Oil Prices Should Continue to Support the Ruble - BBH

Analysts at Brown Brother Harriman noted that the Central Bank of Russia meets Friday and is likely to keep rates steady. High oil prices should continue to boost the economy, but it appears policymakers are growing concerned about the firm Ruble. 

Key Quotes

"The economy is on the upturn. GDP growth is forecast by the IMF at 1.1% in 2017 and would be the first positive annual reading since 2014. Besides low base effects from 2016, higher oil prices should also help boost growth in both 2017 and 2018.  GDP contracted -0.4% y/y in Q3, but we could see a small positive y/y reading for Q4."

"Price pressures are falling, with CPI decelerating to 5.4% y/y in December. This is the lowest rate since June 2012, but still above the bank’s 4% target. January CPI will be reported next week, with consensus at 5.0%. If disinflation continues at this pace, the bank is likely to start the easing cycle in early Q2. The central bank last cut rates 50 bp to 10% in September but has been on hold since then. Governor Nabiullina may be tempted to cut rates when the bank meets this Friday, but we think it’s too soon. She and other senior bank officials have consistently sent a hawkish message and pledged to keep rates steady until most likely Q2."  

"Fiscal policy bears watching. Low oil prices took a toll on the budget, with the deficit widening to nearly -4% of GDP from -3% in 2015. The gap is expected to narrow to -3% of GDP in 2017, but higher than expected oil prices suggest a smaller than expected deficit is possible."

"For now, USD/RUB is having trouble staying below 60. However, we do not think that the FX purchase plan will have a material impact on the exchange rate. Rather, the ruble will likely be impacted the most by oil prices."  

"Russian equities have typically outperformed after a poor 2014. In 2015, MSCI Russia was -6% while MSCI EM was -17%. In 2016, MSCI Russia was up 47% vs. 7% for MSCI EM. So far this year, MSCI Russia is nearly flat YTD compared to +6% YTD for MSCI EM. This underperformance should continue, as our EM Equity model now has Russia at a VERY UNDERWEIGHT position."  

"Russian bonds have performed well recently. The yield on 10-year local currency government bonds is about -19 bp YTD. This compares to the best performers Brazil (-50 bp), Turkey (-40 bp), and Peru (-33 bp). With inflation likely to continue falling and the central bank likely to cut rates several times this year, we think Russian bonds will start to outperform more." 

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