Russia Rate Meeting, Sanctions and FX Interventions

The main event this week is the central bank’s (CBR) rate-setting meeting on Friday (3 February). We expect the CBR to leave the policy rate unchanged, at 10.00%. This is in line with the Bloomberg consensus forecast. Although the majority of respondents to the Bloomberg survey expect the policy rate to remain unchanged, some expect a 25-50bps cut. It is worth highlighting that the CBR is no longer committed to keeping the policy rate unchanged (in contrast to its message in September 2016) and the government has recently decided not to spend extra oil and gas revenues. We see a number of other arguments in favor of a policy rate cut, but none of these is strong enough for the CBR to act at this week’s meeting, in our view. In particular, we would like to highlight the favorable inflation data in January and weak consumer demand indicators in December. We strongly believe that the decision of the Finance Ministry to introduce regular FX purchases is neutral for the prospects of policy easing. We believe this will be explicitly highlighted in the CBR’s post-meeting statement this week. Although the CBR will not hold a press conference or release a monetary policy report (with updated forecasts and assumptions – pretty important in light of rising oil prices) this week, we expect some comments from the CBR officials as 3 February is also the day when the Finance Ministry will reveal its daily FX purchase volumes, according to the intervention mechanism. We expect the CBR to cut the policy rate at its next meeting on 24 March. On Thursday (2 February), Rosstat will reveal the preliminary estimate of real GDP growth in 2016. We estimate real GDP was down 0.4% in 2016 (after a drop of 3.7% in 2015). A Bloomberg consensus forecast for this variable was not available at the time of writing. On Saturday (28 January), Russia’s President Putin had a phone call with US President Trump. It was the first official call among the two leaders. According to a press release by the Kremlin, the two leaders discussed the crisis in Ukraine and the situation in the Middle East, their countries’ cooperation in fight against global terrorism, Iran’s nuclear program and other international issues. The Kremlin concluded that the call was “positive and productive”. On Friday (27 January), the rally in the Russian local markets was driven by comments from US Presidential Adviser Kellyanne Conway, who noted that rolling back of US sanctions against Russia may be discussed between Putin and Trump on Saturday. Although Kremlin’s press release did not refer to this issue, it does not mean that the issue was not discussed. In our view, the current backdrop may be challenging for those investors who are short Russian assets due to a potential positive headline risk as was the case on Friday