Russia: a brief market watch

RUSSIA ECONOMICS - In Brief 16 Aug 2023 by Evgeny Gavrilenkov

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The rapid depreciation of the ruble became the main event in the past weeks (especially at the end of last week). Since the start of the month, it moved by more than 10% by August 15 (from R/$91.6 to $/R101) and encouraged the authorities to act. As a result, the CBR called for an extraordinary BoD meeting. The Board decided to hike the key rate by 350 bps (to 12%). The regulator mainly referred to an ongoing acceleration of inflation to justify this decision. We believe that the situation on the FX market was the key reason for this action (even though further weakening of the ruble could have contributed to further acceleration of inflation). Note that the media reported that the authorities began discussing the possibility of some elements of capital controls, such as obligatory repatriation of some meaningful part of export earnings if the FX market remains volatile. Even though the ruble bounced back a bit after this decision, the currency can only stabilize if the trade balance and the current account widen. This widening will inevitably happen in the next few months as the ruble has already weakened. The interest rate hike is more focused on calming down the overheated domestic demand, which may help in the short run but has more negative economic consequences in the medium term. Apart from that, a moderation of budgetary spending and narrowing the monthly budget deficit in 2H23 should also help to stabilize the situation. Overall, it looks as though the ruble has some room for appreciation. The growth of the OFZ yields was moderate despite the significant increase of the key rate. 10-year papers added only 10 bps since the start of August. At the same time, the...