Virus and the Russian economy: making efforts to decouple
As Russia remains on a week-off regime and people are not supposed to leave their homes, the number of Russians who contracted the virus continued to rise at a high rate in recent days, albeit from a relatively low level (given the size of the country). Around 200,000 Russians who had either returned from abroad before the borders were shut or had contact with returnees are under medical surveillance and are supposed to stay isolated (but are not fully locked down).
The Russian authorities acted relatively fast and at a relatively early stage, which gives hope that Russia still has a chance to avoid greater problems. If so, then economic activity in the country may be suspended or reduced for a shorter period compared to other countries – possibly weeks rather than several months. A very preliminary estimate suggests that the impact on economic activity of a week off was strong, but any such estimates cannot and should not be extrapolated for future periods. The key question is not how deep the fall was in recent days or even weeks, but how long severe restrictions on movement and business activity will last.
--- Any quantitative estimates of the macroeconomic data and forecasts in the current environment should be treated with great caution, in Russia in particular. Even Russia’s inflation numbers may be questioned as it is not very clear how “raw” data are going to be collected during the quarantine.
--- The most reliable information can currently be obtained from financial and commodity markets, as well as from daily banking and monetary statistics.
--- In recent days the Russian markets calmed down and almost ignored another drop in the oil price. Brent traded at around $23/bbl on March 30 and 31 and fell by over $3/bbl (-11%) since Thursday last week, while the ruble weakened only by 1% ,and the long-term OFZ yield even dropped by 30 bps. Such decoupling from oil can be explained by various factors, some purely technical and those more linked to expectations, namely the additional supply of FX from the National Wealth Fund.
--- In contrast to many other EMs, Russia has enough resources to cover all debt obligations on time and in full. There are plenty debt problems other countries should face within the next 6-12 months. Hence, attention may concentrate on more problematic cases. The exposure to OFZ looks safe, but not profitable in USD terms for many investors.
--- Foreigners’ holdings of OFZ may drop to 27-28% in coming months. The latter translates into net offer of OFZs on the secondary market up to R350-450 bln. If the global situation deteriorates, it may happen quickly, within a month or two. In this case, pressure on the ruble may increase, and OFZ yields may jump to 8-8.5%.
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