Early 2014 capital outflow is driven by foreign exchange cash purchase

As noted in the comment dated 2.04.2014, total volume of Bank of Russia’s interventions in the internal foreign exchange market amounted to $41,1bn in Q1 2014. In this context, the initial estimation ($50,6bn) of net capital outflow from the non-public sector seems to be quite moderate, but it doesn’t take account of a series of operations between Russian banks and the Bank of Russia (FX swops and foreign exchange balances on correspondent accounts) which de facto constitute investment in foreign exchange assets, net of capital outflow, as made in a resident entity.

With allowance for the foregoing operations, net capital outflow from the non-public sector amounted to $63,7bn in Q1 2014, corresponding to our preliminary estimates. This volume is bigger than a total of $59,4bn in 2013 and $62,7bn in 2012.

According to the Bank of Russia’s estimates, the volume of foreign exchange in cash increased $19,6bn in Q1 2014, this item showing a small outflow comparing to Q1 2013, when net outflow amounted to $28,2bn, whereas the volume of foreign exchange in cash contracted by $1,9bn. Furthermore, outflow on operations in the banking sector increased $14bn (to $32bn, inclusive of swaps and foreign exchange correspondent accounts). Therefore, the non-bank sector в Q1 2014, net of operations with foreign exchange in cash, had the same volume of operations with financial assets comparing to Q1 2013.

It’s important to note that banks’ foreign assets were growing because customers , above all, legal entities converted their accounts into foreign currency. In the period of January-February alone the volume of resources on corporate and retail foreign exchange accounts and deposits increased $13,7bn and $3,3bn respectively.

Mikhail Khromov, a leading expert of Gaidar Institute’s Center for Structural Research