Page 18 - RusRPTFeb19

The outlook for 2019 for FX deposits is pretty similar as after a brief dip in the middle of the year the CBR’s decision to hike rates in September is driving deposits rates up again on ruble accounts and the Fed is expected to continue tightening. Interest rates on dollar accounts at the leading Russian banks is already up to 3.5% as 2019 got started but only 1% for euros.
The outlook for the ruble this is very confused with the uncertainty of new “crushing” US sanctions hanging like the sword of Damocles over the currency, but the majority of analysts are expecting the ruble to weaken in 2019, although the spread cited by Vedomosti is very wide, ranging from RUB66 to RUB75 to the dollar.
Bank deposits have long been Russians favourite investment vehicle for their life savings but the big difference now is thanks to the fall of inflation to record post-Soviet lows interest rates are now real. Whereas only a few years ago FX bank deposits were simply a way to protect savings against the ravages of double digit inflation, now they have become very profitable investments in their own right, which ironically is stymieing the development of a retail investment industry as few investments can match deposits for their returns or their predictability.
Bonds
Bonds also returned decent returns. Although the price of the vast majority of Russian bonds fell, investors were still in the black thanks to coupon payments. The aggregate income of the Cbonds ruble bond index portfolio (IFX-Cbonds) for the year was a modest 4.2% against 12.2% in 2017, although some names, like Sistema, did much better.
On average, the annual return on investment in the state treasury bills, the OFZs where most foreign investors are parked, was 3.7%. Returns were higher in other classes of bond where foreigners have less exposure, including reliable sub-federal bonds, which were up 7.5% and liquid corporate securities (6.4-10%).
Vedomosti cited analysts saying that investments into the debt market this year are attractive but recommend only buying reliable bonds, with a rating not lower than BBB-BB and a maturity of up to three years.
Stocks
Stocks have not been an obvious investment since the silent crisis started in 2013 when the petro-economic model for the Russian economy was exhausted in 2013 and things got worse in the “silent crisis” of 2014-2016. However, for the opportunist there have been some excellent returns to be made. The market returned 52% in 2016 simply as the market bounced back from a big sell off in 2014 on the back of the fears of war following Russia’s annexation of Crimea that year.
Since then the leading dollar denominated Russia Trading System (RTS) has been range bound at about 1000, but as bne IntelliNews has reported, if the price of oil is still valid as a factor on Russian stocks (and it is less important than it was in the boom years in the noughties) then the market in dollar terms was the most undervalued it has been for years in the third quarter of 2018 – the RTS is some was 400 points below where it should be according to the traditional relationship between the price of oil and the index. However, since the price of oil fell back from over $80 to an average of $54 in December the RTS is now where it should be according to the oil price and ended the year at 1074, down from 1,238 in January, a fall of 8.8% over the year.
The RTS’s sister index ruble denominated Moscow Interbank Currency Exchange (MICEX) index did a lot better adding 9.4% on the year, but in dollar terms lost ground due to the fall of the ruble to the dollar.
18 RUSSIA Country Report February 2019 www.intellinews.com