And the outflow of capital from the Russian Federation has reached unprecedented high values
The Bank of Russia has just published data on key aggregates of the balance of payments of the Russian Federation for the first five months of this year. Some indicators of the balance of payments continue to break records, and these records do not cause delight, but alarm and indignation.
positive balance of trade in goods and services for the period January-May 2022 amounted to 124.3 billion dollars against 44.5 billion dollars for the same period last year. We had years in the past when the surplus exceeded the bar of $100 billion, but this was an excess for a whole year, and here it was only for five months. The Bank of Russia previously published estimates of the balance of payments of the Russian Federation for the first quarter of 2022: the positive balance of trade in goods and services for January-March amounted to $66.1 billion. It turns out that at the height of the sanctions war in April-May, the net inflow of foreign currency, due to the excess of exports over imports, amounted to 58.2 billion dollars.
That is, the sanctions war has sharply spurred the inflow of foreign currency into Russia. And this is the result of two factors.
Firstlythis is the result of a sharp increase in the value of exports, caused not by an increase in the physical volumes of exports, but by rising prices. This applies primarily to energy carriers, the growth was provoked by the sanctions actions of the West. Secondlythere was a significant reduction in imports, which was also provoked by sanctions.
Back in April, many experts gave forecasts according to which, at the end of the year, Russia’s foreign trade surplus would amount to at least $200 billion. Some even predicted that the bar would reach $300 billion. USD
Another indicator published by the Bank of Russia is current account balance for five months of the year. It amounted to 110.3 billion dollars against 32.1 billion dollars for the same period last year. The current account balance differs from the balance of trade in goods and services by the balance of primary and secondary income. The balance of income is an important part of the balance of payments included in the current account. Traditionally, the most important position in the balance of income is income from investments.
Traditionally balance sheet of primary and secondary income Russia is negative because the income received by foreign investors and withdrawn from the country exceeds the income received by Russian investors from their foreign assets. So, the income account for the first five months of this year amounted to minus 14.0 billion dollars against minus 12.4 billion dollars for the same period last year. Although Russia has imposed seemingly severe restrictions on cross-border foreign exchange transactions since the start of the sanctions war, net investment income leakage continues. It can be assumed that the monetary authorities of Russia (the Central Bank and the Ministry of Finance) leave loopholes for foreign investors to withdraw their income in the form of dividends and interest.
Previously, the Bank of Russia gave some figures for other sections of the balance of payments – for capital account balance (difference between outflow and inflow of capital) and change in foreign exchange reserves of the Russian Federation. Now we do not see these numbers. However, we can find the change in the international reserves of the Russian Federation for five months of the year on the website of the Central Bank on the page “Monthly values of the total volume of international reserves of the Russian Federation at the beginning of the reporting date.” As of January 1, it was 630.6 billion dollars; as of June 1, it was 584.4 billion dollars. international reserves fell by $46.2 billion. We are told that the collective West has frozen more than $300 billion of Russian reserves, or exactly half, and the Bank of Russia does not want to admit this “medical fact”. It had a reduction over the five-month period of only 7.3%. Apparently, as a result of the revaluation of certain components of international reserves.
Interestingly, when the West confiscates the frozen reserves, the Bank of Russia will still reflect them in its balance sheet?
The balance of payments for that and the balance is called that the total of all sections and articles should be zero. A positive current account balance has always been balanced by net capital outflows and increases in international reserves. There is no increase in reserves, there is only their loss. The purely mathematical conclusion from this equation is simple: a sharp inflow of currency is accompanied by a sharp increase in net capital outflow.
There are military operations in Ukraine, the collective West is increasing sanctions pressure on Russia, and under these conditions it is somehow indecent to report that the export of capital from Russia to the West is increasing.
“What export?” the reader will ask. “Rosneft made investments in oil production in Texas?”. “Gazprom is investing in the construction of some kind of pipeline?”. “Rosnano bought a stake in the business of E. Musk?”. No, everything is much worse and more primitive.
Russian business buys US dollars, euros, British pounds and Japanese yen, which are the most common IOUs. The accumulation of foreign exchange reserves is nothing more than perpetual lending (often at a negative interest rate) to those states that issued these currencies. Not only is this lending perpetual and interest-free, it is also unsecured. The West can confiscate these savings at any time. And all this turbulent activity of Russian business in the balance of payments will be reflected as the export (export) of capital.
Apparently, Neglinka considered that it would be inappropriate at such a critical moment to supplement its summary with an indicator of net capital outflow. However, one can estimate and conclude that the outflow of capital has reached unprecedented high values.
We will be able to satisfy our curiosity only when the Bank of Russia publishes complete data on the balance of payments of the Russian Federation for the second quarter. The publication for the second quarter usually comes out in late July – early August. However, it may happen differently: the Bank of Russia will generally cease to publish complete data on the balance of payments, and will be limited to its fragments. It’s all going to this.
Recently, the Ministry of Economic Development came up with an initiative to classify information on Russia’s gold and foreign exchange reserves. Like, the sanctions war requires it. But if “A” is said (data on reserves will be classified), you will have to say both “B” and “C”, etc. When information about reserves is classified, it will not be possible to provide information on changes in the amount of reserves (for a month, quarter, year). And if there is no such information, then the balance of payments cannot be shown. According to my information, both the Central Bank and the Ministry of Finance support this initiative of the Ministry of Economic Development. And although the departments of the economic and financial bloc say that the initiative is aimed at ensuring that our geopolitical opponents do not know about Russian reserves, I suspect that they want to close the information, first of all, from their own people: it reflects the obvious fact that the financial and economic departments play on the side of Russia’s geopolitical opponents.
Let’s return to the record levels of the trade balance and the current account. Giant amounts of currency are accumulating, only now not in the accounts of the Central Bank, but in the accounts of exporting companies. And not only in Russian banks, but also in foreign ones (monetary authorities have already given the go-ahead for foreign currency earnings to be placed in foreign banks). This means that this currency can be frozen and confiscated. Even people far from the economy understand that this is a game of giveaway. A game played by the Bank of Russia and the Russian Ministry of Finance.
The noted “records” reflect a systemic flaw in the Russian economic model – a steady excess of exports of goods over their imports. At the end of May, the vice president of Lukoil Leonid Fedun rightly drew attention to this oddity of the Russian economy. He asked a perfectly valid question: why produce and export more goods than is necessary for economic growth and prosperity?
Why does Russia need to provide daily production of 10 million barrels of “black gold” if we can effectively consume and export 7-8 million barrels without losses for the state budget, domestic consumption and imports? What is better – to sell 10 million barrels of crude oil, bringing down the price of “black gold” to $50, or 7 million barrels, but at a price of $80? And now there is a desire to maintain the volume of exports that were before the sanctions war. Is it reasonable to go for 30 percent, and sometimes even 40 percent discounts for this? How much more rational is it to preserve reserves of oil and other natural resources in the bowels for future generations. These stocks are safer than doubtful foreign currency debt. To what Fedun said, I would add that in general it would be much more rational to export not crude oil, but products of deep processing of “black gold”. The currency efficiency of such exports would increase by an order of magnitude!
In fact, the well-known entrepreneur spoke the elementary truths that were known to any competent economist in the Soviet Union. The export of goods was part of the general plan for the development of the national economy. When planning, they “danced” from the target indicators for the production of certain types of products. Plans for the import of machinery and equipment were drawn up under production plans. And already export plans were adjusted to the import plans. The balance of commodity exports and imports was an economic axiom.
If it were my will, I would generally give this axiom the status of a law of the Russian Federation today.
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