Category Archives: Central Bank of Russia

28/4/17: Russia Cuts Headline Rate by 50bps

Bigger than forecast move by the Russian Central Bank to cut rates (down 50bps against consensus - and my own - forecast of 25bps cut) signals the CBR's comfort with inflationary expectations forward.

As noted in my regular advisory call on the Russian economy earlier this week (transcript here), inflation fell substantial in 1Q 2017, with current FY 2017 forecast sitting at around 4.3 percent. In line with this, CBR started cutting rates at the end of March, moving from 10% to 9.75% for its benchmark one-week auction rate. Today, the CBR lowered the rate to 9.25%.

According to CBR: "“Inflation is moving towards the target, inflation expectations are still declining and economic activity is recovering. Given the moderately tight monetary policy, the 4 percent inflation target will be achieved before the end of 2017 and will be maintained close to this level in 2018-2019.”

Median Bloomberg estimate is for the rate to fall to 8.5% by the end of the year. As I noted in the call: "I expect ...year-end (2017) rate target of around 8.25-8.5% if inflation remains on the path toward 4.3% annual rate, or 8.75-9% range if inflation stays around 4.6% annual rate".

The latest move helps the cause of the Federal budget (championed by the Economic Ministry) that needs to see ruble lose some of its attractiveness as a carry trade currency. In recent months, ruble has been the third best performing currency in the world, resulting in investors willing to borrow in foreign currencies to invest in rubles denominated assets. The net effect of this on the Russian economy is improving demand for imports and deteriorating budget dynamics (as Russian budget operates ruble-based expenditure, funded to a large extent by dollar and other forex revenues from exports of primary materials).

Nabiulina's move today, however, should not be interpreted as the CBR surrender to the Economic Ministry agenda of lowering ruble value. Instead, the rate cut is clearly in line with inflation targeting and also in line with previously stated CBR concerns about investment environment in Russia. Russian aggregate investment has been extremely weak in recent years, and economic recovery needs to involve a dramatic reversal of investment volumes to the upside, especially in areas of technology, R&D, and product and processes innovation. High interest rates tend to significantly reduce investment by making capital expenditure more expensive to fund.

27/4/17: Russian Economy Update, Part 3: Ruble and CBR Rates

The following is a transcript of my recent briefing on the Russian economy. 

This part (Part 3) covers outlook  for ruble and monetary policy for Russia over 2017-2019. Part 1 covered general growth outlook (link here) and part 2 covered two sectors of interest (link here).

Outlook for the ruble and CB rates

The ruble has appreciated this year about 6.6% against the US dollar, from 61.15 at the start of 2017 to just above 57.10 so far, and 3% against the euro from 64.0 to 62.06, compared to the start of 2016, ruble is up on the dollar ca 21.3% and on the euro some 22.4%

  • The ruble has been supported by the strengthening in the trade surplus in late 2016 into early 2017, and by improved foreign investment inflows
  • The ruble has been on an upward trend after hitting the bottom at the start of 2016
  • However, rate of appreciation has fallen in recent months, while volatility has risen
  • March real effective (trade-weighted) exchange rate (RER) was up nearly 30% y/y, as reported by BOFIT (see chart below)
  • As noted by some researchers (e.g. BOFIT), “in Russia, exchange rate shifts tend to pass through relatively quickly and strongly to consumer prices, so ruble strengthening tends to curb inflation” which, in turn, increases private and fiscal purchasing power
  • Another effect of the ruble appreciation is that it lowers government ruble-denominated tax revenue through direct link between energy exporting taxes (oil and gas) and oil prices, which are denominated in dollars 

For domestic businesses, a stronger ruble:

  • Reduces their price competitiveness with respect to imports, but also 
  • Lowers the cost of imported capital, technology and intermediates
    • Majority of Russian manufacturers are relatively highly dependent on such imports and have very limited non-ruble exports

  • Stronger ruble has very limited effect on the volume of Russian exports, primarily due to heavy bias in exports in favour of dollar-denominated energy and other primary materials
  • Ruble appreciation reduces the costs of foreign debt service for firms (a positive for larger firms and banks) and can lead, over time, to lower borrowing costs within Russian credit markets (a positive for all firms)

