Europe is running a deficit in its current account, i.e., trade and financial transactions, with Russia. According to a July 5th statistical release from the European Central Bank, in the first quarter of this year the euro area ran a combined trade and financial deficit vs. Russia of €-26 billion. Only the deficit vs. China was bigger, at €-38.8 billion.
Adding up the four quarters ending in Q1 of 2022, the EU ran a current-account deficit vs. Russia of €-44.4 billion. A year earlier, for the four-quarter period ending in Q1 of 2021, the same current account was in a surplus of €18 billion. However, current-account surpluses are unusual on the EU’s trade and financial transactions with Russia: the only period during which a four-quarter surplus has been recorded was during the pandemic-related economic shutdown in 2020 and 2021.
The current-account deficit recorded in Q1 of 2022 is the largest on record for the EU vs. Russia, both as a single quarter and as a four-quarter cumulative. This is reflected in the exchange rate between the euro and the Russian ruble: according to xe.com, per July 11th, the ruble traded at a rate of 62.8:1 vs. the euro, the strongest position for the ruble since May of 2017. When the euro zone runs a current-account deficit vs. Russia, demand for rubles increases relative to the euro. This causes a downward pressure on the euro; in other words, the ruble becomes stronger.
Overall, the balance of foreign trade and financial transactions for the European Union has been weakening rapidly. In Q3 of 2021, the EU’s total four-quarter current-account balance stood at a surplus of €619.3 billion; in Q1 of 2022 that balance had declined by more than 42%, to €363.6 billion.
In addition to a rapidly deteriorating current account with Russia, the EU has seen a 60% increase in its cumulative current-account deficit with China. Its current-account surplus with the United States has declined by more than 11%.
While the balance vs. Japan has improved, it has deteriorated vs. the rest of the world.