The GDP in Russia contracted 0.57% in the Q3' 2015 over the previous quarter. The Russian economy shrank 2.5% YoY in January of 2016, following a 3.5% drop in the previous month. Russian Finance Minister Anton Siluanov said on Thursday that "the country's budget deficit was seen at 3% of GDP in 2016 under an oil price of $40 a barrel." 

We project a gradual recovery in H2 2016 activity to give way to ruble appreciation in the long term. Real GDP growth is likely to continue improving. CBR forecasts real GDP YoY at -1.0 to 0.5% for 2016, while market consensus forecasts 0.0%.

The Bank of Russia left its benchmark one-week repo rate unchanged at 11% on March 18th saying inflationary risks remain high due to developments in the oil market and budget uncertainties. Policymakers also said rates may stay high for longer than previously planned, aiming to bring inflation to target.

Consumer prices in Russia increased 8.1% year-on-year in February of 2016, compared to 9.8% in the previous month and below market expectations. It was the lowest figure since September of 2015, as cost of food, housing and transportation rose at a slower pace. On a monthly basis, prices went up by 0.6%.

The Board of Directors of the Bank of Russia decided to stand pat at 11.00% p.a. in spite of certain stabilisation in financial and commodity markets, inflation risks remain high.

These stem from the current developments in the oil market, persistently high inflation expectations and some uncertainties surrounding budget configuration.

 To enable the accomplishment of inflation targets, the Bank of Russia predicts that, consistent with this decision, annual inflation will total less than 6% in March 2017, to reach the 4% target in late 2017.

At spot ref. 68.86: we recommend either going long in 2m/1w diagonal USD/RUB put spread or shorts in near month futures, but the oil and RUB recovery now look too extended for a put position vs. the USD as from current levels we see only contained further potential for RUB gains.

This is especially as CBR is likely to respond to material further RUB gains by easing earlier while if we reach very strong levels, the bank may even consider resuming FX purchases to replenish reserves.

A 70.50/67.15 diagonal put spread is likely to fetch for certain yields of the USD notional as it edges above upto higher strikes in next 1 week or so and slides as much as possible upto maturity on longs.

Risk is potentially unlimited the further USD/RUB trades below 59 at expiry. The structure should benefit from a further compression in RUB volatility in a bullish scenario.