Balance of Payments' Sustainability Analysis in the Russian Federation with the Model of Foreign Economic Activity

In this paper we introduce the model of the Russian Federation’s foreign economic activity. The model includes four blocks: model of the balance of payments, models of the fuels markets (oil, oil products and gas), the equation for the nominal exchange rate (rubble against dollar) and the equation for the currency purchase by the monetary authority under the budget rule. The components of the balance of payments and the series for the export of each type of fuels are modelled in the separate systems of equations. The model is aimed at forecasting the key series, describing the foreign economic activity of Russia for short (up to 1 year) and medium-term (up to 3 year) horizon. The variables of the model can be divided into exogeneous, which come in the model as fixed, and endogenous, which predicted in the model and, if it is necessary, can also be used to explain the dynamic of other variables. Due to this, it is possible to make predictions under the different scenarios of the dynamic of the exogenous variables on the forecasting horizon. That is the main advantage of the model over simpler benchmarks such as ARIMA, ets and seasonal naïve model. In the paper we consider three scenarios (base, optimistic and pessimistic) for 2020 year. The key difference between them is the price on the Brent Oil. Under these scenarios we test the sustainability of the balance of payments. We define the «sustainability» as the ability of the country to sustain the surplus of the current account in the short-term period. According to the model, in the base and pessimistic scenarios a current account deficit is expected in the coming year. In the optimistic scenario, with the oil price comparable to the last year’s price, the current account is expected to has a surplus.