Russia fundamentals improving but... - BBH

"Russian fundamentals are improving with higher oil prices feeding into the economy.  However, it’s worth noting that the correlations between oil prices and the ruble as well as Russian equities have fallen," BBH economists argued in a recent report.

Key quotes:

"The economy is starting to pick up despite the ongoing sanctions.  GDP growth is forecast by the IMF at 1.4% in both 2017 and 2018, up from -0.2% in 2016.  GDP rose 2.5% y/y in Q2, the strongest rate since Q4 2013.  As such, we see upside risks to the growth forecasts, especially in light of firmer oil prices." 

"Price pressures are falling, with CPI decelerating to a record low 3.3% y/y in August from 3.9% in July.  This is below the 4% target, and came sooner than the central bank expected.  PPI inflation has also fallen sharply, suggesting little in the way of pipeline price pressures."

"This supports the case for lower rates, and we believe the central bank will cut 50 bp to 8.5% when it meets this Friday.  Governor Elvira Nabiullina said “We see room to reduce rates, and there will probably be a discussion about cuts of 25 or 50 bp.”  A small handful of analysts look for a 25 bp cut this week."  

"Banking sector concerns may be easing.  Stresses led the central bank to take over private bank Otkritie last month, the biggest rescue since 2011.  In addition, the central bank said it will provide support for other lenders in an effort to preserve market confidence and so markets have calmed a bit.  Bank Otkritie was the first to be taken over by a government-backed fund set up by the central bank to help consolidate the banking sector."

"Fiscal policy was loosened due to low oil prices.  Oil and natural gas revenues account for nearly 45% of federal government revenue.  While both are off their lows, prospects for greater supply of oil and gas are likely to prevent prices from moving much higher.  The budget deficit came in near -4% of GDP in 2016, up from -3% 2015 and -1% in 2014.  It is expected to narrow to -2% of GDP in 2017 and -1.5% in 2018, but much will depend on oil prices." 

"The external accounts should improve.  Low oil prices have hurt exports, but the sluggish economy has helped reduce imports.  Both of those trends are reversing, but we think the improvement in exports will dominate.  The current account surplus was about 2% of GDP in 2016, and is expected by the IMF to widen to 3.3% in 2017 and 3.5% in 2018."

"Foreign reserves continue to rise after falling over the course of 2014 and 2015.  At $420.5 bln in August, they are the highest since November 2014.  Reserves cover over 17 months of import and are nearly 3 times larger than the stock of short-term external debt.  Governor Nabiullina said that the central bank is in no rush to boost reserves, which she noted is adequate by all international standards.  She added, however, that the bank may start replenishing reserves after inflation and inflationary expectations stabilize and the key rate is at long-term equilibrium."