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Russia Brings in a Record, $100 Billion, Current Account Surplus in 2018

Do you remember when the US last had a surplus? We don't

The CBR’s estimate of the current account surplus for full year 2018 is a record $114.9bn, while for 4Q18 it is $38.8bn, which exceeded the $33bn surplus in 2017.

“The strength of the current account highlights that it is one of several parts of the Russian economy where sensitivity to oil prices is not reduced by the fiscal rule, but rather amplified,” VTB Capital (VTBC) said in a note. “In this case, it was because diminished ruble effective exchange rate (REER) sensitivity to oil eliminated imports’ sensitivity to improvements in the terms of trade. As a result, goods imports in 4Q18 were $65.6bn, but down –$1.9bn y/y. Were oil prices to average approximately $70/bbl in 2019, we would expect a current account surplus of close to $110bn.”

The CBR has reported the current account surplus for 4Q18 at $38.8bn, more than the total surplus accumulated in 2017 of $33.3bn and up +$25.3bn y/y.

At the components level, the trade balance has seen the most drastic improvement, of +$22.0bn y/y. Increased export revenues from oil and petroleum products contributed +$14.4bn to that, while other types of non-oil & gas exports were up just +$2.6bn.

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Imports declined, in annual terms, for the second quarter. The pace of the decline almost doubled, from –$1.1bn in 3Q18 to –$1.9bn in 4Q18. The decline in imports signals modest domestic demand strength.

“To cross-check demand weakness in goods, we refer to the data on trade in services. The balance of this segment of trade continued to improve, in annual terms, for the third quarter in a row, meaning that the growth in exports exceeded that of imports. In particular, the transportation balance was up +$0.6bn y/y, mostly on the growth in exports,” VTBC said.

Both banks and corporates have seen their external debt contract, by –$8.1bn and –$2.3bn, respectively. For the banking sector, this is the 19th consecutive quarter that external debt has contracted, which started in 3Q14.

For the corporate sector, the decline in external debt only restarted in 2H18, and in this sense it is a reversal of the trend of 2017. In 4Q17, the corporate sector attracted around $2bn on a net basis.

Capital outflow reached $67.5bn from the private sector and almost $7bn from the public sector. Apart from this, the CBR bought $36.1bn worth of FX from the market before these purchases were suspended in August.

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In the fourth quarter of 2018, net capital outflow from the private sector reached $36.5bn, exceeding the figure for the whole of 2017 ($25.2bn).

Importantly, net foreign debt redemptions stood at $10.4bn, so the majority of the capital outflow in the fourth quarter of 2018 ($26.1bn) was attributable to an increase in foreign assets.

It appears that once the CBR halted its FX acquisitions, residents took the opportunity to accumulate FX liquidity for FX debt redemptions in the future.

VTB Capital (VTBC) argues that now the Central Bank of Russia (CBR) is back in the FZ market capital outflow should drop significantly in 2019 this year.

According to the preliminary figures (which are subject to revision once the CBR has received all the data for December), portfolio investments in Russian sovereign bonds fell by just $0.6bn in 2018.

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