RUSSIAN URALS DISCOUNT

BLOOMBERG - Apr 11, 2023 - Russia’s current-account surplus shrank last quarter by over $51 billion from a year earlier, as sanctions increasingly deprive the government of what’s been a critical source of hard currency since the invasion of Ukraine.

The surplus in the current account — roughly the difference between exports and imports — decreased to $18.6 billion in the first three months of the year, according to preliminary central bank data published on Tuesday. It’s the smallest surplus for any first quarter since 2016.

A recovery in imports is combining with a sharp drag on Russia’s energy revenues from international restrictions while gas exports to Europe fall. The deterioration in external finances will keep the ruble under strain and add to the urgency for the government and companies to tap new markets for Russian commodity products.

The central bank expects the surplus to drop to $66 billion for the year from a record $227.4 billion in 2022. 

On Tuesday, it said in a statement that a key factor for the current account was “a drop in the trade balance as a result of a significant decrease in the cost volumes of exports, mainly due to a decline in prices.”

“Imports have fully recovered to last year’s levels, but commodity revenue is falling short due to sanctions on Russia’s energy exports. We expect narrower current-account surpluses to lead to currency weakness in the coming quarters. A weaker ruble will start to chip away at consumer confidence, which has been on the rise lately.” —Alexander Isakov, Russia economist said.

Urals, Russia’s main crude export blend, has traded at a significant discount to the Brent benchmark since the European Union banned almost all seaborne imports of oil and petroleum products from the country, and the Group of Seven industrialized nations imposed a price cap.

While putting pressure on Russia’s external finances, that’s also contributed to the government’s widening budget deficit as authorities ramp up defense spending related to the war in Ukraine.

A turnaround for Russia’s energy income could come by the end of the second quarter, when the budget should get additional oil and gas revenues from higher crude prices, President Vladimir Putin said in televised comments on Tuesday.

Putin has signed into law amendments to the way Russia’s oil price is assessed for tax purposes. From April, rates of mineral extraction tax and profit-based tax on oil companies are calculated using a decreasing discount to prevailing Brent prices, rather than assessments of Urals crude.

The discount for this month is set at $34 a barrel and it will narrow to $25 from July.

The ruble is meanwhile increasingly at risk while cash from exports of oil, gas and other commodities dries up. The Russian currency is among the worst performers in emerging markets against the dollar so far this year.

“The current-account surplus in the second quarter will be less than in the previous quarter, and probably the weakest during the year, which will determine the continued high volatility of the ruble,” said Sofya Donets, economist at Renaissance Capital.

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