Russia: a brief market watch

RUSSIA ECONOMICS - In Brief 06 Oct 2022 by Alexander Kudrin

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Domestic financial markets were hit by the announcement of partial mobilization in the second half of October and remained under pressure in the aftermath of the decision to recognize the results of referendums held in Donbas and neighboring areas and incorporate them in Russia. The Western countries introduced a new package of sanctions, which includes the price cap on Russia’s oil and some related restrictions, including its transportation by sea. A day before this decision, OPEC+ decided to cut production by 2 mbd. Given Russia’s intention not to supply oil to the countries, which will implement a price cap, we expect energy markets to experience greater turbulence in the coming months. The latter is likely to add volatility to financial markets as well. In Russia, we suppose that the ruble will be traded in a wider range than in the previous months. As fears among the population grew significantly after the announcement of partial mobilization, demand for cash increased. As a result, banks’ net position with the CBR decreased, and money market rates went up (though still amid a strong banks' liquidity surplus). In turn, the OFZ yield curve moved up (long-term papers are now traded above the 10% mark), which was the reflection of investors' concerns about the ability of the government to finance the budget deficit, as it is likely to be higher in the coming quarters. Also, market participants cannot rule out that CBR may stop interest rate cuts as uncertainty increases. As was expected, the deflationary period was over in the last two weeks of September, though inflation w-o-w was very moderate. In the seven days ending October 3, inflation was ay 0.07%, of which 0....