FxWirePro: CBR remains hawkish, what drives Russian central bank’s short-term cautious and medium-term constructive approach

The Gross Domestic Product (GDP) in Russia contracted 0.57 pct in the third quarter of 2015 over the previous quarter. 

Over a medium-term horizon, we remain constructive RUB. The fundamental drivers for the ruble over the medium term remain supportive: high nominal yields and real yields relative to regional peers, a hawkish central bank, a relatively large current account surplus compared to other high yielders (2.5% of GDP forecast for 2017) and diminishing fiscal risks.

Russian trade surplus increased by 4.7 pct to $11.83 billion in December 2016 from $11.3 billion in the same month a year earlier, well above market expectations of a $9.85 billion surplus. Exports rose 8.3 pct, the second consecutive monthly increase since July 2014; and imports went up 10.6 pct, the fifth month in a row of growth. Considering the full 2016, the trade surplus shrank 39.1 pct to $90.4 billion from $148.5 billion in 2015, as exports fell 17.5 pct and imports declined at a much slower 0.8 pct. 

While RUB may underperform in the short-term given FX interventions, we think that once it finds a new equilibrium, high carry/vol ratio will make the currency attractive to real money and long-term investors.

The CBR remains hawkish: The central bank has accrued significant inflation-fighting credibility by maintaining a hawkish stance in the face of improving inflation dynamics. Analysts expect rate cuts to restart in June, with a total of 150bps of easing in the year, although risks are skewed slightly to the downside, according to our economist. 

Growth has surprised to the upside, and the near-term outlook looks more positive. Russia’s 2016 GDP surprised to the upside, at -0.2% vs. consensus estimates of -0.5%. Looking forward, manufacturing PMI is currently at multi-year highs (54.7), confirming the acceleration in trade sectors of the economy.

The recommencement of FX interventions may lead to near-term weakness. The CBR and MinFin have reintroduced an FX intervention scheme, with the intention of smoothing the impact of volatile oil prices on the economy and government finances.

We envisage near-term RUB weakness on the back of this, but acknowledge ruble depreciation is likely to take longer than we anticipated given the recent strength of oil prices.