Russia: a brief market watch

RUSSIA ECONOMICS - In Brief 27 Feb 2025 by Evgeny Gavrilenkov

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The Russian market moved up on the wave of optimism regarding the potential resolution of the conflict in Ukraine. Many investors think it may happen in the coming months, and some sanctions on Russia could be removed in the aftermath. Moreover, this factor is treated as disinflationary, which makes market participants sure that the CBR will start a rate-cut cycle this year. The equity market has added 33% since Mr. Trump returned to the White House, while the ruble has appreciated to the levels observed in mid-2024 last time. The latter looks excessive given Russia’s high inflation (even though the increased use of national currencies to trade with non-western countries could also have an impact). Overall, we think the recent appreciation is temporary, and the exchange rate will return close to R/$ 100 in the coming months. Also, the equity market may face sharp correction - should peace hopes evaporate or the negotiation process not go smoothly (we suppose that even the start of direct talks between Russia and Ukraine looks nearly impossible at this stage). The Finance Ministry benefited from the market sentiment change in full. It placed R672 bln in OFZ since the start of February and is close to fulfilling its quarterly plan ahead of schedule. The yield of the 10Y paper dropped by 110 bps in the past four weeks. We don’t think that the potential for further compression is significant. The long end of the curve trades below 16%, which translates into expectation for the endpoint of the key rate cut cycle at 12-13%, which looks optimistic given the country’s elevated inflation. In our view, Minfin will continue to offer long-term papers. However, as potential demand ...