Publication: Monitor Volume: 7 Issue: 150

Recently released data on foreign trade developments show that the country’s enormous trade surplus has begun to narrow in the first half of 2001. The US$27.6 billion surplus on merchandise trade in January-June 2001 was US$1.4 billion less than that earned in the same period a year earlier. The huge trade surplus and concomitant large inflows of foreign exchange have put strong upward pressure on the ruble as the Central Bank of Russia has been unable to sterilize the inflows through sales of domestic debt instruments. The Central Bank has had to balance its purchases of foreign exchange to build up foreign reserves with the impact of the consequent increase in the domestic supply of rubles on inflation.

Export growth slowed to only 4.6 percent in the first half of this year, compared with 39.5 percent registered for full year 2000. Imports surged 17.9 percent, up from 13.5 percent in 2000. Of the US$2.2 billion in incremental export earnings in the first half of this year relative to a year earlier, US$1.4 billion was due to higher earnings from exports of energy. While lower prices for crude oil and refined oil products in the year-on-year comparison offset increases in physical volumes exported, sharply higher prices for natural gas exports accounted for the boost in energy export revenues in the period, more than compensating for reduced deliveries in physical terms. Non-energy exports increased by only 3.5 percent in the first half.

Slower growth in exports reflects primarily the high statistical base of comparison last year, as well as the slackening of economic growth in major export markets. Some analysts have suggested that the sharp slowdown also reflects a loss of competitiveness due to the ruble’s real effective appreciation. Domestic inflation has remained high while the ruble has held steady against the dollar. We would argue that real effective appreciation of the ruble has had little impact on the export side. Well over 60 percent of Russia’s exports are commodities that trade at world market prices denominated in dollars. Moreover, while the average dollar wage in May 2001 was up 38.3 percent year-on-year to US$103, it was still well below the US$170 average wage of three years earlier. In Central and Eastern Europe, structural changes in the economies have been the primary determinant of export growth. Real effective exchange rate developments have not played much of a role.

On the import side, however, real effective exchange rate appreciation against the dollar (by 19.3 percent in May 2001 year-on-year with respect to the CPI) does help to explain strong surges in imports of some key consumer items this year, including automobiles, selected food items, clothing and shoes. The Central Bank argues that enterprises in a number of branches that face competition from imports have performed well despite the strengthening of the exchange rate in real effective terms. On average in the first half of 2001, the ruble experienced real effective appreciation of 3.71 percent against the dollar while output of light industry rose 5.2 percent and processed food production increased 6.7 percent (Central Bank of Russia, July 2001).