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BoP 2013 estimate

Last year, the current account surplus dropped to 1.6% of GDP from 3.6% in 2012, with both a shrinking surplus in the merchandise trade balance and a widening gap in invisibles being the main drags. While net capital outflows in the private sector have remained broadly stable, at around USD 63bn pa over the last two years, there is some tentative evidence that the underlying picture is beginning to improve. Adjusted for 'paper' capital flows (i.e. reinvested earnings) and the Rosneft deal, we estimate that the net FDI surplus amounted to about USD 8bn last year – up from a deficit of USD 6bn in 2012. More importantly, ‘grey’ capital flight – which we define as the sum of dubious operations and errors and omissions – shrunk by a fairly solid USD 10bn last year (to USD 38.8bn).

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.

Vladimir Kolychev, Daria Isakova
VTB Capital analyst


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