Russia Q1 Capital Outflows Highlight Key Risk, says Fitch

High capital outflows in the first quarter of 2014 highlight a key risk to Russia’s economy and sovereign credit profile, according to Fitch Ratings. The credit ratings agency (CRA) said that the figure confirms the acceleration of capital outflows as a response to the Ukraine crisis and the imposition and possible escalation of sanctions.

The potential impact of sanctions on Russia’s economy and business environment were the main driver of Fitch’s revision of the outlook on Russia’s BBB sovereign rating to negative last month.

The Central Bank of Russia (CBR) reports that net outflows of private sector capital were US$50.6bn in Q114. This is the highest quarterly outflow since end-2008, and 2014 outflows are already close to last year’s total of US$59.7bn.

Presenting the government’s new forecasts on 8 April, economy minister Alexei Ulyukayev predicted that capital outflows would reach US$100bn in 2014, and that gross domestic product (GDP) growth could slow to around 0.5% without a relaxation of Russia’s fiscal rule.

Fitch believes the Ukraine crisis is exacerbating a longer-term slowdown in the Russian economy, which was already experiencing falling investment and persistent capital outflows. The CRA recently cut its 2014 growth forecast to slightly below 1%, with downside risks if investment continues to decline at the same rate as in Q1.

Nevertheless, the current account surplus widened to US$27.6bn at end-1Q14 from US$24.3bn a year earlier, as imports dropped faster than exports following currency depreciation – consumer confidence appears to be relatively resilient, unlike business confidence. Fitch has revised up its forecast for the current account surplus to 1.5% of GDP in 2014, similar to 2013.

The impact of capital outflows on CBR reserves is moderated by increased refinancing via foreign-currency swaps between Russian banks and the central bank. Reserves fell 4.6% to US$486bn in Q1. Meanwhile, non-resident holdings of Russian domestic government bonds have only fallen slightly, to 22.2% of the total at the beginning of March, from 23.9% at the start of January, according to CBR figures.

The near-term development and final outcome of the Ukraine crisis remain highly uncertain, but the risk that it will provoke large-scale capital flight is a vulnerability of the balance of payments. Russia’s sovereign rating would be sensitive to a weakening in the balance of payments that led to a substantial fall in reserves.

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