Russia: a brief market watch

RUSSIA ECONOMICS - In Brief 29 Aug 2024 by Evgeny Gavrilenkov
The ruble lost about 2% against the dollar in the past two weeks. Military escalation seems to have been one of the main reasons for this move. Meanwhile, the ruble has moved closer to its fundamentally justified level. Interestingly, the spread between CNY/RUB on the exchanges and OTC started to widen and reached 10% last week. Such a significant arbitrage confirms that the transition of FX trading to some new model is not smooth enough. It looks as though it may take several more months to overcome various difficulties and sort out things. OFZ prices continued to move down during the last two weeks, and, as a result, the 10-year yield surpassed 16% for the first time in history. On the one hand, the Finance Ministry tries to collect as much cash as possible from the market, but the execution of the annual borrowing plan only slightly exceeds 40%. Hence, the government needs to use all the opportunities to sell bonds to the public. On the other hand, investors do not rule out another rate hike by the CBR. Many believe it may happen in autumn, and the key rate may increase to 20%. In our view, the policy rate has already peaked and may start to move down in 1H25. At the same time, the market is waiting for some clear messages from the regulator to resume purchasing long-term papers. Until then, investors will prefer to keep a sizable position of their portfolio in money market funds. In the seven days ending on August 26, weekly inflation remained low (0.03%) – mainly on the back of seasonal effect, i.e., the peak of the agricultural season. Meanwhile, deflation is not unusual in the last month of summer as some prices temporarily drop significantly, but not this year....

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