Russia: a brief market watch

RUSSIA ECONOMICS - In Brief 05 Jul 2024 by Evgeny Gavrilenkov

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The effects of sanctions against the Russian FX infrastructure are still visible. The ruble remains abnormally strong (currently, it trades around R/$87-88 on the OTC market vs about R/$90 before the announcement of restrictions). It looks abnormal as the bank’s net liquidity position with the CBR increases (on average, its surplus approached R2 trln over the past ten days). The latter may be explained by the difficulties with FX settlements, which some importers faced after the sanctions. As a result, currently, they accumulate cash in local currency for future transactions. Once the operations return to a kind of a “new regular” mode, it may create decent demand for hard currency and push the ruble to the “normal” level, i.e., well above USD/RUB 90. It is difficult to say how much time it may take. Hence, the government is trying to balance the situation by other means. For example, they decided to decrease obligatory sales of FX-proceeds by exporters from 80% to 60%. On top of that, daily sales of CNY (stipulated by the fiscal rule) from the National Wealth Fund were reduced to R3 bln (from 8R bln previously). The acceleration of inflation during the last several weeks (CPI reached 4,51% YTD) made investors sure that CBR has no other choice but to make another rate hike in July. The market expects the regulator to hike it by 100-200 bps. The latter pushed RUONIA above 16% - despite abundant ruble liquidity. These expectations limit the investor demand for fixed-rate OFZs. Hence, the Finance Ministry started offering papers with floating rates. But the premium requested by investors is still too high. In the second half of June, the government managed to sell only R8...