Russia: a brief market watch

RUSSIA ECONOMICS - In Brief 19 Jan 2023 by Alexander Kudrin

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The main event on the FX market at the beginning of the year was the decision of the Finance Ministry to start selling CNY from the National Wealth Fund, given that the budget revenues from the energy sector are likely to be lower than planned. The latter pushed the ruble up, and the exchange rate moved below the $/R70 mark. The paradox of the current budgetary setup stems from a widening price discount combined with reduced physical volumes of energy exports. Hence, in case of lower oil/gas export revenues, the government will sell more currency from NWF, which will support the ruble. However, the forthcoming contraction of the current account surplus will eventually move the ruble to a more reasonable (weaker) level. A significant increase in the budget expenditures in December caused more liquidity to flow into the system. Therefore, the banking sector's net liquidity position with the CBR reached almost R3 trillion by mid-January. The latter pushed interest rates on the money market down and fueled activity in the stock market. Government bonds remained more or less stable as the Finance Ministry switched to more constrained borrowings. Hence its impact on the secondary market is unlikely to be high in the near term. On the other hand, many investors expect some acceleration of inflation in 2H23 and do not rule out the key rate hike later this year, which limits the appetite for investments in long-term bonds. So far, despite December budgetary spending spree, inflation remained moderate as Rosstat reported that in seven days ending on January 16, inflation was at 0.15%. The YTD inflation reached 0.39% and is likely not to exceed 0.75% m-o-m, implying the y-o-y inf...