Russia Macro Monthly report for May 2017: Spring optimism fighting a lingering winter

Please find Russia Macro Monthly report for May 2017, prepared by Macro-Advisory Ltd from Moscow. Short summary of the report:


Economy continues to show weak recovery. Sentiment indicators are finally showing improvement to pre-sanctions levels. The outlook is that this recovery will be slow and shallow, with the hope that it will get a boost from a new reform program next year. Former Finance Minister Alexei Kudrin submitted his plan – the question is how much the government will water it down?
Politics and inflation change the CBR’s policy stance. The CBR cut its repo rate by 50 basis points to 9.25% in late April. This is a big change to its previous hawkish policy and reflects pressure from the Administration to take actions to weaken the ruble. A big drop in inflation, to 4.1% as at end-April, provided the excuse. The weak ruble is the key element in sustaining competitive conditions in the economy and in attracting inward investment. The CBR is now expected to cut earlier and deeper than previously indicated.
OPEC agreement is both good politics & good economics for Moscow. Russia and OPEC are set to extend the oil production deal into early 2018. This should keep the price of Brent in the low to mid-US$50s p/bbl range … a target Saudi Arabia needs to justify its very ambitious valuation for the Aramco IPO, which is expected in spring 2018. For Russia, this deal represents both good politics (aligning with Saudi Arabia) and good economics (will keep the budget deficit low).
Public protests. The Kremlin’s worst nightmare is ordinary people protesting over a real issue and that is again happening because of Moscow city’s ham-fisted policy to demolish obsolete housing stock. When protests are fueled by a legitimate economic grievance, Putin’s administration tends to concede in a very un-autocratic fashion. When the protests are mainly political, they crackdown.
Pragmatism in US-Russia relations … The Syrian crisis was a poor backdrop to the first official visit to Moscow by a senior Trump administration official. Nonetheless, Tillerson and Lavrov seem to have built a working relationship, and there was enough progress to warrant Tillerson’s meeting with Putin and Lavrov’s with Trump.
… may be derailed by Congress. Back in Washington, the backers of the bills to tighten sanctions pressure on Russia are not giving any ground. Their determination to punish Russia is unwavering, and this remains a very significant threat.
Investors are waiting. Russian equity indices have at least stopped falling, but are stuck in a rut and in need of a new catalyst. That may come from a positive dividend season or a sustained economic recovery. Investors are also waiting to see what message is delivered at this year’s SPIEF event (1-3 June) and the G7 meeting (26-27 May).
Novorossiysk privatization. The Deputy Finance Minister said that a 20% stake in the port operator, NCSP, will be sold via the stock market this year, with a target valuation of RUB30 bln, or some 10% higher than the current valuation.

Download here the full report in PDF format


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