Russia: a brief market watch

RUSSIA ECONOMICS - In Brief 16 Mar 2023 by Alexander Kudrin

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Brent/Urals spread recently narrowed to about $25/bbl (from $32-34/bbl seen in December). Although, it didn’t support the ruble as Brent fell below the $75/bbl benchmark amid renewed concerns about a global slowdown. The current thinking is that the economic problems may turn more acute amid recent fears associated with the banking sector in the US that may spread to Europe. These problems became more visible after the collapse of Silicon Valley bank (#16 by asset size). Apart from other factors, this situation affected the ruble. In the past couple of weeks, it moved from R/$ 75 to 77. Although this move looks natural, the ruble, which demonstrated high volatility in recent months, has to weaken even more. Even tightened local liquidity couldn't prevent the weakening of the ruble in nominal terms, and it came back to levels seen in 2020-2021 (having appreciated in 2022). Still, despite recent weakening in nominal terms, the real effective ruble remains much stronger than a year ago. In February, the real ruble measured against a basket of currencies remained 17.7% stronger y-o-y. The narrowing current account and less liquid FX market will keep placing pressure on the ruble and pushing it toward more equilibrium (weaker) levels even amid tightened ruble liquidity. The budget deficit decreased in February, which tightened ruble liquidity on the domestic money market. As a result, overnight borrowing costs for commercial banks increased, and RUONIA remained, for a while, above the key rate. This week the CBR will decide on the interest rate, but given the low level of w-o-w inflation, we believe the regulator will keep it unchanged. Moreover, we don’t see any reason for...