Russia: a brief market watch

RUSSIA ECONOMICS - In Brief 07 Dec 2023 by Evgeny Gavrilenkov

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The situation on the FX market has changed during the last couple of weeks. After some period of strengthening, which was triggered by a fresh version of partial capital controls, such as compulsory sales of export earnings introduced in mid-October, the ruble started to weaken and almost reached R/$92 in recent days. In our view, the year-end budgetary spending spree appeared to be the main reason for this change. Of course, the bulk of this money will stay inside the country, because opportunities for investments abroad are limited. However, given the poor liquidity on the FX market, even a moderate growth in demand may shift the exchange rate by several percentage points in a few days. Hence, the FX market volatility will remain high. Meanwhile, growing budgetary expenditures and the widening budget deficit provide additional ruble liquidity, which results in additional pressure on the ruble. Note that the ruble previously appreciated amid a tighter liquidity situation in the banking sector, which was in deficit last week. The equity market was under pressure as investors began channeling some of their cash into short-term high-yielding fixed-income instruments (up to 15% yield - including some bank deposits). Prices for long-term OFZs also started to slide down as the market began pricing in a potential key rate hike by 50-100 bps in December. Besides, investors remain cautious concerning the government's plan to issue nearly R1 trln OFZs in 1Q24 (versus R500 bn in 4Q23). As a result, the 10Y papers yield reached almost 12% (+30 bps in 10 days). We expect it to increase further, especially if the regulators continue to tighten monetary policy. In the seven days end...