Page 8 - RusRPTMay19

current account sterilization by corporate capital outflows and FX interventions went up from 67% in 1Q16 to 87% in 1Q17, 97% in 1Q18, and 118% in 1Q19.
Based on seasonality, the private current account should be close to zero in 2Q and 3Q19, while the FX purchases should total around $15-18bn per quarter.
Portfolio flows - key factor for RUB
With the current account surplus balanced by the accumulation of foreign assets by corporates and the government, the importance of portfolio flows to the FX market increases. The 1Q19 data suggests that the last three months were a success. The government sector saw gross portfolio inflows of $7.5bn, including the placement of $3.0bn Eurobonds, which was bought predominantly by non-residents, and the return of non-residents to the OFZ market at a $4-5bn scale. Those flows were the key reason behind the RUB appreciation by 6% to the dollar, outperforming its EM peers.
In the coming two quarters, RUB performance will be increasingly dependent on both the global risk appetite and Russia-specific newsflow, mainly on sanctions, which means a potential increase in volatility vs. a more clear direction seen in 1Q19. Meanwhile, we reiterate our expectation of USD/RUB range of 65-67 for 2-3Q19, based on balance of payments fundamentals and seasonality.
2.3 MinFin selling OFZ like hot cakes
Russia’s Ministry of Finance held yet another successful weekly auction it’s ruble-denominated OFZ treasury bills, selling RUB86.8bn ($1.3bn) worth of the bills with a relatively modest 8.35% cut-off yield and at virtually no premium to the secondary market, Raiffeisen Bank (RZB) reported in a note on April 11.
The OFZ market has seen a remarkable turnaround from last year. the high yielding, low risk OFZ were a bond traders favourite at the start of 2018 but as sanction fears grew there was a big sell off in the bonds over the second half of the year. The share of OFZ held by foreign investors tumbled from 34% in April to end the year at 25% after bond investors sold off some RUB500bn worth of the paper. At the same yields climbed from just over 8% to touch 9% leading Russia’s MinFin to cancel several auctions in the autumn because of lack of demand, while the ministry was unwilling to increase the yields to the level demanded by investors that would have cleared the market.
However, since the start of this year, and especially since March, the market has picked up significantly as it became clear the US Federal Reserve bank has halted its tightening policy and may even ease US rates this year due to an economic slowdown.
The International Monetary Fund (IMF) reduced its projection for global growth in 2019 by 0.2 pp to 3.3% y/y on April 10, which would be the lowest growth rate since the financial crisis. The 2020 growth forecast remained at 3.6%.
“Both estimates for developed and emerging markets for 2019 were cut on the backdrop of a synchronized slowdown in many markets in H2 2018 and multiple risks going forward (e.g. Brexit, trade frictions),” RZB said in a note.
8 RUSSIA Country Report May 2019 www.intellinews.com