Higher oil prices, the new fiscal rule and the World Cup all supported Russia’s currency account balance in the second quarter of this year leading to a $22.3bn surplus, the Central Bank of Russia (CBR) reported on July 10, putting Russia on course for its biggest surplus in seven years.

“The CBR has released its preliminary estimate of the balance of payments in 2Q18. The current account printed $22.3bn, which is up $20.4bn y/y due to more upbeat oil prices. The services balance contributed too, with the deficit softening for the first time since 4Q16, helped by the FIFA World Cup hosted in Russia,” VTB Capital (VTBC) said in a note.

The accumulated first half of 2018 current account stands at $53.1bn.

“With an average RUBUSD exchange rate at 60.5 in 2018F, we expect the total current account balance to exceed $90bn (close to 6% of GDP), a surplus unseen since 2011, when Urals hovered at $109/bbl,” VTBC said.

Expansion in exports accelerated to 31% y/y (+23% y/y in the first quarter of 2018), due to the more favourable oil market backdrop.

With average Urals blend oil prices up to $73 per barrel (bbl) in the second quarter of 2018 (from $65/bbl in the first quarter of 2018), crude oil exports were up 44% y/y versus 22% y/y in the previous quarter.

The booming oil exports have already shown up in the sharp increase in Russia’s National Welfare Fund (NWF) over the last two months that now stand at $77bn; under the budget rule any surplus revenues the government earns from high oil prices is siphoned off into the NWF.

The growth in non-oil and gas exports stayed almost flat to the first quarter of 2018 (22% y/y compared with 24% y/y previously).

The balance of trade was further improved by a slowdown in imports. The recovery in goods imports slowed to +9% y/y, from +19% y/y in the first quarter of 2018.

“In our view, the two key reasons for this slowdown were i) the high base effect of in the first quarter of last year, when imports expanded about 30% y/y, and ii) ruble effective exchange rate (REER) weakening 11.5% y/y on average in the second quarter of 2018 (-6% y/y in the first quarter of 2018 and stable appreciation throughout 2017),” VTBC added.

The services deficit softened for the first time since the fourth quarter of 2016, helped by the FIFA World Cup in Russia.

“As opposed to the goods balance, the services balance has been persistently negative. The deficit stopped widening in the third quarter of 2014, on the back of the sharp decline in services imports (triggered by the FX shock) that lasted until fourth quarter of 2016. In early 2017, the services balance resumed its widening, supported by a recovery in services imports, which was faster than that in exports. However, while in the second quarter of 2018 we still see both exports and imports expanding, the uptick in exports was greater this time ($2.5bn vs $2.0bn). In our view, this can be explained by the inflow of hard currency associated with the World Cup, which started in June,” VTBC said.

The financial account surplus stands at $9.9bn, on more active deleveraging. Banks continued external deleveraging (-$9.5bn), funded by assets sales (-$7.4bn), a strategy they adopted from early 2015. Federal government deleveraging contributed $6.7bn to the total decline in liabilities of $17.1bn.

International reserves added $11.3bn, supported by FX purchases in line with the fiscal rule — the latter brought as much as $15.5bn in the second quarter of 2018, according to VTBC. 

“However, that increase was offset by the decline in the CBR’s outstanding repo with non-residents, which we estimate to be close to $4bn,” VTBC said.