Russian businesses saw a massive jump this year in the amount of cash piling up abroad as the threat of secondary financial sanctions from the US causes increasing delays in international trade settlements.
Foreign financial assets increased by almost US$45 billion in the first seven months, compared with a gain of US$21 billion in the same period the previous year, according to Bank of Russia data published on Tuesday. While some of that is investment abroad, the surge is mainly an accumulation of Russian companies’ accounts receivable due to difficulties with international payments, the central bank said.
The latest US efforts to limit the Kremlin’s ability to finance its war against Ukraine have raised the risk of secondary sanctions even for local banks in countries that trade with Russia, leading to longer delays and more disruptions with payments to and from key partners, including China and Turkey.
“It’s a new reality,” said Sofya Donets, an economist at T-Investments. “Banks have always had deposits in foreign banks and vice versa. To a large extent it has always been a story about reciprocal settlements, it was necessary to keep them with each other. Now it’s taken on another, new form that mirrors trade activity: Debt.”
The settlement delays between Russian importers and exporters and their foreign counterparties haven’t caused trade to collapse, but are squeezing liquidity, according to Alex Isakov, Russia economist at Bloomberg Economics. Russian corporations have to wait longer to get money for their exports and make payments for imports farther in advance, resulting in what is essentially forced lending, he said.
“Forced trade funding means that hard currency is scarcer and costlier,” Isakov said.
Russian banks are facing a shortfall of yuan, the main foreign currency for the country’s external trade nowadays, that’s forced up costs as Chinese counterparts are increasingly afraid of being penalised by the US for indirectly funding Russia’s war machine.
Russian exports have remained stable at US$239 billion in the first seven months, while imports decreased 8 per cent from the same period last year to US$163 billion, the data show. The sanctions imposed by the US on Russia’s financial infrastructure in June have yet to slow imports, including from China, which climbed in July from the previous month.
Foreign assets increased by US$4.7 billion last month, and by US$5 billion in June, according to the central bank. The data show the increase, not the total amount.
“This is indeed a new factor, and probably a significant one, but this is not the only story of the outflows,” Donets said, explaining that she’s waiting for detailed second quarter data to understand the bigger picture. For now, she said, policymakers are trying to quell concerns that capital is leaving the country.
“The Bank of Russia wants to let us know that this US$45 billion of foreign assets is not real capital outflow,” she said.
