Russia: a brief market watch

RUSSIA ECONOMICS - In Brief 06 Jul 2023 by Evgeny Gavrilenkov

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The attempted military coup accompanied by a further escalation in Ukraine (with some media speculation about a potential “incident” at the nuclear plant) pushed the ruble exchange rate down. Ruble reached the R/$90 mark for the first time since March 2022. The narrowing of the current account surplus combined with a partial switch of export settlements in rubles erased a significant part of FX liquidity from the local market. Moreover, the remaining liquidity is split between USD and CNY in contrast with previous times, i.e., before the special military operation, when it was concentrated in the former part. As a result, the exchange rate demonstrates excessive volatility, when some unexpected factors emerge. In the best-case scenario, the ruble will stabilize and may even appreciate a little bit, but highly unlikely to return to the previous range (below R/$80). A weaker ruble will inevitably affect inflation trends in the coming weeks/months, which may start rising. Depending on the magnitude of the passthrough effect we cannot rule out that the CBR could hike the key rate by 25-50 bps even in July. Investors started to price in this scenario, which led to a further increase in OFZ yields. The 10-year paper yields reached 11.1%. Simultaneously, domestic liquidity dropped well below R1 trln, which also can be explained by higher demand for hard currency, which is then transferred abroad amid local uncertainty. In the seven days ending on July 3, the weekly print of inflation was moderate (0.13%). However, yearly indexation of regulated tariffs has not yet happened and inflation may look higher next week. Rosstat also announced that the MTD inflation on the same day w...