Russia: a brief market watch

RUSSIA ECONOMICS - In Brief 27 Jul 2022 by Alexander Kudrin

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Russia continues to limit gas supply to the EU and explains it for technical reasons. Despite the decision of the Canadian Government to return the gas turbine to the Nord Stream operator, the turbine was not yet delivered due to bureaucratic disputes between the two countries (Germany and Russia). On top of that, the Russian gas monopoly stopped the operation of another turbine quoting safety reasons and the need for regular technical maintenance. As a result, the pipeline system operates at 20% of its capacity. The latter will limit the FX revenues of Gazprom, implying that the inflow of hard currency to Russia may decrease. On the back of this news flow, the ruble touched the R/$55 mark on Jul 21, but several days later jumped to R/$61. We expect the ruble to remain volatile and be sensitive to various political news. At the same time, commissions introduced by commercial banks for holding FX accounts (such as USD or EUR) encourage households to sell FX. The CBR decided to cut the key rate by 150 bps amid steady y-o-y disinflation and w-o-w deflation. The latter resumed in July after temporary w-o-w inflation in the first week of the month, caused by a one-off increase of regulated tariffs. OFZ market has largely priced in the CBR’s move, and yields on Government bonds remained flat after the announcement. RUONIA money market rate contracted by 120 bps and currently stays slightly higher than the key rate. Given the abundant supply of the ruble liquidity via quantitative mechanisms by the Ministry of Finance (via opening deposits with commercial banks and conducting repo operations), we expect the money market rate to move down in the coming weeks. Despite the usual...