Russia’s current account surplus in 1Q21 reached $17bn, which was below expectations
Russia’s current account surplus fell not only below expectations but also below the 1Q20 surplus of $23bn despite the average oil price recovering to $60/bbl in 1Q21 from $51/bbl in 1Q20. The y/y difference in the surplus figure corresponds to lower fuel export volumes related to the OPEC+ quotas: in 1Q20, fuel export revenue came in at $51bn versus $45bn in 1Q21. However, the likely contraction in fuel export volumes was a known fact priced-in by the market and could not explain the deviation between the actual result and the consensus projection.
Import growth of 12% y/y was the main negative takeaway from the 1Q21 result
Looking from another angle at the 1Q21 current account, the unexpected development was a rapid recovery in the import of goods. While we expected import growth to come in at 3% y/y in 1Q21, the actual figure was 12% y/y, representing an extra $5 bn increase in 1Q21 imports in y/y terms. This double-digit import growth was combined with the 2.5% y/y Russian GDP contraction in 2M21, which is a negative combination.
Growth in non-fuel exports does not compensate the higher-than-expected import growth
Since 2018, there was a certain correlation between the dynamics in imports and non-fuel exports (we are referring here to the trade balance, not the services figures). During the first quarter, non-fuel exports averaged $39bn during 2018-20 while the respective level of total imports was $56bn for the same period; that translated into flat non-fuel annual export revenues of $181bn for 2018-20 and $248bn of annual imports, which was also very stable. In 1Q21, this stability rule seems to have been broken: non-fuel exports came in at $42, some $3bn above the average of the last three years, while imports were reported at $63bn, jumping by $7bn from the average benchmark. It is not yet clear if this is the beginning of a trend, however there are two reasons why it should be taken seriously. First, last year’s crisis did not generate any import substitution effect: the share of imports in Russia’s retail trade turnover increased to 39% in 2020, the highest level since 2015, while in food retail it recovered to 28%, the level of 2015. Second, the Russian Cabinet’s intention to accelerate investment growth could also build extra demand for imports, especially given that Russia’s economic growth outlook for 2021 and beyond now looks disappointing compared with the strong acceleration in global growth. All in all, we see the higher-than-expected import growth partially explaining the ruble weakness in 1Q21 and also building extra risk for the ruble’s outlook.
Spending on travelling – a gradual recovery
Another negative observation from the 1Q21 result is the gradual acceleration in the import of services. It still dropped 32% y/y in 1Q21, but this represents some recovery from the 39% y/y contraction reported for 4Q20. We reiterate our view that once global borders reopen, a return in demand for international travel will represent a risk for the forex market.
Finance Ministry bought $3.7bn under the budget rule in 1Q21
The Russian cabinet returned to its budget rule operations in January and bought $3.7bn through the CBR from the market in 1Q21. Net private capital outflows were reported at $11.8bn for 1Q21 – given that in March foreign investors reduced their exposure to local OFZs (Russian sovereign bonds) under the fear of possible US sanctions on Russian debt instruments, we expect net private capital outflows to remain strong in 2Q21. So, with the fast recovery in the import of goods, a possible return of the import of services (i.e. travel expenditure), potentially persistent net private capital outflows and the Finance Ministry’s continuing sterilisation of oil revenues, the ruble exchange rate’s chances for appreciation look very modest while downside risk may yet materialise (for the ruble fair value analysis, please see our note from 6 April, Revision of the ruble fair value does not bring good news)