Russian economy and finances: economy gradually improves, markets to stabilize
As several sectors of the economy saw relative improvements in July, such as the strong m-o-m rebound in retail sales that continued to raise consumption following a deep fall reported in April, and better performance in manufacturing, the Economics Ministry estimated that Russia’s GDP contracted in July by a mere 4.7% y-o-y. Russia’s economic performance continued to improve, which generally matches our earlier view that GDP may contract less than 4% this year. As the ruble has weakened in the past few weeks while oil prices remained elevated, it looks likely that the fiscal performance is set to improve in August – at least due to somewhat higher oil-and-gas revenues. The current relative weakness of the ruble is neither bad nor good for the Russian economy and markets. It is natural, especially these days when Minfin’s FX interventions are small and thus no longer as distortionary as they were previously.
To avoid further weakening of the ruble, it is likely that Minfin will not start buying FX in September on the market as stipulated by the fiscal rule. In theory, FX interventions may be suspended, as happened during market volatility in early April. Minfin may also say that it will buy FX from the CBR to comply with the fiscal rule, i.e., transactions will be similar to those orchestrated in the autumn of 2018, when the ruble was also under pressure due to expectations of a new round of the US sanctions. In both cases the exchange rate will not experience additional downward pressure from the regulators. Therefore, it cannot be ruled out that the current currency weakness may be a good entry point to buy local paper.
* Financing the deficit became a bit more difficult after the CBR cut the key rate by an additional 25bp a month ago (having cut the key rate by 100 bp one-off previously), which made Russian bonds less appealing for investors. As a result, the demand for OFZ decreased to the extent that Minfin canceled two recent placements. OFZ yields climbed.
* This additional 25bp rate cut was unnecessary at this time and premature. The excessive and incorrectly timed rate cut (in addition to some other factors) could be blamed for the recent ruble weakening and the reduced demand for the Russian bonds, which had naturally eroded after the previous key rate cut.
* The fact that OFZ yields remain quite high, and even increased in recent months in the long end, is not good either for the sovereign borrower or for the rest of the economy, as corporates and individuals have to pay additional premiums on bank loans. The latest available statistics on credit and deposit rates for households are for June, but it cannot be ruled out that in July and August the spread between deposit and lending rates may have widened as banks usually react quite promptly to CBR decisions and cut deposits rates with ease. Meanwhile, as OFZ yields have not fallen in July and August, it is likely that credit rates to households did not decline, either.
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