Russia: RUB May Get A Boost From De-Facto Easing In The Fiscal Rule

Based on this framework, the range of potential reduction in CBR FX purchases is US$3-15 bn per year, which in terms of effect on the FX market is equivalent to an increase in the base oil price (easing in the budget rule) by US$2-8/bbl. Earlier we indicated that easing in the fiscal rule by US$5-10/bbl is not a threat to the budget stability, and we stick to that view, which suggests that attractiveness of RUB assets to international investors should not decline. Meanwhile, the proposed scheme somewhat lowers the transparency of the Russian budget process and increases the risk profile of the Russian state savings.

In terms of ultimate effect on the USDRUB, the easing in the budget rule by US$2-8/bbl corresponds to potential improvement in the RUB fair value by USDRUB 0.5-1.5. Therefore, our current outlook, which suggests depreciation to USDRUB66.0 at year-end 2020 on recovery in imports, including USDRUB66.0-68.0 in 2-3Q on balance of payments seasonality, may potentially be improved by 1-2% after the details of the SBER handover will be finalized.

All other factors of uncertainty and volatility to the forecasts remain. The recently released balance of payments statistics for January suggest that so far Russia's current account has been strong at US$9.5 bn, however later into the year it is facing risks of contraction. The reasons include and are not limited to Coronavirus, which may negatively affect Russia's exports of goods and services, and the pick-up in imports driven by increased consumer and investment demand. We also note that even the strong current account combined with massive portfolio inflows into the local state bonds (OFZ), which were preliminary estimated at US$2.1 bn for January, did not prevent 3% USDRUB depreciation last month, which confirms our overall cautious view on RUB levels and their intra-year volatility. 

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The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.  more

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