Russia: High rate differentials and the domestic story supports RUB - Danske Bank

Analysts from Danske Bank, remain bullish on the Russian Ruble in the long term and they point out that the economy continues to grow. 

Key Quotes: 

“Russia’s economy continues to grow, although it would seem to be challenging to exceed significantly a 2.0% potential output level in the near-term. In 2017, the economy expanded 1.5% y/y versus a 0.2% y/y contraction a year earlier. Looking at the Q4 17 growth components, construction and retail were leading sectors, while agricultural production and manufacturing shrank. We keep our 2018 GDP growth estimate at 2.0% y/y. We expect the economy to grow 2.1% in 2019 and 2.2% y/y in 2020.”

“The presidential election in March 2018 was a non-event for the markets as broadly expected.”

“In March 2018, the CBR cut its key rate by 25bp to 7.25% as we expected together with Bloomberg’s and Reuters’ consensus. We expect the CBR to continue its moderate cuts, bringing the key rate to 6.25% by end-2018, keeping real rates highly elevated. Inflation fell further under CBR’s 4% y/y target, posting 2.2% y/y in February 2018, which is a post-Soviet all-time low. We expect inflation to accelerate slightly in 2018 staying below 4% y/y.”

“We remain bullish on the RUB in the long term, as high rate differentials prevail and the domestic story supports the currency. Short- and medium-term prospects are murkier, however, as external factors such as the oil price and geopolitics put notable pressure on the RUB.”

“Further geopolitical escalation is a serious short- to medium-term risk for the RUB, Russian stocks and government debt. Upside risks come from an increasing oil price and improving relations with the West.”