Russia: a brief market watch

RUSSIA ECONOMICS - In Brief 09 Nov 2023 by Evgeny Gavrilenkov

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The FX market remained relatively calm at the beginning of November. The widened current account surplus, accompanied by some measures of capital controls, caused the ruble to appreciate. It strengthened to R/$92 as of November 8. The new sanctions package, announced in early November, may negatively affect Russia’s export revenues but is unlikely to change the situation radically. We expect the ruble to stabilize in the R/$90-95 range in the coming weeks. Meanwhile, the potential growth of budgetary expenditures at year-end may create additional pressure on the exchange rate. The OFZ market demonstrated mixed performance during the last couple of weeks. Immediately after the CBR rate hike, the yield for 10-year papers increased to 12.5% but then fell by almost 50 bps in a few days. On the one hand, many investors are sure that the regulator will start to cut interest rates in 2024 and consider the current yield levels attractive. On the other hand, Minfin reduced the borrowing program for 4Q23 to R500 bln (versus planned R1 trln) due to a recently improved budget performance. Reduced supply of the new papers had helped to push yields down. At the same time, in 1Q24, the issuance will grow to R1 trln, which will negatively affect the secondary market. Besides, we expect federal budget expenditures to grow in the coming months, which can create additional inflation pressure and force the CBR to keep tight monetary policy for an extended period. Generally, the mini-rally on the OFZ market may not be sustainable, and yields may return to an upward trend soon. Inflation remained elevated in October and most likely reached 6.8%-6.9% y-o-y at the end of October. Due to a pub...