Russia: a brief market watch

RUSSIA ECONOMICS - In Brief 01 Dec 2022 by Alexander Kudrin

---

The FX market remains more or less stable in anticipation of an embargo on Russian oil and the price cap. It is worth mentioning that trading activity in traditional currencies is declining in Russia as these assets are considered toxic by a growing number of local market participants. The full-scale picture following the implementation of these new restrictions on Russian energy will become clearer at the end of 1Q23, and we expect the ruble-to-dollar exchange rate to exhibit moderate fluctuations without any definitive trend until then. The Ministry of Finance continues to borrow actively on the domestic market. As a result, the total amount of OFZs, issued in October-November reached R1.7 trillion, which exceeded by a factor of ten the previously announced plan for the entire 4Q22 (R 150 bln). Floating rate bonds represented the lion’s share in primary placements (R1.3 trillion). The portion of these instruments in the structure of the OFZ market jumped to 34%. As of end-September, it was 30%. By doing so, the Government accepts an additional amount of interest rate risk, which it can hardly hedge. These borrowings helped the Federal Treasury to increase the amount of offering cash on the money market from R3.5 trillion on average in October to R4.7 trillion in November, which pushed down the RUONIA rate. However, uneven budgetary expenditures lead to higher market volatility. We suppose that Minfin will allocate a significant portion of this spending at the very end of the year, which may fuel inflation in 1Q23 (even though inflation has started gradually picking up in November). In seven days ending on November 28, inflation was at 0.19%, and by that day, it reach...