Russia: a brief market watch

RUSSIA ECONOMICS - In Brief 28 Jan 2022 by Alexander Kudrin

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As was expected, the Russian financial markets were very volatile in January as the noise about the “scheduled” Russia's invasion of Ukraine became louder and more annoying in recent weeks. One can expect volatility to remain elevated also in February regardless of whether the go-ahead takes place or not. If it is not going to happen, many outspoken talking heads of all sorts will remain under the same self-hypnosis that “the invasion is imminent – sanctions to come.” The ruble moved in January close to R/$80 while the oil price exceeded $90/bbl. The monthly average ruble price of oil is likely to attain in January R6500/bbl. It will be around 28.5% higher than the annual average in 2021. It will secure strong oil-and-gas revenue flow in January and the following weeks. However, the domestic liquidity (i.e., the net position of banks with the CBR) will be tight as the budget is likely to be in surplus, while amid the weakness of the ruble, the CBR/Minfin duo stopped buying FX and partially returning the liquidity in the system.Amid such a backdrop, the Russian CDS and 10Y OFZ yields soared. The stock market indices fell. Persistently high inflation and tight liquidity caused money market rates, such as RUONIA, to go up. On top of that, the effect of the end of the month, i.e., the tax payment period, and greater demand for the FX helped RUONIA to move higher. The banking sector liquidity balance turned negative, implying increased demand for refinancing from the CBR.Despite the series of key rate hikes, inflation remains elevated. Even though inflation is on the rise globally, Russia’s inflation to a great extent is caused by too generous budgetary spending, such as in...