Russia: a brief market watch

RUSSIA ECONOMICS - In Brief 20 Oct 2022 by Alexander Kudrin

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The oil price remains volatile. In early October, it moved up as OPEC+ decided to cut production, then it slid on the back of general fears of potential economic recession. The US decision to sell 15 million barrels of oil from the Strategic Petroleum Reserve also influenced the market. The Russian FX market reacted moderately to these events. The ruble is more sensitive to news on sanctions or the ongoing military operation. At the same time, the surplus of the banks' net liquidity position with CBR shrank as the demand for cash was strong, fueled by the discomfort that the population experiences amid elevated uncertainty. The Russian economy is switching to military mode. After the announcement of partial mobilization, the authorities introduced martial law in four regions, absorbed after referendums in September. Two special governmental bodies were created to coordinate efforts in the different regions and to ensure that the economy match the growing appetite for the “special military operation”. Investors are afraid that the budget deficit will widen further and will be covered by the National Wealth Fund (the Government has already agreed to take R1 trln from this coffer), which is a pro-inflationary factor. The latter pushes OFZ yields up. The Finance Ministry seems to share this view as this week it decided to place floating-rate bonds and fixed-rate papers with long maturity. While the former remains in demand by commercial banks as it allows them to manage interest rate risk, the latter were placed despite growing nominal yields. Most likely, the borrower expects rates to be even higher going forward. So far, inflation remains moderate as in seven days ending...