Widening Of Russian Current Account Surplus To Belie Deteriorating External Position In 2022, 2023

Fitch Solutions / Banking & Financial Services / Russia / Fri 18 Mar, 2022

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Key View

  • At Fitch Solutions, we expect that Russia’s current account surplus will widen from 6.0% of GDP in 2021 to 12.8% of GDP in 2022, due to elevated commodity prices and a severe decline in imports. It will then narrow to 8.1% of GDP in 2023 as exports decline.
  • Russia’s large current account surplus masks an otherwise fragile external position. Western sanctions over the invasion of Ukraine have frozen the bulk of Russia’s FX reserves and sparked a massive sell-off in Russian assets.
  • Russia’s inability to access international capital markets due to financial sanctions will lead to the shrinking of its external debt load as willing creditors become increasingly scarce.

At Fitch Solutions, we expect that Russia’s current account surplus will widen from 6.0% of GDP in 2021 to 12.8% of GDP in 2022 due to elevated commodity prices and a severe decline in imports. It will then narrow to 8.1% of GDP in 2023 as exports decline. The latest available data showed a cumulative surplus of USD39.2bn in January and February 2022, around three times the size of the same period of 2021. At Fitch Solutions, we believe that Russia’s current account surplus will widen over the course of H122 as risk premia and supply worries cause commodity prices to spike and Western sanctions cause imports to fall sharply (see chart below).

Russian Current Account Surplus To Peak In H122 Before Narrowing Over H222 And 2023

Russia - Current Account Balance & Components, USDbn 4qma

Source: NBP, Fitch Solutions

We then expect that the surplus will narrow later in the year (see chart above). Commodity prices will ease as the shock of Russia’s invasion of Ukraine recedes. By H222, we expect that Russian importers will have found alternative suppliers and new methods to pay them with.

Despite elevated commodity prices, we expect that Russia’s export earnings will fall by 5.0% y-o-y in US dollar terms in 2022. The price of oil (which makes up 20.7% of Russia’s exports) has averaged USD94.2/bbl this year, 32.7% above last year’s average. However, we expect that prices will come down later this year (see chart below).

Oil Prices To Subside In H222 But Remain Above 2021 Levels

Brent Crude - USD/bbl, daily

Source: Bloomberg, Fitch Solutions

Russia’s export volumes will also decline, falling by at least 2.5% this year. We think that the country’s production and export will fall as a result of direct sanctions, reduced demand for Russian oil, and increased logistical difficulties in buying and shipping Russian crude (see table below).

Measure Imposed By Impact
Russian banks blocked from accessing USD, GBP, EUR, JPY, CHF assets Governments of US, UK, EU, Japan and Switzerland Oil is usually traded in USD. Buyers of Russian oil will have to pay in RUB or an alternative currency which raises their exposure to the Russian banking sector.
Major shipping companies suspend shipments to and from Russia Maersk, MSC, CMA Near-term disruption to physical supply, added costs as alternative shipping must be found.
Russian affiliated ships blocked from entering UK ports UK Government Ships cannot deliver goods by sea to the UK nor can they dock to refuel mid-journey. Could lead to re-routing of certain journeys.
Ban on investing in Russian energy sector EU  It will be difficult for Russian energy companies to scale up production without western capital and machinery. Many projects to be delayed.
Major energy companies suspend operations in Russia or with Russian partners BP, Eni, Equinor, Shell, Exxon Mobil, Centrica, IOG, Total Energies Projects to be delayed, loss of buyers for Russian crude, need to find alternative financing for new projects.
Nord Stream II project suspended German Government  Under normal circumstances, Russia would need to continue paying transit feed to Ukraine, although given the war this may not happen in 2022. Russia will not be able to ramp up additional gas sales to Europe, meaning higher prices and tighter market conditions. Huge hit to Gazprom revenues. 
Ban on exporting high tech goods to Russia including US made or designed software and chips and dual use products Governments of US, UK< EU, Canada, Japan, Taiwan, South Korea and Singapore Shortages of key parts to hit industrial sector leading to lower exports. Also lower imports as many of these goods cannot be replaced by imports from China. 
Source: National sources, national authorities, Fitch Solutions

The US, UK and Canada have already banned the import of Russian crude. These countries only account for 3.0% of Russia’s total oil exports, and we believe these supplies could be rerouted to countries like India and China. It is likely, however, that countries importing additional supplies of Russian oil will be able to do so at a discount. Indeed, Russian crude sold in India – the world’s third largest oil consumer – is priced with a discount of USD25/bbl. We expect that India will pay for additional volumes in RUB.

