Russia Macro Update: Catching a falling knife – August 2018


Losing momentum. The Q2 GDP growth indicator was weaker than expected and is consistent with other indicators that show slowing momentum. But we still see no reason to adjust our 1.7% growth forecast for this year. Another sanctions surprise. The latest US sanctions took everybody by surprise and have contributed to further ruble weakness. The risk of additional sanctions, especially the dangerous DESKAA bill now looking for support in Congress, is very high. There is no danger of a financial crisis or a drop in expected growth but the real impact is the drop in investment and FDI (less than US$2 bln in Q2 from over US$12 bln in 2Q17). This badly hurts future growth prospects.

Weaker ruble and higher inflation. The latest sanctions, plus the elevated risk of more to come, pushed the ruble into a new trading range of 66-68 against the US dollar. The high oil price and Russia’s strong balance sheet should prevent a bigger drop in the absence of additional sanctions. Predicting the actions of the US White House and Congress is, however, akin to trying to catch a falling knife.

Not all bad news. The weak ruble will provide another boost to the competitiveness of domestic industry and to exports. Agriculture and food processing will benefit and the Federal Budget will gain from the dollar conversion. Industries, which rely on imports, such as pharmaceuticals, will again suffer.

No more rate cuts this year. The CBR did not cut the key rate at the 27 July meeting and issued a hawkish statement. Their fears have been realized already, so any prospect of a further rate cut this year has not so much faded as evaporated.

Unforgiving public. The boost to Putin’s approval rating from Crimea has now been eliminated. His approval rating is back to pre-2014 levels. People are frustrated over the poor pace of economic recovery and are angry over pension reform proposals. Polls also show a growing number of people are willing to take part in economic and political protests.

Improved balance sheet. The 1H trade surplus was US$98 bln (+46% YoY), the current account surplus was US$60 bln and the budget ran a US$13.5 bln surplus, or 1.9% of GDP. There is no danger of a financial crisis and the government has plenty of financial fire-power to fund some growth initiatives, such as the May Decrees.

Ukraine movement? It has been widely speculated for many weeks that Russia has made proposals to help ease the conflict in eastern Ukraine. It is acknowledged that these proposals were discussed at the Helsinki summit and this will also be one of the topics at the meeting between Putin and Chancellor Merkel in Germany on August 18th

Market catalysts. Russia’s equity indices took a big hit from the sanctions, especially the dollar indices (ruble weakness). In this report, we list the factors that may drive the indices (better or worse) in2H18 and 2019. One of those would be if other companies follow Rosneft’s lead and launch share buybacks. Plenty have the cash to do so.