Page 21 - BNE_magazine_06_2020 Growers

bne June 2020 Companies & Markets I 21
on a campaign during the last few years to force all the state- owned enterprises (SOEs) to pay out 50% of their income
as dividends and despite determined resistance by some of the most powerful men in the country, MinFin had largely won the battle.
The second big change has been fact that thanks to very prudent management of the economy the Central Bank of Russia (CBR) is for the first time in a position to cut interest rates to try to stimulate growth. The CBR aggressively lopped 50bp over the prime rate to bring it down to 5.5% in April and is expected to cut again at the June meeting by up to 50bp. Despite the 19% devaluation of the ruble in March, inflation in April has fallen
to zero, dragged down by the concurrent collapse in demand after everyone was locked up at home.
That stands in stark contrast to 2014, during the last oil price shock, when the central bank was forced to hike interest rates by a massive 17% to stop the currency melting down. This time round the ruble has been surprising resilient to the collapse of oil prices and lost only 19% of its value to the dollar YTD against a fall of 56% in oil prices, as bne IntelliNews reported in “Russia’s amazing levitating ruble.”
“We expect the Central Bank of Russia to cut the key rate by another 100bp to 4.5% by the end of 2020, with inflation just below the 4% target. As the ruble has stabilised around RUB70-75 per dollar, we believe that FX interventions will decline in coming weeks. Since mid-March, authorities have sold FX to the tune of RUB600bn (slightly more than $8bn),” Ribakova said.
CBR keeping its powder dry
The surprisingly strong performance of the ruble is another plus for the potential investor. In the 2014 crisis the ruble’s value collapsed from c.RUB35 to the dollar to c.RUB80 in the space of a month. This time round the currency has held up remarkably well, sliding a bit more than RUB15 to the dollar to touch on RUB80 to the dollar again, but this time round starting off from RUB62 to the dollar in February.
FX interventions are beginning to subside
Source: Central Bank of Russia, IIF
The CBR has been intervening in the FX market, but according to the latest research the value of the ruble has also been boosted by strong inflows into the OFZ market from foreign investors.
The CBR pumped some RUB600bn into the FX markets in April and May to hold up the ruble but the latest data shows that it is already reducing its interventions as the market stabilises.
But the real surprise is that very strong inflows into the OFZ market during April have played a big role in keeping the value of the ruble up against the dollar and in the worst week completely offset the fall of oil prices to leave the month-on- month change in the ruble’s value flat. The inflows into OFZ are also more important than the brightening mood of EM investors as the epidemic starts to abate.
“Our model shows that current RUB appreciation is not driven by the EM sentiment improvement. The demand for Russian bonds helped the RUB to come around in April after corona sell-off in March. Now oil price is coming to the fore,” Grigory Zhirnov, an economist with Nordea, tweeted.
In addition to only making modest interventions in the money markets, CBR governor Elvira Nabiullina has also said the regulator will avoid engaging in quantitative easing.
The rationale is the same: the CBR doesn't want to burn through its precious reserves by buying any sort of asset whatsoever. However, ever the pragmatist the central bank has started to offer long-term repos terms to help banks with their increasing maturity mismatch, according to IIF.
Bank liquidity remains good for the meantime and there is little chance of the corona-crisis sparking a financial crisis in Russia. Banks only hold about 4% of their capital as OFZs,
so there is plenty of room for the Ministry of Finance to issue more and tap that liquidity pool if needed. Indeed, the budget calls for some RUB2 trillion of OFZ issuances this year (and $4bn on international capital markets) but MinFin has already said it will probably double that amount.
Russia’s modest fiscal stimulus programme will almost certainly be expanded and it is unlikely the government will tap the National Welfare Fund (NWF) for more investment capital, which currently holds RUB9 trillion of cash, or 9% of GDP. That means the obvious place to fund any extra spending will be via OFZ issuances.
“The government announced a total of 6.5% of GDP in measures. However, we only count some as direct stimulus, since these measures also include deferred tax payments, reallocation of spending and loan guarantees,” Ribakova said. “We estimate that direct stimulus measures amount to roughly RUB1.85 trillion (or 1.3% of GDP). Furthermore, we expect additional measures to be announced going forward due to the dramatic growth collapse and declining popularity of the government – possibly for a total of RUB2.5 trillion.”
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