We mentioned on Friday that Moody’s removed its negative watch on Russia citing, “stabilization of Russia’s external finances resulting from a macroeconomic adjustment” and “diminished likelihood of … further shock in the next 12-18 months”. One of the positive trends Moody’s must have accounted for was the estimates from the Russian Central Bank showing a net capital inflow of USD 5.3bn in the third quarter. The quarterly inflow marked an end to 4 years of consecutive quarterly outflows and a record exodus of capital in 2014 (USD 151bn) induced by a triad of dilemmas: lower oil prices, withdrawing its currency peg, and the conflict in Ukraine – along with the subsequent and ongoing sanctions.
Today Prime Minister Dmitry Medvedev boasted, "The anti-crisis plan has worked. It allowed us to survive the most difficult period of the year. The plan has brought result in almost all areas". Medvedev expects growth in the economy in 2016 and inflation to fall to 6.4%. This does not seem unrealistic when accounting for the devaluation the Russians have already endured, the possibility that sanctions could be lifted latter in 2016 and their luxury of relatively high interest rates allowing it “an arsenal of monetary policy”.
Oil prices will of course be an important factor for Russia returning to growth but even at current levels, ~$40 “doesn’t threaten the stability of the economy “, according to Aleksey Ulyukaev, Economic Development Minister. Tensions with Ukraine are ongoing with the recent concession by Putin, allowing Kiev a 3 year period over which they could spread debt repayments, seemingly refused by Ukraine. Russia may feel hoodwinked at the latest IMF rule changes that should allow support of Ukraine even if they are not, “making a good faith effort to eliminate their arrears with creditors". In any case they are certainly trying hard to make themselves out as a victim perhaps to win points prior to any further discussion of sanctions.
This year, contrary to many other emerging markets, Russia has been one of the best performers. The EMBI+ YTD has returned 2.6% but excluding Russia this would be just 1% with the Russian bond component returning 19.2% over the 11 months. Because the CBR was able and willing to take the necessary steps it does seem that they are past “the most difficult period” and the outlook for the next 12 months should indeed be “stable” or perhaps positive.