Page 57 - RusRPTSept20

* Belarus risk – concern Russia will intervene directly in the crisis;
* Navalny risk – concern Russia is somehow subject to Western sanctions related to this case.
* Positioning – foreigners have long been Russia risk.
In the last week of August the ruble exchange rate tested the RUB76/$mark. The ruble weakness was the hot topic for the market, although it was hardly unexpected: the Russian currency has been depreciating for several weeks, starting from end-June, ignoring continuing growth in crude prices and a rally across many external markets. Recent geopolitical events merely intensified the ruble’s weakness.
BCS GM believe that the main factors behind the weakening of the ruble over the past 2 months were: (1) the market’s reaction to the CBR’s decision to cut the rate; (2) seasonally stronger demand for foreign currency in Russia, which coincided with a decrease in FX sales by the Ministry of Finance; and (3) the August factor reinforced by geopolitical news.
BCS GM says that the weakness of the ruble will not last long, as the Russian currency should be supported by potential stabilization of the geopolitical background around Russia, as well as the signs that OFZ sales by non- residents are passing their peak.
Historical analysis of the exchange rate shows that abrupt changes in the ruble’s value, caused by negative geopolitical news, usually lead to a depreciation of the exchange rate by 5% within 5 trading sessions and is mainly caused by a reduction in the positions of non-residents in OFZ. Then, as the market adapts to new risks, the ruble rate begins to gradually return to its fundamental value within 1-3 weeks – provided that oil prices remain at comfortable levels for Russia, which implies ruble strengthening.
This is precisely what we have witnessed this time. The period of sharp ruble weakness began on 20 August and, as in previous periods, lasted for 5 trading sessions. On 27 August, the Russian currency started to recover; this process intensified on Friday, 28 August – even despite the end of the tax period. Absent new geopolitical or oil shocks, BCS GM believes that the ruble will return to the RUB72-74/$corridor in the next 1-2 weeks.
Besides geopolitics, the two other major triggers for non-residents exiting their positions in Russian ruble public debt were ruble weakness (in FX, the devaluation completely zeroed the OFZ yield) and a series of key rate cuts by the CBR that made investment in ruble public debt unattractive.
It is only natural that, in August, placement of new OFZ issues has been increasingly challenging for the Ministry of Finance – market demand for these instruments dropped sharply. As a result, there has been a significant change in the government's strategy: until recently, the Cabinet planned to cover the growing budget deficit exclusively through new placements of ruble- denominated public debt without tapping the sovereign funds (NWF) this year. Now this plan may not materialize, which means that in order to keep the budget balanced, the government would have to spend funds from the NWF.
57 RUSSIA Country Report September 2020 www.intellinews.com