Rosneft Sale, Oil Price and Ruble

The government managed to sell its 19.5% stake in oil company Rosneft for EUR10.5bn ($11.3bn). The stake was sold to the consortium of Glencore Plc and Qatar Investment. Both will have 50% share in the stake. In a meeting with Rosneft’s CEO, President Putin urged Rosneft to develop a joint plan with the central bank (CBR) and the government for a smooth conversion of FDI inflows into rouble. We are not aware of the details of this scheme, but given the context of Putin’s comments the implications of this deal on the market should be neutral for the rouble. Having said that, we think this deal should be positive for the sentiment in the local market, as the market did not expect foreign investors to be involved in this privatization. Following this news (late in the evening local time), the rouble strengthened by almost 1.0% against the dollar. Inflation expectations improved only marginally in November. According to the central bank survey, year-ahead inflation expectations (based on normal and uniform distribution) fell to 5.6% and 5.5% in November, from 5.8% and 5.7%, respectively, in October. According to the CBR’s statement, inflation expectations remain elevated relative to the CBR’s 4% inflation target. In the CBR’s view, elevated inflation expectations justify a relatively tight monetary policy stance. Inflation in the week to 5 December was 0.1% wow, on par with the previous week. On our estimates, headline inflation was down to 5.7% yoy as of 5 December. We expect headline inflation to reach 5.6% yoy by the end of this year, which is consistent with the CBR’s forecast. According to Finance Minister Siluanov, the government may spend the windfall oil revenues in 2017. In our view, this is a very likely scenario if the average Urals oil price stabilizes above $40/bbl in 2017 (the base assumption for the federal budget law in 2017- 2019). The increase in spending will be supported by the proximity of presidential elections in early 2018 and an almost two-year-long recession. The news is negative for the prospects of a decline in nominal interest rates, in our view.