In line with the export-import effects discussed above:

  • Volume of Russian exports grew by over 2 % last year (primarily driven by oil and gas prices recovery and continued elevated volumes of Russian production of primary materials), plus by another (second consecutive) year of grain harvests 
    • In 2017, export growth should slow as both harvest and energy prices effects dissipate
    • Volume of exports of goods and services fell 1.87% in 2014, 0.41% in 2015 and 0.68% in 2016. Current forecasts suggest that the volume of exports will rise 4.5-4.6% in 2017
  • Volume of imports was much harder hit by the crisis
    • Volume of imports of goods and services fell 7.6% in 2014, followed by 25.0 drop in 2015 and 4.0% decline in 2016
    • Current forecasts suggest strong, but only partial recovery in demand for imports, with volumes expected to rise 7.0-7.2% in 2017
    • Key driver for imports growth will be the recovery in aggregate demand, plus appreciation of the ruble
    • Key downward pressure on imports will continue to come (as in 2016) from trade sanctions and from ongoing reforms of public and SOEs procurement rules and systems (more on this later)
  • Russia’s current account surplus contracted last year to less than 2% of GDP, printing at USD 22.2 billion, down from USD69 billion in 2015
    • 2017 projections of the current account surplus range widely, although no analyst / forecaster projects a negative print, despite expected increase in imports
    • IMF’s most current (April 2017) projection is for 2017 CA surplus of USD51.5 billion
    • This level of CA surpluses would stand above the 2014-2016 average (USD 49.6 billion), but below 2010-2013 average (USD67.4 billion) and lower than 2000-2007 average (USD 55.7 billion)
    • If IMF projection comes through, CA surplus will be supportive of significantly tighter fiscal deficit than currently projected by Moscow
    • As a percentage of GDP, CA surplus is expected to come in at 3.30% in 2017, slightly above 2014-2016 average of 3.19% and slightly below the 2010-2013 average of 3.42% of GDP


  • With Russian inflation falling and current account surplus strengthening, 2017 will witness further pressures on the ruble to appreciate vis-à-vis the dollar and the euro
  • Russia’s annual inflation fell below 5% in 1Q 2017
  • The CB of Russia has kept a relatively tight monetary stance, holding the key rate at nearly 10% through most of 1Q, as consistent with the CBR strict targeting of the inflation rate (4% inflation target set by the end of 2017)
    • CBR dropped rate to 9.75% at the end of March, noting a faster-than-expected drop in inflation and a slight decline in inflation expectations 
  • Inflation fell from 4.6% in February to 4.5% in March and 4.1% as of mid-April
    • 12-month forecast now at 4.3%
    • CBR governor Nabiullina said the central bank does not share the finance ministry's view of a overvalued ruble, which is consistent with her projecting continued cautious stance on inflation
    • Finance Minister, Anton Siluanov, recently stated that the ruble is overvalued by 10–12%
    • Consistent with this, I expect a 25 bps cut at April 28th meeting of CBR Council and year-end (2017) rate target of around 8.25-8.5% if inflation remains on the path toward 4.3% annual rate, or 8.75-9% range if inflation stays around 4.6% annual rate

22/4/16: Russian Economy: Renewed Signs of Pressure

Earlier this week, I posted my latest comprehensive deck covering Russian economy prospects for 2016-2017 (see here: Key conclusion from that data was that Russian economy is desperately searching for a domestic growth catalyst and not finding one to-date.

Today, we have some new data out showing there has been significant deterioration in the underlying economic conditions in the Russian economy and confirming my key thesis.

As reported by BOFIT, based on Russian data, “Russian economy has shrunk considerably from
early 2015. Seasonally adjusted figures show a substantial recovery in industrial output in the first three months of this year. Extractive industries, particularly oil production, drove that growth with production in the extractive sector rising nearly 3.5 % y-o-y. Seasonally adjusted manufacturing output remained rather flat in the first quarter with output down more than 3 % y-o-y.”

As the result, “the economy ministry estimates GDP declined slightly less than 2% y-o-y in 1Q16. Adjusting for the February 29 “leap day,” the fall was closer to 2.5%.”

