Terms of Trade: How the Ratio of Export to Import Prices Moves the Rouble and Profits

The terms of trade are the ratio between the prices at which a country sells its exports and the prices at which it buys its imports. When exports rise in price faster than imports, the terms of trade improve: for the same physical volume of commodities shipped abroad, the country receives more imported goods. For the Russian market this is one of the most powerful macro indicators, because the export basket is commodity-based and concentrated, while the import basket is broad and made up of machinery and consumer goods. An improvement in the terms of trade does not reach a portfolio directly; it arrives through the exchange rate, budget revenues and exporters' revenue, and a deterioration travels along the same routes in the opposite direction.

What exactly is measured

The indicator is built as the ratio of the export price index to the import price index. It is an index, not an exchange rate and not the price of a barrel: it answers the question "how much imports can be bought with a unit of exports", not "how much does oil cost". A consequence follows that is often lost: the terms of trade can improve while commodity prices are falling, if imports are getting cheaper faster, and they can worsen while commodities are expensive, if imported inflation, logistics and insurance are rising in cost.

The values come from customs and central bank statistics on foreign trade, not from exchange quotes. The indicator is therefore published with a lag and is revised. The exchange starts to price in the move before the statistics confirm it, taking its cue from commodity prices, freight rates and discounts to benchmark grades.

Through the currency

The currency channel is the fastest. An improvement in the terms of trade means an inflow of export revenue while demand for imports is unchanged or lower, so the rouble gets support from the trade balance. A deterioration works the other way: revenue shrinks, import demand lags behind it through inertia, and pressure on the exchange rate builds.

It is useful at this point to separate two things that are often confused. The terms of trade set the direction, while fiscal rules, foreign exchange operations and restrictions on capital movement determine how much of that direction reaches the exchange rate. The same shift in prices has produced a different response from the rouble in different years for exactly this reason, and to explain the exchange rate by commodities alone is to miss half of the mechanics.

Through the budget and the rate

Commodity exports are a tax base. An improvement in the terms of trade widens budget revenues; a deterioration squeezes them and increases the need to borrow. From there the effect reaches the debt market: the supply of new issues grows, the yield curve of government bonds shifts, and the price of money changes for every other borrower. An overview of the debt market as a whole is in the bonds section.

The inflation link also runs through imports. A weaker rouble on the back of worse terms of trade passes through into the prices of imported goods and components, from there into the overall price index, and from there into the key rate decision. For a shareholder this means that a foreign trade shock reaches them twice: first through company revenue, then through the discount rate at which the market values those companies' future cash flows.

Through corporate profits

For an exporter, an improvement in the terms of trade feeds straight into revenue, while its costs are mostly in roubles, so the margin widens disproportionately. For an importer, and for a company that serves domestic demand with imported purchases, the picture is the mirror image. Hence the divergence inside a single index: the broad market can stand still while the commodity and domestic blocks move in opposite directions. A sector-by-sector breakdown is in the piece on sector sensitivity to macro conditions.

The dividend branch follows the margin with a delay: first the financial statements, then the board of directors' decision, then the record date. A shift in the terms of trade therefore shows up in payouts not in the same quarter but a cycle later. Check the statements in the reports section against the nearest payouts:

How to read it in practice

Step 1: work out which side the issuer is on, whether it sells for foreign currency or buys for foreign currency. Step 2: check whether its costs are in roubles and whether it has foreign currency debt; foreign currency debt reverses the sign of the effect of a weaker rouble. Step 3: see whether the channel is closed off by regulation: export duties, dampers and exchange rate surcharges skim off part of the improvement in favour of the budget. Step 4: check your conclusion against the news flow on commodities and logistics in the news section, and against the schedule of macro events and statistical releases in the events calendar.

What the indicator does not explain

It says nothing about physical volumes. The terms of trade can improve against a background of shrinking exports: the price rises, the quantity falls, revenue stands still. It does not distinguish the structure of imports: more expensive consumer imports and more expensive capital equipment affect future output differently, yet in the index they are blended together. And it does not take into account the discounts at which commodities are actually shipped: in periods when trade flows are being redirected, the gap between the benchmark price and the actual contract price becomes a factor in its own right, one that is not visible in benchmark quotes.

Definitions of related concepts (the balance of payments, exchange rate pass-through to prices, the fiscal rule) are collected in the glossary. An instrument-level view of Russian securities is in the stocks section and in the funds section, if you work with broad exposure and not with individual issuers.