Russia’s macro: Weathering the 2020 storm, looking for tipping points ahead
A year ago, we expected moderate GDP growth in 2020, a kind of muddling through seen in the past years. Inflation was supposed to decelerate slightly from the 3% reached in 2019. Hence we expected the key rate to be gradually cut by at least 100 bps. The current account and the federal budget balance were seen to remain in surplus.
What came unexpectedly was the pandemic, the Russia/Saudi disputes about production cuts and the temporary oil price collapse. In mid-2Q20, we revised our 2020 outlook, suggesting that the budget deficit could remain moderate in a fundamentally different environment, and the economic contraction would not exceed 4% assuming no return to the lockdown. We also suggested that the official data would be revised higher. These revisions of selected indicators came on a regular basis in 2H20. Hence the economy is going to shrink by around 3.3%, and the OPEC+ deal that strongly affected Russia’s mining sector played a major direct role in Russia's GDP contraction.
The pandemic shock encouraged the CBR to cut the key rate abruptly in mid-summer, causing several mini-shocks across the country's financial system. What also was unexpected was the fact that instead of borrowing around R1.8 trln on the domestic market (assumed in the “pre-pandemic” surplus budget), the government was able to raise nearly R5.2 trln gross by issuing OFZ – mostly in 2H20. The bulk of this surplus liquidity the Russian banks accumulated in the previous year in accounts with the CBR ended up in the Minfin's coffers as the Russian banks became main buyers of the OFZs issued in 2H20. Currently, banks hold no spare liquidity to buy OFZs in 2021 in the same fashion as in 2020.
* In a calm environment, the CBR remained quite conservative and cautious concerning its key rate – the CBR kept it too high for too long while considering what might be the appropriate neutral policy rate for Russia. The pandemic panic forced the CBR to act and cut the key rate decisively.
* The abrupt key rate cut last summer had multiple effects, including negative ones, such as weakening of the ruble as Russia’s lower rates and OFZ yields discouraged foreign buyers from investing in the country’s instruments.
* As the situation has seemingly stabilized in Russia in 2H20, the CBR is likely to return to its usual unhurried thinking and start acting cautiously again. We currently expect no more than a 25-bp rate cut by the CBR in 2021.
* The RUONIA may get very close to the key rate and even exceed it in 1Q21, meaning that the liquidity situation could become tense, and issuing OFZ may be challenging for Minfin.
* What is likely to happen, however, is that the 2021 federal budget deficit will be below the planned R3.7 trln gross (R2.7 trln net), bringing some relief.
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