Russia's Imports Are Likely to Fall by Half in 2015

Russia will lose one-third of its 2014 exports in 2015 if oil prices stay as low as they are at present, which appears likely, forcing the nation to cut half of its imports. Such a cut would devastate Russia's economy.

As of early January, the Brent oil price has just fallen below $50 per barrel. In 2014, JP Morgan assessed that the average Urals crude oil price was $99 per barrel (marginally lower than the Brent oil price). It appears increasingly likely that the oil price will stay low for a long time because of oversupply, energy conservation efforts, and declining economic growth in many countries. All these features are long term. Therefore, it is realistic to assume that the average 2015 oil price would be half of what it was in 2014.

Russia is heavily dependent on income from its oil resources. In 2013, the latest year for which we have full annual statistics, oil and natural gas accounted for 68 percent of Russia's exports. In the last four years, this share has varied from 63 percent to 68 percent. It is safe to assume that it was two-thirds in 2014 (table 1)

Russia's foreign accounts are quite peculiar with a large trade surplus but deficits on most other accounts. Its merchandise exports have traditionally been about 60 percent larger than its merchandise imports. A substantial deficit in its service trade and various financial transfers eat up most of this merchandise trade surplus, but Russia has had persistently significant current account surpluses (table 2). Its export revenues have been nearly stable for the last four years at $508 billion to $527 billion, reflecting the fact that oil and gas production have stagnated and that their prices have been stable.

Western financial sanctions (reflected in lower exchange rates) are likely to compel Russia to deliver larger current account surpluses than previously so that Russia can service its foreign debt obligations of some $100 billion a year. That is a lot of money, given that Russia only had $174 billion in liquid international reserves with the Central Bank of Russia, deducting the $169 billion held by the Ministry of Finance in two sovereign wealth funds and $45 billion in gold. JP Morgan therefore presumes that Russia's current account surplus will increase from $34 billion in 2013 to $61 billion in 2014 and $80 billion in 2015.

Added up, these data indicate that exports are likely to decline by one-third from probably $508 billion in 2014 to $339 billion in 2015. Assuming that the difference between exports and imports will stay about the same in nominal terms, the imports would fall from a forecast of $310 billion in 2014 by more than half to $141 billion in 2015 (table 2). This might be slightly overstated, but only marginally so, because nobody wants to keep money unnecessarily in an economy in rampant financial crisis.

Turning to Russia's import composition, two-thirds of Russian imports are manufactures, mainly production goods but also consumer goods (table 3). That means that a reduction of import by half will deal a devastating blow to investment and consumption and thus to overall output.