We treat the CA deterioration as a medium-term trend flagging the constraints of demand-side stimuli in the face of local producers’ constrained competitiveness. As regards capital flows, we are encouraged to see some improvement in both FDI flows and grey capital flight. On a less encouraging note, however, we suspect the latter might be at least partly linked to capital flight taking another form: the investment income deficit has widened almost USD 9.4bn on the back of rising income outflows, which looks strange given stagnant/declining corporate profits.
Looking ahead, we expect the CA balance to continue narrowing in 2014 (to 0.9% of GDP), albeit at a milder pace, as softer domestic demand takes its toll on imports. In addition, we do not rule out the capital account continuing to improve on a margin on the back of the better business climate and improving efficiency of the budget and SOE spending. RUB, however, is set to remain under pressure as the CA surplus is already lower than structural capital flight, while the CBR is withdrawing its interventions support. We expect RUB to weaken toward 35.0 against the dollar by the end of the year.