Rise and fall
Russian authorities shunned a one-off devaluation of the rouble, opting for a gradual decline instead. Record capital outflows and a hefty corporate debt burden may have eased, but the economy is hardly out of the woods
Russia’s tidal wave of outward capital flows is subsiding, its cross-border private-sector debt burden is getting lighter and the government’s gradual devaluation has stabilized the rouble. Some economists even see light at the end of the tunnel – although the black clouds of oil price dependency and the real economy’s collapse have not cleared.
The good news that capital outflows have slowed down was confirmed by Russia’s balance-of-payments figures for the first quarter of 2009. The net outflow in Q4 2008 was a record high, $130.6 billion – more than five times greater than in any previous quarter since records began in 1994 – but fell back to $38.8 billion Q1 of 2009. Natalia Orlova, chief economist at Alfa Bank in Moscow, tells Emerging Markets: “If there’s room for optimism anywhere in the balance-of-payments figures, it’s on the capital account.”
Part of the capital outflows in the first quarter of this year are associated with companies paying off cross-border debt. “Russian companies and banks have repaid $90 billion of foreign debt, and this is significant,” Orlova says.
When the financial crisis exploded in September last year, the foreign debt burden of Russian banks was $198.2 billion, and of Russian companies $299.6 billion. The central bank estimated that by March these amounts had fallen to $147.5 billion and $275.5 billion. Ordinary Russians switching their savings out of roubles also accounted for part of the Q4 2008 outflow, Orlova pointed out – and that also appears to have slowed this year.
Yaroslav Lissovolik, Deutsche Bank’s chief Russia economist, said that the moderation of capital outflows was welcome. “Indeed, Russia’s experience in the last few years shows how quickly net outflows are followed by sizeable inflows,” he tells Emerging Markets.
The outflow could be seen as “the cost of full capital account liberalization”, a policy that would be maintained since prime minister Vladimir Putin, president Dmitry Medvedev and their economic team had invested so much in it politically.
Lissovolik says he has been “disappointed” by the continued decline in foreign direct investment (FDI) this year. “Typically FDI flows are more stable. For the first three quarters of 2008 they held up, despite the other negative trends.
“We hoped that we would have got over the worst of the decline in the fourth quarter of last year – but the decline has continued,” Lissovolik tells Emerging Markets. “It may take several years before these inflows recover to the levels of 2007 and early 2008.”
Economists have been debating the extent to which Russia’s capital outflows reflect capital flight from the country. Measuring it is not an exact science. The “net errors and omissions” item in the national accounts, flows that are most clearly identifiable as capital flight, has swelled from $5.8 billion in Q4 2008 to $12.3 billion in Q1 2009. But a fuller measure of capital flight, the IMF’s “hot money 1” statistic, which rose from $30 billion in Q1 2008 to nearly $70 billion in Q4 2008, actually fell, to around $32–33 billion, in Q1 2009.
Russia’s first-quarter current account balance shows a healthy $11.1 billion surplus, but Orlova at Alfa Bank says there is no cause for celebration. “This reflects a steep decline in imports, by 35% since the previous quarter, and that reflects a collapse in economic activity,” she says. Exports remain dominated by oil, and the rouble devaluation has not been sufficient to achieve significant diversification, she adds.
But the central bank’s exchange rate policy during the critical months following September’s Wall Street meltdown was “much more sensible than they were given credit for at the time”, Ed Parker, head of emerging Europe sovereigns at Fitch Ratings, tells Emerging Markets.
The authorities rejected calls for a one-off rouble devaluation, opting in November for a gradual fall in its value that saw it lose 35% against the dollar and 29% against the dollar-euro basket by February. “That cost them dearly. But it provided support to Russian banks and companies, enabling them to build up their foreign currency holdings. This forestalled a greater dislocation of the banking system than there otherwise might have been,” Parker says. “They have taken the rouble to a lower level, and it’s now a two-way bet.”
Initial fears after the financial meltdown last September that some of Russia’s large business groups could collapse under the weight of debt have not been realized. But they are not out of the woods yet. “There was some simplification and exaggeration on this issue. But many Russian corporates do still face great difficulties refinancing external debts,” Parker at Fitch says. One saving grace for Russia’s business groups is that “some of them have built up not only external debts, but also external assets.”
The Basel group owned by Oleg Deripaska is a case in point. It has sold off stakes in Hochtief, the German builder, and Magna, the Canadian car parts maker, to help pay its debts. A dispute over how debts would be restructured resulted last month in a public row between Deripaska and Mikhail Fridman of the Alfa Group, one of Basel’s largest Russian creditors.
Last month Basel first deputy general director Olga Zinovieva said that the group’s aggregate total debts were about $20 billion, including about $14 billion for Rusal, the aluminium maker – but that some key subsidiaries, such as the insurance company Ingosstrakh, had no debt at all.
The real struggle
Russia’s relative success in stabilizing its finances has not eased the devastation of its economy by the world recession, though. Plummeting oil and gas prices, and oil and gas demand, are wreaking havoc.The gas monopoly Gazprom announced last month that its first-quarter gas output was down by 18.3% year-on-year – although there was some compensation from a 7.6% increase in production from Novatek, the second-largest gas producer.
First-quarter oil production was down 1.1% year-on-year. Analysts said that had it not been for cuts in export duties and the mineral resources extraction tax in January, things would have been worse still.
Things are no better for processing industries. Their output was down 24.1% year-on-year in January and 18.3% year-on-year in February, the state statistics service said. Car making has been devastated: output falls in the vehicles and vehicle equipment sector were 36.0% year-on-year in January and 31.0% year-on-year in February, the state statistics service said.
VTB Capital’s GDP indicator, which the bank says is the earliest and most accurate indication of overall trends, fell by 5.4% in March to a new record low. Aleksandr Evtifyeva, senior economist at the bank, says: “The most significant warning sign is the record drop in employment, which suggests that the weakness in consumption might be protracted.”
The government has wrapped fiscal stimulus measures into a package, announced by Putin on April 6, that will result in spending this year of an estimated 800 billion roubles to support the real economy, directed in the first place at domestically-oriented sectors such as construction and the car industry; 110 billion roubles in social support; and 300 billion roubles in transfers to the regions. This comes on top of more than 1.3 trillion roubles in government support to the financial sector.
The government is also planning tax cuts that it says should provide about 850 billion roubles of aid to business this year, the finance ministry has said.