The Central Bank of Russia (CBR) has built up its credibility substantially as a result of its reactions to the 2014 crisis. The key rate was hiked to 17% in late 2014, reduced to a more “normal” 11% in 2016, and monetary easing since then has been extremely gradual with the policy rate still standing at a high 7%. The yield pickup relative to other EMs has supported the ruble despite geopolitical noise throughout the period. Monetary policy may be about to become a lot less restrictive with inflation falling below the 4% target; 2020 will likely be another benign inflation year given favorable base effects related to this year’s value added tax hikes. The CBR now has room to engage in a substantial easing cycle with policy rates likely to approach 5.5% by next summer. Monetary easing will eventually have a favorable impact on growth, but on a first-order basis may erode the ruble’s yield support.
Balance of payment dynamics trends have also started to reverse. After a brutal decline in 2014-15, imports seem to have bottomed. Non-energy exports improved significantly starting in mid-2016, but have rolled over given weakness in its main export market, Europe. The price of Russia’s main export, energy, remains challenged as global demand concerns outweigh OPEC supply cuts. Income outflows are set to pick up as Russian companies switch from using cash to repair balance sheets and restart dividend payments. As a result, analysts expect the current account to erode from an impressive 7% of gross domestic product to closer to 4% by 2020.
However, Russia remains in a good spot. The sovereign has room to draw on fiscal savings to invest in infrastructure and boost growth. Better loan affordability has ended years of painful deleveraging. The central bank has ample reserves in the event of another crisis. It’s more of a question of how much of the good news is already baked into the currency and what the future holds.
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