USDRUB, Russian Inflation and Bashneft Privatization

The central bank (CBR) will publish the preliminary balance of payments data for 3Q tomorrow. We estimate the current account surplus was $2.4bn in 3Q. This would correspond to a narrower surplus compared to 2Q in seasonally adjusted terms, but we think the narrower surplus in 3Q was offset with higher net private capital inflows. Later this week, the Finance Ministry will publish the federal budget data for September. On a 12-month rolling basis, we expect the federal budget deficit to stay unchanged from the previous month, at around 3.3% of GDP. Also this week, we will monitor closely the developments with regards to privatization of Bashneft and potential tightening of sanctions against Russia over the Syria conflict or cyber-attacks. Below we review the data releases and other developments from last week which we were not able to cover due to our travel schedule.

 CPI inflation surprised marginally to the downside in September. According to Rosstat data published last week (on 4 October), CPI inflation fell to 6.4% yoy in September from 6.9% yoy in August. The outcome was slightly below our expectation and the Bloomberg consensus forecast (6.5% yoy). Food price inflation was 5.9% yoy in September, down from 6.5% yoy in August. Durable goods inflation slowed to 7.5% yoy from 8.1% yoy in August, while services price inflation marginally picked up to 5.6% yoy from 5.5% yoy in August. Official core inflation (net of fruit and vegetables, but including most other food items) dropped to 6.7% yoy from 7.0% yoy previously. Our definition of core inflation (net of all food and energy products) also dropped, to 5.7% yoy from 6.0% yoy in August. The run-rate of core inflation (on our definition) was 5.4% in September, broadly in line with the 5.6% in the previous three months. Inflation in the week to 3 October was 0.1% qoq, on par with the previous week.

We expect headline inflation to drop further to 6.2% yoy in October. According to another data release last week, manufacturing PMI was up to 51.1 in September (from 50.7 in the previous month), confirming a gradual recovery in economic activity in 3Q. The increase was attributed to the output and new orders indices of the manufacturing PMI, while employment index was marginally down compared to the previous month. New export orders also fell sharply, to 43.3 in September from 47.2 in August. The stocks of finished goods index also declined in September. While the input prices sub-index registered a sharp drop (to 53.1 in September from 57.7 in August), the output prices sub-index unexpectedly picked up to 53.1, from 52.6 in August. The data are consistent with our view of a gradual recovery in economic activity, which so far has been driven by domestic demand, rather than external factors.

There were some key developments last week around the privatization of Bashneft. On Thursday (6 October), the government published a decree that approved Rosneft’s purchase of the government’s stake in Bashneft. In this decree, the government set the limit on the amount of funds (RUB 330bn) that Rosneft may use to buy Basheft’s stake. The main uncertainty for the market following this development was related to the potential impact of this transaction on the FX market, as Rosneft’s cash flow is traditionally denominated in foreign currency due to its export operations. In her interview with Bloomberg, central bank’s (CBR) First Deputy Chairwoman Yudaeva mentioned that the privatization may result in a temporary strengthening of the rouble. However, on Friday (7 October) the spokesman of Rosneft ruled out any impact on the rouble from Rosneft’s participation in Bashneft’s privatization. We believe the CBR may and should intervene in the FX market if the privatization results in a significant deviation of the rouble from its fundamental fair value.