Russia's current account surplus of $11.8bn for January is in line with our expectations. This, combined with a benign external environment, reinforces our constructive short-term view on RUB. However, starting in 2Q19 the Russian currency may face more headwinds

According to preliminary estimates by the Central Bank of Russia (CBR), the current account surplus in January reached $11.8bn, which is perfectly in line with our $12bn expectations. This surplus was sterilized by the net private capital outflow of $10.4bn, which we attribute to the growth in corporate international assets, and the Finance Ministry's FX purchases of $1.9bn.

We see the following implications from those figures:

The current account surplus of $11.8bn for January 2019 is very close to the January 2018 figure of $12.9bn despite an almost $10/bbl decline in the Urals oil price, which we attribute primarily to the weakening in the imports. After posting 19% y/y growth in 1Q18, it must have contracted in 1Q19. While positive for the balance of payments, we see it as a confirmation of higher dependence of Russia's growth story on net exports - amid weakening consumption and possibly investment trends.

The net private capital outflow of $10.4bn in January 2019 is higher than the January 2018 amount of $7.0bn, which is a cause of concern, as it might reflect lower appetite for capital locally, challenging our $20-30bn full-year forecast of net capital outflow. However, we note that the large capital outflow and FX purchases exceeded the current account surplus but did not prevent RUB's 6.1% appreciation to $in January, outperforming its peers. This suggests, that the Russian state bond market (OFZ) might have seen foreign portfolio inflows this year after suffering $9bn outflows in April-December 2018. A softening in the US Fed and CBR rhetoric, as well as positive newsflow on Russia's sovereign ratings (including the upgrade from Moody's last week and possible revision from Fitch this Friday), may come as a mild support factor for portfolio flows in the short term.

We continue to see a $27-30bn current account surplus for 1Q19, which, combined with portfolio inflows should be enough to cover the net capital outflow from the private sector and FX purchases, and even with the catch up on the backlog from 2018 are staying within $4bn per month. This makes us comfortable with our expectations of $RUB at 64-65 for the next 3 months, as we mentioned in the latest edition of FX Talking.

At the same time, by mid-year the seasonality of the balance of payments should result in the current account surplus shrinking to $3-5bn per month amid the Finance Ministry's FX purchases and private capital outflow, leaving the ruble vulnerable to a possible reversal in portfolio flows, which may arise in case global expectations of easing in the global trade tensions prove too optimistic, the Fed returns to a more hawkish stance due to a strong labour market, and/or Russia faces unfavourable developments on the sanctions front.

Dmitri Dolgin is the Chief Economist, Russia, at ING in Moscow. This note first appeared on ING’s “Think” portal here.