Russia: a brief market watch

RUSSIA ECONOMICS - In Brief 23 Jun 2023 by Evgeny Gavrilenkov

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The CBR decided to keep the key rate unchanged (at 7.5%) earlier in Jun but sent a hawkish signal to the market. The latter lifted the OFZ yield curve higher. The 10-year papers are now traded above 11%. The last time this level was in the spring of 2022. Many investors see a threat of potential rate hikes in the coming months and are not ready to increase their exposure to ruble bonds. In addition, Minfin has to borrow as the budget deficit remains significant, and raising more funds became a necessity this year. The combination of these factors pushes yields up. Domestic liquidity remains stable and sufficient (the net liquidity position of the banking system with the CBR is close to R1 trln), which holds RUONIA close to the key rate (albeit slightly below). Despite relatively expensive funding, the ruble weakened and surpassed R/$84. On the one hand, the supply from the FX market evaporated as many settlements for export supplies switched to the local currency. On the other hand, imports grow faster than expected. As a result, the exchange rate is weakening. On top of that, ongoing escalation in Ukraine and expectations of new sanctions make investors nervous and serve as additional arguments in favor of a weaker ruble. In the seven days ending on June 19, inflation was 0.02%, which brought the MTD tally to 0.22%. Inflation YTD reached 2.62%, which looks moderate. By the end of this month, inflation y-o-y could move to 3.2%, which is not too high either. Therefore, the CBR’s concerns about accelerating inflation look too alarming. Inflation y-o-y will continue to rise gradually amid the 2022 summer base effects, i.e., a rather prolonged deflationary period. This yea...