Russia: a brief market watch

RUSSIA ECONOMICS - In Brief 31 Aug 2023 by Evgeny Gavrilenkov

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The CBR's decision to hike the key rate to 12% in mid-August immediately moved the ruble from about R/$101 to R/$93. Markets expected a more moderate CBR move (+200-250 bps), and some overshooting was understandable. By the end of the month, the ruble moved to above R/$ 95. A significant increase in interest rates will most likely stimulate the inflow of retail money to ruble bank deposits. It will trim demand for FX and, with some lag, will cool down overheated consumption. Both factors will likely have some disinflationary effect. A weaker currency will also trim imports, though it may take several months. After the CBR rate hike, the yield curve became inverted. The existing ruble liquidity doesn’t look excessive at all. Hence, we expect RUONIA to trade above the key rate soon. Simultaneously, we expect budget revenues to improve on the back of a weaker ruble. In this environment, Minfin’s appetite for primary placements will likely decline as the budget deficit will narrow in the coming months. As a result, long-term papers will have more potential for yield compression. In the seven days ending on September 28, weekly inflation fell to 0.03% w-o-w, which brought the MTD tally to 0.23%. The YTD tally moved to 3.65%. By the end of August, the y-o-y inflation will likely be close to 5.25% amid 0.52% deflation in August 2022. Even though inflation w-o-w has seemingly decelerated, it happened mainly due to seasonal factors, such as deflation in the fruits/vegetable segment. Most other prices kept rising, therefore pointing to demand overheating.