In the absence of any clear pathway forward on global economic growth or supply prospects and given the disruptive and unpredictable nature of the US administration the market does what is the most reasonable thing to do under the circumstances: react to headlines. It is trying to recover from Friday’s sharp losses, which shattered bulls’ hopes of a sustained recovery. The bounce yesterday was triggered by fresh sanctions imposed by the US on intermediaries and shippers that help Iran sell its oil to willing buyers. Iraq’s promise to the OPEC+ producer alliance to submit a new plan to compensate for past disobedience to its quota might have also played a role in the recovery.

Amidst these developments, uncertainties, however, remain. Ukraine’s fate, three years after it was invaded by Russia, is ever more obscure. A resolution drafted by the US calling for a swift end of the Ukrainian war without blaming the aggressor passed the UN Security Council with the support of Russia and China whilst the UK and France abstained. It laid bare the fraying unity of the trans-Atlantic alliance and paints a rather ominous picture for Greenland, Canada, Taiwan or the former Soviet republics as territorial sovereignty is no longer the sacrosanct right of countries and invasions can seemingly be carried out with impunity. The US President’s transactional attitude also foreshadows the lifting of Russian sanctions potentially welcoming unfettered Russian supply back to the market. When possible tit-for-tat economic sanctions are added to the equation one can only conclude that the roughly $12/bbl range of $70/bbl and $82/bbl basis Brent established between December and January will remain intact for the foreseeable future.

Is Deficit Really Harmful?

When at the end of the month one finds her bank account showing a positive balance, she will be content and satisfied; her monthly incomings outweighed her outgoings. She registered a surplus and this, by any means, provides a sense of financial security. A positive ‘trade balance’ is a welcome phenomenon in any family. Yet, on a country level, the thinking can be markedly different as the causes and effects of a surplus or deficit are much more complex than on a family level. Russia and the US are the most pre-eminent contemporary examples of the pros and cons of negative/positive trade and current account balances.

If Russia were a family, it would be delighted, as it currently runs a positive balance of trade. Its exports exceed its imports. Of course, a country’s finances are much more complicated than that of a family’s and in the current political and economic environment the trade surplus Russia runs is anything but encouraging. In December 2024 it recorded a positive imbalance of $5.6 billion. It is much lower than the $37.5 billion surplus registered in the immediate aftermath of the Ukraine’s invasion. This decline suggests that the country’s exports, predominantly raw materials, have suffered a significant blow and so did its imports. In other words, sanctions have been proving partially effective. Given that the country has been a major exporter in peacetime its trade balance has hardly ever gone below zero.

The positive trade surplus plays a salient role in running a current account surplus, the difference between public and private savings and investment. It is deemed to be a broader measure, which is where, as aptly put by the IMF, international economics collides with political reality. Russia’s current account surplus is the function of the country being forced to export capital. In an investment-friendly environment, this surplus would be reduced, the rouble would strengthen, and the stock market would rally as the economy would also be supported by innovation via imported technology. For now, however, the current account surplus is maintained by circumventing sanctions. The war economy does not create sustainable value, defence spending went up from 3% of the GDP to nearly 7%. Inflation is 10% and interest rates are 21%. The trade and current account surplus have been coupled with the rouble depreciating from 50 to 100 to the dollar at the end of last month before Donald Trump’s ‘peace’ intentions were announced. A positive balance is not necessarily the harbinger of bright economic prospects.

In the US, the ever-intensifying debate about trade and current account surplus permeates every segment of society and forces unprecedented changes in trans-Atlantic relationships. In December 2024 the US registered a total trade deficit of $98.4 billion as the country imported foreign goods in the value of $364.9 billion and exported goods in the value of $266.5 billion. The latest available data shows that the current account balance widened to $310.9 billion in the third quarter of last year. It is noticeable that the country’s trade deficit widened sharply right after Russia’s incursion into Ukraine and after narrowing impressively during the second half of Joe Biden’s term, it ballooned once again before Donald Trump’s inauguration.

Both the trade and the current account deficits are currently much higher than under Barack Obama or during the first Trump presidency. The present US administration is determined to narrow it by imposing tariffs on trading partners and coercing them to buy American goods and products. By doing so the complex question of trade balance is being simplified (and the hostile rhetoric undeniably resulted in hundreds of thousands of votes to the Republican nominee in last year’s election). Economists believe a negative trade imbalance is the function, as touched upon above, of the difference between savings and investment. A flourishing economy usually runs deficits, simply because it is eager to invest in machinery and factories that produce high-quality goods and services for consumers. Due to bright economic prospects, the country is an attractive destination for foreign capital, the result of which is a strong domestic currency. Intervening in economic principles will achieve the opposite of the desired goal with the economy stagnating. Since the only available check on the US President is the stock market, Mr Trump will likely alter his economic policies to the tune of equity movements. And the sign of that is already conspicuous as the Nasdaq Composite Index is down nearly 5% since the end of January.

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