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At the same time the CRB "has earned credibility over the past few years for its policy response to the oil price shock and effective disinflation efforts," bringing inflation to a historically low annual reading of 2.3% in June 2018 from 12.9% in 2015, despite still-elevated inflation expectations.
S&P expects that rising domestic demand, and higher food and fuel prices will spur headline inflation back to the CBR's target of 4%,
8.5 Fixed income
In June and the second quarter of 2018 foreign investors pulled RUB152bn ($2.4bn) and RUB380bn respectively out of Russian federal government OFZ bonds , estimates from Rosbank analysts on June 13 show. As of the end of the reporting period non-resident holdings in OFZ totalled RUB1.97 trillion.
This continues the previous OFZ sell-off seen in April and May. Bond investors had been overweight in the high paying but low risk Russian domestic treasury bonds last year, but their appeal has waned following the latest round of US sanctions on April 6 and the general emerging markets (EM) capital outflow trend.
According to previous estimates from the Central Bank of Russia (CBR) in April-May RUB230bn worth of domestic bonds OFZ were sold by foreign investors, RUB131bn in April and RUB97bn in May. The trend did not stop in June, and even intensified with a RUB152bn pullout estimated by Rosbank.
The outflow of foreigners from the OFZ market was the fastest since the market was liberalised and opened to overseas investors in 2012, Uralsib Bank commented.
The CBR report showed that large local investors (mainly "systemic credit organisations", i.e. state controlled banks) supported the OFZ market by buying out medium term bonds of five to eight year maturities from the selling non-residents.
Activity of the state banks on the OFZ market could be linked to the finance ministy's plans to raise RUB5 trillion ($80bn) domestically over the next three years, in an unprecedented borrowing spree to pay for President Vladimir Putin’s ambitious “breakthrough” investment programme outlined in the latest May Decrees.
In the meantime Reuters noted on July 13 that investors took a pause on the OFZ market anticipating the geopolitical and sanction-related effects of the July 16 Trump-Putin summit in Helsinki. Industry experts and political observers surveyed by Reuters note that the holding of the summit alone is seen as political victory for Putin, who was earlier this year shut out of the G7 summit.
The Central Bank of Russia (CBR) intends to limit sales of subordinated bonds of banks to individual retail clients , Vedomosti daily reported on July 27 citing the draft bill published by the regulator. Subordinated securities are ranked below other forms of debt in terms of claims on assets or earnings of the issuer. As the CBR's banking sector clean-up in 2017 culminated with
57 RUSSIA Country Report August 2018 www.intellinews.com