Russia: a brief market watch

RUSSIA ECONOMICS - In Brief 21 Dec 2023 by Evgeny Gavrilenkov

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The ruble appeared less volatile in the past couple of weeks - it fluctuated close to the R/$90 mark within a relatively narrow band. However, we see some room for its weakening in the coming months as average monthly federal budget expenditures will grow next year. Budgetary spending traditionally creates some pressure on the exchange rate. On top of that, the sanctions regime will likely tighten (especially in the area of oil trading), which may reduce the FX inflows.  The bond market reacted positively to the CBR key rate hike by 100 bps, and the yield for 10-year OFZ compressed by about 50 bps after the announcement as many investors didn't rule out a more radical step from the regulator (+200 bps vs instead of +100 bps). On top of that, the CBR chairperson Ms Nabiullina, mentioned that the key rate has probably reached its peak. She also added that interest rates may stay elevated for an extended period, but the market almost ignored this part of the statement. We think that there are many chances to see OFZ yield higher in January once Minfin starts to borrow more aggressively. In the seven days ending on December 18, inflation w-o-w was at 0.18%, which moved the MTD and YTD tallies to 0.45% and 7.12%. Inflation remains elevated and hovers close to 1% m-o-m on average for the fourth consecutive month. By year-end, it should be about 7.5% or slightly higher, fueled by generous budgetary spending, a high rate of wage growth, and rapidly growing credits, including subsidized mortgages. As in 2024, the federal budgetary expenditures will be even more generous, one should not take for granted that inflation may fall to 4.0%-4.5% by the end of next year as the CBR targ...