Heli Simola of Bank of Finland -
Russia’s international reserves have declined substantially, by around $150bn, since the start of 2014. However, during the second quarter of this year the level of reserves has been relatively stable, fluctuating at around $350bn-360bn.
The recent stabilization has been supported by the continuous current account surplus that Russia has maintained despite the huge drop in oil prices. Naturally, exports have contracted substantially as crude oil, petroleum products and natural gas still make up nearly two-thirds of the country’s exports. But with subduing demand and the steep depreciation of the ruble late last year, imports have fallen even more pronouncedly, leaving the current account significantly in the positive.
By contrast, the financial account has continued strongly in the negative. That was mainly caused by foreign debt repayments, as the increased uncertainty and Western sanctions have made it more difficult for Russian companies to refinance their debt.
This year the Central Bank of Russia (CBR) has practically not spent any money from the international reserves on ruble-supporting market interventions in line with the policy announced in November. However, in the past few months there has not been even much need for supporting interventions, as the ruble was strengthening rapidly until end-May. The forex repos provided by the CBR have still lowered the international reserves, but the central bank has cut them down recently when perceiving less demand for them.
Russia’s international reserves in 2014-15, USD bn.
Reserves reported according to international standards
Russia’s international reserves are reported in accordance with International Monetary Fund (IMF) standards and so are made up of the central bank's gold reserves, liquid assets denominated in foreign currencies (at end-March, 85% of them were in the form of securities and the rest in cash and deposits), special drawing rights (SDR), and the country's reserve position at the IMF.
Russia's international reserves also include the majority of the country's oil funds (the entire Reserve Fund of $76bn, and $52bn of the Welfare Fund at the end of May). They are reported as part of the international reserves because they are invested in liquid dollar-, euro- and sterling-denominated assets. The CBR controls and invests the assets as instructed by the Ministry of Finance, and therefore they are regarded as central bank assets. On the liabilities side of the central bank's balance sheet, they are recorded under government claims on the central bank.
If the oil fund assets that are part of the international reserves were needed, for example to stabilise the ruble, the Ministry of Finance could instruct the central bank to use those fund assets also for this purpose, in the same way as the other parts of the international reserves are used. For example, in December 2014 as the ruble depreciated sharply, the Ministry of Finance sold some of its currency assets to support the rouble.
Structure of Russia’s reserves in 1.6.2015, %
Use of oil funds does not necessarily reduce reserves
The Russian government plans to use a considerable part of the oil funds this year to support the economy. The deficit in the 2015 federal budget is planned to be covered mainly by Reserve Fund assets. According to estimates by the Ministry of Finance (based on federal budget approved in April 2015), the value of the Reserve Fund will total RUB2,620bn at the end of December 2015, compared with RUB4,040bn ($76bn) at the end of May. So about RUB1,400bn ($25bn) would still be used this year. In addition, the government has decided to use in 2015 a maximum of RUB550bn ($10 bn) of the National Welfare Fund to finance measures in support of economic growth and a large part of that has already been withdrawn.
If the withdrawals of the fund assets continue to be made mainly in rubles as so far, the use of them should not change the value of the international reserves. The Ministry of Finance sells currencies included in the international reserves to the central bank and receives rubles in return. The value of the international reserves is not affected, but the share of the Funds in the international reserves will decrease because currency assets are transferred directly to the central bank.
Future development of reserves
The development of Russian exports usually follows quite closely oil price movements, so if the current market expectations of a gradual mild increase in the oil price continues, the value of Russian exports should also increase moderately. The contraction in imports has slightly slowed down in the past few months and it could moderate slightly, further supported by real strengthening of the ruble. But with the expected weak demand, there is probably not too much room for imports to improve, so the current account is likely to stay in the positive also in coming months.
Capital outflow is expected to continue, as Russia’s company sector still has a notable foreign debt stock of $510bn (government foreign debt is small at $40bn). Most of the debt is long term, but Russia faces total payments of about $80bn in the second half of the year and a further $44bn in the first half of 2016. Of the private sector debt, however, about 15% is denominated in domestic currency so there is no foreign currency need for these debt payments. In addition, companies should be able to refinance part of their debt as in past months, particularly as one-fifth of the foreign debt is inter-company or similar debt.
Judging by traditional indicators, the level of Russia’s international reserves is relatively comfortable. The reserves cover imports of about 10 months or about 300% of short-term foreign debt, which is three-times higher than the standard thresholds. However, the CBR governor Elvira Nabiullina stated recently that in the current environment of Russian companies’ very limited access to international financial markets, the CBR feels that even more prudent evaluation of the reserve adequacy is needed. According to the CBR’s current view, Russia’s international reserves should be large enough to cover significant capital outflows for two to three years and hence it started in late May currency purchases to replenish the reserves up to $500bn over the next few years.
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