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We remain bullish in Russian currency on various grounds, with rouble remaining our favorite carry expression in the region. The domestic side of the story remains largely unchanged. The key positive remains a hawkish central bank keeping nominal and real yields elevated.
Meanwhile, latest data show a lower current account surplus than we previously assumed, with our economist now downgrading forecasts to 2.1% of GDP in 2016 (from 2.8% previously) and to 2.6% of GDP in 2017 (from 3.0% previously).
However, this revision is balanced out by better financial flows than expected – net capital outflows should be below $20bn this year, which is the lowest level since the global financial crisis (see here). Meanwhile, we also focus on the privatization revenue potential. Bashneft’s sale was worth about US$5bn paid in RUB, in our understanding.
We believe the buyer, Rosneft, had to largely convert the amount from USD, as suggested by the composition of cash holdings in its last set of financial accounts. Rosneft's own privatization is likely to be worth about US$12bn inflow into RUB, with the buyer and financing yet to be decided.
From current levels, oil prices are a key risk for our position, leading us to partially de-risk via closing our short ZAR/RUB trade. However, any set back is likely to be temporary, with strong fundamentals supporting our medium-term bullish position. With a wide spread optimism regarding the OPEC production cut negotiations, the market appears vulnerable to some disappointment.
Additionally, positioning data show oil shorts have been completely squeezed out from the market. RUB is currently trading about 0.7% too rich to oil prices and CDS.
Finally, indicators of RUB positioning continue to suggest the market is long the currency (although we would dismiss the extremes recorded in the IMM data set, which covers only a small share of the RUB market).
