Russia: Greater resilience to new sanctions, but dollar dependency remains

By Andreas Schwabe, RBI |

Andreas Schwabe, CFA, analyst for Eastern Europe at RBI

Russia’s foreign trade is in a much better shape this year. The current account surplus – i.e. broadly the difference between exports and imports – almost tripled in the first three quarters of 2018 compared with the previous year. While Russia was able to report a current account balance of 20 billion US dollars in 2017, this figure was 76 billion in Q1-Q3 2018! With a surplus of 136 billion dollars, the balance in merchandise goods trading was even significantly higher. This development is mainly attributable to two factors: Firstly, a higher oil price has boosted export earnings this year. Exports of goods dominated by energy and raw materials rose by 27.5 percent compared with the previous year. At the same time, the weaker rouble and the slow increase in purchasing power among the population led to a much more moderate increase in goods imports of just under eight percent compared with the previous year. Except for the possibility of a renewed oil price shock, foreign trade surpluses should also be maintained in the coming year, as the economy is likely to continue to grow rather moderately.

Russia was also able to increase its foreign exchange reserves to the equivalent of 460 billion dollar. However, the growth trend in reserves has come to a standstill once again, partly due to the turbulence on the rouble market. Given the weakness of the rouble in autumn, regular currency purchases were put on hold at least until the end of the year. Nevertheless, it seems realistic that Russia will soon again have over 500 billion US dollars in foreign exchange reserves at its disposal. In addition, the Russian economy’s external debt deleveraging process continues to progress. In September 2017, total external debt of the Russian state, banks and companies in total still amounted to 530 billion dollars. In the meantime, i.e. as of the end of September 2018, the figure is less than 470 billion dollars. Russia’s integration into the global capital markets is therefore declining in this sense. Also Russian banks and companies that are not directly sanctioned are adapting to the increased US sanction risks and trying to keep borrowing in the global financial system low.

However, recent announcements and plans by the Russian government to move away from the US dollar in foreign trade must be viewed with caution. A quick, even more a complete departure from the dollar is not very realistic. Russia will continue to have to resort to the US dollar for most of its foreign trade. Moreover, the recently announced reallocation within the currency reserves will not be able to completely replace the US dollar with gold and other currencies.

In summary: Rising foreign exchange reserves, large current account surpluses and lower external debt make Russia less vulnerable to new financial sanctions and external shocks. However, new US financial sanctions could still do significant damage, partly because it is not possible to turn away from the US dollar in the short and medium term.

Andreas Schwabe is an analyst for Central and Eastern Europe with a focus on Russia and Ukraine in the Economics Department at Raiffeisen Bank International in Vienna.

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