Russia: a brief market watch

RUSSIA ECONOMICS - In Brief 16 Feb 2023 by Alexander Kudrin

---

The Russian financial markets remain in the area of turbulence. On the eve of the first anniversary of the start of a special military operation in Ukraine, media are reporting about the forthcoming new sanctions package, which will be introduced by the EU and potentially US next week. Besides, investors are anxious as an extraordinary joint meeting of the lower and upper chambers of the Russian parliament is due on February 22. As a result, the Russian equity market fell by 8.7% since the start of the month (in terms of the RTS index). The abundant liquidity places additional pressure on the ruble as the surplus liquidity position of the banking sector with CBR exceeded R4 trln last week. Apart from that, lower-than-expected budget revenues from the energy sector collected in January, which fueled discussions about the options to finance the widening budget deficit, moved up expectations for further depreciation of the ruble. The currency already broke the R/$74 mark. The CBR decided to keep the key rate unchanged (at 7.5%) at the Board meeting last week but also made a statement that sounded more hawkish. As a result, the market started to price in 1-2 hikes until the end of the year. The latter pushes the yield for OFZ up, which approaches 11% in 10Y duration. We don’t think that CBR will change the rate in the next month or two as CPI (in annual terms) will drop significantly soon due to a base effect. RUONIA stays well below the CBR key rate as liquidity remains abundant. However, banks started to cut the amount of REPO operations with CBR, which is likely to move the cost of funding on the money market closer to the policy rate. Rosstat reported that inflation in...