Download The effects of the Russian economy and low oil prices on

The effects of the Russian
economy and low oil prices on the
CIS region
“An analysis of how the Russian currency and oil
prices affect remittance channels, local
economies and their Fx”
Prague, 6 November 2015
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Historical Perpective : Foreign Exchange
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* For Belarus and Tajikistan ; Jan2001=100
I. 1998 Russian Crisis
II. Between the Two Crises
I.
Trade Links with Russia
II.
FDIs versus Remittances
III. 2014 Russian Crisis
I.
Situation in Russia
II.
Impact on Remittances
III.
CIS currencies
IV. Vulnerability of the Financial
Sector to FX
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1998 Russian Crisis
• Fixed exchange rate regime
between the ruble and
foreign currencies
• Fragile fiscal position,
political crisis
• External shocks – Asian
crisis, world commodity
prices dropping, rubble
under speculative attack
• Result: severe banking,
currency and sovereign debt
crisis
• September 1998 – currency
corridor removed, making
the ruble a freely floating
currency
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I. 1998 Russian Crisis
II. Between the Two Crises
I.
Trade Links with Russia
II.
FDIs versus Remittances
III. 2014 Russian Crisis
I.
Situation in Russia
II.
Impact on Remittances
III.
CIS currencies
IV. Vulnerability of the Financial
Sector to FX
Title | Date
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Trade Links to Russia
Net Goods Exports to Russia (%GDP)
Net Goods Imports from Russia (%GDP)
• Vast majority of the CIS
countries are net
importers from Russia
• Moreover, mostly
widening merchandise
deficits to Russia
• Increasing vulnerability
to Russia or just a
general widening of the
merchandise deficits?
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Trade Dependency with Russia
2000 vs 2013
Exports to Russia (% of Total)
Imports from Russia (% of Total)
• Most CIS actually had weaker merchandise links with Russia in 2013 than in
2000.
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Balance of Payments
• Remittances play a crucial role in making the large merchandise deficits sustainable
• Rather low foreign direct investment inflows BUT important capital link in the
banking sectors!
Remittances
• Russia is by far the biggest origin of the remittances in the CIS region, or at least
in countries where remittance play an important role
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I. 1998 Russian Crisis
II. Between the Two Crises
I.
Trade Links with Russia
II.
FDIs versus Remittances
III. 2014 Russian Crisis
I.
Situation in Russia
II.
Impact on Remittances
III.
CIS currencies
IV. Vulnerability of the Financial
Sector to FX
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Overview of Situation in Russia
 November 2013 - Gradual
depreciation of the rubble against
both EUR and USD started (before
Russian-Ukraine conflict emerged and
when oil prices were high)
 March-April 2014 – Effect of
Russia’s annexation of Crimea and
the first round of US and EU
sanctions against Russia
 July 2014 – December 2014 –
falling oil prices, speeding up pace of
rubble’s depreciation temporarily
halted by a massive FX intervention
 January 2015 – S&P’s downgrade
of Russia’s credit rating and
subsequent escalation of the
Donbass conflict in Ukraine
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Remittances Development
Growth of Remittances (USD, YoY, in percent)
40
20
0
-20
-40
-60
-80
13Q1
Armenia
Belarus
Georgia
Kyrgyzstan
Kazakhstan
Moldova
Tajikistan
13Q2
13Q3
13Q4
14Q1
14Q2
14Q3
14Q4
15Q1
15Q2
• Remittances denominated in USD have been tumbling along with the
nominal depreciation of rubble
• Increased vulnerability given the declining trade links with Russia
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International Reserves
* As of February 2015, no newer data available.
• While all CIS currencies have depreciated wrt to USD, the national banks have
also lost a substantial share of their Foreign Exchange Reserves
Sources: IMF, World Bank
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Nominal Exchange Rates
Appreciation
• However, the Russian rubble has weakened even more wrt the USD, leaving all the
CIS currencies relatively stronger with respect to the rubble in nominal terms
• So what is the conclusion?
Sources: Bloomberg
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Real effective exchange rate
 Has the nominal depreciation been sufficient to help adjust the external
imbalances?
Sources: Bloomberg, TCX
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I. 1998 Russian Crisis
II. Between the Two Crises
I.
Trade Links with Russia
II.
FDIs versus Remittances
III. 2014 Russian Crisis
I.
Situation in Russia
II.
Impact on Remittances
III.
CIS currencies
IV. Vulnerability of the Financial
Sector to Fx
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High levels of debt in foreign currency
High vulnerability to external shocks
Public and private sector debt denominated in foreign currency as % GDP
Sources: IMF, national authorities via CEIC, BIS and EBRD
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Too much private sector debt in foreign currency
Very high company and household FX burden
Corporate and household debt denominated in foreign currency as % GDP
Sources: IMF, national authorities via CEIC, BIS and EBRD
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Persistent NPLs mean lower credit growth and subdued
investment impending economic development
Bank nonperforming loans to total gross loans (%)
Sources: World Bank
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Increasing NPL’s expose the most banks in dollarized
economies to a “perfect storm”
2014- Bank
nonperforming
loans to total
gross loans (%)
Public & private debt denominated in foreign currency (as % GDP)
Sources: World Bank and EBRD
Systemic under-supply of local currency financing
 FX risk is very high and increasing
 Loan impairments increasing and credit crunch unfolding – systemic risk
increasing/perfect storm (Moody’s – July 2015 Announcement )
 Large majority of SMEs do not export. When an SME borrows in FX, it bears
significant currency risk. Other borrowers tend not to have Fx earnings
 Bank funding from domestic sources. Generally limited local currency deposits
and very limited institutional sources
 Bank funding from cross-border sources is

primarly in USD/Euro and 90%

from IFI’s/MIV’s
 Bank funding in FX necessitates the banks lend to SMEs in the same currency as
their funding (FX)
Local currency loans incur much lower NPL ratios (EBRD)
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Conclusion
 Compared to ’98 Russian crisis, we are now dealing with:

Significantly higher role of remittance inflows, mainly coming from Russia

Trade links with Russia have weakened
Important capital link to Russia in the CIS banks, running currency
mismatches

 Consequences:
Increased vulnerability of CIS countries to external developments that are
out of their scope of influence (oil prices, performance of Russian
economy,...)

Exposure of banking sector to source of funding in HCY and solvency of
borrowers in foreign currencies has increased the vulnarability of these
countries to external shocks

 What to do?
Promote the usage of local currencies and prevent clients who do not
earn HCY to borrow to take a hit on brutal Fx re-adjustements.

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