Russia: a brief market watch

RUSSIA ECONOMICS - In Brief 17 Nov 2022 by Alexander Kudrin

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Strong demand for cash from the household sector combined with increased issuance activity of the Finance Ministry fueled demand for refinancing in CBR. The overall amount of REPO loans exceeded R1.7 trln. Despite that, RUONIA moved well above the key rate level in the first half of the month. Given the growing budget deficit in 2022-23, the CBR refinancing facility is likely to be used actively by commercial banks to buy debt. On the FX market situation is more or less stable, the ruble tested R/$62 level in the early month, but this move was short-lived. The Finance Ministry is actively placing OFZ to finance the budget deficit. During last 5 weeks it issued papers worth R1.3 trln, which is matching the preliminary estimation of the gap between revenues and expenditures for FY2022. To do that the Government had to increase the offering of floating-rate bonds and grant significant premiums during the auctions for fixed-rate papers. In such a way the Finance Ministry is ready to accept more interest rate risk and higher cost of debt servicing. On the secondary market, the entire yield curve stays above the 10% level and we don't think it will move into single-digit territory soon. As weekly inflation remains low (on November 14 the MTD inflation was 0.07%) in November as a whole, inflation will likely stay around 0.2% m-o-m as there are no signs of a recovery in consumer demand. By the end of 2022, inflation could be below 11.5% implying that current inflation (say, 6M moving average) remains well below the key rate. It may prompt the CBR to consider the key rate cut in December, especially amid growing demand for cash from the Ministry of Finance. However, if geopolit...