Russia Faces End of Petrodollar Surplus

Russia’s petrodollar surplus, which has buffered the economy from external shocks for more than a decade, is poised to vanish as early as 2015 as import revenues overtake those from oil exports, according to its central bank.


The forecast represents the first official acknowledgment that the economic model which has come to characterize the era of Vladimir Putin’s leadership — a country buttressed by oil money — is ending.

Russia’s oil-fuelled trade surplus — which accumulated $785 billion between 2000 and 2011, equivalent to more than 40 per cent of last year’s gross domestic product — has given it the third-largest foreign currency reserves in the world, roughly half a trillion dollars.

These reserves allowed the Kremlin to spend over $200 billion to see off the global financial crisis in 2008-09 without a major bankruptcy. Russia has also been able to pour money into rainy day funds such as its reserve fund, $61 billion, and national welfare fund, $88 billion, as an extra buffer against shocks.

However, the eventual transition to a “twin deficit economy”, where both the government budget and external trade balance are negative, is likely to be a rude awakening for Russian policy makers.

“This will be a totally new macro paradigm for a country that has become inured to living with external surpluses,” said Ivan Tchakarov, chief economist for Russia and the CIS at Renaissance Capital, a Moscow investment bank.

According to the central bank’s midterm monetary strategy, a document sent to parliament and partly released to the press on Wednesday, the central bank sees the current account surplus – composed of trade and other payments — shrinking from a forecast $79.9 billion in 2012 to $25.2 billion in 2013 and becoming an $8.8 billion deficit in 2015. The forecast is based on the bank’s central oil price scenario, which sees oil at $104 a barrel in 2015.

This prediction is broadly in line with others — the International Monetary Fund expects Russia to move from a current account surplus to a small deficit in 2016.

The last time Russia’s current account turned negative on a quarterly basis was in late 1997, a shift widely seen as a main reason for the collapse of the ruble in August 1998.

In 1998 foreign reserves were less than $20 billion, while now they are about $500 billion. Economic management today, while far from perfect, is nowhere near as chaotic as in the post-communist 1990s.

Nice While it Lasted

However, the eventual end of Russia’s oil cushion will probably cause a sea change in the country’s economic management and a challenge to Mr. Putin, who has pledged trillions of rubles in wage rises and budget spending to secure re-election in March. Now, rather than facing the question of how to spend a windfall, the government will probably face the unhappy choice of whether to borrow, devalue, or spend less.

Economists are quick to point out that oil could still appreciate – the central bank projects that, with oil under $130 a barrel, Russia could run a $51 billion surplus in 2015 – but imports will eventually outpace exports as Russians make up for the deprivations of communism by consuming at a prodigious rate.

The removal of the petrodollar pillow could finally force the government to reform its economy and legal system in an effort to become an attractive destination for foreign investment.

“The deficits will need to be financed either by running down international reserves, thus putting significant pressure on the exchange rate, inflation and the broader economy, or, preferably, by improving domestic business climate in order to attract foreign direct investment and flows into the stock market,” Mr. Tchakarov said.

At the moment however, rather than attracting capital, Russia is exporting it in net terms.

Partly because of political uncertainty, capital outflows totaled a net $84 bilion in 2011, equivalent to 5 per cent of GDP. The central bank sees this figure falling to $65 billion in 2012, and $15 billion, under the central oil price scenario, in 2015.