Energy Relationship With China More Important Than Ever, Imports To India To Increase

Russia - Oil Export Destinations, % of total exports

Source: OEC, Trademap, Fitch Solutions

Russian export bans designed to deprive Western countries of key minerals will also reduce the country’s foreign earnings. Moscow has already banned the export of wheat, sugar, electrical equipment and the reexport of foreign medicine. Further bans are likely, and we will update our forecasts when they are announced. However, the goods export bans in place at present account for a very small portion of Russia’s total exports (around 4.0%).

Russian imports will decline even faster than exports; we estimate that imports will fall by 30.0% in USD terms this year. Sustained RUB weakness will mean push up the cost of imported goods in 2022 and 2023 (see chart below). We also expect that sanctions and private sector disinvestment from Russia will restrict the country’s access to certain goods. For example, while Western governments’ high-tech goods embargo on Russia does not include consumer electronics and appliances, the departure of companies (or the suspension of their operations in Russia) like Dell, Apple, Microsoft, IBM and Bosch will create this effect independently. This will contribute to far lower imports and severe shortages of certain goods in Russia.

RUB Suffers Fastest Depreciation In 25 Years But CBR's Response Limited By Sanctions

RUB/USD - Daily Exchange Rate, rebased to 01-Jan = 0

Note: Values presented in reverse order. Source: Bloomberg, Fitch Solutions

With the Central Bank of Russia under western sanctions, the Bank will be unable to utilise much of its substantial FX reserves, meaning that the RUB will remain very weak. Typically, a rise in oil prices would prompt a rise in Russia’s FX reserves as Russia’s receives higher export receipts (see chart below).

Sanctions Freeze Majority Of Russia's FX Reserves, Decoupling Relationship With Oil Prices

Russia - Brent Crude, USD/bbl & FX Reserves, USD bn

Source: CBR, Bloomberg, Fitch Solutions

However, the CBR’s inability to make USD, EUR, GBP, JPY or CHF transactions means that any oil revenues denominated in any of those currencies will not reach the Central Bank. Instead, they will remain with those commercial banks that handle the transactions, namely Gazprom Bank. As the EU is still importing Russian energy, the bloc has so far excluded those Russian banks involved in the European energy trade (Gazprom Bank and Sberbank) from the relevant punitive measures.

In 2014, oil prices fell by 47.7% from the start of the year to the end, triggering a 77.0% depreciation in the RUB against the USD across the same period. Over the course of 2014, the CBR used almost a quarter of its total international reserves (excluding gold) to shore up the RUB and prevent further weakening. Using 2014 as a rough template, we estimate that the CBR would need to use at least 20.0% of its FX reserves – equal to USD102.5bn – to make an equivalent response in 2022 to support the RUB's losses of 59.2% against the USD (percentage difference between exchange rate at start of 2022 and March 10). Given that the CBR cannot access its assets held in EUR, USD, GBP, JPY or CHF (which account for around 60.0% of total reserves), the CBR would need to sell either gold or CNY to raise that capital (see chart below). If the CBR were to use CNY, this baseline level needed to support the RUB would require the use of all of its current CNY assets and some of its gold.   

Energy Export Revenues Will Not Make It Back To CBR If Payments Made In EUR or USD

Russia - Breakdown of FX Reserves by Currency (LHC) & Geographical Location (RHC), % of total

Note: Data correct as of June 2021, latest available data. Source: CBR, Fitch Solutions

In our view, Russia’s financial and capital accounts will move into deeper deficits in 2022 and remain there in 2023 as investors swiftly drop Russian assets. Already, a huge number of foreign firms have suspended their operations in Russia or announced their intention to exit the country. As Russia remains in the grips of a financial crisis, we believe investor appetite for Russian assets will remain weak to non-existent given the risk of secondary sanctions and reputational damage. Trading on the Moscow Stock Exchange was halted on February 28 and remain in place until at least March 18 after the MOEX index plunged 32.8% on February 22.

External Debt Load To Shrink As Ability To Borrow Is Severely Curtailed

Russia - External Debt Load By Currency, % of total (LHC); External Debt By Denomination, USD bn & y-o-y chg., %

Source: CBR, Fitch Solutions

In addition, the Russian state and many of its major banks are prohibited from raising capital on European or American capital markets. Therefore, portfolio inflows will fall significantly in 2022 even though the CBR banned non-resident holders of Russian stocks and bonds from divesting from their existing assets on March 2. We believe that these measures will contribute to a decline in Russia’s external debt load in the years ahead, as well as a further reduction in its USD and EUR debts, in favour of the CNY (see LHC above). We forecast that external debt will fall to 28.4% of GDP in 2022 and 22.3% in 2023 as declining FX reserves and portfolio inflows lead to forced deleveraging as seen after the annexation of Crimea in 2014 (see RHC above).

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. Copyright © 2021 Fitch Solutions Group Limited. © Fitch Solutions Group Limited All rights reserved. 30 North Colonnade, London E14 5GN, UK.

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