Meanwhile, domestic demand remained under pressure. Seasonally adjusted volume of retail sales fell 5.5% y/y and is now down 12% on same period in 2014. “Real household incomes contracted nearly 4% y-o-y. Driven by private sector wage hikes, nominal wages rose 6 % y-o-y, just a couple of percentage points less than the pace of 12-month inflation.”

A handy chart:

Oil and gas production, however, continued to boom:

What’s happening? “Russian crude oil output was up in January-March by 4.5% y-o-y to record levels. Under Russia’s interpretation of the proposed production freeze to January levels, it could increase oil output this year by 1.5‒2%. The energy ministry just recently estimated that growth of output this year would only reach 0.5‒1%, which is quite in line with the latest estimate of the International Energy Agency (IEA). However, Russia’s energy ministry expects Russian oil exports to increase 4‒6% this year as domestic oil consumption falls.”

It is worth noting that the signals of a renewed pressure on economic growth side have been present in advanced data for some time now.

Two charts below show Russian (and other BRIC) Manufacturing and Services PMIs:

Both indicate effectively no recovery in the two sectors in 1Q 2016. While Services PMI ended 1Q 2016 with a quarterly average reading of 50.0 (zero growth), marking second consecutive quarter of zero-to-negative growth in the sector, Manufacturing PMI posted average reading of 49.1, below the 50.0 zero growth line and below already contractionary 49.7 reading for 4Q 2015.

Russia’s composite quarterly reading is at 49.9 for 1Q 2016 an improvement on 4Q 2015 reading of 49.1, but still not above 50.0.

In simple terms, the problem remains even though its acuteness might have abated somewhat.

10/1/16: Russian Banks: Licenses Cancellations Galore

Why Russian Central Bank’s chief Elvira Nabiullina deserves title of the best central banker she got in 2015? Why, because she sticks to her stated objectives and goes on even in challenging conditions.

When Nabiullina came to office, Russian banking system was besieged by underperforming and weak banks - mostly at the bottom of banking sector rankings, but with some at the very top too (see ongoing VEB saga here And she promised a thorough clean up of the sector. I wrote about that before (see and

But times have been tough for such reforms, amidst credit tightening, rising arrears and economic crisis. Again, majority of the problems are within the lower tier banks, but numbers of loss-making institutions has been climbing over 2015. January-November 2015 data shows that almost 30% of Russian banks are running operating losses and overdue loans have risen by nearly 50% to RUB2.63 trillion. Still, this constitutes less than 7 percent of total credit outstanding. Stressed (but not necessarily overdue) loans rose from 7 percent of total credit in January 2015 to 8 percent at the end of December 2015. Notably, both stressed and overdue loans numbers are surprisingly low. And on another positive side, bank’s own capital to assets ratio averaged 13 percent. The aggregate numbers conceal quite some variation within the banking sector, as noted by Bofit: “At the beginning of November, 129 banks had equity ratios below 12%. Large deficiencies in calculating the capital have come to light in several bank insolvencies.”

Amidst this toughening of trading conditions, CBR continued to push our weaker banks from the market. Over 2015, 93 banks lost their licenses, almost the same number as in 18 months prior with just 740 banks left trading the market as of December 2015. As the result, banking sector concentration rose, with 20 largest banks now holding 75 percent share of the market by assets. In January-October 2015, some 600,000 depositors in Russian banks were moved from banks losing licenses to functioning banks, per report here.

Chart from Bofit illustrates the trends in terms of banking licenses revoked:

Overall, this is good news. Russian banking system evolved - prior to 2009 - into a trilateral system of banks, including strong larger (universal) banks, medium-sized specialist and foreign banks with retail exposures, weak and sizeable fringe of smaller institutions, often linked to industrial holding companies. Aside from VEB - which officially is not a bank - larger banks are operating in tough conditions, but remain relatively robust. Smaller banks, however, having relied in previous years on higher risk consumer credit and holding, often, lower quality capital, have been impacted by the crisis and by the lack of liquidity. Shutting these operations down and consolidating the smaller banks' fringe is something that Russian needs anyway.