Page 7 - RusRPTMay21

rates aggressively in both March (25bp) and April (50bp) to try and nip the problem in the bud. Previously the CBR was expected to hike rates in 2021 by about 75bp, but it has already added that amount and is now looking at adding a total of 125bp this year, bring six years of easing to an end.
As inflation is being driven by food and the devaluation effects, neither of these things are monetary problems, so the CBR hikes will only reduce inflation at the margins and the CBR’s main tool is ineffective. There is little more the central bank can do other than simply to wait for the economy to find a new equilibrium, but that should take about six months tops and the psychological impact of decisive action will help the process along.
At the same time, real incomes were down 3.6% in the first quarter and this is a more serious problem at both economic and political levels. The situation is confused here as the low base effects and distortions from last year’s crisis are already making themselves felt. For example, retail turnover in March was down 3.4% y/y, but that is measured against March 2020 when retail sales surged a whopping 6.1% y/y as the population started stockpiling goods ahead of the widely anticipated lockdown that was imposed in April. Looking at the month-on-month results and the situation doesn't appear quite as dramatic as the headline numbers suggest. This is a problem that will only get worse in the coming months.
The good news is that all these problems are seen as temporary and a result of the economy rebalancing as it recovers from the multiple shocks it received last year. Inflation should fall as the seasonal effect on food prices starts to kick in over the summer dacha season and the pass-through devaluation effect also usually takes about six months to run its course and so will also fade in the next months.
Analysts see the ruble strengthening from here under all scenarios. Just how much it will strengthen depends a lot on geopolitical tensions and the oil prices as the two big concerns going forward. With the OPEC+ deal still in place and a global economic bounce back already underway the outlook for oil looks good. Geopolitics, not so much.
April saw tensions flare again as Russia moved some 40,000 troops up to Ukraine’s border for “exercises.” The Kremlin claimed it was only reacting to Ukraine’s decision to move troops up to the line of contact in Donbas over the prior two months as part of the spring rotation in preparation of the new campaigning season, and there are some reports that Ukrainian troops were on the move bring up heavier artillery too. Some have speculated that this was a move by Ukrainian president Volodymyr Zelenskiy to provoke exactly the response he got from Russia as a way of pressuring the west for more aid. Its still unclear exactly what just happened, but whatever the truth, Russia’s response was overkill and designed to send a clear message to the White House that the Kremlin can, and will, make serious trouble if its demands are
7 RUSSIA Country Report May 2021 www.intellinews.com