Russia: a brief market watch

RUSSIA ECONOMICS - In Brief 23 Sep 2022 by Alexander Kudrin

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The decision to call referendums in Donbas and neighboring regions and the announcement of partial mobilization in Ukraine pushed the Russian financial market significantly lower. As a result, the yield for 10-year OFZ moved to double-digit territory, for the first time since the end of May, while the RTS equity index slid down by around 8% in 4 days. The overall mood on the market is rather negative. Hence a further decline is highly likely in the coming weeks. As expected, the CBR cut the key rate by 50 bps to 7.5% amid deflation, which was observed in Russia since May with only temporary weekly breaks. However, the regulator has changed the tone and the language of the statement to more negative, which gave investors the reason to discuss the completion of the rate cut cycle. We expect inflation can continue to decelerate in 2023 amid relatively weak (albeit recovering) demand, which may force CBR to pursue a neutral monetary policy. The key rate may decline below 6% by the end of 2023. Rosstat reported that deflation continued for another week, and in seven days ending on September 19, was at 0.03%. The MTD inflation reached 0.15%, while the YTD inflation fell to 10.23%. It is still possible that deflation may be reported in September as a whole. It looks as though the deflationary period is over, and in the coming weeks, moderate w-o-w inflation will be reported.