The Russian Economy Explained – A 3-Part Series (Part 2)

Originally posted in October 2015, Updated in November 2016.

In part two of a three part series on the economy of Russia, we cover Russia’s Balance of payments and detail their exports and imports and how they are currently impacting the economy.

Before starting part 2, If you missed it, check out Part 1 on Russia’s economic profile, which gives an overview of Russia’s economy starting from the fall of the Soviet Union until present day including analysis of assets, risks, economic growth, and inflation.

Russia’s Current Economic Outlook

In this article you will learn more about Russia’s current economic outlook with a piece on Russia’s balance of payments, including analysis of the current account balance, trade balance, private capital expenditure, and PMI as well as detail on how their recent geopolitical issues have impacted their capital and financial accounts.

The article will also examine their exports and imports, detailing their main imports and exports over the last few years showing an evolution of their trade surplus with a forecast on where it will be by the end of 2016 and into 2017.

Balance of Payments

Russia’s current account records regular trade surpluses largely due to exports of commodities such as crude oil and natural gas. From 2010 to 2014, Russia’s average current account surplus was USD 66.8 billion, reaching a peak in 2011 at USD 98.8 billion.

Russia’s balance of payments suffered a significant terms-of-trade shock in the fourth quarter of 2014 as a result of falling oil prices, which were, in part, offset by a drop in imports. Simultaneously, geopolitical uncertainties and related sanctions in 2014 resulted in large capital outflows, further deteriorating Russia’s BoP. Private sector capital outflows increased from USD 60.7 billion in 2013 to USD 130.5 billion in 2014. During the same period, capital and financial accounts of the Russian Federation fell from a deficit of USD 45.4 billion to a deficit of USD 146 billion (2.2% and 7.8% of GDP, respectively).

Russia’s economy registered the steepest contraction since 2009 last year as a combination of external factors—such as a plunge in oil prices and international sanctions—coupled with structural weaknesses took a heavy toll on growth. The economy contracted 3.7% in the full year 2015, which contrasted the meagre growth registered in the previous year. However, the contraction in the Russian economy in the second quarter of 20167 was the slowest since the recession began in late 2014. Comprehensive data showed that GDP contracted 0.6% annually in Q2, which came in above the 1.2% decrease recorded in Q1. Although industrial production shrank in September, falling at the fastest pace seen in 8 months, it is expected to expand slightly in 2016 after suffering the worst contraction in six years in 2015.

Exports and Imports

Crude oil, petroleum products and natural gas comprise roughly 58% of total exports, iron and steel represent 4% and other mining sector related exports including gems and precious metals account for about 2.5%. Sales to Europe represent over 60% of total exports while Asia has an export share of roughly 30%. Russian exports to the United States, Africa and Latin America combined represent less than 5% of total shipments.

Russia’s main imports are food and ground transports, which represent 13% and 12% of total imports, respectively. Other significant imports include pharmaceuticals, textile and footwear, plastics and optical instruments. Exports peaked in 2012 reaching USD 527 billion; imports peaked in 2013 reaching USD 341 billion.

In August of 2015, Russian exports amounted to USD 25.0 billion, which marked a 39.7% contraction in annual terms. This marked the 10th consecutive contraction at a double-digit rate. Imports totaled USD 16.5 billion, which marked a 34.7% year-on-year contraction.

Russia’s trade surplus is narrowing rapidly. Russia’s trade surplus narrowed to USD 4.4 billion in August of this year, which came in dramatically below the USD 8.8 billion registered in the same month last year and the USD 16.2 billion the prior year. August’s result prompted the 12-month rolling surplus to decrease to USD 99.5 billion, the smallest accumulated surplus in over a decade. The fall in the trade surplus continues to reflect the free fall that Russian exports have registered over the last few years.

Following a period of heightened volatility, oil prices have recently stabilized especially since the extraordinary meeting of the OPEC Conference in Algiers in the last week of September, which concluded with a commitment to freeze oil production at between 32.5 and 33.0 million barrels a day. Analysts expect the commitment to be honored by most members at OPEC’s official meeting in November where non-OPEC oil exporters are also encouraged to sign on the dotted line. The re-establishment of OPEC’s price leadership prompted global oil prices to spike, including for Urals oil. On 30 September, the price for Urals oil settled at USD 46.3 per barrel, which was 4.6% higher than at the end of August. Urals oil has also recovered from the lows registered earlier this year and was 31.8% on a year-to-date basis.

Concluding Remarks

Russia’s decline from the highs of just a few years ago are made plainly visible in the above sections on Balance of Payments and Exports & Imports. The global fall in commodity prices and the subsequent dire economic situation they find themselves in currently clearly exposes their reliance on commodities for growth - unbalancing their payments and halting exports. Recent geo political issues certainly haven’t helped matters either and the future is uncertain as a result. However, economic conditions have begun to look up. After a plunge in Russian exports 2015, the latest projection from FocusEconomics sees an exports expansion of 11.5% in 2016.

If you would like to get an overview of Russia’s economy past and present and you missed part one of this series, have a look.  

Anthony Halley and Senior Economist Ricardo Aceves contributed to this piece. 

Originally posted in October 2015, Updated in November 2016.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.

Date: October 28, 2015


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