Russia: a brief market watch

RUSSIA ECONOMICS - In Brief 29 Dec 2022 by Alexander Kudrin

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The FX market was volatile in December. The ruble dropped from R/$61 in the early month to R/$71-72 in recent days. On the one hand, some local investors decided to increase their FX exposure in anticipation of a contraction of the current account surplus. The latter is expected to result from the imposed cap on Russian oil prices accompanied by counter-measures from the Russian authorities. On the other hand, a significant increase in budgetary expenditures, which may reach even R31 trln in 2022, could be considered as a source of additional demand for foreign currency as well, especially if one assumes that the near-term risk of further sanctions against the local financial system is not very high. Despite active borrowing by Minfin, the OFZ yield curve didn't change significantly and the 10Y papers were traded slightly above 10%. The government borrowed about R1.5 trln in December and in such a way pre-funded some expenditures planned for 2023. We expect Minfin's issuance activity to contract at the beginning of the next year. Combined with expectations of lower inflation, it may lead to a compression of the yield curve in the coming months. Meanwhile, December budgetary spending spree pushed interest rates on the money market below the key rate. Rosstat reported that inflation in the seven days ending on December 26 was 0.12% w-o-w, which was slightly higher than a week ago, but well below its level seen in early December. Inflation MTD and YTD reached 0.85% and 12.01%. Inflation w-o-w temporarily accelerated on the back of an indexation of the regulated tariffs in early December, while most recently, prices for fresh fruits and vegetables were among main driving f...