private capital inflow in 23, continued in 24, although reduced to $2.9 bn from $6.6 bn in 23. Net foreign currency sales of $3.2 bn in Q.1-24, turned into net foreign currency purchases $3 million in Q.2 and $1.5 bn in Q.3. The latter were a 4 2-2 -4 Foreign Cash Purchase/Sale(-/+) in Russia, quarterly average, USD bn 1994 1996 1998 2 21 23 Q.2-24 Q.4-24 consequence of the interruption of nominal ruble appreciation trend in April- September, as well as of the micro-crisis of confidence in the banking system in June-July. However, the resumption of ruble strengthening and the normalization of the situation in the banking system encouraged a new wave of foreign currency sales by the population in Q.4, when the net sales reached $1.4 bn. The net sales of foreign cash, as a source of the capital inflow, has had a further potential, as the volume of cash USD savings by the Russian population is estimated at $3-4 bn. In contrast to 23-4, in 2-2 the population was a net buyer of foreign cash, hence, contributing $8-9 million per year to the capital outflow In 1996-97, when dollarization of the economy reached its peak, the foreign cash purchases amounted to $9-13 bn In de-dollarisation (here, the conversion of foreign currency savings into the rubles) of the economy is likely to continue, given expected further ruble strengthening. 4
The capital flows were affected by the monetary authorities, who discouraged an inflow of speculative money Net private capital outflow rose, although remained at a reasonable level The change in the trends of private capital flows was triggered by the interruption of nominal ruble appreciation against the USD, which lasted more than a year until February 24, and after a period of stability the ruble weakened from April to August. This ruble weakening was a result of deliberate measures of the Russian monetary authorities (rather than a deterioration of any economic fundamentals), which committed not to allow excess ruble appreciation and to limit real effective ruble appreciation by 7% in 24. Particularly, the monetary authorities announced certain restrictions on shortterm speculative foreign capital inflow to the country. The process of a gradual increase of interest rates in the U.S. also contributed to the acceleration of the capital flow out of Russia and the slowdown of the inflow. As a result, in 24 the net private capital outflow from Russia rose to $6.5 bn compared with $1.7 bn previous year, being considerably lower than in 1998-22 ($9- bn) (table 1). USD bn 5 Private Capital Flows to/from Russia In 24 the net private capital outflow -5 from Russia increased relative to the Net private capital flow current account surplus to 11% from Private capital outflow 5% in 23, but was dramatically lower than in 1999-22 (31-86%), not saying about 1998 (13%). - 1998 1999 2 21 22 23 24 e. f. Privat e capital inflow We expect a further increase of the private capital flow to Russia at the expense of, above all, longer-term investments including the FDI. In we expect the capital inflow of $38 bn and a reduction of the net outflow to $3. bn. Current account and foreign trade surpluses to decrease in Forecast scenarios rest on oil prices We forecast that in the current account and foreign trade surpluses will decrease to $37 bn and $67 bn, respectively (table 1 and chart 5). The base scenario implies a lower average world price on the main export item crude oil $28 p/b (see also below) Along with lower exports, other factors continuing economic growth in Russia and real ruble appreciation are likely to stimulate further intensive growth of the import volumes In GDP growth is expected at 5.8%. The ruble is likely to appreciate by 12% against the USD in real terms in addition to 76% in 2-4, and around 3% against the euro after 5.5% in 24. An increase in the net private investment income outflow will restrain, to a some extent, the current account surplus rise Depending on the average crude oil price (Urals blend) in the world market, we forecast the current account surplus as follows: $31 bn (5.%) at the price of $2 p/b $37 bn (5.5%) at the price of $28 p/b (base scenario) $56 bn (8.% of GDP) at the price of $36 p/b Under the same scenarios, the foreign trade surplus is forecasted at $61 bn, $67 bn and $86 bn. 5
The balance of payments to change its shape Overall, in the mid-term Russia s balance of payments is likely to demonstrate a gradual substitution of a net foreign inflow through the current account for a net foreign capital inflow. This is more typical for the growing economy with the appreciating national currency, fiscal and political stability and improving credit ratings. USD bn 6 3-3 -22-23 Russia's Balance of Payments Performance in 1998-3 -21 47 21 2 21 - -13 35 3 1998 1999 2 21 22 23 24 NET FLOW TOTAL CURRENT ACCOUNT est. BALANCE f. NET PRIVATE CAPITAL FLOW -9-2 52 58-7 37-3 Yuri Chaikin Analyst yurii.chaikin@citigroup.com 7-95-7-6862 This communication is made by ZAO Citibank ( the Firm ) exclusively to its clients, and any investment services, strategies or products offered herein are made available solely to market counterparties. No other person may rely on the contents of such communication nor have access to any such investment services or products. Such commentary and ideas are based upon generally available information. On occasion, information provided herein might include excerpts, abstracts, or other summary material derived from research reports published by the Firm's [Fixed Income Research] Department. Readers are directed to the original research report or note to review the Fixed Income Research Analyst s full analysis of the Subject Company. Although all information has been obtained from and is based upon sources the Firm believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. Any opinions attributed to the Firm constitute our judgment as of the date of the material and are subject to change without notice. This material is for your sole use and is for informational purposes only and does not constitute a recommendation by the Firm. Neither the Firm nor any other person accepts any liability whatsoever for any loss (howsoever arising and whether direct or consequential) from any use of the information contained herein or otherwise arising in connection herewith. Citibank NA., 23. All rights reserved. Any unauthorised use, duplication, redistribution or disclosure is prohibited by law and will result in prosecution. 6