Good news for the rouble
In 2015 the volume of Russia’s external debt decreased by USD 85 billion. This year, total debt repayments are set to fall to USD 50–55 billion. This means a reduction in demand for foreign currency which will in turn have a positive impact on the rouble exchange rate. At the current time the Russian economy is generating sufficient foreign currency to service its debts.
The Russian rouble began to strengthen on Friday after a rise in oil prices. During trading on the Moscow Exchange the euro fell to below RUB 86, and the dollar fell to RUB 79. This was not the only good news for the rouble. According to Central Bank figures, Russia’s external debt fell last year by 14% – from USD 599 billion to USD 515.3 billion. This represents a fall from the peak value of USD 117.5 billion, set at USD 732.8 billion on July 1, 2014. Public debt fell by USD 1.6 billion over the last year to USD 30.7 billion (debt stood at USD 57.1 billion at the beginning of July 2014), with the outstanding debt owed as payments to foreign creditor banks and corporations.
The chief share of payments came in the third and fourth quarters of 2015, notes Alor Broker analyst Anton Vanin.
However, this has not had a major effect on the year end rouble exchange rate. The domestic currency was supported through large tax payments, and the fact that the finance and corporate sectors accumulated sufficient quantities of the currency.
In its final December financial stability report, the Central Bank states that “the liquidity available to major banks is more than sufficient to cover payments on external debt” for the period from October 1, 2015 to July 1, 2016. Furthermore, there is a significant upper limit on refinancing of external debt which remains unexploited: according to the Central Bank this figure stood at USD 28.7 billion on December 18, 2015.
Due to the lack of issues with foreign currency, a small reduction in the Central Bank’s gold reserves is observable (from USD 385.5 billion at the beginning of 2015 to USD 368.4 billion at the beginning of 2016) as well as in Russia’s balance of payment figures, which were published on January 18, 2016. According to preliminary Bank of Russia estimates, the current account surplus in 2015 stood at USD 65.8 billion, against USD 58.4 billion in 2014. The balance of trade did see a reduction of more than 23%, but remained considerably strong, standing at USD 145.6 billion.
“The growth in the current account surplus was the result of a significant reduction in the adverse contributions made by the balance of services and income from investments, including a reduction in payments on servicing foreign debt thanks to a reduction in the total volume of debt owed to non-residents,” the Central Bank announced.
Preliminary estimates of net private sector capital exports in 2015 calculate the figure at USD 56.9 billion (against USD 153 billion in 2014). Unlike in previous years, the largest share of net capital exports was the repayment of external private debt. The most significant factor was the reduction in external liabilities held by banks, which was achieved not only through the sale of foreign assets, but also with the accumulation of funds through current account transactions. Related sectors, finding themselves in harsh conditions of external refinancing, were also forced to fulfill repayments on external debt in an economic climate that saw the lowest accumulation of foreign assets in recent years, chiefly through direct investments.
“The economy overall proved to be quite resistant to strong external shocks, and in particular to the fall in oil prices, which amounted to a 45% drop over the last year,” concluded Sberbank CIB analysts.
This year, even at current or lower oil prices, the balance of trade will remain in surplus. Due to the weakening of the rouble and shrinking consumer demand, imports continue to decline at a faster rate than exports. The current account balance will also remain in surplus. Analysts at Sberbank CIB note that a reduction in the debt burden (in 2015) will set the conditions in place for an increase in the current account balance in 2016, achieved through a reduction in the interest rate on debt repayments. Gazprombank analysts forecast a current account surplus of USD 55.7 billion with a year average Brent Oil price of USD 38.3 per barrel.
The volume of external debt payments in 2016 will be lower than in 2015 according to analysts and, taking into account the availability of foreign currency reserves, debt repayments will not be a contributing factor to pressure on the rouble exchange rate. The servicing of debts is a key contributing factor to capital outflow. The Ministry of Economic Development believes that outflow could reach USD 50 billion in 2016, as reported by TASS agency.
According to Yury Kravchenko, Senior Analyst at Veles Capital, the official volume of repayment on Russia’s external debt, adjusted for 2016 interest rates, is around USD 95 billion. The vast majority of repayments are due to corporations and banks – USD 91 billion.
“However, the actual observed payments could be much lower than preliminary estimates, because a part of the payments will include intra-group accounts with a high probability of turnover and refinancing of funds between the parties involved. For example, of USD 13.9 billion of debt owed to major creditors and which came to maturity in the first quarter, the actual sum paid, according to Central Bank data, was USD 12.7 billion. This trend is set to continue throughout 2016, and the actual volume of debt repayments will total around USD 50–55 billion, which is largely in line with the projected volume of capital outflow,” the analyst said.
In 2016 the impact of the factor of servicing external debt on exchange rates will be reduced to a minimum for the foreseeable future, according to Kravchenko.
The weakening of the rouble in recent days is primarily due to a sharp fall in oil prices, with Brent Oil falling as low as USD 28 per barrel, rather than the result of a requirement to pay off debts or a dollar shortfall. In addition, the Russian currency is, according to the Director of the Bank of Russia Monetary Policy Department Igor Dmitriev, showing ‘resilience’, since the scale of its fall is significantly lower than the fall in oil prices. Sofia Kirsanova, an analyst at Raiffeisen Capital notes that since the beginning of the fourth quarter of 2015 the cost of ‘black gold’ has already lost 43% of its value, while Russia’s national currency has fallen by just 19%.
All of this means that, if oil indicators begin to rise once more, there will be nothing to hold back a strengthening of the rouble. Head of LUKOIL Vagit Alekperov told the World Economic Forum in Davos that the price of oil will begin to rise in the second half of 2016, reaching USD 50 per barrel by the year’s end. It remains only to wait for this moment, which is sure to arrive sooner or later.
Source: http://www.gazeta.ru/business/2016/01/21/8034089.shtml (Russian only)