Russia Macro Monthly report for May 2017: Will sanctions threat damage the recovery?

Please find Russia Macro Monthly report for June 2017, prepared by Chris Weafer, Senior Partner at Macro-Advisory Ltd from Moscow. Short summary of the report:


Congress pushes ahead with sanctions threat. The big elephant in the room, when it comes to longer-term growth in the economy is the threat of additional US sanctions. Now that the Senate has voted for tougher sanctions, attention will shift to the House of Representatives and then whether President Trump is willing or able to block a sanctions extension. If a tougher sanctions regime is adopted by the US, the EU is not expected to follow but Russia will almost certainly retaliate in some way.

Economic recovery on track. Q1 GDP growth was 0.5% which, according to the Economy Minister, was really 1.0% adjusted for the calendar effect. The IMF upped its forecast to 1.4% while the Economy Minister is hoping for 2%. Business sentiment indicators remain strong, and 1Q investment growth of 2.8% suggests hopes for a more robust recovery are justified.

Budget increase. As expected, and despite repeated denials from the Finance Ministry, the government plans to spend some of the additional oil tax revenue this year. It is election year after all.

Nabiullina points to more rate cuts. The CBR Chairwoman said that she expected rates to settle at around 6.5% when inflation was stable at 4%. Rates are currently 9.25% and inflation is 4%. The CBR is expected to cut by 25-50 bps at its mid-June meeting.

Ruble may soon weaken. There is a clear divergence between the CBR and government ministers over where the ruble should trade. But the recent period of strength may now be ending as oil weakens, the risk of further sanctions increases and the CBR cuts rates.


Oil slide continues. The price of oil continued its slide in May despite the extension of the OPEC-Russia deal. The greater influence is the still rising commercial inventories in the US and the fact that US shale output is up 500,000 bpd since 4Q16. Concerns over Venezuela may provide some short-term support.


Nothing new from protests. The protests held in Moscow and in several other Russian cities on the 12 June national holiday were relatively modest and provide no cause for reassessing the assumption of continued social stability or the prospect of any threat to Putin’s re-election in March next year.

Investor fears outweigh hope. Equity markets fell about 5% in May driven by weaker oil (down 3.3%) and the growing threat of more US sanctions. In reality, investors have been avoiding Russia this year because there are no fresh catalysts, only more reasons to worry. Amongst the latter is the Rosneft claim against Sistema.

Putin’s call-in and Oliver Stone’s interview. President Putin will hold his annual televised Q&A session, which takes questions from the public. Thursday 15 June also sees the publication of the text of Putin’s extensive interview with film-maker Oliver Stone. 

Download here the full report in PDF format. . 


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